Republic Services' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb. 6.14 | About: Republic Services, (RSG)

Republic Services, Inc. (NYSE:RSG)

Q4 2013 Results Earnings Call

February 06, 2014, 05:00 PM ET

Executives

Edward A. Lang - Senior Vice President of Treasury and Risk Management

Donald W. Slager - President and Chief Executive Officer

Glenn A. Culpepper - Chief Financial Officer and Executive Vice President

Analysts

Hamzah Mazari - Credit Suisse

Corey Greendale - First Analysis Securities Corporation

Adam R. Thalhimer - BB&T Capital Markets

Joe Box - KeyBanc Capital Markets

Michael E. Hoffman - Wunderlich Securities

Alex Ovshey - Goldman Sachs Group Inc.

Derek Sbrogna - Macquarie

Albert Leo Kaschalk - Wedbush Securities

Barbara Noverini - Morningstar Inc.

Operator

Good afternoon, and welcome to the Fourth Quarter and Full Year 2013 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 and all participants are in a listen-only mode. There will be a question-and-answer session following Republic's summary of quarterly earnings. (Operator Instructions).

It is now my pleasure to turn the call over to Mr. Lang. Good afternoon, Mr. Lang.

Edward A. Lang

Thanks, Angie. Welcome, and thank you for joining us. This is Ed Lang, and I would like to welcome everyone to Republic Services' fourth quarter and full year 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 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 involves risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations.

The material that we discuss today is time-sensitive. If in the future you listen to a rebroadcast or recording of this conference call you should be sensitive to the date of the original call, which is February 6, 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 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.

Donald W. Slager

Thanks, Ed. Good afternoon everyone and thank you for joining us as we discuss Republic Services 2013 performance and 2014 guidance.

I am pleased to report our fourth quarter and full year performance exceeded our financial guidance. Republic team continued to execute on our long term strategy and maintained our track record of generating strong free cash flow. We are managing the business for long term success including investments in growth, acquisitions and productivity improvements. After reinvesting in the business and consistent with our approach to cash utilization we return the majority of free cash flow to our stockholders.

I will now discuss some our financial highlights. Fourth quarter adjusted EPS was $0.53. These results include $0.03 of favorable development in insurance claim costs and $0.03 of reduced environmental cost. Full year adjusted EPS was $1.97. We achieved the upper end of our guidance range even without the $0.06 of favorable items recorded in the fourth quarter. This level of performance was in line with our expectations and consistent with the guidance we provided on our third quarter earnings call.

Full year 2013 adjusted free cash flow was $714 million, which exceeded our guidance of $675 million to $700 million. This level of performance continues to demonstrate the strong cash flow characteristics of our business.

Full year 2013 EBITDA margin was 29%. The improvement in our second half 2013 margin performance includes an increase in landfill special waste which was lagging during the first half of the year. Core price in the fourth quarter was 3.4% and our average yield was 1.3%. We continue to see better price contribution from the open market to offset lower CPI-based price resets.

Fourth quarter volume increased 2.5%, volume growth continues to be concentrated C&D roll off, national accounts and landfill special waste. Throughout the year we discussed our multiyear initiatives that enable us to execute our strategy. These initiatives are designed to profitably build the business, enhance the customer experience and improve productivity and reduce cost.

I will now recap our progress made during 2013. The investment made in acquisitions was $82 million. We acquired approximately $60 million of revenue, a post synergy EBITDA multiple of approximately 4.5 times. These transactions consist of tuck-in acquisitions that layer in well for markets we already serve. We completed several privatizations of municipal solid waste services during 2013 with additional total annual of revenue of approximately $70 million. These are profitable growth opportunities for Republic while lowering cost and mitigating risks for municipalities.

We increased recycling capabilities by investing approximately $30 million in developing and upgrading our recycling centers during the year. 2013 recycling facility tons per day increased 8.5% over the prior year. Most of the increase relates to recycling facilities that have been added or upgraded over the last four quarters. We continue to invest in our CNG fleet and natural gas infrastructure with 12% of our fleet now operating on natural gas. During 2013 about 50% of trucks purchased were fueled by

CNG. 66% of our residential fleets is now automated which was in line with our year end goal. Automation creates a safe to work environment for employees, improves driver productivity and reduces labor cost. Approximately 45% 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’ll start realizing benefits.

Finally, our cash return to owners was approximately 4.7%. Dividend payments during the year were $349 million and we repurchased 6.5 million shares for $240 million, a part of our achievements during 2013 which is reflected in our strong performance. I want to thank entire Republic team for their hard work and execution.

Glenn and Ed will now discuss our financial performance. Glenn?

Glenn A. Culpepper

Thanks, Don. Fourth quarter 2013 revenue was approximately $2.1 billion, an increase of $113 million from the prior year. This 5.6% increase in revenue includes acquisitions of 60 basis points and reflects the following three components of internal growth; pricing, volume and recycled commodities.

First, pricing. We had an average yield growth of 1.3%. Fourth quarter average yield was consistent with our third quarter performance and in line with our expectations. Core price in the fourth quarter was 3.4%. As a reminder, core price is defined as price increases to customers in changes and fees, excluding fuel recovery net of price decreases.

Average yield in the collection business was 1.2% which includes 2.8% yield in the industrial business and 1.6% yield in the commercial business. Average yield in the post-collection business was 1.9% led by landfill which increased 2.1%.

We continue to see better open market pricing to help offset lower CPI-based resets. As a reminder 50% of our revenue has a contractually based pricing restriction and a majority reset in the second half of the year. Fuel recovery fees increased 0.2%. Most of this change relates to an increase in the rate charge to recover fuel costs.

Second, fourth quarter volumes increased 2.5% year-over-year. The collection business was positive 1.1%, primarily due to an increase in industrial volume. Growth in the industrial line of business includes C&D and other temporary activity which was up 6.4% and the permanent business was up 3%. The post collection business consisting a third-party landfill and transfer station volume was positive 6.4% which includes an increase in landfill special waste of approximately 18%. Special waste landfill volumes began to slow in the second half of 2012 which created an easier comparison. Our landfill MSW volumes were down 2%. Our defection rate, which represents the annualized rate of customer turnover, remained stable at approximately 7%.

Third, an increase in commodity sales resulted in a 1% increase in revenue. The increase in commodity sales reflects both higher prices for recycled commodities and an increase in tons sold. Commodity prices increased approximately 6% to an average of $116 per ton in the fourth quarter from $109 per ton in the prior year. This represents the average price for all commodity types across all regions.

Fourth quarter recycling facility commodity volume of approximately 600,000 tons was up 13.6% from the prior year. Most of the increase relates to additional national accounts brokered volumes. We saw a 6% in tons sold at new or recently upgraded facilities which was partially offset by a Murph we closed that was not earning an adequate return. Current average commodity prices are approximately $110 per ton. For reference purposes, a $10 per ton change in commodity values equals approximately $0.03 of full year EPS, which includes the impact on our recycling facility and collection businesses.

Now I will discuss year-over-year margin. Fourth quarter 2013 adjusted EBITDA margin was 30.3% compared to 28.2% in the prior year, an increase of 210 basis points. As Don mentioned there were favorable, environmental and risk insurance savings that added $0.06 of EPS and reduced cost by approximately a 170 basis points compared to the prior year. Even without these items total EBITDA dollars increased and margin expanded 40 basis points in the quarter.

Our full year adjusted EBITDA margin was 29%. The margin contribution from the reduced insurance and environmental cost on our full year performance was approximately 40 basis points. Our full year EBITDA margin performance was approximately 28.6% excluding these items.

I will now discuss the change in specific cost categories for the fourth quarter of 2013 compared to the prior year. First labor cost improved 30 basis points. This was primary due to higher levels of special waste received in the quarter which added very little incremental labor expense. Maintenance and repairs increased 30 basis points. The increase primarily relates to implementation cost associated with our one fleet maintenance initiative and the general increase in the cost to repairs due to increased truck complexity and enhanced emission controls.

As Don mentioned we expect that 50% of the fleet will complete our standardized maintenance program by mid-2014. We are confident that we can cost effectively extend the useful life of our fleet by approximately one year once the majority of the vehicles have been certified. We estimate this will reduce future capital requirements by approximately $200 million spread over four to five year period beginning in 2015.

Transportation and sub contract costs increased 50 basis points which primarily relates to growth in the outsourced portion of our national accounts business and the incremental special waste volume. In the National Accounts business, we employ subcontractors to perform a portion of the work. While incremental EBITDA margin on this work tends to be in the 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 70 basis point improvement primarily relates to a higher percentage of natural gas trucks in our fleet. Currently, about 12% 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 $3.87 in the fourth quarter from $4.02 in the prior year, a decrease of approximately 4%. The current average diesel price is approximately $3.95 per gallon. For reference purposes, a $0.20 change in diesel fuel per gallon is about $0.01 of full year EPS, which includes the impact of our fuel recovery fees and our fuel hedges.

Landfill operating costs improved 80 basis points related to the favorable reductions in environmental liabilities. We do not expect savings of this size in future periods. Risk management cost improved 80 basis points. Most of this change relates to a decrease in outstanding claim cost as determined by our actuaries. We’re focused on claims management to reduce the ultimate cost of our claims. Magnitude of this benefit should be viewed as a unique event although we continue to look at waste to further reduce cost through ongoing safety initiatives and an effective claims management process.

Cost of goods sold increased 70 basis points and increased to an average of $40 per ton from $28 per ton in the prior year. Most of the change relates to brokering, recycled commodity volumes on behalf of our national accounts customers. The return on this business is attractive since there are limits capital requirements.

Finally SG&A expense was 9.8% of revenue, an improvement of 40 basis points compared to the prior year. Total SG&A dollars were relatively flat to prior year on revenue growth of over $100 million. DD&A as a percentage of revenue was 11.5% in the fourth quarter versus 11.6% in the prior year. DD&A is higher than capital expenditures as a percentage of revenue due to the amortization of intangibles.

Ed will now discuss interest expense, free cash flow and selected balance sheet data.

Edward A. Lang

Thanks, Glenn. Fourth quarter 2013 interest expense was $90 million, which included $12 million of non-cash amortization. Our full year 2013 effective tax rate was 36.5% of adjusted earnings and was impacted by favorably closing out open tax years under audit and realizing additional federal and state credits on our 2012 tax returns. In 2014, there were two tax related changes resulting in a $0.13 EPS headwind.

First, in 2014 we expect to return to our normal statutory effective tax rate of approximately 39.5%. When compared to the 36.5% effective rate in 2013 this result in an EPS headwind of approximately $0.11.

Second, during 2013 we realized alternative fuel tax credits under a provision of the IRS tax code. Similar to bonus depreciation Congress did not extend this provision beyond 2013. The expiration of the fuel tax credit results in a $0.02 EPS headwind. Full year 2013 adjusted free cash flow was $714 million. Adjusted free cash flow included net capital expenditures of $856 million. With the expiration of bonus depreciation at the end of 2013 we expect cash taxes to increase approximately $60 million in 2014.

Our 2014 adjusted free cash flow guidance range of $675 million to $725 million is relatively consistent with our 2013 performance. We expect to overcome the cash tax increase with growth from the business and reductions in capital spending.

Finally I'll discuss the balance sheet. At December 31, our accounts receivable balance was $891 million and our days sales outstanding was 38 days or 25 days net of deferred revenue. Reported debt was approximately $7 billion at December 30, and excess availability under our bank facility was approximately $1.5 billion.

I'll now turn the call back to Don.

Donald W. Slager

Thanks, Ed. Before closing I'll provide 2014 financial guidance. We expect 2014 adjusted earnings per share to be in a range of $1.93 to $1.98. Excluding the $0.13 of tax-related items this represents mid to high-single digit earnings growth. Our guidance assumes that fuel or recycled commodity prices remain at current levels for the full year.

We anticipate 2014 adjusted free cash flow in the range of $675 million to $725 million. This level of performance is relatively consistent with 2013 even though we have to overcome a $60 million increase in cash taxes. We expect annual revenue growth of 3.5% to 4.5% which includes average yield of 1% to 1.5%, volume growth of 1.5% to 2% and contribution from acquisitions of approximately 1%. Our expected yield performance is relatively consistent with our 2013 performance.

We expect a step down in CPI price resets offset by higher levels of price contributions from our open markets. Our expected volume performance anticipates construction and business activity will continue to improve, partially offset by a modest decline in our residential business. Pricing levels for municipal bins and residential subscription work continues to be challenging and we will only renew business if it meets our return criteria.

We anticipate 2014 EBITDA margin of 28.5% to 29%. As Glenn mentioned our full year EBITDA margin in 2013 was 28.6% excluding the favorable insurance and environmental items recorded in the fourth quarter. Our 2014 EBITDA margin guidance is consistent with or slightly up versus the normalized 2013 performance.

2014 net capital expenditures are expected to be approximately $820 million. During 2014 we will continue to focus on managing the controllable aspects of our business by enhancing the quality of our revenue, investing in profitable opportunities and reducing cost.

We will enhance the quality of revenue by identifying customer segments and targeting those willing to pay for our higher quality service offering; focusing on the customer experience to differentiate our service offering and build customer loyalty; and prudent pricing decisions made by our sales team at the point-of-sale using upgraded ROI-based pricing tools; enhancing controls for new business sales and service level transactions; better aligned sales incentive programs and increasing fee participation rates in our cost recovery programs.

We will continue to profitably grow the business through acquisitions, municipal privatizations and building capabilities to capture growth and diversion. We will continue to manage our cost structure by automating residential routes to reduce labor cost; improved driver productivity and create a safer work environment; lowering our cost of fuel and reducing emissions through conversion of CNG vehicles; standardizing maintenance practices and processes to reduce cost and leveraging SG&A expense. Collectively, we anticipate these cost initiatives will lower our cost structure by 75 to 100 basis points over the next three years.

The long term business fundaments and strength of our assets has not changed. We still believe that pricing levels exceed cost inflation under normal business conditions. 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, return on invested capital 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, we’ll open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Hamzah Mazari from Crédit Suisse your line is open.

Hamzah Mazari - Credit Suisse

Good afternoon. Thank you. The first question is just on the gross margin. Could you give us a sense, Don and Glenn what type of incremental margins you are seeing on the volume growth that you are getting? We had talked about sort of a 40% mid 40% incremental EBITDA margin a year ago maybe more. And then within that gross margin that you guys reported is that $0.06 favorable number that you quoted on insurance claims and $0.03 on environmental cost? Is that in the gross margin line as well?

Glenn A. Culpepper

I will take the second question first Hamzah. The $0.06 yes that is in the gross margin line. So our gross margin for the fourth quarter was 30.3%. If you take out those two items our gross margin would have been about 28.6%.

Donald W. Slager

Sure and I will take the first question. So first remember we’ve got some mix issues going on here Hamzah. So some of the growth, a lot of the growth is coming from national accounts, which as you know a lot of that revenue is tied to subcontractor work and some of these brokered recycling tons, so that comes at a lower margin but still a good return. And the other big part of growth is coming from our construction C&D type hauling.

So I will tell you that we still use our ROI based pricing tools in all of the decisions that we make to grow the business so whether it’s a small commercial customer or municipal bid or large national account in all the prices we use for our C&D, hauling in our local markets is all based on improving ROI. So we know that as we build the density of the business and continue to make good ROI-based decisions we’re growing the business profitably.

Hamzah Mazari - Credit Suisse

Great, and just a follow up question, I will turn it over. You talked about open market pricing offsetting lower CPI. Any change you are seeing in terms of discipline or rationality amongst either the majors or private this quarter relative to the last quarter or previously? Thank you.

Donald W. Slager

Okay, I don't think there’s much of a change what we have seen previously. I think the larger companies tend to be from what we can still more ROI-focused and tend to be more rational. Smaller players do tend to fly underneath the price umbrella that's provided by larger companies and those trends will continue and are not very surprising.

Hamzah Mazari - Credit Suisse

Great. Thanks a lot.

Operator

Thank you. Corey Greendale for First Analysis. Your line is open.

Corey Greendale - First Analysis Securities Corporation

Hi, good afternoon.

Donald W. Slager

Hi, Corey.

Corey Greendale - First Analysis Securities Corporation

Hi. Don question on the guidance. With the EBITDA margin at the low end, you are suggesting could be flat to down slightly, you've been very clear about touch to get a lot of margin expansion in the low CPI environmental but you also pointed out the benefit eventually from growing volumes. So if the low ends are conservative or what could happen to the result of hitting the low end of EBITDA margin guidance?

Glenn A. Culpepper

Well. Our guidance is 28.5% to 29% EBITDA margin. And for both the fourth quarter and for the full year on kind of normalized basis I think we said that it was 28.6%. So in fact our guidance range is relatively even too up from 2013.

Corey Greendale - First Analysis Securities Corporation

Okay. That sounds like the low end, just being conservative if I am hearing you right. So…

Donald W. Slager

I'd say it's a fair bridge from where we were in Q4. Q4 had a lot of special waste as we said right. So that was one of the reasons Q4 performed as well as it did. So special waste is a little bit lumpy that's not going to carry right into the first part of the year and probably it will be more evenly spread out through 2014 that we anticipate.

Corey Greendale - First Analysis Securities Corporation

And it sounded like the residential line of business is somewhat of an outlier in terms of the pricing discipline. Can you just talk about why you think that's different and volume trends overall and what you are seeing there?

Donald W. Slager

Well same conditions exist in residential that have existed through the last couple of years. You have got municipalities that are not in say a very healthy state of general finance and so they are really pressuring haulers. We've seen a little bit of more of challenging environmental at least in some markets from pricing activities for new bids and extensions on business. So that's been challenging. I just think we are at the bottom of that cycle and hopefully working our way out of it.

We are going to work through the rest of this let's say re-pricing some of those residential contracts and we look to CPI to improve over the long run. I don't think anybody believes that CPI is going to stay as low as it is forever. So on the 0.5 year average CPI is three plus percent and I think as we go forward a year or two we should start to get some relief on and get back to some normalized CPI environment and that will help things out as well.

Glenn A. Culpepper

And I could say one more thing is -- I think occasionally you see spikes in parts of your business right now but certainly a little more competitive in some markets and as I said in my comments we just decided that we are just not going to price below a reasonable return on that business. And so at some point I think competitively think things will have to change. Because I don't think people can continue to do some of that business as cheaply as they are doing.

Corey Greendale - First Analysis Securities Corporation

Okay. [inaudible]. Thank you.

Operator

Thank you. Adam Thalhimer from BB&T Capital Markets. Your line is open.

Adam R. Thalhimer - BB&T Capital Markets

Good afternoon guys. Nice quarter.

Donald W. Slager

Thank you.

Adam R. Thalhimer - BB&T Capital Markets

I wanted to ask first about the C&D business. Are you seeing any margin improvement in that business?

Edward A. Lang

Yeah. Absolutely. Our industrial line of business that we've seen, it's really a nice story. We've seen year-over-year growth in units, year-over-year growth in price per unit and as a result year-over-year improvement in margin. So just as it should occur. And we talked about this on our Q3 call as we that part of our business turn off and we expect that to continue through 2014.

Adam R. Thalhimer - BB&T Capital Markets

And then I wanted to ask about the commercial business I think you said that it is a slight positive in 2014. I mean can you expand on that like in recent quarters you talked about some greenshoots in terms of commercial volumes. What are you seeing there?

Donald W. Slager

Well. Commercial volume is in absolute units it's up. The margins are pretty stable there. We continue to have pretty good pricing in the open market commercial. As I said that offsets some of the price headwinds in our CPI-based pricing book of business. What we haven’t seen is a dramatic increase in service levels but I would say that if you did an eight quarter chart and drew a straight line through service increases and services decreases you would say that it’s an improving environment across both of those metrics over an eight quarter period.

So we would look for that to continue in ’14. At what rate we can’t necessarily forecast but we look for it to continuing to improve.

Adam R. Thalhimer - BB&T Capital Markets

Okay, thanks guys. Congrats again.

Operator

Thank you. Joe Box from KeyBanc Capital Markets your line is open.

Joe Box - KeyBanc Capital Markets

Hey, good evening guys.

Donald W. Slager

Hi, Joe.

Joe Box - KeyBanc Capital Markets

Can you just put a little bit of color around the $35 million reduction in net CapEx. Just kind of curious is that more asset disposal, maybe spending little bit less on recycling or just maybe an early benefit of one fleet?

Glenn A. Culpepper

Yeah I would say it’s a couple of things. You know we pulled a little bit forward into ’13, bought a few trucks early and we are spending a little less on recycling build out in ’14 and in the last two years again. We are still reworking a number of facilities in ’14 like some of those private [haulers] aren’t as capital intensive is the one we took on last year and a year before. So we’re still moving on recycling platform forward. It's really those two things.

Joe Box - KeyBanc Capital Markets

Okay, that’s helpful. And then it’s been about quarter since the Atlanta is closed. Can you maybe just give us an update on the fundamentals in that market?

Donald W. Slager

Yeah I would say that it really hasn’t helped us much. We probably got a little bit of revenue out of it, nothing to make a headline out of. We’re a best situated landfill in that market and so we tend to be the highest price because of convenience factor. We’re not predisposed to lower our rates to track the volume and I would say that most of the volume has found its way to Orange County to the County site.

Joe Box - KeyBanc Capital Markets

Understood. Thanks guys.

Donald W. Slager

Thank you.

Operator

Thank you. Michael Hoffman from Wunderlich, your line is open.

Michael E. Hoffman - Wunderlich Securities

Thank you very much. Nice job on the year-end.

Donald W. Slager

Thanks, Michael.

Michael E. Hoffman - Wunderlich Securities

Can you talk about what is it you measure to manage when you are talking about your standardized maintenance program and the things you will be looking for that being a success and you have lapped yourself on some of this already so part of those metrics in fact proving to be valid and therefore it actually gives you confidence about ongoing success.

Donald W. Slager

Sure, well we measure a number of things both in maintenance and directly fleet metrics and non-fleet metrics. So we measure absolute cost per hour as a baseline. I will tell you that some of our divisions were spending money poorly and having high cost per maintenance that we can bring down some more spending money, not enough money and having more breakdowns and major component failure. And so their baseline cost per hour was maybe lower than is reasonable and those divisions are going to have a higher cost per hour to have a better end result.

We look at total maintenance spend per route and those kind of things but we also look at driver down time. We look at how many hours per week trucks were sitting on the side of the road broke down because of component failure. We look in the pure metrics of routing mishap we look at what percentage of our repairs are schedule versus non schedule. A world class fleet would operate at about 80% of the work scheduled, so those repairs being not only preventive maintenance but things that you are supposed to catch during preventive maintenance during routine maintenance checks and during driver checks of their trucks.

So we’re catching things before they break. Things are being scheduled appropriately. Our technician time we moved to a format of standard repair times across our fleet. So our technicians know exactly how much time we expect those repairs to take and we better manage our workforce on the floor shop. We measure inventory levels. So everyone of our maintenance our one-fleet rollout has resulted in a substantial drop in our parts inventory, that we use at every facility.

Spare truck ratio, at some point we’re starting to see the earliest fleets that have gone through this lower their spare truck ratio. Once they have confidence that their uptime is getting improved, fleet availability improves, then we have sort of the ability to let go some of those spares and reduce cost that way.

On the non-fleet side we've got driver productivity. We have better customer service metrics. We rolled out customer service metrics across the entire company last year in every division measuring their missed pick-ups and also their performance against the commitments they have made to customers. And those metrics improve when the fleet improves.

So we think that at some point translates into better quality revenue and customers willing to pay a little bit more because our service levels increase. After all that said and done you're going to get an improvement in driving moral and employee turnover which we haven't really measured much as kind of the softer side. And then ultimately and we talked about this $200 million of CapEx reduction.

So starting in 2015 we're going to age the fleet by one year over a four to five year period and that's going to save us $200 million. So we're going to get all that paid back by the investments we've made in just the CapEx change alone on top of that we're going to be higher performing company in every division with better employee engagement and better customer satisfaction scores across the board, how's that?

Michael E. Hoffman - Wunderlich Securities

That's great thanks. And then second one, Glenn or Ed cash flow from operations about 15, $1.58 billion to $1.55 billion this year it looks like that number was down if just do the simple capital spending plus the mid-point of free-cash flow. So what's -- is that you are having some negative working capital swing here or what's happening there and why would we see an incremental negative working capital spend particularly in light of everything Don just talked about, I was thinking about it the other way.

Glenn A. Culpepper

It's really just cash taxes Michael will be up significant next year through the expiration of bonus depreciation we -- that's a $60 million headwind.

Michael E. Hoffman - Wunderlich Securities

Okay. And then one housekeeping item what's the share count you are using when you gave your guidance?

Glenn A. Culpepper

That 366 million share [inaudible], Michael.

Glenn A. Culpepper

I am sorry you broke up Glenn.

Glenn A. Culpepper

It's about 360 shares was about our year-end share count.

Michael E. Hoffman - Wunderlich Securities

Okay, great, thanks.

Operator

Thank you. Alex Ovshey from Goldman Sachs. Your line is open.

Alex Ovshey - Goldman Sachs Group Inc.

How are you guys?

Donald W. Slager

Hi, Alex.

Alex Ovshey - Goldman Sachs Group Inc.

Don I want to ask you about pricing, can you talk about how you see the pricing on the collection side average yield feel as you guys currently trend relative to the landfill side?

Donald W. Slager

To the landfill side?

Alex Ovshey - Goldman Sachs Group Inc.

Yeah, can you just talk about how you see pricing on landfill relative to the collection side in 4Q?

Donald W. Slager

Yeah I would say landfill specifically MSW trends down, have been sort of flat for us. I've seen special ways to trend it up and C&D as the landfill has trended up MSW has been a little bit pressured. We've consistently been raising price to the landfills, watching them and doubling volume along the ways we talked about that trend continuing in Q4 but total landfill in Q4 yield was 2% down a little bit from Q3, I would think flattish throughout the rest of the year.

Alex Ovshey - Goldman Sachs Group Inc.

Got it, thanks for that. And then on the industrial side can you talk about what is driving the improvement in the volume, do you have the sense of the new residential construction market repair model, the non-residential construction what that could be? Do you have a sense of sort of how the ends markets are performing and sort of given if you are seeing an industrial business?

Donald W. Slager

Well first I would tell you that both permanent, our permanent rollout and our temporary rollout were both up in Q4. We don't really make a distinction between residential construction and commercial construction because it really doesn't mean anything to us and how we run our business. So I really don’t have metrics to share with you there. As I shared before I mean it was up pretty dramatically in Q3 and it performed well in Q4. We expect it to maintain that kind of trend through 2014. So it's a bright spot for us what we've all been waiting for.

And we all said for many years the business sort of builds around household formation so as we see more new home construction and then we see more business development around the new home construction infrastructure business formation come in and that's going to fuel the commercial business as well. So it's happening the way we thought would happen, maybe it took a little longer to get started but we’re looking forward to a pretty good trend in ’14.

Alex Ovshey - Goldman Sachs Group Inc.

That's all, thank you.

Operator

Thank you. Derek Sbrogna from Macquarie. Your line is open.

Derek Sbrogna - Macquarie

Hey, thanks for taking my question guys. Just wanted to dig in a little bit. Over the last couple of quarters you have seen volume growth of 2.5% to 2.7% and the overall guidance for 2014, 1.5% to 2% range is that really just a function of what we have seen over the last couple of quarters with the special waste in the C&D coming out?

Donald W. Slager

That’s the biggest factor there Derek. If you look at our 2.5% in the fourth quarter special waste landfill volumes drove about 90 basis points of that and our collection business which is 75% of our revenue was 1.1% growth in volume. So we would see ourselves as continuing to grow all of those things but the special waste had an easier comparison in the fourth quarter this year compared to the last year and that’s what really drove the 2.5%.

Derek Sbrogna - Macquarie

Okay and just one more. Last quarter you guys bumped the repurchase authorization and then were pretty quiet in Q4. Was that really just a function of pulling forward the CapEx into Q4 and specifically if you could talk a little bit more about appetite for buybacks in 2014? Thanks.

Donald W. Slager

I will just tell you that we’re committed to the buybacks and that's been pretty consistent in our history and we’re committed to buyback in 2014. We think we've had probably the steadiest trend in the industry on cash yield. You are going to see us continue to spend on the buyback in 2014. It could be around $400 million or so.

Derek Sbrogna - Macquarie

Great, thanks very much.

Donald W. Slager

Great.

Operator

Thank you. Al Kaschalk from Wedbush Securities. Your line is open.

Albert Leo Kaschalk - Wedbush Securities

Don, Glenn I just wanted to clarify, did you say total price in ’14 was being guided 1% to 1.5% or is that core price?

Glenn A. Culpepper

That was our yield.

Albert Leo Kaschalk - Wedbush Securities

Yield, okay. So help me appreciate, I fully get the CPI mix headwinds. I heard your comments about competitive markets maybe easing and your churn being relatively consistent or flat. It still doesn’t sound like you will get healthy or improving competitive markets because I would think that would lift that pricing guidance that you provided. So are you not able to get to the market with a better price, given defending volume or what’s happening there, is it mix?

Donald W. Slager

Well let’s start with you know the big headline in CPI is actually going, is going to happen us negatively in ’14. So that’s kind of about is a 60 basis points move in CPI so you know that’s that tends to be you know a little bit of tail that wags the dog for us. We have talked about it so. We expect that we will be as active in the open market in ’14 as we were in ’13 and we think the open market will allow us to get little bit more price in ’14 than ’13 to offset the CPI headwinds and the resets that we’ll face.

So absolutely the nutshell. So we do have some dynamics improving. Again pricing in CNG roll-offs going up, price in special waste has held up and actually gone up nicely. We got to be consistent with our pricing cadence through ’14 in the open market, we got to hold our line of landfill pricing like we have historically and hit our marks. So we believe that as I said CPI at some point will start to give us a positive bounce but we don't control that. So we just got to operate around it for now.

Albert Leo Kaschalk - Wedbush Securities

Okay so 60 basis headwind is what you calculated for.

Donald W. Slager

From CPI, right.

Albert Leo Kaschalk - Wedbush Securities

All right, okay. And then just a second part and the margin story on the [XT] items are obviously up a little bit for ’14 with the guide, but with that pricing backdrop and some of the net special waste and I guess the closure of one recycling facility I would think margins would have a little better room going directionally higher than say 28.5% and 29%. So first I guess the broader question would be are you planning, should we be on the lookout for further closures on recycling facilities due to economics? And then two generically I think you have always thought special waste has been a tougher margin business than the collection business?

Donald W. Slager

No, the last question first. Special waste has not necessarily been a -- it's been a great business for us and a good margin business for us. The larger the special waste job the tighter the margin becomes but special waste performed very nicely for us in not only in volume but in margin. So we hope to see that continue. The best you can do when you are building business plan is look at the current trends and look at the actions you are taking and build them together.

So we think the 28.5% to 29% margin performance for '14 is a strong performance. We don't have a lot of business closures or work closures that we can be concern ourselves with. It really comes down to the headwind from the CPI environment and we don't start to see benefits from the one [inaudible] till the second half of the year and all the other cost initiatives that we talked about continue.

So we think it's a pretty good story and if CPI starts to give some relief in the out years then we just grow from there. We still believe that in the long run we can see margins over 30% again but it's going to take some better CPI environment for us to experience that.

Albert Leo Kaschalk - Wedbush Securities

Just curious was the Murph closure in a top 25 market or outside of that?

Donald W. Slager

No, it was a smaller one.

Albert Leo Kaschalk - Wedbush Securities

Thanks, Don.

Operator

Thank you. Barbara Noverini from Morningstar. Your line is open.

Barbara Noverini - Morningstar Inc.

Hi, good afternoon everyone.

Donald W. Slager

Hello?

Barbara Noverini - Morningstar Inc.

Can you give us a little extra color on the recycling component of your municipal privatization. For example in your recent deals, do these cities already have a second program in place, have you found that these deals are predicated and adding to or upgrading, struggling with second programs as well?

Donald W. Slager

No, I don't think recycling is kind of a decision point for privatization of a municipal collection operation. Generally they are relatively small contracts and simply the city is looking at the capital spending requirement for fleets. So containers, and then we prefer to kind of step away from the business not wanting to make those type with long-term tactical commitments.

Barbara Noverini - Morningstar Inc.

Got it. Thanks.

Operator

I am showing no other questions at this time.

Donald W. Slager

Thank you, Angie. 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 great evening.

Operator

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

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