Republic Services, Inc. (RSG) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Third Quarter 2013 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; and 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, Lisa. Welcome, and thank you for joining us. This is Ed Lang, and I would like to welcome everyone to Republic Services' Third Quarter 2013 Conference Call. Don Slager, our CEO; Glenn Culpepper, our CFO, and Brian DelGhiaccio, Vice President of Investor Relations, are joining me as we discuss our third quarter 2013 performance. Before we get started, I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations. The material that we discuss today is time-sensitive. If in the future, you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is October 31, 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 would like to turn the call over to Don.

Thanks, Ed. We recognize that many of you would like to be with your families this evening and we really appreciate you joining our call today. We will do our best to get you home on time, so let's begin. Our third quarter performance demonstrates our ability to execute our plans and profitably grow our business. Revenues increased approximately 6%, led by strong volume growth, including higher-margin special waste streams. Our EBITDA margin performance of 29.5% reflects a sequential improvement from the first half of the year, consistent with the expectations we communicated on our last earnings call. I will now discuss some financial and operational highlights. Third quarter adjusted EPS was $0.55. These results include $0.03 of favorable tax items and $0.02 of reduced environmental costs. Including these items, we expect to achieve the high end of our full year EPS guidance. Year-to-date adjusted free cash flow was $469 million. We remain on track to achieve our full year guidance range of $675 million to $700 million. Core price in the third quarter was 3.4% and our average yield was 1.3%. Average yield was consistent with the second quarter, even with a sequential step down in CPI-based pricing. We experienced better price contributions from the open market to offset the CPI headwind. Q3 volumes increased 2.2%. If you include the extra workday, total volumes were up 2.7%. The key drivers of volume growth were C&D roll-off, national accounts and landfill special waste. Construction activity continues to improve. Temporary roll-off hauls increased 7.4% over the prior year, which reflects the sustained recovery in housing construction. The increase in activity was broad-based with virtually all of our areas reporting growth in temporary hauls per day. During the quarter, we introduced expanded service offerings to certain National Accounts customers to meet their waste stream needs. We often engage third-party providers to service this work, so it tends to be lower-margin business but has very limited capital requirements. Growth in National Accounts represented about 20% of our volume increase in the quarter. Landfill special waste volumes were up 5.4% over the prior year which help improved our margin performance. On prior calls, we discussed special waste volumes that were deferred. We are now seeing these event-driven jobs get funded and special waste volumes return to our original expectations. Landfill MSW is down less than 1%. It is important to note that landfill MSW volume tends to track closely with changes in collection volumes. Q3 recycling facility tons per day increased 7.4% over the prior year. Most of the increase is related to recycling facilities that we have been -- that we've added or upgraded over the last 3 quarters. The year-to-date investment in acquisitions was approximately $60 million. Annual revenue is approximately $45 million at a post-synergy EBITDA multiple of approximately 4.5x. These transactions consist of tuck-in acquisitions in existing markets. We anticipate completing our goal of investing $100 million by the end of the year. Approximately 40% of our fleet has completed our One Fleet maintenance initiative and our maintenance cost headwind continues to abate. We expect to have 50% of the fleet completed by mid-2014, at which point we will start realizing benefits. During the third quarter, we completed our withdrawal from the Central States Pension Fund. This is a significant accomplishment that benefits our company and our employees. We are happy to report that these 850 employees now participate in financially sound retirement programs. Year-to-date, we returned $469 million to our stockholders. Dividend payments were $255 million and we repurchased 6.5 million shares for $214 million. Our board recently approved an additional $650 million to our share repurchase authorization. We now have approximately $760 million remaining, which extends through December 2015. In summary, we delivered results in line with our expectations. And I want to thank the entire Republic team for their hard work and execution. Glenn and Ed will now discuss our financial performance. Glenn?

Thanks, Don. Third quarter 2013 revenue was approximately $2.2 billion, an increase of $119 million from the prior year. This 5.8% increase in revenue includes acquisitions of 60 basis points and reflects the following 3 components of internal growth: pricing, volume and recycled commodities. First, pricing. We had an average yield growth of 1.3% with positive yield in all lines of business. Third quarter average yield was consistent sequentially and in line with our expectations. Core price was 3.4%, up 30 basis points sequentially. As a reminder, core price is defined as price increases to customers in changes and fees, excluding fuel recovery net of price decreases. We saw an increase in open market pricing in the third quarter, which was offset by CPI-based price resets. Beginning in July, price resets started using the lower CPI from 2012 of 2.1% compared to the first half of the year, which was based on the higher 2011 CPI pricing of 3.2%. Year-to-date, CPI is currently running at approximately 1.5%. Since our price reset tends to lag 12 to 18 months, we will see this lower CPI in our price performance in the second half of 2014. As a result, we expect less price contribution from these contracts next year. As a reminder, 50% of our revenue has a contractually based pricing restriction and approximately 60% of those contracts have index-based price resets. Fuel recovery fees increased 0.5%. Most of this change relates to an increase in the rate charge to recover fuel for us [ph] . Second, third quarter volumes increased 2.2% year-over-year. The collection business was positive 1.6%, primarily due to an increase in industrial volume. Growth in the industrial line of business was driven by temporary hauls, which were up 7.4% over the prior year. Landfill volumes were positive 2.6%, which includes an increase in landfill special waste of 5.4%. Our landfill MSW volumes were down 70 basis points. Our defection rate, which reflects the annualized rate of customer turnover, remained stable at approximately 7%. In addition to the volume increase of 2.2%, there was one more workday in the quarter, which contributed an additional 50 basis points of revenue growth. Third, an increase in commodity sales resulted in a 0.7% increase in revenue. The increase in commodity sales reflects both higher prices for recycled commodities and an increase in the tons sold. Commodity prices increased approximately 8% to an average of $117 per ton in the third quarter from $108 per ton in the prior year. This represents the average price for all commodity types across all regions. Third quarter recycling facility commodity volume of 545,000 tons was up 7.4% from the prior year. Current average commodity prices are approximately $119 per ton. For reference purposes, a $10 per ton change in commodity values equals approximately $0.03 of full year EPS, which includes the impacts on our recycling facility and collection businesses. Now I will discuss year-over-year margin. Third quarter 2013 adjusted EBITDA margin was 29.5% compared to 29.8% in the prior year, a decrease of 30 basis points. I will now discuss some specific cost categories. Labor costs increased 30 basis points and maintenance expense increased 20 basis points. These cost increases as a percentage of revenue continue to be impacted by volume growth in the C&D collection business. Sequentially, the margin headwind on these 2 cost line items was cut in half. This was due in part to higher levels of special waste received in the quarter, which had very little incremental labor and maintenance expense. Additionally, we continue to anniversary the elevated levels of maintenance expense as we continue to implement our fleet initiative. Second, transportation and subcontract costs increased 40 basis points, which relates primarily to growth in our National Accounts business and incremental special waste volume. In the National Accounts business, we employ subcontractors to perform a portion of the work. The costs are a pass-through on these contracts. While incremental EBITDA margin on this work can be in the low- to middle-single digit range. This work generates additional free cash flow and has attractive returns since it has very limited capital requirements. For special waste, there is often additional third-party transportation to deliver the volumes to our landfills. Next, fuel. The 40 basis point improvement primarily relates to a higher percentage of natural gas trucks in our fleet. Currently, about 11% of our fleet runs on natural gas. We will continue to replace diesel trucks with natural gas vehicles where appropriate and as part of our normal truck replacement cycle. The average price per gallon of diesel decreased to $3.91 in the third quarter from $3.94 in the prior year, a decrease of approximately 1%. The current average diesel price is approximately $3.87 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 fuel hedges. Landfill operating costs improved 60 basis points. Approximately 50 basis points of the change relates to successfully permitting a new solution for a remediation project in Illinois. As Don mentioned, this provided a $0.02 EPS benefit in the quarter. Finally SG&A expense was 9.7% of revenue, an increase of 20 basis points compared to the prior year. Both periods contained adjustments to incentive compensation accruals, which reduced SG&A below 10%. DD&A as a percentage of revenue was 11.2% in the third quarter of 2013 versus 10.9% in the prior year. The prior year included a benefit related to landfill expansions. DD&A is higher than capital expenditures as a percentage of revenue due to the amortization of intangibles. Ed will now discuss interest expense, free cash flow and selected balance sheet data.

Thanks, Glenn. Third quarter 2013 interest expense was $90 million, which included $12 million of noncash amortization. Our third quarter 2013 effective tax rate of 35.2% was favorably impacted by realizing additional federal and state credits on our 2012 tax returns. As Don mentioned earlier, this provided a $0.03 EPS benefit in the third quarter versus our expectations. Looking forward to 2014, we expect to return to our normal statutory effective tax rate of approximately 39.5%. Our estimated full year 2013 effective tax rate is approximately 36.5%, which assumes a 39.5% rate in the fourth quarter. The increase in tax rate creates a $0.10 EPS headwind year-over-year. Year-to-date adjusted free cash flow was $469 million and in line with our expectations. Adjusted free cash flow included net capital expenditures of $689 million or 83% of our projected full year spend. Cash flow can vary quarter-to-quarter, based on the timing of capital expenditures and working capital. With the expiration of bonus depreciation at the end of 2013, we expect an increase in cash taxes next year. We have not completed our annual planning process, but we anticipate free cash flow will be relatively flat in 2014. I will now discuss the balance sheet. At September 30, our accounts receivable balance was $907 million and our days sales outstanding was 38 days or 25 days net of deferred revenue. Reported debt was approximately $7 billion at September 30, and excess availability under our bank facility was approximately $1.5 billion. I'll now turn the call back to Don.

Thanks, Ed. Before we go to Q&A, I would like to address some topics discussed this afternoon in further detail. Glenn discussed that CPI-based pricing will be lower in 2014. We expect to offset this headwind with higher levels of price contribution from our open markets and improved price performance when renewing municipal contracts. We currently anticipate that yield in 2014 will be consistent with current levels. In order to drive better open market pricing, we are improving pricing decisions made by our sales team at the point-of-sale, enhancing controls for new business sales and service level transactions, better aligning sales incentive programs to drive improved quality of revenue, identifying customer segments and focusing on those willing to pay for our higher-quality service offering and increasing fee participation rates in our cost recovery programs. I would like to discuss current business conditions and market trends. Business conditions continue to improve. We will enter 2014 with positive yield and positive volume performance. This is the first time this will occur since 2007. Core price was 3.4% in the quarter, the highest level of performance in over 2 years. We consistently raised prices across each of our businesses. Over the last several years, our landfill MSW volumes have declined as a result of our pricing actions. We have consistently priced our landfill assets because they are capital intensive and expensive to operate. Our collection volume growth was concentrated in the industrial business, which includes temporary roll-off. Volumes in this business grew over 4% and yield was up over 2%. Margin in the industrial business improved 90 basis points in the quarter. This demonstrates our ability to achieve volume growth at higher prices. Generally speaking, there is a high correlation between collection and landfill volumes. In our business, commercial and residential volumes were up less than 1% combined and landfill MSW volumes were essentially flat. At the same time, C&D volumes in the collection and landfill businesses were both up high-single digits in the quarter. Recycling continues to grow and remains one of our core service offerings. Our recycling business has generally performed in line with our expectations. However, we have experienced higher costs and reduced volumes as a result of Operation Green Fence. Future investment in this line of business will be driven by customer demand, willingness to pay and return on invested capital. Our near-term plan is to focus on operating recent investments and leveraging our third-party network. We continue to manage the controllable aspects of our business to help mitigate cost increases, including automating residential routes to reduce labor costs and improve productivity; lowering our cost of fuel and reducing emission through conversion to CNG vehicles; and standardizing maintenance practices and processes to reduce costs. Collectively, we anticipate these initiatives will lower our cost structure by 75 to 100 basis points over the next 3 years. As a result of our maintenance initiative, we expect that we can effectively extend the useful life of our fleet by approximately 1 year once the majority of the vehicles have been certified. We estimate this will reduce future capital requirements by approximately $200 million spread over a 4- to 5-year period, beginning as early as 2015. Looking to 2014. We anticipate our normal mid- to high-single digit growth in earnings and free cash flow performance before taking into account to tax-related items that will partially offset this level of performance. First, an increasing effective tax rate which results in a $0.10 EPS headwind. And second, the exploration of bonus depreciation, which reduces free cash flow by approximately $50 million. Expected earnings growth in the business, together with tighter controls on capital spending, gives us confidence that we can offset the cash tax headwind from bonus depreciation in 2014. Our long-term view of the business and strength of our assets has not changed. We still believe that pricing levels exceed cost inflation under normal business conditions, that we gain operating leverage and increased density with broad-based volume growth. We can differentiate our service offerings through superior customer service, world-class safety and employee engagement. We can maintain our pace of tuck-in acquisitions in existing markets. Margins can expand through cost efficiencies, productivity improvements and leveraging SG&A expenses. And finally, ROIC can steadily improve through earnings growth, capital spending controls and investing wisely in the business. Our team remains focused on executing our strategy to deliver consistent earnings and cash flow growth. We are committed to an efficient capital structure, maintaining our investment grade rating and increasing cash returns to our stockholders. At this time, operator, I'd like to open the call for questions.

[Operator Instructions] And our first question comes from Hamzah Mazari with Credit Suisse.

The first question is just on volume. Has your strategy changed at all in terms of going after new business now that you're seeing volumes begin to get better? Or how should we think about volume strategy now versus last year when volumes were shrinking? Has there been any change?

No, there really hasn't. Let me walk you through because when you think about volume, we've got to look at it through several different lenses, Hamzah. The first one is on the landfill side. As I said in my comments, we've consistently lost landfill MSW volume over the last 3 years. So we've consistently priced those assets because of the high cost nature of those landfills and we've consistently lost volume for the last several years and so -- by, frankly, a substantial amount. So we continue to price, even in light of that landfill volume loss and those volumes leaving our system and going to other landfills. On the collections side of the business, we made a point a couple of years ago with the fact that there wasn't a lot of organic growth and CPI was low and so on, that we weren't going to surrender our high-quality business during that time and we were going to really hold the line on our volume and we've done that. As volume has returned, again, we're really only seeing organic volume growth in a couple of places, and we mentioned National Accounts, C&D roll-off specifically and special waste has gotten better over the last quarter. So if special waste comes in a pretty good margin, as I mentioned in my comments, we've seen really nice growth in the roll-off system. And we've seen not only volume growth but we've seen pricing improvements and we've seen margin enhancement at the same time. So we're proving that we can improve both volume and price and margin in that system with that kind of growth. So we've been saying for a long time, we think when the economy returns, we're going to see it start with housing formation into construction. At some point, that's going to convert into business formation. And hopefully, we might see some change in service increases and so forth, business formation in the commercial lines and we'd like to see that same performance happen. But we consistently price our business across all lines of businesses, as I've said. Again, we're not walking away from good business, but I think we've demonstrated our willingness to hold the line at the landfill because of the nature of that asset. And also, we've walked away from some substantial municipal business this year and we just couldn't get down in the trenches and lower our prices as much as the competition could, so we're going to see some headwind from that in 2014.

Got you. Very helpful. And just a follow-up. You mentioned tax. When we think about next year's earnings, you talked about price on lower CPI when we think about next year. Anything on the cost side that we should keep in mind in terms of non-recurring or something that is different next year relative to this year?

No, not really. We mentioned -- we're going to continue the major cost initiatives we talked about, the automation, the CNG conversion. The maintenance initiative, we've slowed that down here in the latter half of '14 -- or '13, I'm sorry. So we haven't rolled out any new divisions on One Fleet. We talked about that cost abating year-over-year. We're going to go back and shore up all those divisions that have already gone through the process and get those certified. Ultimately, then, we're going to see that benefit I talked about in the capital spend in our truck fleet out in '15. But nothing other than that. We're sticking to those projects and we think they've got good returns.

Our next question comes from Al Kaschalk with Wedbush Securities.

In terms of the pricing data, could you talk about the benefit on the recovery, if you will, from open market business? I mean, how much that helped, maybe it was a swing of the volume because yield actually -- I mean, it came in line where we were looking for, but it seemed like maybe it benefited from special waste. I just wanted to hear your thoughts on the pricing environment.

Yes. Special waste was our -- probably our brightest spot in the quarter, the -- having seen that volume come back after kind of a slow Q2. But we did get a little more ground covered in the open market on pricing. Keep in mind, Al, we've got 7% defection in our permanent commercial and permanent roll-off business in an open market. And so as that business leaves the system, we have to replace it. And, again, we replaced that business to keep our volumes consistent. And that new business comes in at a lower-than-average price. The business that leaves the system leaves at a higher-than-average price and that's churn, all right? So that's consistent. It's not a new phenomenon. We've seen it for many years. It's good that it's held stable at 7%. So we're happy about that. Meanwhile, with the slow CPI environment, we've gone into that open market and we've tried to get just a little more pricing in that open market and we've been pretty successful with it. But it's really on the margin. So that's helped us offset this effect of low CPI and we've been in a low CPI environment now for 3 years. And it doesn't look like we're going to have any relief from that for at least 1 or 2 years.

That's helpful. So if I think about the lag on CPI, I think about the benefit of volume. To me, the headwind here is how you're going to over -- how you're going to compensate for the price discrepancy between cost inflation and your ability to get price. And while you probably won't comment [ph] , is the headwind here several quarters in your mind? Or how would you maybe characterize that -- framing it in that light?

Well, you got a couple of questions there, Al. The headwind from CPI is real. Our true inflation, net of all the productivity, is a little better than that, a little stronger than that. We've got to continue to hold the line on the quality volume we have. We've got to get a little more creative in other areas of pricing. And I mentioned in my comments, we're working on some initiatives within the sales organization to improve pricing at the point-of-sale to see if we can continue to improve fee participation. There's a number of those things we'll continue to do in '14 to try to tweak a little more price out of the system in the open market that -- where we're not restricted based on the CPI. So we've got our work cut out for us there. But we've got some new tools we're putting to work. We've made some investments in some software to expand the capability of our pricing tool. And we think we'll get some better control and a better outcome.

Our next question comes from Michael Hoffman with Wunderlich.

Commercial sales, the revenue growth year-over-year seems very healthy. It's calculated at 4.3%. And I'm trying to read through some of your comments, Don, how much of that is where you're winning new business or incrementally, your defection rate or is it just price? I'm not hearing that there's much volume. You said that basically volume was, for all intent and purpose, was flat to 1%.

Yes, the commercial volume, Michael, is only about 1%. We won some new contracts, some new franchise contracts, I guess, that have more commercial business than them. So that's outside of those wins, just normal commercial growth coming in at about that 1% range.

Okay. So -- but the 4.3%, then that's a pretty healthy underlying trend there, right? What I was trying to understand is, are we getting service interval upgrades yet? Is that's what working through?

I'm not sure where your 4.3% is coming from because it's...

Well, unless I did my math wrong, 659 divided by 632 is a 4.3% growth rate year-over-year.

Yes. So -- help me out, guys, 1% volume.

Yes. So, Michael, we've got -- the average yield in the commercial business is about 1.6%. You have the 1% volume and then we have increases FERF as we talked about. That makes [indiscernible] .

Okay, okay. So you're getting some service upgrades. So that's a nice trend to be seeing is we're getting some service upgrades.

Yes. We're starting to see it. So again, we're -- for a couple of quarters now in a row, service increases are outweighing service decreases. So I think that's -- it's nice to say that for the first time that we've seen that for quarters 2 straight. So we're not declaring victory there yet because it's coming back pretty slowly. But all those trends are kind of pointing in the right direction. And again, just like I talked about in the roll-off business, and we have this trend of seeing volume come back and roll off, and seeing pricing take traction and roll off, as we see more organic volume in commercial and see some service increases coming back, that will help drive the margin in that business for us as well in upcoming years.

Okay. And if I can ask the last person's question a little bit differently. When do you think time-wise? Is it in years, in quarters, that you cover your inflation with price, the reported price that you show us. You call it yield. When do we cover inflation?

Well, again, let's do a little history lesson here, right? If we go back 2006 and 2009, our yield exceeded our cost inflation because we had this sort of average 3.3% CPI environment, okay? The last 3 years, we've had an average 1.6% CPI environment, and we've had to struggle doing that. So we know that at least next year, our CPI is going to be 1.5%. So we don't see much relief coming in '14. And we know, it's this 18-month lag. So we've got that going for us, okay? So I think the strategy still works. The approach we've taken still works. We need to stay vigilant on these cost initiatives we've deployed so far. We need to execute those well. When you get anniversarying this One Fleet initiative into next year, that will start to help us and -- but then, it really all depends really, Michael, on some of the market from there, right? And so what's really going on in this open market? And can we got a little more advantage there? And then it's going to happen -- it's going to matter what happens with landfill pricing. Again, we've lost landfill volume consistently every year for years. And that landfill volume has found a cheaper home and it's going to matter to see what happens there.

Our next question comes from Corey Greendale with First Analysis.

I was hoping you might be able to frame how we should be thinking about volume and understanding that there's a lot of variables, but given that you're starting to see the service increase levels, should we be thinking that as that increases, you see accelerated volume growth in '13 -- in '14? Or is it more that you've got a strong special waste quarter this quarter? Last quarter, you had wet volume so that we should be thinking about tough comps and maybe a slower volume growth in '14?

Yes. We're really not giving '14 guidance, Corey. We're trying to help you guys understand the exit speed here. We've had some inflection with special waste, which is positive. Again, this inflection in industrial roll-off is a very positive sign. So that's something we can put a stake in the ground on and see continued benefit from. It's a little too early to talk about when commercial is really going to take off for us. This very slightly positive trend in service increases, again very slightly positive, and we'll see where it goes. We still have headwinds in residential. We've seen a lot of price pressure in residential. We've had to take some rollbacks. We're going to take a stronger position on those rollbacks in '14, we think, but we've got still a substantial book of business that's coming for renewal. And we've seen some real competitive behavior there. And we've had to walk away from some business. So that's going to cause a little drag on us. So we're still doing our business plan. And we're still working through all these things. And we'll bring you the full-blown guidance in February, like we always do.

Okay. And you mentioned some pricing initiatives, you were thinking about price in different ways. Your larger competitor talked about some stuff there, thinking of or doing differently in how they're structuring their recycling contracts and surcharging customers for contamination. Just what are your thoughts on structure of recycling contracts?

Well, one, I'd point out our recycling business has actually performed pretty in line with our expectations. So we're not caught offguard there. We would like to see some more benefit accrued to the company with the way recycling contracts operate, better pass-throughs on some of these expenses around Green Fence and so forth could help us. But remember, if recycling volumes come back, we get a pretty big boost from our volumes -- I mean, pricing, we get pretty big boost from these facilities. So we're working with our customers to weave some of this kind of language into our contract. It gives us a little more protection. But this is going to take a long, long time to work through the system. These municipalities are used to buying products a certain way and it's going to take a while for any of those kind of changes to catch on.

So it sounds like you are theoretically looking at similar things?

Yes. I mean, we always are. We're always looking for ways to improve the balance and make sure that the fairness in that -- in those contracts work for both parties.

Our next question comes from Joe Box with KeyBanc Capital Markets.

I missed some of the call earlier, so I apologize if you went through this detail, but one thing I'm trying to understand is, obviously, the special waste component was a nice benefit in the quarter. Can you just help us understand the improvement that you've seen in the incremental EBITDA this quarter? Maybe how much of that came from the landfill business and specifically special waste?

Joe, this is Ed. We don't really break out or give guidance to EBITDA margin by line of business. I think what we really saw the change in special waste in the quarter. As Don mentioned in his speaker notes, is that we had been awarded a number of projects actually last year. And what we had seen starting probably Q3 of '12 is some of these government-run projects being delayed for various reasons. We have now seen those projects now come back online. One of the larger projects we have right now is a port cleanup in San Diego. But really, what we're seeing now is these projects will occur because they're environmental cleanup. It's just that given some of the political noise we've had over the past year, they had been delayed. But we see those projects coming free and we're getting that revenue now, which you would view as special waste on a recurring basis like our E&P business. We did not really see any disruption in those volumes at all. It was really some of this event work, kind of environmental cleanup that had been delayed, but we definitely see these projects coming back into the pipeline.

And just one more quick one. Switching gears to the National Account component. I know that you guys kind of comped the large last customer that left last year. Can you just maybe talk to the strategy on the National Account side, maybe what's driving the success here? And do you think it continues to grow at a nice pace or is it going to continue to be lumpy?

Well, I think it's going to grow at a reasonably steady pace going forward. We're frankly less interested these days in those really super large accounts because they tend to be a little more volatile. Maybe we learned that lesson. So we're still focused a little bit more on -- with some of the regional customers, some of the accounts that we're closer to. We're also expanding our share of wallet with those same customers and doing more for them. And so we talked about the fact that we're doing more business that requires us to broker. We're handling their white goods or their recyclables. We're the contractor, then we hire a subcontractor to do some of that work. So we're -- again, we're working to add more value and improve the service offering with those customers to be their waste stream expert, so to speak. And so we're going to continue to focus on -- it's good business, it's got a good return and it is one of the areas that we think will grow for some time.

Our next question comes from Adam Thalhimer with BB&T Capital Markets.

On the residential competition you talked about, is that surprising to you at all? I mean, with housing getting a little bit better, you might think that, that would actually benefit that market. But maybe...

Yes. I think we got this state of municipal finance that's been weak and we've talked about a lot of that. You look at some of the data that's out there, about the condition of the general fund in these cities and the way their tax base has been affected over the years. It doesn't surprise me that cities are looking for discounts, it does surprise me that some of the pricing we've seen by some of the players out there and really more some of those smaller, regional and those kind of companies. But they're capitally-intensive deployments with all the CNG requirements now. They put contracts on automation, everything else they want. Cities are asking for a lot more services without wanting to pay a lot more price. And at some point, we just have to draw the line because we've got to get that ROI moving in the right direction for the organization. So we're going to take a few hits there and we're also using that tough environment to battle back and actually use some privatization work. So we've had a couple of nice privatization wins in the year, albeit smaller ones. I'm not sure they're going to be able to offset the revenue loss in total.

Okay. So I'm still a little bit iffy on the -- what the volume outlook is. It almost sounds like Q3 might be a near-term high for volume growth. Is that the right read?

I think, I said, we're going to enter Q4 -- enter next year with positive volume, positive price for the first time since '07. So I think we've got good trend going. We're -- we found, I think, the basement in commercial, kind of bump it along even a little positive. We've got this boost in industrial, which has performed well not only the volume but the pricing and margin. Landfill is hard for us. As I said, we've lost virtually all of our third-party competitive MSW volume. So we don't get the benefit of that volume but we also don't get the benefit of those customers when they grow their volume. So that's going to work against us a little bit. But all in all, I mean, it's a pretty good story. We need to work through some of these costs where, as we talked about, controlling the capital. And in this tough CPI environment, it's kind of the tail that wags the dog for us, when half of our business is restricted. So we have to work through '14's CPI environment.

And our next question comes from Alex Ovshey with Goldman Sachs.

Well, I wanted to go back to the pricing line of questioning for '14. I want to confirm something before I ask the question. You said a couple of times that 50% of your business is linked to CPI. But I also thought you said that 60% of that 50% would actually be directly impacted by the reset in CPI...

Yes, that's right. So 50% is indexed and 60% of that 50% -- you're right. Nevertheless, it's a pretty big chunk.

It's a pretty big chunk. Okay, got you. And then what are you saying the headwind then would be from residential business that is up for a renewal and it's not just a CPI adjustment there, it might be something more than that? I mean, what will that be for 2014? Do you have a sense for that?

Yes. Again, we're not trying to dial too much into '14 on this call. We're trying to give you kind of where we are through the year and how we're going to end the year. We're still working through the business plan to getting through all that. We -- as I said, we're going to work harder on those renewals. And we're going to take a stronger position on the rollbacks. We're still going to protect volume that has a high return. And we're going to have the discipline to walk away from volume that doesn't have an appropriate return. We can't keep throwing capital and additional service into some of these contracts that don't have the return criteria that we need to move forward. So we think that's been spiraling down over the last several years. We're probably halfway through that book of business. And we would like to see it spiral back up. But we've got to get the work done and business plan to get a better handle on where we think it's going to come off in '14.

Alex, in a typical year, as far as municipal contracts coming up for renewal, generally, is in a range of $300 million to $350 million. So essentially, we have to -- we'll be employing this discipline as we look at those renewals.

Okay, that's helpful, guys. And just my last question on the pricing side. So what's the implied price that you need to get on the open market, not CPI business, to be able to keep average yield at around 1.5%? I mean, how does that compare to history? Is there potential upside to that if we are seeing volumes grow?

Well, as far as our pricing actions go, we've been pretty consistent through this year compared to last year. We plan to be consistent with our pricing actions into '14, only that we're going to get a little smarter around some of the -- when you talk about some of the pricing tools that we're using and see if we can, at the point of quoting our customers, work a little harder on some of the fringe like the fees and some of the other things that push the open market pricing up and try to do a little better job on demonstrating the value to customers. So we're looking to slow the rollback. We're looking to impact some of the churn. But if you think about it, maybe it's a 50/50 split, right?

And we accomplished that here in the third quarter, meaning we started to see the lower CPI roll into our numbers beginning July 1 and we were able to make up what we lost there with price increases in the open market. So we're getting the job done today.

Okay, got it. And if I can just ask one more. It's interesting, it seems like as we move through the year, your temporary roll-off business seems to be very exposed to housing has strengthened even though looking at the macro housing data, it's actually softened. I'm curious if you have any thoughts on that disconnect and what that may be related to?

Well, I think that's just the lag, the natural lag. When you read about housing starts and then you see the production of waste from that construction, it just lags. So I think that's what we're experiencing today. I would tell you, we think we're getting our fair share of that business...

At a higher price.

Yes.

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

Can you talk a little about the natural gas trucks, fleet, how things are going, your rate of conversion and also, on your fueling stations? Are you looking to profit or could you quantify how much of the fueling stations will be -- what percentage will be used for outside fleets other than Republic Services? And how much could you -- you could earn on that?

Yes. Stewart, we're -- currently, 11% of our fleet is on natural gas vehicles. We have a fleet of 15,000 trucks. We buy about 1,000 trucks per year as our replacement program. And we've been buying about half CNG trucks and about half diesel. So we're kind of upping that percentage, if you like, 3% or 3.5% per year. And as far as the fueling stations, we use it only for our own trucks. We don't fuel anybody else's.

So you have no plans to share that, share the fueling stations?

No, no. Because if you think about it, we have to fuel our trucks every day. And we do that in the evening, when the trucks are idle and there's no -- we have no plans to be a retailer of fuels.

We view our investment in the natural gas infrastructure as being a competitive advantage and we don't want to share that with other folks.

How many fueling stations do you have right now?

25, plus or minus.

25. And they cost roughly $1 million per station?

It depends on the size, $1.5 million to $2 million. You also have to realize you have a different maintenance environment. So there are some other changes which need to occur. And really, from a safety perspective, you don't really want folks that are not part of Republic coming on the property. We're not a fuel retailer. We're in the business of solid waste management.

And what's the hurdle rate? What are you looking for ROI in that kind of investment, based on the...

It's in the mid-teens. We have the payback of 3 to 4 years.

Our next question comes from Barbara Noverini with MorningStar.

What are some of the factors that make Republic Services a more competitive vendor to a National Accounts worth? I know you haven't mentioned much about National Accounts in a couple quarters and we're seeing some nice improvement in the quarter. So I'm wondering if maybe your strategy has changed, maybe you're better equipped to satisfy demand for recycling from these customers now that you've added some capacity into your network.

Well, I think what matters to National Account customers is, as I used the term earlier, they're looking for somebody to be their waste expert, somebody who can understand all the aspects of the waste stream and help them manage them. So whether that is recycling, diversion of white goods, all those kinds of things, the things we do. Reporting is important to large customers, who have a distributed network. They want access to data that helps them understand what's going on at their locations. And so that's an important aspect. We've got customer service tools, our portal that they can access their information and manage their information online through our system. So those are the kind of things that we incorporate into our presentations to customers. They get really good service. And we've got a third-party hauler network in those markets that we don't serve to help us out, to give us that broad reach. So all in all, I think we do a good job for them. And we're finding other ways to meet their needs, albeit some of those new ways don't really require our capital, our brick-and-mortar, but we're finding with opportunities through other alliances and other third-party networks to meet their needs and just be their go-to company and sort of take the worries off of their plate. So that's what we do for our customers. And we'll continue to find those accounts that -- and customers that see the value in them.

Got you. Would you be able to provide some sort of ballpark with the recycling business that does come from these customers? Are you able to handle most of it or do you need to rely on a third-party network to take the majority of it?

Well, we're not in the, for instance, the e-waste business. We haven't built any infrastructure around that. So when it comes to certain slices of the waste stream, we work through alliances. We don't have -- we're not in the medical waste business so -- even though we have alliances for that. So what we try to do is stick with the, what we call, traditional recycling, the fiber, which is the highest content of the waste stream. And that's where we play with our own people and our own trucks. And then we rely on these other partners to help us fill in the gaps.

Our next question comes from Jeff Osborne with Stifel.

Most everything's been answered here. Just 2 quick ones for me. One is I wonder if you could just touch on what you're seeing in the M&A environment for 2014 as we exit the year? And then the special waste business, obviously, a bright spot here in the third quarter, a bit erratic to start the year. Just what's the trajectory here, as we head into the fourth quarter and early next year?

Well, on the M&A side, as I said in my comments, we think that we've got a couple more years of spending, about $100 million in spend to buy good companies at that same multiple and in tuck-in environments, so in cities and markets we're already in. We're looking at collection companies and occasionally some infrastructure that helps fill out our network. So we've got a pretty good pipeline and we haven't seen multiples necessarily change. We're always looking for good companies and we think we've got the ability to continue to do that. On the special waste side, as Ed said, the business can be a little lumpy but more so on the event-driven business. So again, what we saw happen in Q3 was sort of picking up some of that pent-up demand that was deferred from Q2. So we think that will even out in Q4 and then settle down to be as good as average or better than average in '14.

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

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