Waste Connections, Inc.
Q3 2012 Earnings Call Transcript

Published: 23 Oct 2012

[Operator:]

Good day, ladies and gentlemen, and welcome to Third Quarter 2012 Waste Connections Earnings Conference Call. My name is Deanna, and I’ll be the operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Ron Mittelstaedt, Chairman and Chief Executive Officer. Please proceed?

[Ronald J. Mittelstaedt:]

Okay. Thank you, operator, and good morning. I’d like to welcome everyone to this conference call to discuss our third quarter 2012 results and the recently announced R360 acquisition, as well as provide both a detailed outlook for the fourth quarter, and a few early thoughts on 2013. I’m joined this morning by Steve Bouck, our President; Worthing Jackman, our CFO; and several other members of our senior management team. As noted in our earnings release, we are once again extremely pleased with our performance in the third quarter as revenue, margins and free cash flow exceeded the upper end of our expectation. This strong performance was especially notable in light of declining recycled commodity values realized during the period. As we’ve communicated throughout the year, year-over-year margin comparisons have been impacted primarily by decreases in recycled commodity values, our decision to turn away lower-priced disposable volumes at our Chiquita Canyon landfill and tough comp on special waste activity. And while adjusted net income actually increased year-over-year, earnings on a per share basis have declined due to the higher share count resulting from the equity offering we completed earlier this year, and anticipation of increased acquisition activity. Getting through these headwinds and deploying our excess capital for the R360 acquisition should start to significantly improve these comparisons. Moreover, as we look ahead, we are consciously encouraged by the recent improvement in construction data an uptick since early October in recycled commodity prices and our timetable for completing the R360 transaction. In fact, we believe the R360 acquisition should close before the end of this month. Before we get into much more details, let me turn the call over to Worthing for our forward-looking disclaimer and other housekeeping items.

[Worthing F. Jackman:]

Thank you, Ron, and good morning. We must inform everyone listening that certain matters discussed in this conference call are forward-looking statements intended to qualify for the Safe Harbors from liability established by the Private Securities Litigation Reform Act of 1995, including statements relating to expected volume and pricing trends, recycled commodity prices, expectations regarding period-to-period comparisons, potential acquisition activity, expected litigation outcomes, the anticipated closing date, contribution from and financing of announced acquisitions, contribution from closed acquisitions, share repurchases, the impact of the relocation of the Company’s corporate headquarters from California to Texas, comparative results among our regions, and our fourth quarter and 2013 outlook for financial results. Such forward-looking statements are subject to various risks and uncertainties which could cause actual results to differ materially from those currently anticipated. These risks and uncertainties are set forth in the Company’s periodic filings with the Securities and Exchange Commission. Stockholders, potential investors and other participants are urged to consider these factors carefully in evaluating the forward-looking statements, and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this conference call, and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. On the call, we will discuss non-GAAP measures such as adjusted operating income before depreciation and amortization, adjusted net income and adjusted net income per diluted share and adjusted free cash flow. Please refer to our earnings release for reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations, and other companies may calculate these non-GAAP measures differently. I'll now turn the call back over to Ron.

[Ronald J. Mittelstaedt:]

Okay. Thank you, Worthing. As noted earlier, revenue in the third quarter exceeded our expectations. Revenue was $425.7 million, up 5.4% over the prior year period. Internal growth in the quarter was negative 2.7% broken down as follows. A positive 2.9% from core price, negative 3.4% volume, negative 2.2% from recycling, intermodal and other services and surcharges were flat. We expect core pricing growth to remain around 3% for Q4, and could see a slight increase in surcharges given current fuel prices. At this point we believe that pricing in 2013 should look similar to this year, assuming no deterioration in the economy. Volume growth in Q3 was negative 3.4%, which was within our outlook of negative 3% to negative 3.5% for the quarter. Our decision to turn away lower-priced volumes at our Chiquita Canyon landfill, and tough year-over-year comp following record special waste levels last year account for over half of our volume losses this year alone. For example, one stimulus driven special waste job in Q3 of 2011 accounted for almost 200,000 tons of disposal received in that period. The good news is that we will start to anniversary the impact of these two items as we get into 2013. In the meantime, two items have developed which will add to these losses beginning in Q4. First, the wrongful termination of the municipal contract in Madera, California that we are litigating with the intent of recovering several million dollars of estimated lost profit, and other damages. The second item is the loss of a portion of subcontracted collection volumes from Oakleaf following its acquisition by Waste Management in mid 2011. The combined impact of these factors should result in volume losses remaining between negative 3% and negative 3.5% in Q4, 2012. Then improving in 2013 to between an estimated negative 1% and negative 1.5% under the current economic environment. Since the underlying volumes in our base business remain fairly stable, any flow through from recent improvements in construction data or an up tick in the macro economy could offset this and push volumes closer to flat next year. Disposal volumes on a tonnage basis in the third quarter adjusted for the impact of acquisitions were down about 9% year-over-year; this decrease is closer to 7% adjusting for one less day in the current year period. Put simply, increase in construction related and oil waste volumes were more than offset by the reduction in lower priced municipal solid waste or MSW. Volumes we decided to take at one of our landfill, and the comparisons to record special waste volumes we had last year. In the third quarter, construction related volumes rose 13%, and oil waste activity increased 55% year-over-year. However, the impact of these increases almost gets lost on a consolidated basis, as both are much smaller portions of our current disposal business in MSW. MSW disposal volumes were down about 10% with 60% of the decline attributed to our turning away of lower priced disposal volumes at our Chiquita Canyon landfill. As noted throughout the year, rather than chasing the prices down and consume Chiquita Canyon zero space at lower prices, we’ve taken a longer term approach and made the decision to hold the line on our prices in the short term. We still expect a significant increase in market pricing in the LA Basin once Puente Hills closes on October 31, 2013. Another 20% of the MSW decrease was related to our landfill in Michigan which saw a reduction in Canadian related volumes due to a significant reduction in disposable waste offered by competing landfill owned by republic, which is quoting prices up to 35% less per ton than our pricing to these Canadian customers. Special waste volumes were down about 20% in Q3, the single project last years that I mentioned earlier accounted for about 125% of the client in special waste activity in Q3. Special waste volumes were actually up excluding is one project. Roll-off pulls per day in the third quarter were down about 2% year-over-year on a same-store basis, this decrease was closer to 1% adjusting for day counts. Revenue per pull again increased 2%. We are pleased to see strength in our western region, which showed an increase in pulls per day, and we were encouraged by positive trends during the quarter as September was our best month across all regions in Q3. Internal growth in the quarter from recycling, intermodal and other services was a negative 2.2% due to year-over-year decreases in recycled commodity values. Proceeds from the sale of recycled commodities in the third quarter were 4% of consolidated revenue, down from 6.3% in the prior year period when prices reached record levels. On a same-store basis, revenue from such activity declined $9.5 million or 37% year-over-year and at very high margins. Prices for OCC or old corrugated containers averaged about $117 per ton during the third quarter, down about 41% from the year ago period, and down 18% sequentially from Q2. OCC prices began Q3 around $135 a ton, and fell throughout the period to almost $100 per ton in late September. We are encouraged by recent increases in OCC prices which have rebounded to about $125 a ton. At current prices, we believe this will translate into an almost $5 million year-over-year decrease in such revenue in the fourth quarter or about a $4.5 million improvement in the year-over-year reduction we experienced in Q3. Headwinds from epic pricing realized during 2011, and year-over-year comparisons are starting to ease. Performance of recently completed acquisitions was a bright spot in the quarter as both Alaska Waste and SKB Environmental are nicely ahead of our initial expectations. These two transactions together with R360 Environmental Solutions should provide highly accretive rollover contribution in 2013; accretive to EBITDA margins, earnings per share and free cash flow. In mid-September, we entered into an agreement to acquire the business of R360 Environmental Solutions for approximately $1.3 billion in cash. R360 is the leading provider of non-hazardous oilfield waste treatment, recovery and disposal services in several of the most active natural resource producing areas in the United States, including the oil-rich Permian, Bakken and Eagle Ford Basins. It operate 26 facilities across Louisiana, New Mexico, North Dakota, Oklahoma, Texas, and Wyoming and has annualized revenue of approximately $300 million with margins similar to our disposal business. R360’s disposal lag margins are to be expected as the vast majority of R360’s business is focused on the treatment, disposal, and recovery of solid and drilling nuts, not lower barrier to entry trucking or frac tank services. In fact, R360's permitting, engineering, and operations are similar in many respects to the disposal assets we already own and operate. What makes R360 different, or its growth prospects? They are vastly different and complementaring to our solid waste business. Both of ways volumes are increasing at double-digit rates due to growth in horizontal drilling activity across the number of unconventional plays and increased environmental regulatory scrutiny. With strategically located assets across a diversity of basins and within the most active basins, R360 has experienced pro forma revenue growth this year in excess of 25%. Its market should continue to expand over the next several years as the number of wells drilled per year in oil shale plays is expected to increase more than 30% and production is expected to increase more than 50% over that period. Horizontal drilling produces higher quantities of waste compared to vertical drilling. This increasing waste stream is resulting in more stringent environmental action not unlike what the solid waste industry experience some 25 years ago when Subtitle B changed the landscape and barriers to entry for MSW landfills. It is estimated that slightly more than 50% of the wells drilled each year still they utilize open pit disposal for drill cutting at the well side. As more safe and landowners look to eliminate such practices in favor of professionally managed permitted sites, third-party providers such as R360 should benefit and already have, as evidenced by the growth they’ve experienced over the past several years. If increased environmental regulations push a greater percentage of the waste stream to third-party providers, the oilfield waste treatment and disposal sector will experience additional growth and related to changes in rig counts for the number of wells drilled. Increased regulations also typically result in higher amounts of capital investments for waste service providers. The fragmented nature of the oilfield waste treatment and disposal industry provides additional consolidation opportunities for well capitalized company. The waiting periods for Hart-Scott-Rodino review has now expired, and we expect to close the transaction before the end of the month. We intend to fund the acquisition to about $1.25 billion of incremental debt plus excess cash on hand. The current interest rate on this incremental debt is about 2.25%, or about $30 million per year including upfront finance costs. Our leverage ratio as defined in our credit facility will be about 3.2 times following the closing of the transaction. And finally, we were pleased to announce yesterday that our Board of Directors authorized an 11% increase in the quarterly cash dividend to $0.10 per share, which represents an almost 1.3% dividend yield. This dividend represents an estimated 15% of free cash flow in the up coming year. We plan to direct our excess cash flow to reduce leverage and fund additional acquisition and growth opportunities. Now I’d like to pass the call to Worthing to review more in depth of financial highlights for the third quarter, provide a detailed outlook for Q4 of 2012. I will then provide some early thoughts on 2013 in my closing remarks.

[Worthing F. Jackman:]

Thank you, Ron. In the third quarter, revenue increased 5.4% from the prior year period to $425.7 million, 8.1% from acquisitions and negative 2.7% from organic growth. Adjusted operating income before depreciation and amortization in the quarter as reconciled in our earnings release increased 2.1% to $138.3 million. As a percentage of revenue, this was 32.5% or about 90 basis points below the year-ago period, which is actually less than the impact from recycle commodities, which we estimate at about a 100 basis points. Adjusting for these items reconciled in our earnings release. The following are certain line items that moved the notable amount from the year-ago period as a percentage of revenue. We have known that many of these increases are simply due to the mathematical impact of lower revenue from recycling and disposal volumes not necessarily some increasing cost. SG&A increased 40 basis points, primarily related to an increase in deferred compensation liability. Labor expense increased 30 basis points. Tires, repairs and maintenance increased 15 basis points. Facility and property cost increased 15 basis points. [Lease rate] expense 10 basis points and fuel expense decreased 30 basis points. In a quarter, fuel expense was about 6.1% of revenue and we averaged approximately $3.55 per gallon for diesel or about $0.05 of gallon above the year-ago period, and up $0.03 sequentially from Q2. As a reminder, adjusted results for the period exclude cost associated with the relocation of our corporate headquarters from California to Texas, acquisition related expenses and loss on disposal of assets. These costs in the current year period were offset by a non-recurring gain from an arbitration award. Depreciation and amortization expenses for the third quarter increased $4.6 million year-over-year. As expected, D&A was a 11.4% of revenue, up 50 basis points year-over-year due to higher acquisition-related completion and amortization costs. Net interest expense in the quarter was a $11.6 million or almost $300,000 below the prior year period. This decrease was primarily due to lower outstanding balances. Outstanding debt decreased slightly during Q3 to about $980 million, and we ended the quarter with a little more than $100 million of cash on the balance sheet. We expert to utilize this cash in Q4 to fund the portion of the R360 purchase price. Our effective tax rate for the quarter was 36.4%, slightly better than our outlook due to more favorable throughout associated with tax funds in the period. Our fully diluted outstanding share count for Q3 was a 123.7 million shares, an increase of about 10.5 million shares in the year ago period, due to the impact of our equity offering earlier this year, somewhat offset by share repurchases we completed since that period. GAAP and adjusted EPS in the third quarter were $0.40. Adjusted net income increased $2.3 million in the current year period, but adjusted EPS declined $0.02 due to the increased share count. Adjusted free cash flow through September was $223.9 million, or 18.5% of revenue. We remain on target for original $250 to $260 million outlook for the full year. I will now review our outlook for the fourth quarter of 2012. Before I do, we’d like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement and our various SEC filings. We encourage investors to review these factors carefully. Our outlook assumes no change in the current economic environment, or commodity values and excludes the impact of the R360 acquisition that is expected to close later this month and expensing of acquisition-related transaction costs, as well as costs incurred in connection with the relocation of the Company's corporate headquarters from California to Texas, including the charge we may incur for the write-down of our prior corporate office lease. Revenue in the fourth quarter is estimated to be between $401 million and $403 million, up almost 6% over Q4 2011. Organic growth is expected to improve almost a 100 basis point sequentially from Q3, and is estimated to be between negative 1.5% and negative 2% for the quarter with the components as follows. Net price, again, of about 3%, the volume growth again between negative 3% and negative 3.5%, and recycling, intermodal and other improving to around negative 1.5%. Operating income before depreciation and amortization accretion for Q4 is estimated to be between $122.5 million and $123 million reflecting a margin of about 30.5%. This year-over-year margin decline expected for Q4 is similar to what we experienced in Q3. Depreciation and amortization for the fourth quarter is estimated to be about 11.6% of revenue, up 20 basis points over the prior year due primarily to acquisitions completed since the year-ago period. Operating income for the fourth quarter is estimated to be about 19% of revenue. Net interest expense in Q4 is estimated to be about $11.8 million. Our effective tax rate for Q4 is estimated to return to our more typical 39% range. Noncontrolling interests is expected to reduce net income by about $250,000. Our diluted share count in Q4 is assumed to be about 123.5 million shares. As discussed on prior calls and noted in our public filings, we expect to take a one-time charge to write down our prior corporate office lease in California. This charge is expected to occur in Q4 or early next year and it’s estimated to be between $8 million and $10 million. Regarding R360, if we are able to close the transaction before the end of the month and get two months of contribution in Q4, we believe our outlook for the upcoming quarter would be closer to $450 million of revenue and a $150 million of EBITDA. Now, let me turn the call back over to Ron for some final remarks before Q&A.

[Ronald J. Mittelstaedt:]

Okay. Thank you, Worthing. Again, we are extremely pleased with our results in the third quarter and year-to-date. While we often spend much time on the call focused on community our financial results, we have many other accomplishments, which help drive the results and strengthen our organization. These include some of the followings. Continued improvement and safety metric and certain leaderships for us, tightly managing our expenses in CapEx in the faces some uncontrollable hit, such as the following recycle commodity prices, completion and integration of the Alaska Waste and SKB Environmental acquisition; signing R360, our single largest transaction ever and one which has tremendous growth prospects. Racing almost $1.2 billion of new debt and equity capital and reallocating the corporate office and almost 90 families under budget to get better position the company for future growth. I also note that we also planned and recovered from our 15 anniversary celebration on September 29. Finally and more importantly, as we look ahead, we are encouraged about our prospects for 2013 given expected continued strength in pricing and proving volume in recycle commodity value, improving economic data and strong accretive contribution from recently completed acquisition and the upcoming R360 transaction, although we won’t provide formal 2013 guidance until next February. We think it is important to provide some direction, now given the many moving pieces. Our current trajectory should put us at about between $1.95 billion and $2 billion of revenue next year and at least 35.5% EBITDA margin. Any increase in oilfield waste activity, improvement in the economy, or recycling prices, or additional acquisitions would provide upside to these estimates. We appreciate your time today. I will now turn this call over to the operator, and open up the lines for your questions. Operator?

[Operator:]

(Operator Instructions) Our first question will come from the line of Scott Levine, JPMorgan.

[Scott Levine:]

Hi, good morning guys.

[Ronald J. Mittelstaedt:]

Hi, good morning, Scott.

[Worthing F. Jackman:]

Good morning.

[Scott Levine:]

So the results are better than you guys had expected despite some pretty severe headwinds. I’m wondering it sounds like it’s predominantly the acquisitions and internal efficiencies. But your press release suggests you’re seeing some Green Suites maybe here are some causes for increased optimism. I’m hoping you can provide a little bit more color on how the quarter played out relative to your internal expectations? And whether we have any real cause or you have any real cause to be more optimistic with regard to business levels improving or whether it’s really just improving in the macro data and indicators and commodities that are driving your increased optimism there?

[Ronald J. Mittelstaedt:]

Scott, I think the quarter played out really how we thought obviously close to guidance a little better than guidance. And most of that it seems really came in the last week of August and the month of September. And so in that way, we are cautiously more optimistic again one month doesn’t make a trend. But we saw the economy softened, but I’d say notably in the second quarter relative to the way I think have been in the first quarter and the fourth quarter of last year. And we wondered if that softening would continue through the third quarter and it really didn’t seem to it. It seemed to sort of stabilize and nominally we improve. So I would say that we were encouraged by that. September was the best month from new accounts versus last account and a new customer ultimate location versus close location that we’ve had in five years for September. And so since that the start of the contraction or this recession, this September was the best month we’ve seen in our results on a sales basis since then. So I would say those are the things that give us, we would tell you that we still think the economy is very pocketed. There are areas with tremendous strength such as the Midwest, Rocky Mountains, the upper Southeast, and there are areas that continue to be relatively weak such as the West Coast and parts of the upper Northeast.

[Scott Levine:]

Got it. And maybe it’s my follow-up on R360, it sounds like a combination of a drilling activity entitled Reg is driving the growth profile there. But you probably do a little bit more color in terms of which fields are the greatest revenue contributors for you form that deal. And maybe help us as well get a sense of the sensitivity of the growth of the margins to levels of joint activities. What indicator should we look for in order to be able to assess growth prospects and sensitivity to commodities within that business going forward?

[Ronald J. Mittelstaedt:]

Sure. Well, as we said in the call, I mean the largest current basins of activity include the Bakken in North Dakota, the Permian in New Mexico and West, Texas, and the Eagle Ford in Texas. Those are the largest three basins right now, although, they are operating in about seven very actively right now. And we would expect those to continue to be for the foreseeable future the largest basins of activity. I think to your question of variability and commodity, obviously, there is certainly a linkage to crude pricing. And I would tell you that at crude pricing somewhere around $75 to $80 or north. We think the level of activity stays consistent with what we are seeing today and have been seeing over the last year or so, if crude moves probably north of $95 to $100, I think you see increased activity and of course, that moves south of $75, I think you see a decreased activity, because the reality is there are break-even return points for the producers and the drillers at each of the shale plays at different price points. Some of the shale plays that produce an appropriate return on the well and the investment at $50, some produce it at $35, but some produce it at $65 to $75. So there is really, it really depends on the price of oil clearly has an impact to drilling activity.

[Scott Levine:]

Understood. And in terms of the margin sensitivities I mean what you’ve seen in the past are obviously there is a much greater disposal content. Does that imply a greater degree of operating leverage in both directions that your expectation in margins should remain relatively stabled in that business?

[Ronald J. Mittelstaedt:]

I believe margins that we took a look at this during our due diligence very, very hard. And that was back in ’08, ’09, when the start of a significant contraction happen and really the economy sort of fell off a cliff there. They saw about a 25% to 30% decrease in drilling activity. Yeah, margins remained relatively consistent. And so I would tell you that rest in the midst of our business, which is in R360 between solid and liquid and we don’t anticipate that. Although we won’t give an acquisition could move at a little either direction. That as long as the mix of the business between solid and liquid stays the same that margin should stay relatively the same on the way up and on the way down.

[Scott Levine:]

Got it. Thanks, congratulations.

[Ronald J. Mittelstaedt:]

Thank you.

[Operator:]

Your next question comes from the line of Hamzah Mazari, Waste Connections.

[Unidentified Analyst:]

Good morning.

[Ronald J. Mittelstaedt:]

Welcome to the company Hamzah.

[Unidentified Analyst:]

Thanks a lot. I appreciate it. Ron, maybe if you could touch based on in which markets are you seeing disposal pricing pressure and maybe, which markets higher disposal pricing is not converting into a higher collection pricing due to maybe some other competitors take in a margin squeeze?

[Ronald J. Mittelstaedt:]

Okay, well. First, I would tell you that in the quarter, we saw higher disposal pricing at 60% of our landfills and lower disposal pricing at approximately 40% of our landfills. So clearly the majority of our landfills we did see improved pricing at. Most of that improved pricing continues to be in the Midwest, the Rocky Mountains parts of the Southeast. The decreases that we are seeing are in Southern California or in the Great Lakes area in Michigan and pressures in the Northeast. Those are the markets where we’re seeing the most disposal possible pricing. I would tell you that I think for the most part Hamzah, that incrementally improved disposal pricing is translating to margin improvement on the collection side in most places. But it’s been mass by the rapid decline in commodity pricing. I mean, if you were to keep commodities consistent Q2 to Q3, or last year to this year, you would see margins that are dramatically up year-over-year. So I think it is translating, but it’s being masked by the rapid decrease and the magnitude of the decrease in commodity pricing, as well as some margin impact, not dollar impact, but margin impacts from rising fuel that’s recovered. So those two things are affecting margins, but they’re really masking, you have to strip them away to see what’s happening to the underlying business.

[Unidentified Analyst:]

Make sense. And then on the construction side of the business, you seem a little more bullish, maybe if you can talk about, any kind of benefits you are seeing there, or does the material benefit come, second half next year, because of the lag in your business?

[Ronald J. Mittelstaedt:]

Yeah. I think first off, our optimism to the extent that we have is just that, our West region, which is our largest region and which is not only our largest region, but if the region where we get a 100% of the business good or bad, because of the exclusive nature of our contract. Our optimism is that region finally had positive year-over-year roll off comps for the first time in over four years. And so, whether or not that mean, there is improvement there or we’ve just hit the bottom on comps, it’s hard to tell with one-month or one quarter. But if it is an indication of improvement, the good news is as we get a 100% of that and we get it all at a guaranteed price, not a discovered price on a competitive market. So that will have very nice incremental contribution should that be a turnaround.

[Unidentified Analyst:]

And just last follow-up, as you think longer-term about your business and once you bring down some of your leverage post this transaction, what is your strategy in terms of expanding further outside of your base legacy business?

[Ronald J. Mittelstaedt:]

Hamzah, I mean, again I think is that our base solid waste disposal and recycling business will always be the core of what we do, will be the vast majority of what we do will be the center of what we do. Again, R360 is as we see it is very complimentary, it’s just a disposal business of a specific waste stream rather than a disposal business of multiple waste stream. We’re not looking to diversify outside of areas that we have a certain amount of expertise and knowledge in. I think, the waste stream is changing. It is stratifying due to consumer demand, due to a regulatory requirement, due to technologies. And as the waste stream stratifies, I think you will see us and others look to acquire certain specialty niche players that have leading market positions to capture that waste stream that no longer maybe in our traditional MSW waste stream. I think R360 is an example of that. You could find a similar thing in electronic ways or organics or some other form over time. But we’re not one to go out there and make a bunch of a speculative play, and I hope one of them hits on the roulette table. We look to go find a proven strategy with a quality company, we’re the leading position and we will pay for it. And our belief is that if you control the waste stream and you have the balance sheet, at the end of the day, you will be able to play in the game.

[Unidentified Analyst:]

It makes sense. Thank you

[Operator:]

Your next question comes from the line of Michael Hoffman, Wunderlich.

[Michael Hoffman:]

Okay, thank you for taking the call this morning. Can you talk a little bit about the core leverage business in the acquisition environment as we head into the end of the year. There seems to be a fair amount of angst about what the fiscal cliff means to capital gains taxes and what might or might not be get negotiated away. So are you seeing any changes in behavior in the seller market?

[Ronald J. Mittelstaedt:]

Yeah, we are Michael, and it’s sort of an ironic time right now. We are seeing a number of sellers suddenly realize that December 31 comes after November. And amazingly, besides that, maybe it is getting, maybe we are to be doing something. So we are seeing a lot of people sort of sprint for the game at the end of the year. But the other thing we are seeing is that, they had a decent deterioration in the business over the last 12 months, particularly if they have any exposure to commodities. And so what they thought, their run rate was in terms of performance, they would like to have that at $200 a ton commodity value, not a $115. And so, we have gotten to, I would call it the finish line on a number of deals and we’ve decided to adjust valuations downward for the reality of the current environment. And that is, several of those will still get done, but several of those will get deterred into next year, because we really look at the value, we don't really care what people did, we care what they're going to do.

[Michael Hoffman:]

Okay. And can you frame it all what you think that might look like in the fourth quarter as far as revenues?

[Ronald J. Mittelstaedt:]

As you know, we do not provide any acquisition guidance that we’re going to suggest about anything speculative. I would not expect it be material on its own. And again we don’t want to put any undue pressure to do something that might not end up making sense at the 11 hour.

[Michael Hoffman:]

Okay. And then on R360, how much of their volume is tied to current activity, where there is a current drilling environment versus landowners and leaseholders are going to back and saying I’m going to cleanup some of these open pits?

[Ronald J. Mittelstaedt:]

Yeah, I would say that about 75% is related to current period drill activity and about 25% is related to – I’m going to define it as you did more a little differently than you did as cleanup activity related to pits and activity post drilling.

[Michael Hoffman:]

Okay. And then in the context of areas that fastest growth in the Permian is predominately conventional drilling, but converting to horizontal. So is that the area of fastest growth at the moment or is the Bakken?

[Ronald J. Mittelstaedt:]

I would say the Permian is probably the area of the fastest growth. I mean as you know it’s probably the largest shale play. It’s the most well known, and it had drilling since arguably the 1930s. Most of it was conventional. It’s now converting to horizontal and that the spacing between growth size is the tightest that we’re seeing anywhere so and much tighter than what you see up in the Bakken. So it’s much more a long, and it’s closed maturity, but it’s got a tremendous growth happening there.

[Michael Hoffman:]

Okay, thank you on that. And then capital allocation, presume R360 gets done. We stopped the buyback until the leverage ratio gets back down to our particular levels. Can you sort of frame what that level would look like?

[Worthing F. Jackman:]

Mick, we target anywhere between 2.5 and 2.75 leverage. Obviously, the excess free cash flow beyond the dividend as Ron said earlier will be directed towards the combination of delevering as well as the potential growth opportunities.

[Michael Hoffman:]

And then am I right and assuming that the dividend would still I have an opportunity to grow even in an environment where you’re using excess cash to pay down debt?

[Worthing F. Jackman:]

Oh, yes I mean as you saw it, it happened yesterday. You know I think that would influence our decision on dividends in the future is just the uncertainty on what might happen to cash flow next year.

[Michael Hoffman:]

Right, okay. I think that’s it. Thank you

[Ronald J. Mittelstaedt:]

Thank you

[Operator:]

Your next question comes from the line of Al Kaschalk, Wedbush Securities.

[Al Kaschalk:]

Good morning, guys.

[Ronald J. Mittelstaedt:]

Good morning, Al. How are you?

[Worthing F. Jackman:]

Good morning.

[Al Kaschalk:]

Pretty good thank you. Just another touch here on R360 and really the oilfield waste business, and one could argue there is a different risk profiles then the traditional MSW business and I guess in the flip side some benefit. So I was hoping maybe Ron, you could just share and you did some already, but maybe the risk that you see in that business from a growth perspective that could drive or slowdown the volume?

[Ronald J. Mittelstaedt:]

Sure. Well, I think as you stated in your question, I mean I will tend to argue that anything with that has greater up side also has potentially greater down side. The oilfield waste business is clearly more volatile than the traditional MSW business, our core business. Our MSW business as you’ve seen is a very predictable business, it performs very well in both contraction and expansion period. But the reality is that particularly in the current economic environment with unemployment where it is, and with construction and manufacturing activity at lows that the MSW business is really basically a flat to know growth business other than some incremental improvement in pricing and some special waste jobs here in there. That’s the reality of what it is in this economic environment. And whereas the oilfield waste business, because of the advancement in technology and horizontal drilling, the drilling activity is that at an all-time high, not seen since the mid 1970s in terms of drill activity. And so it is that really just below in all-time high, which actually we’ve seen in 1974, ’75. So it was taken nearly 40 years plus to get back to this level and if taken technology to do that. It’s of course also taken $90 to $100 oil to drive the economic. So the volatility in the R360 business will be driven by the long-term price of crude. If your view drew is that that long-term price of crude is how many years of number, north of $75 or $80 of barrel when I think the current activity that you see will remain at this level or above. If your long-term view is that that price of oil is north of that then I think you’re going to continue to see double-digit growth for the next five years in term of rig count and therefore drilling activity. That is what is currently being projected by both most quote experts in the field. If your long-term view is that, it’s a $40 a barrel market then clearly, there is going to be less drill cuttings in many of the basins and a reduction in activity. We spent a lot of time looking at this due diligence, and while there is no a perfect crystal ball, our view is that, 90 was a lot more likely than 50 and by quite a wide margin. And so we expect the volatility to be lower than one might expect. Now, the other offset here is that, natural gas activity and drill activity in natural gas well plays is really at a 10-year low. That rig count is at a ten-year low because of gas being in the 250 to 350 range over the last several years. And the reality is that, R360 is also positioned and arguably the top gas plays in the U.S. should that come back. So our belief is that, if you didn't have the long-term view that oil was going to be down in the 40 to 60 range, that natural gas would be dramatically higher somewhere in the 450 to 550 range. And at that level while rig counts would decline in oil, they would dramatically increase to higher levels in the natural gas side and again, there are cuttings and other types of muds associated with that that we would get. So we think the natural gas being it such a low level today somewhat provide sort of a natural hedge against a pretty dramatic drop in the commodity value of oil. So, that’s the Reader’s Digest version on how we look at it and what the risk is.

[Al Kaschalk:]

Okay, thanks for that. Maybe next time the larger print version given my eyes are going, just kidding, Reader’s Digest, but that was a joke.

[Ronald J. Mittelstaedt:]

That was a digital version.

[Al Kaschalk:]

Yeah. In terms of the actual business today the majority of its oil, right?

[Worthing F. Jackman:]

Right.

[Ronald J. Mittelstaedt:]

Yes, that's correct.

[Al Kaschalk:]

And then secondly, help us appreciate, obviously your core business is a local business. This one arguably is a local business as well. So how much CapEx will you need to be spending whether it’s relative to revenue level percentage, or growth opportunities, how do we think about how much capital you will need to be spent to operate this business going forward?

[Ronald J. Mittelstaedt:]

Okay. Well, in a sort of static environment with, excluding incremental organic growth opportunities. I would tell you that, the CapEx is lower than our core business, particularly lower than our core disposal business. And using a number of somewhere around 7% or 8% of revenue for the maintenance CapEx would be a good number for R360. Now, we are pursuing, they are pursuing, and therefore we are a number of organic growth opportunity. And I would tell you that for the next couple of years, I would expect the growth CapEx to be as much as the maintenance CapEx, and therefore, another 7% to 8%, or maybe even nominally higher on growth CapEx over the next 24 months at least.

[Steven F. Bouck:]

Assuming they are successful in the new permit, right?

[Ronald J. Mittelstaedt:]

Yes, assuming those permits are successful et cetera. And so, roughly if you want to use 15% to 17% of revenue, and roughly split it between growth and maintenance Al, that would be a fair number for the next few years. But if we did that, you would also see, the revenue and EBITDA from those growth prospects baked into the numbers.

[Al Kaschalk:]

Okay. I think I will hop back in queue. Thanks a lot.

[Ronald J. Mittelstaedt:]

Thank you.

[Operator:]

Your next question comes from the line of Adam Thalhimer, BB&T Capital Markets.

[Adam Thalhimer:]

Hey, good morning, guys. Congrats on nice quarter.

[Ronald J. Mittelstaedt:]

Thank you, Adam

[Worthing F. Jackman:]

Hi, Adam.

[Adam Thalhimer:]

Wanted to ask Ron, last quarter you gave some details on construction volumes and maybe you just gave it again this quarter, I just missed it. But did you breakout what the volume increase in construction was in the quarter?

[Ronald J. Mittelstaedt:]

Yes, we did, give me just a second, and I will grab it for you, but yes, we did. Hold on a second, okay.

[Worthing F. Jackman:]

Yeah, maybe C&D volumes were up 13%...

[Ronald J. Mittelstaedt:]

Yeah, 13%.

[Adam Thalhimer:]

Okay, got it, it’s lower than last quarter. And then so if construction, if total C&D volumes right now, I will call it 6% to 7% of revenue, where were they in a healthier construction environment, call it five or six years ago?

[Ronald J. Mittelstaedt:]

Yes, they were between 9% and 11%.

[Adam Thalhimer:]

Okay. And lastly, Ron, you mentioned on natural gas prices, still within that range of 250 and 350. Where do you think I need to be to encourage more drilling in your current shale plays?

[Ronald J. Mittelstaedt:]

What we understand and again, we are not experts in this. We are relying on a lot of the information that we got through the R360 guys to what do you consider expert on this. They would say that that number is probably $4 or north for most of the plays.

[Adam Thalhimer:]

All right, not far away from that right now?

[Ronald J. Mittelstaedt:]

No, not as far as we were six months ago.

[Adam Thalhimer:]

Yeah, okay, great. Thank you very much.

[Ronald J. Mittelstaedt:]

Yeah.

[Operator:]

Your next question comes from the line of Bill Fisher, Raymond James.

[William Fisher:]

Thank you. Good morning.

[Worthing F. Jackman:]

Hey, Bill.

[Ronald J. Mittelstaedt:]

Hey, Bill, how are you?

[William Fisher:]

Good, thanks. Ron, just change gears a bit just on the LA landfill. It seems like that’s been probably $10 million, $15 million headwind or so this year. Do you have sense for the LA callers who have taken (inaudible) prices this year. One say, you get a Q2, Q3 of next year, do they try to start look another alternatives like yourselves or a public or do they display it out right to the end, I am just trying to get it, would you get any sort of pickup maybe earlier than October next year?

[Ronald J. Mittelstaedt:]

Bill, my belief is that you that there will some that come to provision prior to October 31 of next year. But the reality is that, there has been so much contraction in the disposal market in LA. The disposal market in LA is down about 40% plus from its peak. And so because of that, I think there is really a reluctance for callers, private callers enter into agreements, literally a day sooner than they have to, because they are just, they are really waiting for some sort of a recovery and they are also hoping that there is some last-minute opportunity for them that is, that might be better, because the market is expected to jump, the differences between market pricing post-apartheid look so different than it does today. The other thing is that most of these hours have a municipal franchises, that they have a guaranteed price through except for major changes in disposal. And as long as there is an option to take it to a lower disposal, they have to take it up till that last moment, in order not to have to eat that cost in their collection franchise. So, they can’t really shift those volumes in May or June or July and then go to their municipality and ask for a price change due to disposal when there was another available option that was dramatically left until the end.

[William Fisher:]

Gotcha, okay. And then just overall on price maybe looking up 2013, could you talk about, do you get any rate adjustments sort of Northwest next year? And then on the flip side is commercial collection pricing over the summer, did that kind of stabilized or was it more or less competitive?

[Ronald J. Mittelstaedt:]

Well, first off on your first question. Right now we believe that the, for the most part the CPI is nominally higher for our index business for 2013 than it was in 2012. In 2012, we saw about a 1.6% to 1.7% type CPI increase in that business, and we are currently expecting around a 2.2% to 2.3%, so call it a 50, 60 basis point improvement year-over-year in that. So, that is why we said today, we believe that pricing will remain relatively consistent year-over-year, because even with that up tick, we are continuing to project a competitive environment in the competitive piece of our business. As we have seen that, I would say escalate throughout the course of this year and continue into the third quarter, which is really in a no growth environment what I would expect, which is incrementally greater pricing pressure on stable volume. So to the extent the economy improves. I think, there is a little upside to our pricing for next year, and that will come out of our competitive markets. But right now, we’re projecting that it continued to stay very competitive.

[William Fisher:]

Okay, great. Thank you

[Operator:]

Your next question comes from the line of Joe Box, KeyBanc Capital Markets.

[Joe Box:]

Hey, good morning, guys.

[Worthing F. Jackman:]

Good morning, Joe.

[Joe Box:]

Just a quick clarification on R360, I hear you that there is environmental opportunity that should push operators toward a more managed disposal. If we were to just take a conservative approach and assume that the percentage of managed disposal doesn’t change all things equal at about $90 oil, did you still see this business growing in the double-digit range for the next couple of years?

[Ronald J. Mittelstaedt:]

Yes.

[Joe Box:]

Okay, thanks. And then maybe just a couple of quick questions for you on the cost drivers, if you look your 10-Q, I think you noted that diesel expenses were actually down about $1.1 million, really stemming from less fuel consumed. Can you just talk to maybe what some of the primary drivers were to bring down fuel consumption?

[Worthing F. Jackman:]

It’s a combination of slight volume decreases on [volume] side, but not material and that side is more of an impact of acquisition mix as you’ve got the SKB coming into the full, which against the disposal end of the business, which uses comparatively less fuel.

[Joe Box:]

Okay.

[Worthing F. Jackman:]

Yeah.

[Joe Box:]

And then, Worthing, I think you mentioned earlier that our NIM expenses were down about 15 basis points in a quarter. We’re starting to hear some higher cost planning out and potentially even declining next year. Is that something that could create it a cost tailwind in 2013?

[Worthing F. Jackman:]

Yeah, actually repairs and maintenance were up 15 basis points year-over-year in the period, not down, because we have taken some cost increases this year, but again also some hit from the revenue side, which changes as a percentage of revenue. Next year, we’re expecting further increases, but now we’re near the magnitude of what we saw this year. And in fact we believe some of our expenses could goes down next year, because of the some initiates we took this year in some of the fueled side and maintenance side.

[Joe Box:]

Okay, great guys. Thanks for the time.

[Operator:]

Your next question comes from the line of Corey Greendale, First Analysis.

[Corey Greendale:]

Thanks. Good morning.

[Ronald J. Mittelstaedt:]

Good morning.

[Worthing F. Jackman:]

Good morning.

[Corey Greendale:]

First I have to ask that can you quantify the hit of productivity premier anniversary celebration in the quarter.

[Ronald J. Mittelstaedt:]

I could tell you at least 10 basis points.

[Corey Greendale:]

Not bad for you guys.

[Ronald J. Mittelstaedt:]

Yeah.

[Corey Greendale:]

First question, I guess my question about R360, from time-to-time you talk about your acquisition pipeline or the opportunity for acquisition kind of quantifying it in your footprint? Could you do that now and how does R360 – what kind of acquisition opportunity is there? Could you put some dollar amounts around that?

[Ronald J. Mittelstaedt:]

Well, seeing that we haven’t closed yet. But we expect to hopefully over the course of the end of this week or beginning of next, I think it would be a little premature to talk about. But what I can tell you Corey, is that the oilfield waste disposal business and treatment business is still very fragmented. Although R360 is comfortably the leader in that field, it’s still a very fragmented business. We would define that business in the shale play that R360 is in. We believe that that’s about $1.5 billion to $2 billion annual business. And so if I said R360 is doing $300 million of that that would tell you, they’ve got somewhere around 15% rounding or so of that market. Now not all of that do we want by any mean, but I think to say that we believe that between over the next five years we could increase that business from a $300 million to $500 million business. I think that’s a fair statement.

[Corey Greendale:]

Okay, great. Second question I had is specialize, I know you had really touch year-ago comp, but what’s kind of real-time what is the pipeline look like your special waste and what do you assuming in 2013?

[Worthing F. Jackman:]

We have a special waste, we’ve had some projects push out at Q4 and into ‘13 already, obviously, the comps as you look at 2013 over 2012 are more favorable than the comps we have 2012 to 2011. So again, I think next year is probably more normalized year for special waste and which puts special waste again back in that 1% to 2% of revenue.

[Corey Greendale:]

Okay. And then my last question is just essentially providing some initial thoughts on 2013, I was hoping you might be able to give a little hope on some of the moving pieces in free cash flow like what preliminary thoughts on what CapEx might be and what bonus depreciation what does that to tax?

[Worthing F. Jackman:]

Sure, we’ll give you that in February.

[Corey Greendale:]

Okay, great. Thanks.

[Operator:]

Your next question comes from the line of Alex Ovshey, Goldman Sachs.

[Worthing F. Jackman:]

Hey, Alex, good morning.

[Alex Ovshey:]

Thanks. Good morning, Worth, and good morning, everyone. A couple of questions for you guys. Just first of all thinking about the exposure to the recovering construction, one housing normalizes if we assume that your C&D volumes to go back to 9% to 10% of the total revenue pie. Is there a rule of thumb for thinking about the incremental margin on the volume up tick to that vertical?

[Ronald J. Mittelstaedt:]

I would say that, thinking of it in the relation to it of about 40%, it’s probably fair. I mean and part of the reason for that is, we are assuming that, two-thirds of that incremental construction activity is internalized, and so you are obviously getting a disposal type margin on that.

[Alex Ovshey:]

Understand, thank you, Ron. And I was just looking at a joint center for housing study piece that was out by Howard University. And they were talking to a material pickup in repair and remodel actually starting in the fourth quarter of this year and then to 2013, if you think about your exposure in new construction versus repair and remodel, do you see a more benefit from repair and remodel coming back or new construction coming back?

[Ronald J. Mittelstaedt:]

I think, the reality is new construction. I mean, certainly repairs and remodels, that certainly helps, but it’s no where near the magnitude of waste generated that new construction does.

[Alex Ovshey:]

Okay, understand. And then turning to R360, do you guys expect to report that as a standalone segment?

[Ronald J. Mittelstaedt:]

Yes.

[Worthing F. Jackman:]

Yes.

[Alex Ovshey:]

Okay, with the incremental color on volume and pricing specific to R360, I would assume?

[Worthing F. Jackman:]

We’ll roll it in initially just as one reported segment, the pricing volume breakout will be relative to our solid waste business.

[Alex Ovshey:]

Okay, got it. And correct me if I’m wrong on this, but did you mention that your revenue number for 2012 in R360 is expected to be about 25% year-over-year in 2012?

[Ronald J. Mittelstaedt:]

No, we said that…

[Worthing F. Jackman:]

R360 in our pro forma basis dropped over 25% of revenue in ’12 versus ‘11.

[Alex Ovshey:]

Okay. So would you be able to also comment on what the change in the EBITDA would be in relation to that change in revenue on the pro forma basis?

[Worthing F. Jackman:]

Yeah, it’s commensurate on with the moving revenue.

[Alex Ovshey:]

Commensurate moving revenue; and then just last question, just long upon somebody just asked. Did you guys say that you think over the next three years, you could take the organic revenue profile of R360; they’re about $0.5 billion?

[Ronald J. Mittelstaedt:]

I said over the next five years that between organic growth and acquisition growth that we thought it would be a $0.5 billion business.

[Alex Ovshey:]

Okay, got it. That’s all I had. Thank you very much.

[Operator:]

Your next question comes from the line of Barbara Noverini, Morningstar.

[Barbara Noverini:]

Hey, good morning everybody.

[Worthing F. Jackman:]

Good morning.

[Ronald J. Mittelstaedt:]

Good morning.

[Barbara Noverini:]

It seems like other national players both solid waste and hazardous waste have recognized oil and gas market as an areas increased opportunity. So how would you describe your competitive advantages with R360 in place relative to other competing per share in this end market? Is it that your disposal assets are particularly well aligned with their operation, just under customer relationships, what else could you specifically highlight?

[Ronald J. Mittelstaedt:]

I think those two are good start. I would say that R360 has without question that the premier asset position within the most attractive oil-rich basins in the U.S. Number one, I would say that because they have the most attractive assets positions in the Permian Basin. They have exceedingly strong corporate relationships with the major oil drillers and producers in the U.S. And I will also say that because the vast majority of their assets are disposal based. They are the more difficult assets to replicate improvement. So I think the barriers to entry for what they do or much higher. So those would be the three major things I would tell you.

[Barbara Noverini:]

Okay, gotcha. And you mentioned that potentially in the future regulations could become more stringent in this end market. So could this possibly tip the scales in a favor of the hazardous waste guys, since their expertise isn’t even more control disposal environment?

[Ronald J. Mittelstaedt:]

That we do not expect that the waste would be categorized as it is from any stretch. I mean remember, right now half of it sitting in open pits. So that would be a massive stretch to get it to become as it is. So no we don’t believe that. What we do believe is that many of the states will require the handling of it in an off-site aligned facility, and that close to the strength of R360.

[Barbara Noverini:]

Got it. Thanks very much.

[Operator:]

Your next question comes from the line of Tara Reisbig, Moab Partners.

[Jamie Yackow:]

Hi, guys, it’s Jamie Yackow for Tara, good morning.

[Ronald J. Mittelstaedt:]

Good morning.

[Jamie Yackow:]

So it’s our understanding that R360 was qualified to IPO as an MLP before they agreed with you guys? What you are thinking about dropping these assets into MLP at some point down the road. Are there any triggers that could expedite a decision in this regard, or do you plan to take advantage of the future tax savings of this deal?

[Worthing F. Jackman:]

Look, I think it’s, first of all we get the tax benefit to us is the way we deal construction, we do get a step-up basis in our acquisition to outlay that’s worth almost $200 million a PV basis against that purchase price number one. Number two, R360 has invested a few million dollars in creating that MLP structure and getting the approval of that entity and we will keep that entity intact for the time being as we weigh our options going forward.

[Jamie Yackow:]

All right. Great, thanks.

[Operator:]

Your next question comes from the line of Tony Bancroft, Gabelli Asset Management.

[Tony Bancroft:]

Hey, Jim, how are you doing.

[James M. Little:]

Hi, good morning, Tony.

[Tony Bancroft:]

Hi, just a real quick, the drilling economics per well, what are like revenue per well and you could break it out, is it different for natural gas oil and then what about water treatment, I thought that I spread something about R360 during water treatment and if not, are you interested in water treatment?

[Ronald J. Mittelstaedt:]

Okay. Well, it’s a multiple question, let’s just take the last one first. A portion of R360’s business is the fluid management side and that includes obviously the produced and processed waters. It is less than about 25% of what they do, obviously that predominantly comes in the latter years well not just at the drill time, but in the latter years of production of the wells on the maintenance side. And they are not involved in the transportation of water, nor do we plan to be so, they are not involved in the FRAC Act business for the separations, nor do we plan to. What they are involved in deep well injection of soft water into soft water wells from the production and the processing. So they provide that service in order to be turnkey to the drillers and the producers who want and all encompassing our service from the disposal and treatment side at the wellhead. But see, the second part, one of the part to your question was, what are the economics between the oil and the gas side? I can tell you that, we believe the oil side is got greater economics in it because of the magnitude of the drill cuttings and muds produced from that, but not substantially greater economics. As far as revenue per well, I think it was one of your question that varies on the play, because it has to do with the distance between disposal and the wellhead production itself. So obviously, if that is a short distance then the transport and disposal cost is far lower. So the answer is that we have seen it run between a 100,000 of well and 250,000 of well. It has sort of a booking in terms of revenue per well that this would generate that, the R360 business would generate.

[Tony Bancroft:]

Thanks so much, I appreciate it. And is there any prospects, I know you did say they are fragmented. But I mean is that something that, I mean that could be still like the next roll up in the waste businesses to go around and do this out, because do you look at that way?

[Ronald J. Mittelstaedt:]

I think that yes, and no. I think number one is, this is not nearly the magnitude of the waste business obviously in terms of side, it’s probably only, roughly about 5% to 6% of the waste business in terms of side, so it’s substantially slow, substantially smaller, but it is highly fragmented. Certainly, we expect that acquisitions within the shale plays and strengthening our asset positioning, as well as entering new shale plays over the years and they are uncover and made economic to drilling, that will be a part of our growth strategy for R360, yes, but do I except this to be the majority of what we do, no.

[Tony Bancroft:]

Thank you very much.

[Operator:]

(Operator Instructions) The next question comes from the line of Stewart Scharf, S&P Capital IQ.

[Stewart Scharf:]

Good morning.

[Ronald J. Mittelstaedt:]

Good morning.

[Stewart Scharf:]

Regarding recycling prices, the general economy, there is still concerns of global slowing and kind of that is slowest pace in more than three years going 7.4% in the third quarter. And recycles here are still laying off workers, so what gives you the confidence that recycling prices will continue to prove as you go into 2013?

[Worthing F. Jackman:]

I mean it’s not like confident, because obviously something is out of control. Prices have come up in Q4 of where they bottomed out in September, initially we think that contributed are due to potential or fear of a strike, along Sherman’s strike on the West Coast and East Coast. And so we have mills in Asia tried to reposition inventory ahead of a potential strike. I think that strike got put off until after the election for obvious political reasons. But if you look at some of the industry pieces for next year and the year out, I think resid puts of piece that has commodity prices up about $15 to $20 next year for the sector. Some of that driven by an expectation and another mill come to online within the next few months in Asia. It looks that happens our hope would be correct. If we don’t see that mill come online and you still see the economy meander or go over the fiscal cliff so to speak. You could see a bracket of between 100 and 125 on the OCC side versus the 120 to 150. So it will depends on the crystal ball and how things play out, included something that’s out of our control.

[Stewart Scharf:]

Okay. Thank you.

[Operator:]

And your next question comes from the line of Charlie Park, Findlay Park.

[Ronald J. Mittelstaedt:]

Hi, Charlie good morning.

[Charlie Park:]

Good morning. How are you?

[Ronald J. Mittelstaedt:]

Good.

[Charlie Park:]

Good. Can just remind me as a percentage of revenues, what 360 should be doing in free cash flow and how to think about bonus depreciation there? That’s the first question?

[Worthing F. Jackman:]

Sure. The bonus depreciation as it currently stands expires at the end of this year, and so that comes off a table for next year. If you look at the combined free cash flow with the two companies assuming not an outsized period of investment for multiple growth opportunities at Greenfield site. But the CapEx between maintenance CapEx and some growth CapEx ranges call it 15% to 18% as Ron discussed before. You’d see R360 likely come in at between 15% and 18% of our revenue as a free cash flow number, and push our combined free cash flow north of $300 million for next year.

[Charlie Park:]

Okay. So I’m just trying to do back of the calculation.

[Worthing F. Jackman:]

But calculation will get you closer to 25%, but I’m not going to say that until we get the guidance next year.

[Charlie Park:]

A 25% of revenue?

[Worthing F. Jackman:]

Right for their business, but we’re not going- we’ll keep that up and so we actually own the business and go through a pricing discussion with them.

[Charlie Park:]

Okay. But that’s quite a big swing factor isn’t it and how you can get the 3.5 debt-to-EBITDA down to 2.5, is that right?

[Worthing F. Jackman:]

Right, I mean it’s the 3.2 times down here. The model shows about a half a turn of EBITDA leverage reduction year-over-year.

[Charlie Park:]

Okay.

[Ronald J. Mittelstaedt:]

As a business discovery model.

[Charlie Park:]

Okay. And just last question, but what would be the thing that makes it 20% rather than 25% for 360?

[Ronald J. Mittelstaedt:]

Well, it depends on the growth opportunities.

[Charlie Park:]

Okay.

[Ronald J. Mittelstaedt:]

Again they’re pursuing several new permits, and depends on the profile of the assets that they construct under that permit. But those assets could range in the low end as an incremental $5 million growth CapEx to a high-end of $25 million per application.

[Charlie Park:]

Okay.

[Ronald J. Mittelstaedt:]

So it will depends on their success in getting some new facilities permitted. But again if they are successful that would show an increase ramp in the business in 2014.

[Charlie Park:]

Great, thank you.

[Operator:]

There are no more questions at this time. I would now like to turn the call back to Ron Mittelstaedt, Chairman and Chief Executive Officer for closing remarks.

[Ronald J. Mittelstaedt:]

Okay. Well, if there are no further questions on behalf of our entire management team, we appreciate your listening to and interest in our call today. Worthing, Mary Anne, Steve and I will be here today to answer any direct questions that we did not cover that we are allowed to answer under regulation FD or regulation G. Thank you, again and we look forward to speaking with you at our upcoming investor conferences or on our next earnings call.

[Operator:]

And thank you very much. This concludes today’s conference call. Thank you once again for participating. You may now disconnect and have a great day.