Republic Services, Inc. (RSG) Q3 2014 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Third Quarter 2014 Call for Investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol, RSG. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Delghiaccio. Good afternoon, Mr. Delghiaccio. Thank you.

Good afternoon, and thank you for joining us. This is Brian Delghiaccio, and I would like to welcome everyone to Republic Services' Third Quarter 2014 Conference Call. Don Slager, our CEO; Chuck Serianni, our CFO; and Ed Lang, Senior Vice President, are joining me as we discuss our performance. Before we get started, I would like to take a moment to remind everyone that some of the information we discuss on today's call contains forward-looking statements, which involve risks and uncertainties and may be materially different from our actual results. Our SEC filings discuss factors that could cause actual results to differ materially from our expectations. The material 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 30, 2014. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited. I want to point out that our SEC filings; our earnings press release, which includes GAAP reconciliation tables; and a discussion of business activities, along with the recording of this call, are all available on Republic's website at republicservices.com. And finally, I want to remind you that Republic's management team routinely participate in investor conferences. When events are scheduled, the dates, times and presentations are posted on our website, along with instructions for listening to the live webcast of the event. With that, I would like to turn the call over to Don.

Thanks, Brian. Good afternoon, everyone, and thank you for joining us. We are pleased with our third quarter results which were in line with our expectations. Revenues increased approximately 5% with a balanced mix between price and volume growth. During the quarter, we continued to profitably grow our business by focusing on attracting the right types of customers, differentiating our service offering and improving our service quality. We completed high-quality accretive acquisitions and have already exceeded our full year goal. And we remain focused on managing cost, improving productivity and leveraging our cost structure. We made great progress towards achieving our annual goal, and we are pleased with our third quarter performance. Some of the highlights include third quarter EPS of $0.52, which was in line with our expectations. Year-to-date, adjusted free cash flow was $433 million. This level of performance includes 84% of our projected full year capital expenditures. Core price in the third quarter was 3%, and average yield was 1.4%. Average yield was consistent with our second quarter performance even with a step-down in CPI-based pricing. We continue to see better open market pricing to offset the CPI headwind. Third quarter volume increased 2.1% and was concentrated to event-driven waste streams. This level of performance was strong given the tougher prior-year comparisons. Year-to-date, we have returned approximately $560 million to shareholders through share repurchases and dividends. This includes 8 million shares repurchased for $279 million. We expect to spend approximately $400 million on share repurchases in 2014. During the quarter, we continued to implement our multi-year initiatives that enable us to execute our strategy. For example, we continue to rollout Capture, our next-generation ROI-based pricing tool, and priority-based selling, our new standardized sales process. Both initiatives are focused on our open market commercial and industrial businesses. Capture and priority-based selling were designed to work together on the same cloud-based platform to integrate the process of identifying the right type of volume growth at attractive prices. We continued to make tuck-in acquisitions that layer in well to our existing markets. Year-to-date, we have invested $111 million to acquire $57 million of revenue at a post-synergy EBITDA multiple of 5x. Additionally, we completed the acquisition of Rainbow Disposal on October 1. This high-quality franchise business complements our Southern California operations. Regarding our fleet. 14% is currently operating on natural gas, 68% of our residential fleet is now automated and over half the fleet has completed our One Fleet maintenance initiative. I'm proud of our achievements during the third quarter and remain encouraged by the underlying strength of our business. I want to thank the entire Republic team for their hard work and execution. Chuck and Brian will now discuss our financial performance. Chuck?

Thank you, Don. Third quarter 2014 revenue was approximately $2.3 billion, an increase of $99 million from the prior year. This 4.6% increase in revenue includes acquisitions of 70 basis points and reflects the following 3 components of internal growth: pricing, volume and recycled commodities. First, pricing. We had average yield growth of 1.4% and core price of 3%. Core price consisted of 4.1% in the open market and 1.2% in our restricted business. Average yield in the collection business was 1.5%, which includes 2.1% yield in the industrial business and 1.8% yield in the commercial business. Average yield in the post-collection business was 1.3%, led by landfill MSW, which increased approximately 2%. Fuel recovery fees increased 20 basis points. Most of this change relates to an increase in the rate charge to recover fuel costs. Fuel costs decreased approximately $2 million compared to the prior year and decreased 30 basis points as a percentage of revenue. The average price per gallon of diesel decreased to $3.84 in the third quarter from $3.91 in the prior year, a decrease of 1.8%. The current average diesel price is $3.64 per gallon. Second, volumes increased 2.1% year-over-year. The collection business was positive 1.5%, primarily due to an increase in landfill and industrial volume. Growth in the industrial line of business was 4.9% and includes C&D and other temporary business, which was up 7.4%. Volume in the commercial business was up 1.1% and residential was down 60 basis points. The decline in residential was primarily due to contracts lost in bid situations. We will only renew business if it meets our return criteria. The post-collection business, consisting of third-party landfill and transfer station volume, was positive 4.1%, which includes an increase in landfill special waste of approximately 16%. Our landfill MSW volumes were up 1.8%. Our defection rate, which represents the annualized rate of customer turnover, remained stable at approximately 7%. Third, commodity revenue increased 20 basis points. The increase in commodity sales reflects an increase in tons sold, partially offset by a decline in recycled commodity prices. Commodity prices decreased 2% to an average price of $115 per ton in the third quarter from $117 per ton in the prior year. Current average commodity prices are approximately $108 per ton. Third quarter recycle volume of 569,000 tons were up 4% from the prior year. The increase relates to additional National Accounts brokered volumes. Cost of goods sold for recycled commodities increased $7 million compared to the prior year, an increase of 30 basis points as a percentage of revenue. Again, the increase relates to additional National Accounts brokered volumes. Now I will discuss year-over-year margin. Third quarter 2014 adjusted EBITDA margin was 28.2% compared to 29.5% in the prior year, a decrease of 130 basis points. A majority of the change can be explained by 3 line items, most of which relate to onetime benefits in the prior year. First, landfill operating costs increased 60 basis points. In the prior year, we implemented a low-cost solution at one of our remediation sites, which resulted in a onetime benefit. Second, risk management costs increased 40 basis points. Risk management costs were approximately $12 million higher than our expectations during the quarter or 50 basis points due to a few large claims. On a year-to-date basis, risk management costs were 2.1% of revenue in both the current and prior year. Third, SG&A expenses increased 40 basis points related to a bad debt recovery in the prior year. SG&A expenses were 10.1% of revenue during the quarter and on a year-to-date basis, which was in line with our expectations. Of the 3 expense line items I just discussed, risk management created the largest variance to our current year margin performance. Excluding the 50-basis-point increase, EBITDA margin would have been 28.7%. All other cost changes represented 10-basis-point improvement in margin. I would like to remind you that we provide a detailed schedule of cost of operations and SG&A expenses in our 8-K filing. Brian will now discuss interest expense, free cash flow and selected balance sheet data.

Thanks, Chuck. Third quarter 2014 interest expense was $87 million, which included $11 million of noncash amortization. Our effective tax rate was 37.1% of adjusted earnings in the third quarter and 38.4% on a year-to-date basis. We expect an effective tax rate of approximately 39.5% in the fourth quarter. Year-to-date adjusted free cash flow was $433 million. Net capital expenditures during this period were $678 million or 84% of our projected full year spend. Free cash flow can fluctuate by period due to the timing of capital expenditures, cash tax payments and working capital. At September 30, our accounts receivable balance was $955 million, and our days sales outstanding was 38 days or 26 days net of deferred revenue. Reported debt was approximately $7 billion at September 30, and availability under our bank facility was approximately $1.6 billion. I will now turn the call back to Don.

Thanks, Brian. To recap our 2014 year-to-date performance, I am very pleased with our results and the progress we made in profitably growing the business and achieving operational excellence. Most of our business lines are performing well and showing strong year-over-year gains in revenue, EBITDA and margin. The one area of our business that continues to lag is residential. The residential line of business has the highest concentration of pricing restrictions, and therefore, the most exposure to low CPI-based resets. While we don't control CPI, we are focusing our efforts on the things we can control to improve our residential business. Specifically, we've reviewed all contracts to ensure we are realizing the full revenue potential for each contract. We identified underperforming contracts and are not exercising options to extend those without a price increase. We are working to convert new contracts to waste-related indexes versus headline CPI because they better reflect our cost structure. And we are designing and launching priority-based selling for our municipal business segment in 2015. We will continue to offer high-quality services and products to our residential customers but must earn an appropriate return to deliver those services. In our earnings release, we updated our 2014 financial guidance that provided a preliminary outlook for 2015. We expect to finish the year with adjusted EPS of $1.93 to $1.94 and adjusted free cash flow of $675 million to $690 million, both are within the guidance range that we provided you in February. We are midway through our 2015 planning process. Based on early reviews of the budget and assuming current business conditions, our 2015 preliminary outlook is: EPS of $2.02 to $2.06. This represents mid- to high-single digit earnings growth compared to our expected 2014 performance. And adjusted free cash flow of $725 million to $750 million. This represents mid-single digit to low double-digit growth compared to our expected 2014 performance. This outlook includes the benefit of extending the useful life of our fleet, partially offset by investments in growth opportunities and technology. Consistent with prior practice, we will provide detailed guidance in February of 2015. We look forward to delivering on our promises to our key stakeholders, including our customers, communities, employees and shareholders. For our customers, we strive to provide the highest level of customer service. We are committed to developing differentiated and superior products that enhance the customer experience. For the communities we serve, we remain devoted to delivering safe, convenient and cost-effective solutions while being good stewards of the environment. For our employees, training and developing our people is a priority. We strive to be the employer of choice. And for our shareholders, we remain committed to creating a long-term shareholder value by generating consistent earnings and free cash flow growth while improving return on invested capital. I would like to thank the entire Republic team for their contributions that have allowed us to meet our 2014 objectives and positioned us well for future growth opportunities. At this time, operator, we'd like to open the call up for questions.

[Operator Instructions] Your first question comes from Joe Box with KeyBanc Capital Markets.

So I recognize that the 2015 guidance is preliminary, but can you maybe just walk through some of the high-level assumptions like price, volume and maybe recycling?

Now you know what, Joe, again, we're -- it's preliminary outlook, and we're going to give you detailed guidance in February like we do all the time. We're in the midst of the business planning process as we speak. We're just taking a look at current trends in the business. As you know, things in the business don't change rapidly. You understand the current CPI environment. You understand how the business works. And we're taking that current trend, kind of building it out into '15, setting goals for the field and understanding what the business can produce. So that's where we're at, and we'll give you more detail as we have it in February.

Okay, I can appreciate that, Don. Let me try it from another angle then. I mean, obviously, we've got guidance and planning set for 2014. So Chuck, you highlighted the 3 cost buckets that could potentially be somewhat onetime in nature, but just optically looking at 4Q guidance and what it implies, it does seem to imply that maybe some costs remain elevated. Can you maybe just talk to some of the areas that we should be aware of for 4Q?

For 4Q or -- the year-over-year, if I look at the year-over-year, let me answer that. Right now, we had originally guided to 28.5% to 29%. We're trending a little bit down from there. But keep in mind that we've got about a 20-basis-point headwind because of commodities. We've got a headwind of about 10 basis points due to insurance, and we've got about a 10-basis-point headwind because of weather. So if you'd take all of those into consideration and add that back to the 28.1% that we're at right now, we end up being kind of on the -- within the guidance that we had given at the beginning of the year. So in terms of Q4, I don't see any significant changes in our EBITDA.

One other thing to consider there, too, Joe, is that most of the things that Chuck outlined were actually prior year items that were onetime benefits in 2013 that just anniversary-ed, right? So when you talk about it in the current year, the cost that was an increase relative to our expectation was just an insurance item. So to Chuck's point, x that, when you kind of take a look at our year-to-date performance, we're kind of in line with what our original expectations were from an overall EBITDA margin performance.

Appreciate that. And one last one for you. Don, in the release, I think you mentioned that you guys have the ability and the intent to complete some larger transactions. I haven't seen that before. I'm just wondering if that's foreshadowing something or if there's any change to your acquisition strategy?

No, Joe, and I think we've always said, look, we set our sights on $100 million spend. We look at a lot of deals to spend $100 million and do that intelligently. This year, we had a few more deals in the pipeline. And then, of course, on top of that, the Rainbow Disposal acquisition came into the market and we were able to successfully complete that. So we've got the capacity. We always say we want to keep our financial flexibility. Important for us to keep our investment-grade rating, keep that financial flexibility. We want to keep some powder dry so that when there's a good deal in the market, we can take advantage of it. That's exactly what you saw us do with Rainbow.

Next question is from Al Kaschalk with Wedbush Securities.

I want to -- can you add some additional detail behind the insurance, either I missed in your prepared remarks, or why is that elevated? And just start from there, please?

Yes. So Al, our actuary reviews all open claims every single quarter. So when you think about that process of every quarter, it can introduce a little bit of volatility. But if you take a look at where we were through June, we were actually performing more favorable than our original expectations, and we expected that to continue. What we had was a handful of claims that we saw some increased development on in the third quarter. That was the $12 million that Chuck called out in his notes. But when you take look at a year-to-date basis, both in the current and prior year, both are running at about 2.1% of revenue. So what I would just say is that when we were standing there at Q2, expected the favorable development to continue, and we saw it go a little bit backwards in the third quarter.

Great. And then just another housekeeping item. The $0.01 or so in bad debt provision, is that legacy? Is that -- what is that related to, please?

Yes, that was a bad debt recovery that we actually realized last year. And so that when you look at the EBITDA margins year-over-year, that creates a headwind for us. But there was something that happened last year, recovered from last year.

Okay. And then I want to focus in terms of the core business. And I mean this genuinely here. Don, you had said the residential business continues to lag and the commercial and industrial, I guess, maybe you can comment on that whether that's in line with your expectations. But if I take a step back and look and add in some of the adjustments, it doesn't feel from the outside that the conversion rate on the margin is perhaps where it could be, should be and probably not where you wanted it to be. So are there additional areas that maybe you can highlight for us that maybe still remains a struggle, absent price?

Yes, so let's back up a little bit further from that first, okay? So we have a backdrop where CPI has been averaging 1.6% for 5 years. And over that time, in total, a 1.6% doesn't get our costs recovered just through inflation, right? So obviously, we battle back every year with productivity measures and other things to improve our costs. I would tell you that with that 5-year low CPI environment and pretty steady inflation, we've done a good job running the business and managing the core business, but essentially holding our EBITDA margins flattish. And as Chuck said, if you take out some of the nonrecurring items, they're actually flat to better. So let's start with that. So that's what we've been working ourselves toward is improving the business in that low CPI environment. Again, as I said in my comments, CPI really impacts us in the residential business. And so to say it as clear as I can, the resi business is just a stinker right now. We've been dealing with these price rollbacks. It's a high capital-intensive business, and it's one of the reasons we're really tackling it and focusing in on it. If we step back and look at the other LOBs, we're actually doing very well. And when we do the netting of all the sort of individual issues, the growth that we're seeing in the business is coming in at a good margin. We are seeing the right growth in our commercial business, albeit slow. We've been bragging about the industrial business growing now for several quarters. That's continued in Q3. Finally, starting to see a little bit of life in MSW volumes at the landfill after many, many quarters of 0 to negative. So the rest of business is performing pretty well, and we think frankly very well in light of the macro environment. It really is this residential business that's been dragging us backwards. So, yes, let me just give you a couple of issues or a couple of details. We've talked about permanent industrial being up 5.3%. And in Q3, it was 5.6% up in Q2. Temp was up 7% -- over 7%. So in pricing, it's 4.8% in temporary roll-off. So we're managing that core business as it's recovering. We're getting more volume growth. We're getting price per unit growth, and we're getting some margin expansion. And now we're starting to see that in the commercial business. So again, it's early in the commercial. We thought it would be stronger by now, but it's positive and getting better. So we're not sure the trend is occurring as quickly as we like or it's probably as much as you would like, but it's happening. It really is residential for us. So I'm sure all of my guys listening on the phone right now are hard to work and figuring out how we're going to improve residential.

Okay. Throughout the call, maybe you could comment at some point on the opportunity or the progress on the waste-related index pricing that could help you down the road and when that could start to benefit?

Yes, let me comment on it. So I think that's your fourth question, but that's okay, Al. It's early. It's early. Here's the issue. I think the industry used headline CPI or some version of that in the residential business, gosh, as long as I can remember, and I've been doing this for 35 years. So we've always had that in our resi municipal business. And even in the municipal side of the landfill business, we've used that kind of an index. It worked for us just marvelously for decades because the 25 and 50 average of CPI is over 3%. And as we've grown our business and built density and done acquisitions and everything else we've done to build the business over that period of time, CPI never gave us any heartburn. It was a nice annuity business. Well, again, now we've had this really strange 5 years of averaging 1.6%. And if you step back and we'd go back in time, 4 years ago, we were probably expecting CPI to right itself. And every year, there's been sort of this sort of hint or promise that it could improve and it just hasn't. So we finally had to say, "Look, enough is enough," and CPI isn't a fair way for those municipal customers to view our business and so we've looked at alternatives. And so if you look on the BLS, one of the components of the CPI basket is an index called water sewer trash. And we've been working on introducing that index to customers. We've done it in a very small way. We've done it successfully in a few small -- I would say very small type municipal contracts with some success. And we're actually using our industry association in things like SWANA and so forth to begin to have a conversation about what's reasonable and fair for cities to expect out of their waste hauling companies, and 1.6% CPI isn't the ticket. So it's going to take a long time to get that in the business, but the good news is, we're on it and we're working the system. And that's the expectation that my team has. And hopefully at some point, you think maybe the industry would support and catch onto it and do it as well because it's not good for anybody, and it's not good for the city because the city doesn't want to have a partnership with a company that's as important as a waste company to keep its streets clean. That's going to be constantly moving backwards in its profitability, or at some point, go upside down. So we have to -- we've got to right it and the gross operating margin in that business has shrunk because of this situation, and we've got to change it. So early stages. Hopefully, we can comment more on as we go through year-by-year and hopefully, we could see some kind of a shift in -- an industry shift as well. So that's it. But -- so we're not sitting on our hands, and we're not just whining about it. We're controlling things we can control, Al.

Our next question comes from Scott Levine with Imperial Capital.

So a couple of questions. Firstly, special waste volumes are very good in the quarter. I'm wondering if that's project-specific, how the pipeline looks in general, we can see this type of growth continue or what's behind it?

Yes, it's pretty broad-based. We don't have any really, really big, big projects to report, and that's the good news. A pretty strong growth. Most of it is soil-related. So contaminated soil, which I always look at that, Scott, and think that's a good sign of construction and development to come when they're doing land clearing and taking off the soil it means that they're going to build something new at an old site. So hopefully, that continues to fuel construction for us into the out years. So again, broad-based, and we think the trend should continue forward.

Got it. And as my follow-up, maybe a little bit of color or update on One Fleet. I think you said more than 50% of the fleet is there. Are you guys running positive on that? And should we be thinking about that as potentially a margin contributor, a needle moving margin contributor and/or a free cash flow contributor to the positive in 2015?

Yes. So it's moving a little slower still than we'd hoped, but we're more committed to it than we ever have been. So let me give you a couple of comments. First and maybe foremost, it is going to contribute to us spending $40 million less next year on truck capital. So as we said, we're going to aged our fleet and extend the useful life of it to the tune of $200 million capital savings over 5 years starting in '15. So we're committed to that. And in the One Fleet divisions, we're seeing very good results. So let me give you a couple of stats. Maintenance cost per engine hour in One Fleet divisions has improved by 1% to 2%. Driver productivity in One Fleet sites has contributed approximately $2.5 million to productivity in '14. One Fleet divisions have 30% fewer unscheduled repairs and 25% higher truck availability or we'd call fleet reliability. So we think that's going to convert to what we would think as a lower driver turnover rate, higher employee satisfaction at some point, more customer experience and improved customer experience because our fleet's up and running, and we're servicing the customers better. So we're very, very focused here on how we can take care of our customers from a service delivery perspective and a differentiation perspective, so we can improve the quality of revenue. And our technician turnover's lower, substantially lower at One Fleet sites and it's really hard today to find good diesel technicians. And so all of those things are real. The divisions that we're in now that were converting to One Fleet, it's a lot of heavy lifting, and those divisions are probably costing us a little more than we thought they would going into Q3 and 4. But it's going to come around and at some point, this sort of backlog of workload is going to be behind us. We're going to anniversary that, and we're going to get those benefits. We're going to get all those other softer benefits I just mentioned, Scott, and we're certainly going to be able to extend the life of the fleet in a very methodical and thoughtful way without interrupting the business, and again, improving the service quality all along the route. So we're going to get it done and just again, it's just harder than we imagined. But it's the absolute right thing for the business. And we've got to think beyond the quarter, right? We're never going to be at Republic a slave to the quarter or a hostage to consensus. We're going to have to run the business for the long term and do the sustainable right thing for the business.

Next is Alex Ovshey with Goldman Sachs.

A couple of questions. So first on the volume, just looking at the big picture. It's a pretty solid number in the third quarter. And I say that because last year in the third quarter, you had a nice strong number as well. So you were able to deliver a nice number again in what I would say a tough comp. And so a 2-part question there. I mean, does that imply that sort of the economy and the construction markets are sort of in a cycle where we can continue to expect sort of a 1% to 2% volume number out of Republic going forward? And the second part to that, is the volume number you guys are reporting, is that really what you're seeing in your end market or is there some market share gains that is helping benefit your volumes right now?

Yes, so again, we're not giving guidance for '15. We are seeing good and steady volume growth. Again, the business grows, as you know, through population growth that fuels housing information, fuels business formation. So as long as those dynamics continue, we'll benefit from it. Housing starts are still well below the 25- and 50-year average. So could it improve from there? It could, but we're not seeing that yet. We're -- I would tell you that we're getting our fair share of organic growth, and we're replacing the business that we're losing. So again, we've got the 7% defection every year. More than half of that is competitive. So we replace that business. We're doing a good job of replacing that volume, albeit at a lower average rate, and so there's that churn issue that impacts us. But we're getting the volume replaced, and we're getting our fair share of new organic growth. That's really our goal. On top of that, we've got to replace those units at a slightly higher rate than we have historically and that's really our focus with things like Capture and priority-based selling. We're really hyper-focused on, internally, what we call quality revenue. Again, as I said to Scott, really focused on the customer service delivery and on everything on that end, but we're also focused on the selling processes, that point-of-sale decision making that we're doing to make sure that we're signing on those new customers at higher rates year-over-year. So the things we are doing are going to continue. If the macro environment continues, you'll get kind of more the same. And but the same thing is true with CPI, right? We don't have any indication in '15 that CPI is somehow going to magically get better. And it's an 18-month lag for CPI to work through our system. So you can sort of factor that commentary into why we're giving you this 2015 preliminary outlook.

Got it, Don. And just on the pricing side. So going back to the point around potentially changing some of the residential contracts and what index they're linked to. I mean, is there any timeline you could provide around when we should expect enough progress so it would move the needle on the bottom line? And the second part to that question, I'll turn it over. You have some really big residential contract out there. I mean, where is it in the Q in terms of actually going and speaking to the folks who are responsible for those contracts and potentially changing the index structure there?

Well, look, one, it's lumpy, right? The contracts in that business are generally 5 years. So one, we're not going to have 100% success rate. Let's be fair. We'd like to think over time, if the industry itself determines that the water sewer trash index is a fair way to go, and we can start to get cities to believe that is true, then it can maybe get some traction. But it's a 5-year process to work through the entire book of business. It could've been a bit longer because we've got some contracts that are 7-year contracts, right? So -- and some even longer than that. But I think the bigger franchise type agreements, the contracts are longer. However, I would say this that those contracts they tend to be more like real true public private partnerships, where we really are extension of the city and maybe because of the great job we're doing and so forth, we might have some opportunity to deal with that. So look, it's going to be a long road. But there's nothing I'm reading that's telling you that CPI is going to get better in a year or 2. There's a lot of commentary out there that informs our thinking that it could be this way for some time, and we just decided we can't wait anymore for CPI to right itself. So the decades that we've benefited from CPI, we don't know when that's going to come back. So everything else that we're doing to improve the business, Capture, priority-based selling, improving the customer experience, all of the work we're putting into trying to drive a higher quality of revenue, extend customer loyalty and earn the price increases year-on-year, we're going to continue to do that. And if CPI comes back, then that'll be a wonderful thing, and it looks to be icing on the cake for us.

The next question is from Tony Bancroft with Gabelli.

Just a quick question on the pricing dynamics on the street. We've heard from your competitor's recent calls talking about holding yield and pricing. I just want to sort of get your view what you're seeing out there, if that's what you're seeing or something different?

Yes. So look, our view hasn't changed. Let me start with that, right? So the price volume discussion is always kind of a bifurcated discussion and people sort of get lost in some of the commentary that companies are sharing. We have -- again, a big part of our business is restricted, limited by contract to CPI. Again, not whining about that. It is just what it is. I can't go in and magically change that. What we've said going into '14 is that we would go into the open market that didn't have the restrictions stronger to offset some of the pricing that we've lost in CPI. And we've done that this year. And the open market has held up very nicely. Our open market core price is substantially better than our average, okay? So the core market, meaning, or the open market, meaning open market commercial small container business and open market industrial. So that -- part of that's construction and part of that is permanent business. So that open market has held up well. So if you look at the pricing dynamic in that market, it's done okay. It could be better if the landfill pricing was moving. And that's the thing that doesn't get enough discussion. The fact is, again, Republic has done a very deliberate job of moving landfill prices forward. You've heard me talk about the fact that we've, year-on-year, lost landfill volume. It's the first quarter in I don't remember how many quarters, but maybe 10 or 12, maybe 16, I have no idea, that we've actually seen positive MSW volume growth. And that's just kind of keeping pace now with sort of normal -- some of the construction -- some of the other growth that's in the market. But that's really the issue for us is what will happen with landfill pricing going forward. We're going to continue to do what we do, and we'd like to think that as the market gets better, as the economy improves, that we could see landfill pricing moving at a more solid rate to support the underlying economics of supply and demand in the business. The other thing, obviously, is we've got a big presence in these markets. We tend to be #1 or #2 in size, and market density does drive margin and hold margin, and we don't want to get to a point where we're seeing gaps develop in our density. So replacing that 7% defection every year, trying to do it better than before using these new tools and training that we've talked about now extensively. And so back to my opening comment, I'll close with that. We haven't changed our tune on landfill pricing certainly and on price volume overall.

Got it. And I know you spoken about, you always talk about $100 million of M&A and looking at tuck-ins inside your markets, is there any update or what would it be, what would it take to go outside your market, what would you be looking at for there? And are there any -- you said you're always going out in the market and looking. Are there any possibilities that have come up recently or -- that you are interested in?

Well, I'm just going to -- we're going to stick with our $100 million general goal. There are some opportunities out there that you people are probably aware of, some big deals in the market that private equity deals coming back to market. We generally look at everything, Tony, in the marketplace, but primarily, we like the tuck-in business because it comes at the lowest multiple, post-synergy. It comes at the lowest risk of integration because we already have management and facilities and infrastructure in place. And as it relates to the Rainbow Disposal Company, that was just a really high-quality asset that was in an adjacent market to where we already were, and we felt that, one, that the assets were great and the management team there was outstanding, and some of their infrastructure can actually benefit us going forward in the surrounding market. So we're going to continue on the same pace. So I know I said this earlier, but I'd say it again. It makes sense for staying focused on tuck-ins in around that $100 million pace, and then it makes sense for us to look at other opportunities and when they're available and we can get good-quality assets with the right price to take advantage of that just like we did with Rainbow. So we'll continue to take that stance going forward.

Next is from Michael Hoffman with Stifel.

Housekeeping question for all of us, if you would. What's implicit in your earnings guidance for a tax rate?

We're not -- Michael, this is Chuck. We're not giving that level of guidance right now. Obviously, we'll get into a lot more details when we give full guidance in February. Just keep in mind that our rate in 2014 is 39.5%.

And there's no reason that's going to change, right?

Yes. We'll give more guidance in February.

Okay. For whatever it's worth, guys, some of that kind of knowledge would be helpful. Well that doesn't get into real guidance. So you've got to have some assumptions in it. Year-over-year, 4Q, you're going to have about a 200-basis-point margin difference. Are there -- what are the onetime, nonrecurring that we should be aware of?

Michael, we didn't give Q4 margin guidance, though.

Well, it's implicit in your full year guidance.

Right now, we're saying that year-to-date, they were at 28.1% on our EBITDA guidance.

Right. And a year ago, you were 30.3%.

Right. We called out some of the factors that were included in our year-to-date numbers, including commodities, weather and insurance, when you adjust for that, we're writing the range of the guidance that we gave at the beginning of the year. So...

So that's the point. Those numbers are in the fourth quarter as well. That's what I was trying to get at. It was of last year. We got the same call-outs there.

Yes. And remember, Michael, in the last year, in the fourth quarter, which we had called out that we did benefit from some favorable environmental adjustments that were more prior-year items, which brought the margin up above our original expectations. So again, when you kind of take a look at what we've expected for this year, we knew that those things would anniversary out.

Right. That's what I was trying to get at. And then, Don, you have talked about in the past, you did share the $200 million in CapEx spread over 5 years, but you also talked about 75 basis points spread out over 3 or 4 years of improvement as a result from automation productivity CNG One Fleet, how do you feel about that today?

Yes. So look, we're getting the benefits from automation on the productivity side. We're getting benefits from CNG on the fuel side. The maintenance benefits are coming a little harder than that. As I said earlier, the One Fleet initiative is the right thing to do. It's coming a little slower than we'd like, and it's costing us a little more in this quarter, and in the remaining quarter of the year than we may be expected. We also have some other things going on in there. So again, as you know, Michael, I mean, there's a lot of mix in this business. You've got a lot of geographical mix. You've got a lot of line of business mix. There's a lot of puts and takes. And the one thing we found as we've dug deeper into the maintenance initiative is fleet complexity. So these emission standards from the '08 and '10 and '14 engines are driving cost up on those trucks. We really weren't anticipating that when we went down the road with One Fleet. And -- but the fact is we're probably spending more time than any company out there really understanding our fleet dynamics and try to drive fleet cost out and anniversary-ing some of these costs. But there are some things like that, that are masking it. The fact that the CPI resets in the resi business, where again most of our automated fleet is working, that has not helped us. So we're committed to those initiatives. We're going to continue to roll them out and see them through. And there will be a day when we anniversary some of this bio-wave [ph] cost in maintenance, and it'll flat line and then we'll have the benefits throughout other parts of the business.

Barbara Noverini with Morningstar.

So in reviewing your residential contracts, we've talked at length about the challenges CPI-based pricing on the solid waste side, but can you comment a little bit about the profitability of your residential recycling programs now that commodity prices are kind of holding at these relatively low levels. How are you looking to improve this part of your residential business as well?

Well, Barbara, the review that we're doing with our all of our residential contracts include recycling as well. So we're constantly looking at improving the recycling line of business through making it more efficient at our sorting facilities. Part of what we're doing through collection methodology by getting efficiencies there. And when we do look at residential -- or I'm sorry, recycling contracts, we tend to look at sort of 10- to 15-year returns in average using sort of an average market price. So they're not performing as well as we'd hoped, but again, all things are cyclical. So we're using all the learnings that we're putting into this now to bid new contracts and we will just get better through time. But the -- it's not the recycling part of the residential business that's dragging us down. It's the overall CPI environment for, again, in that line of business that's almost 30% of our total collection business. So it's a big chunk of our business that is weighing down the other components of the business that are actually operating pretty well.

Sure, got you. Do you guys have any leeway to put forth a processing fee or something like that? I know some other competitors in the industry have been talking about this.

Well, things like contamination and performance criteria sort of a normal part of these contracts. So we do our best to hold anybody who is delivering material or producing material for these contracts to their end of the bargain. So it's -- you can't just break a contract in the middle of a contract and introduce new features or new penalties. If they're not in there generally at the beginning, you don't get to pull those triggers, and that's the issue with municipal buyers. They like to have a fixed-price, month-to-month throughout the course of the contract and only onetime a year do they want to open it up to some kind of a standardized index that you don't have to argue about, and that's the way they've walked for decades. And that's probably not going to change much except for the fact that we can get them focused on a different type of index that's more fair to a waste hauler like Republic Services. And overtime, just continue to move through that book of business and improve it.

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.

Great. Well thank you, Holly. 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, all, for spending time with us today, and have a good and safe evening.

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