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Republic Services (NYSE:RSG)

Q3 2012 Earnings Call

November 01, 2012 5:00 pm ET

Executives

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

Donald W. Slager - Chief Executive Officer, President and Director

Tod C. Holmes - Chief Financial Officer and Executive Vice President

Analysts

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Vance H. Edelson - Morgan Stanley, Research Division

Hamzah Mazari - Crédit Suisse AG, Research Division

William H. Fisher - Raymond James & Associates, Inc., Research Division

Corey Greendale - First Analysis Securities Corporation, Research Division

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Scott J. Levine - JP Morgan Chase & Co, Research Division

Adam R. Thalhimer - BB&T Capital Markets, Research Division

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Tony Bancroft - Gabelli & Company, Inc.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Operator

Good afternoon, and welcome to the third quarter 2012 call for investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. Your hosts for today's call are Don Slager, President and CEO; Tod Holmes, 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.

Edward A. Lang

Thank you, Anna. Welcome, good afternoon, and thank you for joining us. This is Ed Lang, and I would like to welcome everyone to Republic Services Third Quarter 2012 Conference Call. Don Slager, our CEO; and Tod Holmes, our CFO, are joining me as we discuss our third quarter performance.

Before we get started, I would like to take a moment to remind everyone that some of the information that we discuss on today's call contains forward-looking statements, which involve risks and uncertainties and may be materially different from actual results. Our SEC filings discuss factors that could cause actual results to differ materially from expectations.

Additionally, 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 November 1, 2012. 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.

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' third quarter performance. I will review financial and operating results before discussing our updated 2012 guidance and preliminary 2013 outlook.

We recorded revenue of approximately $2 billion. Core price growth in the quarter was 1%, which was in line with our expectations, and an increase of 40 basis points versus Q2. Net price increase to customer, defined as price increases less rollbacks, was 2.8% in the third quarter. Landfill price increased by 2.7% in the quarter. Volumes decreased by 1.6%. The majority of volume decline can be attributed to contract losses we discussed on previous earnings calls and lower special waste streams. Although we saw an overall decline in volume, our collection business grew 0.3% versus the prior year. This is the first time collection volumes have been positive since 2008.

Our third quarter adjusted earnings per share was $0.47. This includes a remediation charge for a closed landfill of $37 million or $0.06 of EPS. Year-to-date, adjusted free cash flow was $480 million. Q3 adjusted EBITDA margin was 28% and SG&A was 9.5%. Excluding the remediation charge and impact from net fuel and commodity, EBITDA margin was 30.8%. We repurchased 1.3 million shares in the third quarter for $36 million. Year-to-date, we have purchased 7.6 million shares for $208 million. We plan to complete our goal of $325 million of buybacks in 2012.

We remain committed to an efficient cash utilization strategy, which includes increasing cash returns to our shareholders through share repurchase and dividends. We expect to return approximately $650 million to our shareholders in 2012. This translates to a cash yield of approximately 6.5%. We have already met our full year acquisition goal of investing approximately $100 million and have purchased tuck-in acquisitions with $62 million of revenue in our existing markets. We continue to work on additional transactions and expect to maintain this pace of acquisitions in 2013.

Our safety performance continues to improve with a 5% favorable reduction in our frequency rate. We have seen continued growth in our recycling business. Q3 recycling tons have increased 1.3% over the prior year. The economy is still sluggish, but we have seen an increase in our temporary roll-off business, which confirms the improvement in the homebuilding statistics. It is too early to call this a broad-based recovery but our temporary roll-off volumes have increased by 3.8% as compared to Q3 2011.

As noted in our press release, we are reorganizing the structure of our headquarters and field operations, which will permanently reduce our annual SG&A cost structure by approximately $23 million. We expect to recognize a onetime charge of approximately $30 million for various costs, approximately half of which will be recorded in the fourth quarter. This reorganization allows us to maintain a streamlined structure that is responsive to market demands.

We are in the process of withdrawing from the Central States Pension Fund. This quarter, we took a charge of approximately $31 million for a partial withdrawal. We anticipate there will be future charges as we negotiate withdrawals for additional bargaining units. The liability is payable over 20 years and does not materially affect our free cash flow performance. This decision will benefit our employees and shareholders by limiting exposure to this critically underfunded plan and by moving employees to a well-designed 401(k) plan. We have amended our bank credit facilities to account for these potential future charges.

Tod and Ed will now update our financial performance.

Tod C. Holmes

Thanks, Don. I'd like to begin by discussing Q3 earnings and our full year EPS guidance. As a Don mentioned, our Q3 adjusted EPS was $0.47. Included in the earnings was a $0.06 environmental remediation charge for a closed landfill in Missouri. This was partially offset by a $0.04 benefit due to realizing tax credits on our 2011 returns. Absent these 2 significant items, adjusted EPS would have been $0.49.

Now in July, we provided full year adjusted EPS guidance of $1.91 to $1.93. Since then, we have seen 4 components of projected earnings change resulting in a $0.06 reduction in full year EPS. 2 of these components I just mentioned: a decrease of $0.06 due to the Q3 remediation charge and an increase of $0.04 due to the Q3 favorable tax rate. In addition, there has been a decrease of $0.01 due to a decline in commodity prices and also a decrease of $0.03 due to the increase in net fuel costs. The net impact of these 4 components is a reduction in projected earnings of $0.06. As a result, we now expect full year adjusted EPS in a range of $1.85 to $1.87. This excludes the restructuring expenses we expect to incur in the fourth quarter of 2012.

Now turning to revenue. Third quarter 2012 revenue of about $2 billion reflects the following components of internal growth. Core price growth of 1% with positive price in all lines of business. Core price increased 40 basis points sequentially from 0.6% in Q2 to 1% in Q3. This was in line with our expectations. The sequential increase reflects the impact from higher CPI-based price resets in our restricted customer base. Our fuel recovery fee decreased 0.4%. The decrease relates to the lag between fuel recovery fees and the fuel costs when prices are changing.

Our fuel recovery fee lags the current fuel costs by 1 to 2 months. When fuel costs are rising, like they did throughout the third quarter of 2012, our recovery percentage declines until fuel costs stabilize. Conversely, fuel cost declined throughout the third quarter of 2011, which resulted in a timing benefit in the prior year. Our commodity revenues decreased by 2%. Commodity prices decreased approximately 33% per ton to an average price of $108 per ton in the third quarter from $162 per ton in the prior year's third quarter.

Our Q3 recycling facility commodity volume of 500,000 tons was up about 1.3% from the prior year. The full year guidance, which we provided in July, was based on our July average price of $116 per ton. We estimate current commodity prices of about $110 per ton. And again, for reference purposes, a $10 per ton change in commodity value equals approximately $0.03 of full year EPS impact. This includes the impact on both our recycling facility and our collection businesses.

Now turning to volume. Our third quarter volumes decreased by 1.6% year-over-year, excluding a 50 basis point decline due to 1 less work day. Most of the decline relates to landfill and transfer station volumes. Within the landfill business, special waste decreased approximately 10% versus the prior year. In Q3 of 2011, we had historically high levels of special waste, which creates a tough comparison for this year. We are also experiencing a slowdown in special waste jobs. In many cases, we've been awarded the work but the start dates have been delayed.

Our landfill MSW volumes are down approximately 4%, primarily due to the previously discussed loss in municipal disposal contracts and also competitive pressures that we previously discussed in our outlaying markets. As Don indicated, collection volume is positive 3%, this despite specific losses that we previously discussed. This level of collection volume represents a 60 basis point sequential increase from our second quarter performance.

Now turning to margin, I will discuss our third quarter year-over-year margin. Q3 2012 adjusted EBITDA margin was 28% compared to 30.7% in the prior year. This is a 270 basis point decrease. As Don mentioned, excluding the impact of the Q3 remediation charge of 180 basis points and the impact of net fuel and commodity of 100 basis points, EBITDA margin would have been 30.8%. Some of the more significant changes in margin include: first, labor, the 90 basis point increase in expense is mostly due to normal increases in wages and health care costs and a change in our revenue mix. Collection volumes have increased, which carry associated labor cost, while disposal volumes, commodity revenues, fuel recovery fees and subcontract revenues are all down, and these have little or no variable labor cost.

Second, our maintenance costs. The 70 basis point increase in maintenance expense relates to the change in revenue mix I just discussed. Also implementation costs associated with our ongoing maintenance initiative, an increase in cost of tires across our supplier base and refurbishment of containers versus purchasing new, which is a prudent cash decision.

Third, our transportation and subcontract cost. The 30 basis point improvement relates to a reduction in subcontract costs associated with a loss of a large national account, which we discussed in July. Subcontract costs tend to be higher in our National Accounts business.

Fourth, our fuel costs. The 20 basis point increase in expense is due to a 1.8% increase in the cost of diesel. After considering the impact of related fuel recovery fees, there was a net margin decline of 30 basis points. The average cost of diesel in October was approximately $4.09 per gallon, an increase of $0.31 from the $3.78 per gallon used in our full year guidance provided in July.

For reference purposes, a $0.10 change in diesel fuel per gallon is about $0.01 of full year EPS, which also includes the impact of our fuel recovery fees.

Fifth, our landfill operating costs. As previously mentioned, the 180 basis point increase in expense relates to a 37% remediation charge for environmental conditions at a closed landfill in Missouri. This charge will not have a significant cash impact in the next few years. As I mentioned earlier, this charge resulted in a $0.06 reduction in EPS in the third quarter. And excluding this charge, landfill operating costs were essentially flat from the prior year.

Up next is our cost of goods sold. The 70 basis point improvement relates to a reduction in rebates, paid for volumes delivered to our recycling facilities. Cost of goods sold decreased to an average of $31 per ton from $55 per ton in the prior year. While the change in cost was favorable, when you consider the more significant decrease in related commodity revenues, there is a net 70 basis point decline in EBITDA margin.

And finally, SG&A. Third quarter 2012 SG&A was 9.5% of revenue. This improvement of 30 basis points primarily relates to a reduction in incentive compensation expense, partially offset by an increase in provision for doubtful accounts. Looking ahead, we consistently believe our annual run rate SG&A is approximately 10% of revenue.

Our DD&A as a percentage of revenue was 10.9% in the third quarter of 2012 versus 11.1% in the prior year. The 20 basis point improvement primarily relates to the favorable impact of landfill expansions in the third quarter of 2012. DD&A is higher than capital expenditures as a percentage of revenue due to the amortization of intangibles.

Ed will now discuss interest expense, taxes and free cash flow.

Edward A. Lang

Thanks, Tod. Third quarter 2012 interest expense was $93 million, which included $14 million of noncash amortization. Our Q3 2012 effective tax rate was favorably impacted by realizing additional federal and state credits on our 2011 tax returns. As Tod mentioned, this provided a $0.04 EPS benefit in the third quarter versus our original expectations. In July, we guided to a 36% full year 2012 effective tax rate. We now expect a full year 2012 tax rate of approximately 33.5%. Looking forward to 2013, we expect an effective tax rate of approximately 38%. The higher tax rate has a negative impact on our preliminary 2013 EPS outlook of approximately $0.14.

I will now discuss free cash flow. Adjusted free cash flow was $149 million in the third quarter and $480 million on a year-to-date basis. Free cash flow timing tends to vary by quarter due to capital expenditures and changes in working capital. The components of adjusted free cash flow are detailed in our 8-K filing. As a result of higher fuel costs and lower commodity prices, we now expect full year cash flow to be approximately $750 million. This is down $25 million from our previous guidance of $775 million.

Now I'll discuss the balance sheet. At September 30, our accounts receivable balance was $854 million and our days sales outstanding was 38 days or 24 days net of deferred revenue. Reported debt was approximately $7.1 billion at September 30, and excess credit available under our bank facility was approximately $1.4 billion.

I will now turn the call back to Don.

Donald W. Slager

Thanks, Ed. As Tod mentioned, we expect 2012 full year adjusted EPS in a range of $1.85 to $1.87 due to lower commodity pricing, higher fuel expense and the Q3 remediation charge. And as Ed discussed, we are reducing our adjusted free cash flow guidance to $750 million accordingly.

We are about midway through our annual planning process for 2013 and have not yet finalized the details, which we will provide next February. At this point, our preliminary outlook for 2013 EPS is approximately $1.90 to $1.92, which represents high single-digit growth after excluding the impact of a higher effective tax rate. Our preliminary outlook for 2013 free cash flow is approximately $650 million, which represents mid-single-digit growth after excluding the impact of higher cash taxes.

Now I want everyone to pay close attention to my following comments. This preliminary EPS outlook for 2013 assumes that fuel and commodities remain at current levels. It assumes no change in the economic environment and a higher effective tax rate compared to 2012. As Ed mentioned, the negative impact that the higher tax rate has on our preliminary 2013 outlook is approximately $0.14. Our free cash flow expectations also assume that bonus depreciation will expire at the end of 2012. If it expires, the negative year-over-year impact of bonus depreciation is approximately $150 million. It is important that you understand these facts and assumptions.

Now before we go to questions, I'd like to highlight a number of key achievements the Republic Services team has made. We delivered free cash flow performance providing a cash yield to positive price throughout the economic downturn. We've grown the business through collection volume growth and tuck-in acquisitions in existing markets. We continue to demonstrate an efficient cost structure, and we remain core-focused and well-disciplined. We're well positioned to take advantage of an improved economy.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Al Kaschalk with Wedbush.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

I guess, I wanted to start real quickly on the restructuring charge. I know it's not a big number. But perhaps, maybe some of the things that went into rethinking the organizational structure and the fallout, of course, is the dollar amount. But maybe from just an operation standpoint, why this makes sense and maybe why now?

Donald W. Slager

Well, I think it makes sense now because we've continued to develop strength in our team, we've continued to build our team, our people continue to grow and we have a high confidence in our region and area leaders that they can operate and lead larger geographies. What's important to note is our general manager business unit level has not been impacted. So we have not spread or expanded the span of control at the business level. Those 170 or so general managers still exist. Those position units haven't been impacted. So our area leaders and our regional leaders have to manage a little larger geography, and we believe they have the talent and the team to do that. Our Republic standards, our initiatives are taking shape and having good progress. And at Republic Services, we're always looking for ways to work hard and work smarter, and this is just one of those examples.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

And then my follow-up, if I may, and it's sort of a broader question. But obviously, the free cash flow number, again, with all of the caveats is still a little bit down from '12. But is that pricing related in certain markets? Are you still seeing some pressure on that?

Edward A. Lang

Al, you're talking about '12 to '13, right?

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Yes, I'm just trying to pick up the trend in the business here that if you...

Edward A. Lang

Well, actually, I think if you look at the normalized trend, free cash flow year-over-year would be up mid-single-digits. The headwind that we have in '13 is the exploration of bonus depreciation at the end of calendar '12. And the impact on a year-over-year basis is about $150 million. So all companies that buy heavy equipment have benefited significantly in their free cash flow performance over the past several years from bonus depreciation. Keep in mind, as recently as 2011, bonus depreciation was 100%. In calendar '12, it's been 50%, and in '13, it will go to 0%. So we're assuming in our guidance -- or excuse me, our outlook that's there is no extension of bonus depreciation. And if that is the case, the year-over-year headwind is $150 million. Now if you normalized free cash flow in '11 -- excuse me in '12 and '13 for bonus depreciation, as I mentioned, you would see a positive free cash flow in the mid-single-digit range. So we are -- from the ongoing business, we are seeing free cash flow growth. What we're seeing is the impact of the change in federal tax policy.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay, am I able to sneak one more in here? Or is this...

Edward A. Lang

Go ahead, one more.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

All right. Sorry. So back to the pricing component. I guess, then the volume trend that you're seeing, you were a little bit lighter than we had expected. And I'm just wondering if there's something contractually or if it's just some of this commercial and industrial that you haven't seen the uptick yet.

Donald W. Slager

Yes, Al, this is Don. Special waste is really just a little bit lighter than we thought. Our commercial business and our collection business, as we said, is growing for the first time since 2008, so we're really happy with what's happening there. We did have the continued effect of some of the previously lost contracts. It really comes down to the special waste. It's a little bit lighter, softer and jobs are being pushed. We still have people saying they're going to let the jobs, but they just seem to be delaying when they're going to start.

Operator

Our next question comes from Vance Edelson with Morgan Stanley.

Vance H. Edelson - Morgan Stanley, Research Division

I just wanted to follow up on the special waste question. So the slowdown that's being experienced, is that resulting in a stronger pipeline now because these are really just pullouts or pushouts? Or is this more of a cancellation nature? Can you distinguish there?

Donald W. Slager

Yes. I think it's just pushing it out. We've seen a slowdown. I think people just are a little uneasy with economic conditions, the fiscal cliff. At this time of the year, it's not unusual if the economy is not doing real well, that people start to tighten up their capital budgets, government jobs being delayed, those kind of things. So it's just a -- it's the event business we're talking about, not the re-occurring special waste stream to manufacturing.

Vance H. Edelson - Morgan Stanley, Research Division

Okay, got it. And on the CPI, it sounds like it's providing a modest lift now based on the contract structure and the lag impact. Do you think it's going to provide more of a tailwind in the fourth quarter and beyond?

Edward A. Lang

Well, as we look at the pricing at the -- exiting the year, we looked at pricing will be at least 1% as we exit the fourth quarter. So I think we're in a good position versus how we were coming into 2011 as far as the trend in pricing.

Tod C. Holmes

And it's in line with what we had thought in line with our expectation.

Unknown Analyst

Okay. And one last one, maybe you mentioned the $650 million of capital that will be returned to shareholders this year. Any feel for where that number might be next year in 2013?

Edward A. Lang

Well, obviously, we just increased the dividend in that number set. We expect to have $325 million of share repurchase available as we go into calendar '13. And as you know, Vance, we try to be opportunistic but kind of hold to our plan, but we just kind of work our way through the year. But we would probably have about $325 million available under the current authorization when we enter the new year.

Donald W. Slager

And remember, Vance, we're working off of a 2-year authorization here. So we have a good portion of that left for 2013.

Tod C. Holmes

But the cash utilization strategy is we very consistent. So it's the foundational dividend. It's that share repurchase 2-year program Don mentioned, and the it's the $100 million or so of tuck-ins.

Donald W. Slager

Yes, there's really nothing we see that would change our approach to that. We've got the tuck-in opportunities. We've got the dividend, and we still will continue, as Tod said, to be opportunistic in the buyback.

Operator

Our next question comes from Hamzah Mazari with Credit Suisse.

Hamzah Mazari - Crédit Suisse AG, Research Division

The first question was just around guidance. I know you guys said you're assuming the current economic environment, you're assuming current OCC and fuel. Under that scenario, what is your pricing assumption for '13 assuming you get the same CPI bump that you did this year? And what are you assuming on volume? I know you've had some contract transitions. What does pricing volume look like in that '13 guidance? And does that include a buyback as well? And if so, how much?

Donald W. Slager

Yes, Hamzah, as I said, this is not guidance, it's preliminary outlook. We're just in the middle of the business planning process. We wanted to bring to light some of these tax issues, so you guys had a handle on that. We'll see what happens with fuel and commodities between now and when we give guidance in February. As you know, when we give guidance in February, it's based on how we end the full year, the previous year. It's yet to be determined. And we talked about the fact that pricing now was up from 60 basis points to 1% in Q3. We'll see how that trend develops, but we're not really giving guidance today. It's just a preliminary outlook, and we're just going to give that EPS and cash flow just to kind of to get everybody focused on that.

Tod C. Holmes

And on the share repurchase, we've said repeatedly that $325 million, it was a 2-year program or a little over 2-year program with $325 million this year and $325 million next year, so that's consistent with what we said in July.

Hamzah Mazari - Crédit Suisse AG, Research Division

Okay, that makes sense. And then just a follow-up question. On your collection volume being up, how much of that is just a general lift in the economy? And how much of that is you guys being more aggressive in the marketplace and maybe defending some business?

Donald W. Slager

Well I'd say it's a couple things. It's puts and takes certainly. We've won the San Jose contract, that's in there. We've got some puts and takes of large contracts. We've been very open with everyone about the fact that a couple years ago, we really started defending our business more ferociously against some of the sort of less rational smaller players. That's paid off because we begun to close a little bit the gaps. I would tell you we're losing less business today as a result of that. And Rule 1, when you're trying to grow, you've got to stop shrinking. So we've stopped the shrinking. We're defending our turf very well, and we're very specifically competing back in markets where we need to. We are continually pricing and our price shows that. And that's really all I can tell you. There's a lot of blocking and tackling and a little trench warfare that's going on in this business, and it's really no different than it's always been. It's been very competitive, but we're getting a little better at it in the trenches than we have been historically.

Hamzah Mazari - Crédit Suisse AG, Research Division

I appreciate that. Just last one, any update on the CFO search process?

Donald W. Slager

Yes, sure. We've got a great process, well defined. We're right on course and on schedule. We have a number of internal high-quality candidates, as you know. And we've got a couple of external candidates we're looking at. And we'll be bringing it to a close here before too long. But as you know, Tod is going to be here through May if we require him to, and he's committed to that. So we're right on course, and there's really no need to worry or hurry. But we'll have an outcome before too long.

Operator

Our next question comes from Bill Fisher with Raymond James.

William H. Fisher - Raymond James & Associates, Inc., Research Division

Just maybe for Tod. I know that the maintenance expense is up like $40 million or so year-to-date. How do we think about that expense into '13 in terms of the One Fleet initiative and kind of some of the puts and takes there?

Tod C. Holmes

Well, again, we're not going to really talk about '13 anymore than the general comments that we've made in the past. I think when you look at kind of sequentially how that maintenance expense rolls out, our container expense continues to be a little bit higher as we continue to repair containers. But that is the right cash decision. I would say that we're kind of working through the -- probably the tail end of that inventory. So as a result, that would drop off a little bit and we'd revert a little bit more to buying containers. And then on the One Fleet initiative, as we've said in the past, that's a multiyear program. We talked last quarter about slowing it down, but really, that slowdown takes a little bit of time to work through. So it will probably step down a little bit here in the fourth quarter and then be at that level as we go forward. The other thing that we have, which is probably more of a margin noise thing, is that change of revenue. Again, when you look at the total mix of business, and this is more from a percentage standpoint, the higher disposal commodity type of business gives you a lower percentage whereas a little bit more collection business pushes your maintenance costs up a little bit. So obviously, on a dollar basis, as we grow the business, as Don said, this is the first quarter since I think '08 that we see a positive there that in the collection business that there's going to be a little more dollars spent on the fleet.

William H. Fisher - Raymond James & Associates, Inc., Research Division

Okay. And then maybe for Don, you mentioned the temporary roll-off was up 3-or-so percent. And if I were to think the sector hadn't really invested in roll-off fleet the last 4 or 5 years, and I know it's a smaller piece of revenue now. But if that stays strong on the volume side, could that kind of benefit price in that piece a little bit more given the capacity maybe?

Tod C. Holmes

That was the total collection -- Bill, this is Tod, I must have misspoke because I think I said 3% for the collection volume being up, and the total company was actually 0.3%.

Donald W. Slager

Temporary roll-off was up 3%, right? Temp roll-off...

William H. Fisher - Raymond James & Associates, Inc., Research Division

I was just talking about the temporary...

Donald W. Slager

Temp roll-off is going to be construction. It's going to be businesses cleaning out, that type of thing. We haven't seen that kind of an uptick in a long time, so it's a little too early to tell. I guess that's what I said in my comments. We wanted to make a note of it because it's a positive, about 3%. So it's -- temp roll-off is only 30% of our total industrial line of business, right? So it's a small portion of a small portion, right? But it is a positive. We'll have a more on it as we see how things kind of develop through Q4. And obviously, supply and demand, right, Bill, if at some point that things start to take off a little bit, it should give us a little more pricing power. That's just how it works in our business.

Operator

Our next question comes from Corey Greendale with First Analysis.

Corey Greendale - First Analysis Securities Corporation, Research Division

First, I wanted to ask, Tod, when you went through the impacts to your new EPS guidance for '12 relative to the prior guidance, I was a little surprised that you were saying there's more of an impact from fuel than from commodities, just given kind of the relative movements. I just want to kind of confirm, had you assumed in the prior guidance that commodities were going to come down further? And on fuel, are you actually recovering less kind of structurally. Or is it just a lag issue?

Tod C. Holmes

I think you got it. That's exactly it, Corey. It's the lag. And then I would say the other thing is commodities have kind of come back a little bit here in the past month or so. So it's those 2 factors.

Edward A. Lang

It's about a 60 day to get the FERF to catch up. And I think what we saw here in the third quarter is that fuel was just continuing to move against us week-after-week throughout the quarter. So it was just you were kind of running after a higher and higher number and just the way the math works. It was difficult to have the FERF kind of keep pace with where actual fuel is going.

Corey Greendale - First Analysis Securities Corporation, Research Division

And on the impact of labor on margin, so I understand the mix issue, where do you think you're at in terms of kind of the efficiency of operations? The 0.3% increase in collection, obviously that's moving the right direction, but that's not a level where you think you need to be adding a bunch of labor, so are there opportunities still to kind of make that side of the business more efficient?

Donald W. Slager

Yes. We continue to work on our automation initiative, Corey, that's -- it's a long-term initiative converting our resi system from 2-person vehicles to single operators. We're going to be at this end of this year 63% complete. We might get in sort of the 80% range before we're done, so we've got some work to do there. We continue to work on routing efficiencies, and we'll get an additional productivity enhancement every year from those things. But we're pretty good at routing, so there's not a big material change. It's just constant steady improvement.

Corey Greendale - First Analysis Securities Corporation, Research Division

If I could just throw in one quick one, Ed, I was hoping you might be able to give us a tax rate guidance just for Q4, given the moving pieces, I want to make sure I'm modeling that correctly.

Tod C. Holmes

Well, I use the full year 33.5%; isn't that what it is? So what -- look at the 9 months and just...

Edward A. Lang

Right. It's going to average 33.5%.

Tod C. Holmes

For the full year. So just force the fourth quarter to get you a 33.5% of the full year.

Edward A. Lang

It will be roughly equal to our statutory rate.

Tod C. Holmes

And again, the third quarter was the return provision true up where you typically actually file your tax return.

Operator

Our next question comes from Michael Hoffman with Wunderlich Securities.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

If you were to go back to the beginning of when bonus depreciation was dumped upon us, I don't know, 2009. And you wiped it out and never happened, what's the free cash flow -- base free cash flow of the business?

Tod C. Holmes

Well, I think it's probably -- if we look at this year, it would be around $700 million. If we look at next year, it would be around $750 million, somewhere in that range. That's kind of that mid-single-digit free cash flow growth that Ed and Don spoke to. And again, if you look at the history of bonus depreciation, '08 and '09, it was 50%. In '10, it was 50% until September, and then it went to 100% in kind of in the closing months of the year, and then in '11, it was 100%. So we're getting a benefit this year, which is a combination of some of the late 2011 capital that we put in place where we probably overpaid a little bit our 2011 taxes. And actually, once we knew it was going down to 50%, we accelerated capital in '11, as you'll recall, to take advantage of that. And in this year, its 50%. So we think that we have probably I'd say realistic, but depending on what happens with all this political uncertainty, we don't have any bonus depreciation in for next year. If there is some, well, that's upside to what we just told you.

Edward A. Lang

And keep in mind, Michael, what we're seeing in the free cash flow outlook we're talking about is the impact of lower-than-average commodity prices that we're currently experiencing, above average fuel costs. But I think if you pull back and you kind of just look at the normal depreciation schedules because historically, we would depreciate equipment over a 5-year period, and if you looked at a normalized level of fuel and commodity values, I think what generally you see in the long term in this business is that free cash flow tends to run about 110% of net income. So there is -- as long as you're continuing to reinvest in the fleet, you get that benefit of the 5-year depreciation schedule. So this is a business that normally you do see free cash flow per share higher than book earnings per share, and that's one of the beauties of the business. But right now, we're just dealing with the volatility on a year-to-year basis, created by bonus depreciation. And then from an operating perspective, a pretty significant decline in commodities during the third quarter. Or as Tod mentioned, it has picked up a little bit here at the beginning of the fourth quarter.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

And then your dividend's now around 3.5%, if I'm not mistaken, your borrowing costs on 10-year or longer money is well below that. So why not fire a bucket of a money and buy a whole lot of stock back and play the spread?

Edward A. Lang

Well, we do like being investment grade, and I'm sure there's a few fixed income investors on the call that appreciate us saying that. So we do...

Tod C. Holmes

And there's also a cost associated with not being investment grade.

Edward A. Lang

And there is a significant cost with our -- keep in mind, we rely on letters of credit. We rely on surety bonds. We do like having or prefer to have -- and the investment grade profile we think is also a benefit for us as we look at municipal marketing opportunities, and having access to capital to expand our business platform through enhancing the fleet, recycling or tuck-in acquisitions. So we don't want to get distracted by some near-term events and be focused on the business for the long term.

Donald W. Slager

We want to maintain that financial flexibility, Michael, in the event that there is a business opportunity we can take advantage of, so that's critical for us.

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Okay. And then Don, just one quick question for you. In your text and in your presentation, if I summarize, you believe the underlying fundamentals of this business are sound, stable and with an improving bias. But macro factors in the bonus depreciation create oddities but structurally believe the business is in a good fundamental position and improving.

Donald W. Slager

Yes, we think the underlying fundamentals of the business are very strong. We think we are well positioned to take advantage of improving conditions. We're very happy with the team. They're very capable of executing the plan. That's evidenced by the fact that we just reduced our area in the region -- our count and increased our coverage. We're that confident in their capability. Yes, we're at a unique point here where, as Ed said, commodities are below average. Fuel is way above average, and we have some of these interesting puts and takes here year-over-year. The -- we're still, as you can see, producing consistent cash flow. The business has that hallmark, and we think overall the industry is still fairly rational even though there's some noise out there.

Tod C. Holmes

With a good cash yield back to the owners through the dividend.

Donald W. Slager

Yes, so you asked me do I feel better about the business now than I felt last year? I would say, yes, I do. And we just have some noise here to sort out.

Operator

Our next question comes from Scott Levine with JPMorgan.

Scott J. Levine - JP Morgan Chase & Co, Research Division

A question, I don't know if you mentioned this earlier, could you quantify the dollar amount of the bonus accrual that was reversed, that was the component of SG&A?

Tod C. Holmes

We did not quantify it. I think you can see it in our SEC filings in the SG&A detail. Typically, this third quarter ends up being a little bit lower than our average of around 10-plus percent or 9.5%. So we had a positive net of 30 basis points but then offsetting that, we had some higher bad debt expense year-over-year. I will say this is not an unusual phenomenon as you go through the second half of the year, to true up bonus accruals. This year it probably is a little bit more than in the past because we've got the headwind from the commodities and fuel, which is bringing our EPS number down.

Donald W. Slager

Yes. So we're going to see around 10% in SG&A going forward. So this 9.5% for the quarter isn't something that we're going to carry into the future. It's going to still remain around 10%.

Tod C. Holmes

10% next year. And the puts and takes is cost savings on the reorganization next year and obviously, our bonus accrual next year will be higher than this year.

Scott J. Levine - JP Morgan Chase & Co, Research Division

Got it. And then I'm not sure if this is covered in terms of the remediation charge. So is that basically a one-shot deal with a cash flow impact of a direct magnitude a few years out? Or is it still a fluid situation where it's still unresolved?

Tod C. Holmes

It's a onetime -- the $30 million is onetime. The $23 million is ongoing. The cash impact is...

Edward A. Lang

About $2 million this year.

Scott J. Levine - JP Morgan Chase & Co, Research Division

$2 million. Got it. Okay. And then one follow-up on acquisition. So it sounds like you guys, you hit your acquisition target here in 3 quarters. Just wondering whether -- what your appetite and interest level still is and whether you're considering outside of traditional tuck-ins, I know that's traditionally been the focus, and whether you may overspend your budget if appealing opportunities become available to you, and whether you'd be willing to lever up a little bit more to do that.

Donald W. Slager

Well, I'd say this. We're always looking, and we've looked at everything, small, medium. We're looking within our core. So solid waste, North America, in the markets we're in typically, which is the definition of tuck-ins. We take a look at everything. We're very pleased with the ones we've done. If there's something else that came up in the remainder of the year, we'd look at it. But at this point, the idea of closing anything that's not on our radar today with this much -- with only 6 days left in the year is probably not going to happen. Where does it go from here? We think there's a pipeline that lets us do a steady diet of, call it, $100 million a year into the future, but we'll have, as we said before, the financial flexibility to do a little more if we run into good opportunities.

Scott J. Levine - JP Morgan Chase & Co, Research Division

Got it. And what's your leverage as of the end of the quarter?

Edward A. Lang

You mean our debt-to-EBITDA?

Scott J. Levine - JP Morgan Chase & Co, Research Division

That's right.

Edward A. Lang

About -- just right around 3x. That's calculated under our bank covenant.

Operator

Our next question is from Adam Thalhimer with BB&T.

Adam R. Thalhimer - BB&T Capital Markets, Research Division

Most of my questions have been answered, but I do want to ask the growth that you saw in the quarter, temporary roll-off, I think you said up 3.8%. How does that compare to recent quarters?

Donald W. Slager

Stronger, a little bit stronger.

Adam R. Thalhimer - BB&T Capital Markets, Research Division

So it's accelerating a little bit.

Donald W. Slager

Yes. I wouldn't get too excited. I think it's...

Edward A. Lang

It's coming off a low base. We have seen a little bit better temporary roll-off in the -- down in the south in some areas in the west, but it's kind of mixed geographically, but maybe some of the areas where there was very little activity are actually showing some new activity.

Operator

Our next question comes from Alex Ovshey with Goldman Sachs.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

A couple of questions. First, can you just talk about how you see the company's leverage through the nascent housing and repair and remodel recoveries as those markets begin to approach normalized levels over the next couple years? What kind of impact do you see that having on the companies volumes?

Edward A. Lang

Well, Alex, if you just look at our total revenue, C&D collections is about 6% of our revenue, and then C&D volumes at our landfills are about 2% of our revenue. So to all types of construction and demolition work, it's about 8% of our revenue. It's up slightly where versus a couple years ago, we were at 7%. So we're still at fairly low levels.

Donald W. Slager

Let me say that again, total C&D revenue 3 years ago or 4 years ago when we're at the peak, '06...

Edward A. Lang

Was about 17% of our revenue.

Donald W. Slager

And today?

Edward A. Lang

It's about 8%.

Donald W. Slager

Yes. So if '06 was normal, and you would argue it's probably greater than normal, and we're not saying we're going to get back to '06 anytime soon, but that's the gap. So today, we're up 9% of our volume.

Edward A. Lang

So still down 50% from the peak. Now what's a normal level? We're not going to go out there and try to give that type of guidance. We would just kind of report as to what's happening in the business. And as those opportunities come to us, we are seeing a little bit higher activity.

Donald W. Slager

And the good part is we're well positioned geographically in the Sunbelt in those markets that would maybe grow faster with population. We're -- we've got the assets, the landfills. We certainly have roll-off containers stacked up, and we're -- we sort of naturally get that growth as it occurs. It's not as though you got to go out and fight that hard for it; you sort of get your fair share, and that fair share would get us back ultimately to the numbers that I've talked about.

Tod C. Holmes

And as we've said before, we're late cycle so as we're clearing land, you're going to see all that activity. And then it's quite some time before they get into the anterior of the building where a lot of the waste is generated in the finishing process.

Donald W. Slager

Yes, so it's still a little too early to call. Let's just leave it there.

Alex Ovshey Ovshey - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. My second question is, based on what you guys have seen out there and the trenches in the recycling business, do you have a view of the outlook for OCC price over the next couple of quarters?

Donald W. Slager

No, flat -- kind of flat's where they are.

Edward A. Lang

And we really don't put any type of forecast of OCC or other products into our outlook or guidance. So they're -- historically, there's a little bit of seasonality tied to holiday season buying. But other than that, we don't really see changes in the pricing. We just kind of assume what the current market is, is what we'll see going forward.

Operator

Our next question comes from Tony Bancroft with Gabelli & Company.

Tony Bancroft - Gabelli & Company, Inc.

Quick question. Just to go a little further on Michael's question as far as nontraditional acquisitions as regarding the R360 deal, what are your thoughts on sort of the drilling waste business and actually sort of dealing in the front end, not just sort of the back end of that business?

Donald W. Slager

Well, as I said, we're really looking in and around the core. That's not as core to us as maybe it might be to somebody else, and we're -- we think there's enough opportunity in the tuck-in arena in the markets we're in. And we think for us if we're going to spend $100 million a year in acquisitions, which is what we've said is a decent run rate, we can buy businesses in markets we're already in and businesses we're already in, and with that, we'll get the best return, the lowest risk of integration. It's hard work buying revenue in $5 million and $10 million chunks, but it's given us the best return so far. And that's where we're going to be focused for the foreseeable future.

Tony Bancroft - Gabelli & Company, Inc.

Got it.

Tod C. Holmes

And we will participate in that energy sector to the extent that we have infrastructure in those drilling areas like Louisiana or Eastern Ohio. So we do see a piece of that business in our, which we consider part of our core.

Donald W. Slager

But purely on the landfilling side. We're not on the front end, as you said. We're not in the dewatering and in some of the other services at this point.

Tony Bancroft - Gabelli & Company, Inc.

Got it. That makes sense. And then just one quick question, could you give us some little more color maybe regionally with what you've seen recently with landfill pricings or defending landfill pricing?

Donald W. Slager

I don't think there's much to tell there regionally. Our landfill, our total disposal price was up 2.7% in the quarter, so we're consistently raising prices in our collection business fairly effectively. We haven't seen any major losses of contracts in and around that space, and we think there's going to be a couple of areas to recover -- I know there's been some talk about what happens in the L.A. market when the landfill closes there next year, they'll see some things occur. But we think it's overall, a fairly rational market for landfill disposal.

Operator

And our next question comes from Joe Box with KeyBanc Capital Markets.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Just a quick question for you on your Industrial Collection business. If my model is right, it looks like this is actually the first decline since 4Q '10. I'm just curious, in talking to some of your customers, does this feel like more of a pause in activity? Or could it be more sustained?

Donald W. Slager

No, really that's just a combination of -- we talked in previous calls about one of our large competitors purchasing Oakleaf and that business being migrated over to their collection routes and then also the large, the big box retail store that was lost in our National Accounts system earlier in the year, and that's really it. You kind of net those things out, things are positive and going okay.

Joe Box - KeyBanc Capital Markets Inc., Research Division

Okay. And changing gears a bit. I think one of your peers was out recently talking about a decline in rollbacks in the quarter. Is that something that's been broad based throughout the industry in 3Q? Or could be more of a one-off?

Donald W. Slager

Yes, I don't know. I think rollbacks are pretty consistent. The general state of municipal finance in this country with our public-private partnerships, as we said, we're probably kind of halfway through renewing that book of business. About $400 million or so of revenue comes up every year in that space, and our municipal customers are struggling in other ways. And so we've had some rollbacks there. We'll probably have a little more over the foreseeable future. I don't think it's going to change much. What has to happen is, generally, we've got to see -- to see meaningful movement in pricing, we're going to have to see CPI increase; again, that's half of our book of our business. We're going to have to see household formation, business formation, manufacturing pick up, we're going to have to see generally consumer sentiment improve and people feel a little better about the state of the economy and exactly, the tax space. So when those things occur, pricing will get better. In the mean time, we're pretty happy that pricing's moved up a little tick here. We're doing good on costs. The fundamentals are sound, so we're just working hard through it. And if things feel a little better today than they did maybe 6 months ago, but we'll see. We'll talk to you next quarter.

Operator

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

Donald W. Slager

Thank you, operator. We would like to express our concerns for all the areas impacted by Hurricane Sandy. Our thoughts and prayers are with you. We are happy to report that we have made contact with all Republic employees and all are safe. Our facilities and assets did not incur any material damage, and we are fully operational in substantially all of our locations. We are committed to providing the high level of service required to address the needs of our customers. I'd like to thank the entire Republic team for their efforts in working through our reorganization and their commitment and dedication to operational excellence in creating a Republic way.

As a reminder, a recording of this call will be available through November 8, 2012, by calling (203) 369-1886 and using the passcode 4589. Additionally, 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. Thank you for spending with time with us today, and have a good evening.

Operator

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

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