Republic Services Inc (RSG) 2009 Q3 法說會逐字稿

Good afternoon, and welcome to the third quarter 2009 conference call for investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. Your host this afternoon is Republic Chairman and CEO, Mr. Jim O'Connor. (Operator Instructions). At this time, it is my pleasure to turn the call over to Mr. O'Connor. Good afternoon, Mr. O'Connor?

Good afternoon, and welcome. I would like to thank all of you for joining us. This is Jim O'Connor and I would like to welcome everyone to Republic Services' third quarter conference call. Don Slager, our President and Chief Operating Officer; Tod Holmes, our Chief Financial Officer; and Ed Lang, our Treasurer, are joining me as we discuss our third quarter performance.

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 2, 2009.

Please note that this call is the property of Republic Services, Incorporated. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited.

I am pleased to report that we are raising our 2009 financial guidance for the second time as a result of our greater merger synergies and our ability to adjust our cost structure in a weak economic environment. We continue to utilize our pricing tool to be sure we are achieving appropriate returns on capital.

Financial highlights in the third quarter are -- revenue of $2.1 billion; net income, adjusted primarily for merger related and debt refinancing expenses, was $149 million or $0.39 per share; adjusted EBITDA margins improved 110 basis points to 30.9% on a combined basis.

This strong performance highlights the ability of our field organization to maintain pricing discipline and implement cost controls while working through the integration process. Core pricing remains strong at 2.8% for the quarter. This level of increase reflects the impact of lower CPI on price resets for index-based contracts. We continue to use our return on investment pricing tool to be sure all business activity meets our requirements.

Volume declined 10.1% in the quarter due to weak economic conditions, particularly the construction business. Our sequential volume performance is flat, and there has been no further deterioration in any lines of business.

Year-to-date, free cash flow of $493 million or $1.30 a share, which is 112% of book earnings. Again, free cash flow is the best measure of measuring the quality of the earnings. Keep in mind that our year-to-date book earnings are negatively impacted by non-cash interest expense of $109 million and amortization of intangibles of $50 million.

Again, these are a result of purchase accounting and revaluation, and the market to market debt adjustments for the Allied debt. Excluding these non-cash charges, our year-to-date book earnings would have been $1.40 per share or 21% higher than our reported earnings. Our Board has also approved a $0.19 per share dividend payable to shareholders January 15, 2009.

During the quarter, both Standard and Poor's and Fitch raised their outlook on Republic's long-term credit rating, which recognizes significant debt reduction and the success of the merger integration. We issued $650 million of ten-year notes with a coupon of 5.5%, and tendered for $325 million of debt maturing in 2010 and 2011. And we will continue to look at liability management opportunities to realize future reductions in interest expense.

I also want to provide some information on our integration and divestiture efforts. Through the third quarter of 2009, our integration schedule and subsequent financial savings are running well ahead of plan. On an annual run rate, synergies achieved as of 9/30 are approximately $140 million. We have already exceeded our 2009 run rate goal of $125 million, which originally was $100 million.

Based on our successful integration process, we expect to achieve $145 million of run rate synergies by the end of 2009, of which $120 million will be realized in 2009. We expect total run rate synergies of $165 million to $175 million by the end of 2010, and our management team will continue to identify further synergy opportunities going through -- going into 2011.

The systems integration in overlap markets has been complete. We are now focused on realizing operational savings from route density and disposal optimization. Also in the third quarter, we converted the entire Company to a single general ledger system. Our IT group has delivered these successful results on schedule, and I congratulate them for that effort.

We have completed our DOJ divestiture process. Total after-tax proceeds were approximately $375 million. All proceeds have been used for debt reduction. Year-to-date debt reduction is approximately $650 million. I will now turn the call over to Tod to recap our third quarter earnings. Tod?

Thank you, Jim. Well, third quarter 2009 revenue as reported rose approximately 149% to $2.07 billion from $834 million last year. Clearly, this increase of $1.24 billion relates to the merger with Allied.

Since we are measuring the performance of the operations on a combined company basis, the remainder of my comments assume the companies were merged on January 1, 2008. The prior year combined company financial data referenced in my comments can also be found on our website.

Now on a combined company basis, there was a year-over-year decline in Q3 internal growth of 12.8%, and this consists of core price, which was a positive 2.8%. We continue to see core price improvements in all lines of business, including collection at 3.3%, and landfill pricing at 2.2%. Industrial pricing of 2.6% was less than other collection lines because the temporary work had price increases less than the industrial average.

Price increases to our index based customers were pressured by lower CPI, which is simply a function of contractual terms. Approximately 50% of our revenues are tied to index based pricing, and we will see this phenomenon in the fourth quarter and into 2010.

Price increases to other customers remain strong and are relatively consistent with prior quarters. We stated before that the price increase percentage should be measured relative to cost inflation. It is the spread or difference between the two that drives margin expansion.

Since we are experiencing a lower inflationary environment, we expect the price increase percentage to be lower than the price increase in prior periods, when cost inflation was clearly higher. The key here is that we have not changed our pricing strategy and we will continue to price to improve margins and to earn an appropriate return on our substantial investment.

Now let me talk about commodity revenues, which decreased by 1.9%. Commodity prices decreased approximately 32% to an average of $95 per ton in the current year from $141 per ton in the prior year. Third quarter material recycling facility commodity volume of 437,000 tons reflects approximately a 10% decrease from the prior year. This is a function of the weaker economy.

Third quarter average price increased $23 per ton from $72 per ton average in the second quarter of 2009, with prices slightly higher in September than the average for the quarter. Offsetting this sequential improvement in price is relatively weaker volumes than anticipated.

Our fuel recovery fee decreased by 3.6% -- caused a 3.6% decline in revenue, rather. This reduction in fuel recovery fees relates to a decrease in related fuel costs. The average price per gallon of diesel fell to $2.60 in the third quarter of 2009 from $4.34 in the third quarter of 2008, or approximately a 40% decline. Current fuel prices are at $2.80 per gallon.

Now our volumes were down 10.1%. This is slightly better than the second quarter where the volume loss was 10.3%. And as Jim indicated, we are seeing no further deterioration in the business. Residential and commercial volumes experienced low to mid-single digit declines. Volume loss was most significant in the industrial and landfill lines of business, which experienced high teen year-over-year volume declines, both a reflection of the weak economy.

In 2009, the revenues are much flatter quarter to quarter, as we are not seeing the normal increase in seasonal revenues. In Q4, we expect year-over-year volume declines to lessen as the sharp volume loss in Q4 2008 begins to anniversary out.

Now let me talk about our third quarter year-over-year margins. Similar to internal growth, I will discuss the third quarter year-over-year change in EBITDA margin as if the companies had merged on January 1st of 2008. Let me remind you that we have posted the components of our cost on our website.

Third quarter 2009 EBITDA margin, excluding divestiture losses of $900,000, restructuring charges of $12.3 million, cost to achieve synergies of $8.9 million, was partially offset by remediation recoveries at one of our landfill facilities of $8.8 million. And this resulted in a 30.9% combined margin, compared to 29.8% in the prior year -- again, an improvement of 110 basis points.

Now I will talk briefly about some of the significant changes in these costs as a percentage of revenue and what caused these changes.

First, fuel. Fuel expense improved by 260 basis points due to the 40% decrease in the cost of diesel. The average price per gallon, as I indicated, decreased from $4.34 to $2.60. Partially offsetting the decrease in fuel costs was a decrease in related fuel recovery fee revenue, resulting in a net improvement in EBITDA margin of approximately 80 basis points.

Second, I will discuss labor, disposal costs, maintenance repair and other operating expenses together. All of these costs decreased on an absolute dollar basis, but increased as a percentage of revenue. These costs were flexed in the collection business as volumes declined, but are relatively fixed in the post-collection business. Therefore, as post-collection revenues decreased as a result of volume loss and commodity revenues decreased as a result of price fluctuations, these costs increased as a percentage of revenue. But again, on an absolute dollar basis, they were down.

Third, transportation and subcontract expenses. The 150 basis point improvement in margin results from synergy-related cost reductions related to the redirection of waste to a more efficient disposal network; second, the internalization of national accounts collection work that was historically subcontracted before the merger; third, the impact of volume mix; and fourth, the lower fuel surcharges as a result of lower diesel prices.

Now let me talk about our cost of goods sold. The 40 basis point improvement in EBITDA margin relates to reductions in rebates to customers for volumes delivered to our MRFs. Cost of goods sold at our MRFs decreased approximately 40% to an average of $28 a ton from $47 per ton in the prior year. Despite this decrease in cost, commodity revenue declines more than outweighed the benefit resulting from this decrease in spread of about $27 a ton. The net impact arising from lower commodity prices was an unfavorable 70 basis point decrease in EBITDA margin.

Next, I'll speak to our risk management costs. The 50 basis point improvement in margin on risk relates to reductions in required reserves and premium expense. These savings are a result of a 24% reduction in the frequency rate of claims, favorable development and claims experience, and the realization of synergy-related cost savings for third party premiums and surety. Each quarter, Republic requires an actuarial study, and this is a function of the results of that study and the business improvement there.

Finally, SG&A. SG&A expenses, excluding $8.9 million of costs to achieve synergies, decreased $23.3 million from the third quarter of 2008. This cost reduction reflects both synergy-related and volume-related staffing changes, as well as other costs savings initiatives. As a percentage of revenue, SG&A expenses increased 60 basis points. Increases in incentive compensation added 20 basis points of this, and the remainder relates to certain fixed costs as a percentage of lower revenue.

To bring it all together, Republic had 110 basis points of margin expansion that can be summarized as follows -- fuel, an increase of 80 basis points; commodity caused a decrease of 70 basis points; divestitures, as you will recall, were a greater mix of landfills, which are a higher EBITDA margin, that was a decrease of 30 basis points; the realization of synergies had a positive impact of 140 basis points; and finally, our pricing, offset by fixed costs on lower volumes, caused a decline in EBITDA margin of 10 basis points.

Now let me speak about our depreciation, amortization and accretion. This increased by 220 basis points. And of this 220 basis point increase, 130 basis points relates to non-cash expenses associated with purchase accounting valuations for Allied's assets and liabilities completed in connection with the merger.

Additionally, Allied recorded a $5.8 million benefit, or 20 basis points, in the prior year related to an expansion that was approved in the third quarter of 2008. The remaining 70 basis point variance relates to this fixed cost nature of DD&A relative to lower revenues.

Finally, interest expense. The Company recorded a non-cash interest expense of $35 million in the third quarter of 2009. Now, this arises primarily from the amortization of Allied debt that was recorded at a significant discount. We also recorded a $31.8 million loss or $0.05 per share related to premiums paid and non-cash write offs of discounts and fees associated with the completed note refinancing and tender offer.

I will now turn the call over to our Treasurer, Ed Lang, who is going to further discuss our financing initiatives.

Thanks, Tod. During the quarter, we executed our first debt offering since the merger, a ten-year note for $650 million, with a coupon of 5.5%. This transaction was significantly oversubscribed, and the rate was lower than the initial price talk. The proceeds of this offering were used primarily to repay all outstanding bank debt and tender for 325 million of existing 2010 and 2011 debt maturities.

We decided to utilize this favorable rate environment to retire existing debt and reduce future refinancing risk. In addition to extending maturities at a lower coupon, we are able to retire a portion of the debt discount associated with merger accounting, which is reported as non-cash interest expense.

The third quarter financial impact of the premium for the tender offer and the write off of the related debt discount was a negative $0.05 of EPS. The 2010 EPS benefit associated with lower interest expense and lower debt amortization costs is slightly greater than a penny.

Now that Republic has a benchmark transaction in the market, we can move forward with additional liability management cost savings opportunities. We recently began this process by calling two existing maturities -- a $450 million note maturing in 2013 with a coupon of 7-7/8%, and a convertible note with a coupon of 4.25%. Republic has over $1.1 billion of excess capacity in its bank facility to call these -- to fund these calls. We will likely execute a new long-term debt offering to finance a portion of these debt maturities.

The financial impact in the fourth quarter associated with the call premium on the 7-7/8ths notes and write off of the debt discount on the two offerings will be approximately negative $0.09. The 2010 EPS benefit associated with the fourth quarter refinancing activities will reduce interest expense and debt amortization costs by approximately $0.05. We will continue to look for opportunities to further reduce interest expense.

I would like to thank all of the individuals in the treasury, accounting and finance groups who have helped realize significant financial cost synergies. I will now discuss free cash flow.

Year-to-date, free cash was $493 million, which consisted of cash provided by operating activities of $1.010 billion, less purchases of property and equipment of $543 million, plus proceeds from the sale of property of $23 million. This equals free cash flow of $493 million.

After excluding divestiture related tax payments of $74 million and tax affected merger-related expenditures of $63 million, year-to-date adjusted free cash flow was $630 million. We plan to increase our 2009 net capital spending to $835 million from $800 million, which Don will discuss later.

We are still on track to meet our full year cash flow guidance of $700 million to $725 million. Keep in mind, we raised our cash flow guidance last quarter, so we are effectively raising our guidance again.

Now I will talk about our balance sheet. At September 30th, our accounts receivable balance was $928.2 million, and our days sales outstanding was 41 days or 26 days net of deferred revenue. Reported debt was approximately $7.1 billion at September 30th. During 2009, total debt has been reduced by $647 million, and excess credit available under our bank facility is approximately $1.1 billion. As Jim mentioned, both S&P and Fitch upgraded their outlook on the Company's long-term rating. Now I will turn the call over to Don.

Thanks, Ed. I would like to start by saying how proud I am of the entire Republic operating team for the improvements they have made in the area of safety. Republic has reduced its Workers' Comp and auto liability claims by approximately 24% year-over-year. I want to recognize our general managers and safety professionals throughout the organization for their leadership in delivering these excellent results. Your dedication to safety and our strong safety programs will continue to benefit our overall performance.

We have learned a lot about our people and our operating platform during the business integration and the economic downturn. We have shown the ability to quickly right size our fleet and workforce to meet the changing economic conditions while maintaining a quality work environment. We have adjusted our capital spending and operating expenses while still investing correctly in the business and delivering quality service.

We have maintained, and in some cases improved, collection productivity in the face of declining volumes, while improving safety. We have consistently priced our services to offset inflation and improve returns while effectively acquiring new business. We have done all of this amidst integration activities that are delivering synergies ahead of plan.

In short, we are successfully uniting two companies into one strong, high performing team. Republic is maintaining its focus on the fundamentals of our business and steadily making improvements in our core competencies and business processes. As the economy improves, we are well positioned to realize operating leverage.

We have started our annual planning process. This is a very important step in completing the merger integration. Our field organization is developing operating plans using a single budgeting platform for the first time. During 2010, we will continue to see the benefits of adopting best practices, common IT systems, and compensation programs that reinforce our focus on return on invested capital and improving free cash flow. We will also continue to appropriately invest in our people and operating assets.

As Ed mentioned, we are increasing 2009 net capital spending to $835 million. The $35 million increase will be used to accelerate truck purchases in advance of the more costly 2010 engine requirements. We are essentially pre-buying 140 trucks from next year's fleet plan. Now I will turn the call back over to Jim.

Thanks, Don. Due to our pricing discipline, cost control, and integration synergies, we are increasing our earnings per share and synergy guidance for 2009. We are raising adjusted earnings per share guidance to a range of $1.46 to $1.48 per share before integration costs. The previous guidance was a range of $1.43 to $1.45 per share.

We expect run rate synergies realized by the end of 2009 to be $145 million. And we are comfortable with our free cash flow guidance of $700 million to $725 million, including that additional $35 million of increase in net capital spending that Don related to.

Before going to question-and-answers I would like to comment on the exceptional performance of our entire organization. Don and I have been conducting the operating reviews throughout the Republic field organization and continue to be impressed with the rapid integration and the realization of cost synergies and the commitment to improve return on capital.

As Don said, we recently kicked off our annual planning process with a meeting in Phoenix with our regional and area management teams. We will have the same strategic focus as we have had in previous years -- pricing discipline, maintaining a competitive cost structure, and realizing the integration synergies. We believe this will lead to further improvement in margins and returns in 2010.

Simply put, more of the same, better. And our success in working as a single team has allowed us to execute the most successful integration in the solid waste industry. So with that, I would like to open the call up to questions. Operator?

(Operator Instructions). Hamzah Mazari with Credit Suisse.

Good evening. Thank you. Just a question on your Q4 guidance. When you back into it, it looks like it's $0.31 to $0.33. I am just curious what the delta between the low end and the high end of your guidance is? Volumes are running flat sequentially, so is that delta related to pricing on the CPI side, or is there something on the cost side? And any color you can add there?

Well, I think the Company is doing an excellent job on the cost side. There certainly is the CPI phenomenon that we are seeing here beginning in the second half of this year, and will carry into next year. Again, Republic doesn't give quarterly guidance; obviously, when you get to the third quarter with our annual guidance, people kind of back into it and compare it to their results.

I would say that we have the opportunity, again, to bring the cost in maybe a little bit better than what is expected. Remember that there is seasonality in certain lines of business, such as the residential collection, where you get a lot -- particularly up in the Midwest and the North where you get a lot of yard clean up and much heavier weights and costs associated with those lines of business. So on balance I think we feel pretty positive about the fourth quarter, and -- do you want to add anything, Jim?

No, I think we feel very good about the year. We continue to escalate and give increased guidance on earnings as clarity as -- as we've gotten more clarity. And again, I think I'd go back to some of the comments that Don made in our opening comments as to the focus of the organization, on improving the cost structure; keeping in mind that as we have seen the economy deteriorate, there has been a significant effort by the field organization to continue to stay on pace with '08 productivity, which has been a significant contributor to our success this year. So I mean, all in all, I think we have got a great year going.

Okay. And just a follow-up question, as you look across your portfolio, how much of your customer base would you say is mispriced? And by that I just mean how much of an opportunity do you have to prune low margin business from your portfolio? Is there any low hanging fruit there, or is that process sort of ongoing? How should we be thinking about that?

Hi Hamzah, this is Don. We have been at this pricing thing pretty steadily now for the last three or four years, as you know, and I think we have really been through the portfolio, and I don't think there's really much left -- there may be a customer or two that was under a long-term contract that we have got to sort of terminate out of and renegotiate, but there's not a great deal of those left in the portfolio.

Okay. Fair enough. Thank you very much.

Scott Levine with JPMorgan.

Good afternoon, guys.

Hi, Scott.

On disposal pricing, it looked like the number was -- I think you said 2.2%. You said you're seeing some -- seeing continued discipline in the marketplace there. What are your expectations there going forward? Are there any mix issues in the quarter?

Well, I mean, I think part of our landfill and disposal pricing is index-priced like a lot of the rest of our business. So we have seen some pressure come back in certain markets. We've seen Houston, we've seen Mecklenburg County, which is Charlotte. We've seen Los Angeles come in with flat to negative CPI adjustments. So those are putting some pressure on it. But all in all, the intensity of the review by the field organization on disposal prices and our commitment to continually move it up is still there.

Yes, if I could add to that, remember too, Scott, the mix in that business, the -- what we would call the open market volume at landfills -- that volume that's not under a contract that limits our pricing to CPI -- that open volume -- open market volume that is decreased with the economy.

So when we are telling you that we've seen 18% reductions in our roll off business, those open markets market customers that come to our landfills have seen those kind of reductions as well. So when you get into the whole mix issue, we have had fewer tons to price in those landfills as well, so that all kind of comes out in the math.

Understood. Also, we saw that you guys recently sold the Miami Dade operations to Waste Services. That was not a required divestiture. Would you guys consider, are you contemplating selling other markets voluntarily?

Well, I mean, we are always reviewing our portfolios of business. In the case of Miami, we looked at our ability to further integrate the business with disposal and really didn't see anything in the near-term or the intermediate term. So we got a very good deal from waste services, and they're able to integrate it and take advantage of their market integration.

So the rest of our markets in Florida have municipal-based disposal, and we still feel very high on those. But again, I think -- look, as these two companies continue to come together, we're going to continue to look at the returns that each of the marketplaces are giving us, and we have got well over 100 to -- 150 markets, Tod and Don? -- that we're reviewing right now.

So if we see that opportunity to improve or if we see an opportunity to do an exchange or a divestiture, we are going to -- we'll take advantage of those. But right now we feel real good about the portfolio.

Yes, I think if you take Miami -- again, Dade County is really a separate market than Greater Miami. But to Jim's point, I think we are probably a solid number four in the marketplace. And in most of the markets we are in, we are a one or a number two, and so we just had a weaker position to start.

Got it. Thanks.

Michael Hoffman with WSI.

Thank you very much.

Good evening, Michael.

Hi. Good evening, guys. On the price side, you have extraordinarily low inflation across the whole business model. So can we frame price with regards to real price as opposed to nominal, and whether you are seeing any improvements going forward with the spread?

So -- is it going -- coming out of 2009 going into 2010, do you actually see a better real price relative to 2009, so that is part of why margins should continue to improve and cash flow improves?

Well, yes. I mean, I think it goes, Michael, to some of the opening comments that I think each of us made here, that we are still looking at the spread between core pricing and inflation, and the spread is still well in excess of 100 basis points, which should be a contributor to margin expansion for us. So I don't see any reason why we wouldn't continue to see that, and I think when we get ready to give guidance for 2010 you will see that we will be giving guidance to further marketing of our margin expansion.

Okay. So this is not my second question, so it's clear to the operator. I just want to make sure I understood you correctly. You are still expecting the spread to be in place and improve regardless of what the inflation environment is.

Yes. And if you do the math, we have got about half of our revenue is the index price. So if you think CPI pricing is going to go down by 2 -- or CPI is going to go down by 200 basis points, that's a net impact to our price of 100 basis points. The math is pretty simple.

Got it.

We look at the margin expansion that we spoke to and that we've achieved -- somewhere in that 100 basis point range -- we feel very good about that.

Okay. And then the 2010 expiration of the capital gains taxes, I get it, you are in the process of integrating two companies, you are coming up on the anniversary of that. But can you talk about the acquisition environment for you and whether there is this opportunity to take advantage of a lot of businesses that may choose to sell because of capturing capital gains at a lower rate in 2010, and what's your position in being able to compete for that?

Well, I guess we have never looked at our business portfolio on the basis of how the federal government sets the tax rates. We really look at the integration benefits to the acquisition, whether it's a latch-on collection company, or filling in for a void that we have in terms of disposal capacity.

So we're going to take advantage of those. There's not any reason we shouldn't. We have plenty of cash flow to do that. I mean, obviously, we are committed to delevering the Company, but we are not going to pass up a good opportunity in a particular market to fill out the integration process.

So as those become available, we are going to review those. And if we don't look like we are participating -- for the most part we usually are, it's just that we can't meet the seller's expectations.

Okay. Great.

Jonathan Ellis with Bank of America.

Thanks, and good evening, guys. Wanted to just first of all talk about the -- you mentioned that 50% of revenue is tied to some form of index, but can you give us a sense when that -- how much of that 50% of revenues is tied to CPI or other indices on more of a realtime basis versus more lag? And really what I am getting at is how much of an incremental, assuming that's CPI, remains kind of at the current run rate? How much of an incremental downside or pressure could there be as you move into 2010 and some of those contracts begin to reset?

Well, again, we have looked at it, and the math, again, is pretty simple. I mean, if we're doing somewhere between 3 and 3.5% price on what was an inflationary environment that was probably 2.5% or something like that, and you think it is going to go to 1% or maybe even less than that, it could have a 100 basis point impact on our price year-over-year from -- actually, between 75 and 100 basis points '09 to '10.

And again, it is a function of what's going on with CPI; it's a function, obviously -- as you are alluding to -- of the contracts themselves and when they reset. But we are starting to see them reset here in the third quarter, and they will reset all the way through, probably, the third quarter of next year.

Okay, so on more of a rolling basis than opposed to a step function change in one quarter next year, perhaps?

Right. It is going to come in on a rolling basis. You will see a series of steps, I guess, is the better way to put it.

Okay. That's helpful. And then my second question is, just in light of the formulaic aspect of your contracts, any thoughts on opportunities to potentially raise either existing fees or introduce additional fees? I know one of your large competitors has put an administrative fee in place with some success. So any thoughts on your fee structure, generally speaking, to compliment what you are doing from a pricing standpoint?

I don't think so, Jonathan. I think we have evaluated the fee structures that we have in place today, and we feel that they're appropriate today. But I mean, again, as the business environment changes and as it relates to fees, or administration fees, we will obviously look at those and evaluate those at the appropriate time. But right now, we feel real good about where we are at.

Okay. So -- I'm sorry, just to be clear, you do not have an administrative fee in place right now?

That is correct.

Okay. Thanks, guys.

Let's clear that up, okay? Just because I know we were talking over each other here. We do have -- in certain markets where we do have administrative fees in place, they're not to a great degree, and they're not necessarily throughout the entire organization, nor do we plan at this particular time to standardize those administrative fees.

Okay. Thank you. That's helpful.

Thanks.

Corey Greendale with First Analysis.

Thank you. Good afternoon.

Good afternoon, Corey.

I believe if I heard you correctly, Tod, in your comments you said something about recycling volumes being weaker than expected. Could you just put that in context of the other comments about volumes basically being stable and trending as expected in the waste part of the business?

Well, I would say -- what we saw actually was a step up sequentially from the first quarter to the second quarter in our materials recycling facility volumes. And I think we were hopeful that they were going to continue to move up. They probably went up by about 7 or 8%. And actually, what we saw, I think, is as the price moved up, the volumes came back a little bit. So our third quarter volumes were probably more in line with our first quarter volumes.

Now some of that may be a mix issue with the mills. I think Ed has been looking at our hedging strategy, and one things that we are hearing is that there are tax incentives associated with virgin fiber, which maybe would be set to expire later this year, and so that may be a driver. So it could be a short-term phenomenon. It could be just the mills in China ramping up for the -- ramping up inventory for the holiday selling season, and maybe starting to back off a little bit later in the third quarter.

Okay. And my follow-up question is about landfill pricing. I think there have been at least some instances of municipal or county sites raising their price more as a source of revenue. Is that something you are seeing? Are you seeing it to any great degree, and do you think that could help support maybe greater landfill pricing in some markets than -- that that would offset some of the lower CPI in other markets?

Well, (multiple speakers) I'm sorry. I don't think we have seen that to any great degree, Corey. We have seen a few examples of it. If that continues, that certainly helps the pricing environment. But I don't think it is necessarily -- I think it's a little too early to say that's the new trend in municipal pricing.

I don't know if it would help us anyways, where we have that situation. I think it would -- if a municipality or a unit of government has a disposal facility, for the most part when they recognize that as a source of income -- additional income -- I think they will probably look at it like they do their other fee structures in light of a [poor] ad valorem tax basis environment.

Richard Skidmore with Goldman Sachs.

Thank you. Good afternoon.

Good afternoon.

Jim -- just a question for you, Jim. You've now had the Allied Waste business for nearly a year. Just interested in hearing what your thoughts are in terms of the top one or two best surprises, if you will, and what are the maybe one or two biggest concerns that you have now as you've had the business now for a year?

Well, I think the -- most -- well, it is not really surprising to me, because I think when we actually were in preliminary discussions, we realized the strength of both organizations of people, and that human element, I guess I would refer to it as, that's probably the biggest facet that we have had. It is the reason that we have been able to put such a great integration plan together and execute against it.

And while I know you probably just use these words somewhat loosely, is that since I've had it, it's really -- this was a merger of equals, more so. And I think what you would look at is that both companies brought a significant amount to the table.

So I guess when really I'm on the street talking to individual investors and they ask me this question, really the integration process has far exceeded my highest expectations. Now a lot of that is due to the people's efforts, the quality of the people and the planning process, and then our ability to execute against it.

And then just following up on that a little bit with regards to the synergy target for 2010, based on the commentary, it sounds like you are expecting about a $20 million incremental synergy benefit in '10 versus '09. Is there a reason that that wouldn't be a bigger number given the overall cost structure of the business?

Well, I think it will probably be a little bit bigger than that. Again, we're -- in terms of total synergies -- well, we originally mapped out $150 million; we're looking more towards $165 million to $175 million. And we think that in this calendar year in terms of absolute dollars realized, we should get something in the range of about $120 million.

So the difference between the $120 million and the $165 million to $175 million, not all of that will come next year. Some of it will obviously be a rollover into 2011 depending on the timing. But I would say that we should be getting maybe something in the $30 million, $35 million range in 2010.

(Inaudible) cost structure -- in the cost of the (inaudible), meaning I think that --

Right, the costs of the [painting] also drop off in 2010.

Great. Thank you.

Thank you. That is all the time we have for questions today. I will now turn the call back to Mr. O'Connor for his closing remarks.

Thank you, operator. In summary, I'm very pleased with our third quarter results, and we'll continue to say focused on achieving an appropriate return on capital through improved pricing, maintaining labor productivity through route and disposal optimization, continuing to meet and exceed expectations for realizing merger synergies, generating higher levels of free cash flow performance, reinvesting in our people and business platforms to ensure customer service and a high quality and safe work environment; continuing to reduce debt, improving our credit profile and taking advantage of refinancing opportunities to reduce interest expense.

I'd like to thank our field organization for their continued focus on exceeding financial targets and integrating our national operating platform. I would like to remind everyone that a recording of this call is available through November 16th by calling area code 203-369-0795.

Additionally, I want to point out that our SEC filings and a discussion of business activities, along with a recording of this call, are available on Republic's website at republicservices.com. Thank you for spending time with us today, and have a great evening.

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