Republic Services Inc (RSG) 2010 Q3 法說會逐字稿

Good afternoon, and welcome to the third quarter 2010 conference call for investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. Your hosts this afternoon are Republic Chairman and CEO, Mr. Jim O'Connor and Republic President and COO, Mr. Don Slager. Today's call is being recorded, and all participants are in listen-only mode. There will be a question-and-answer session following Republic's summary of quarterly earnings. (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, Lisa. Welcome, and good afternoon, and thank you for joining us. This is Jim O'Connor, and I'd 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 and are joining me as we discuss our third quarter and year to date performance.

Before we get started, I'd like to take a moment to remind everyone that some of the information that we discuss that 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 a recording of this conference call, you should be sensitive to the date of the original call which is November 4, 2010. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Republic Services is strictly prohibited.

I'm very pleased to report that we continue to achieve record performance in a weak but stable economy. We are raising our free cash flow guidance to $800 million due to the benefit of bonus depreciation. We are on target to achieve the revised upward earnings guidance of $1.69 to $1.71 we provided you in July. We remain on track to meet or exceed the full year EBITDA margin guidance, and we continue to see improvement in year-over-year volumes. Based on our strong earnings and cash flow visibility, our board of directors has authorized a share repurchase program of $400 million.

In less than two years since the merger -- the closing of our merger, we've completed the first successful large implementation integration in the solid waste industry on a timely basis. All operating locations are on a single IT platform. We've achieved $190 million of run rate synergies and exceeded our goal by 27%. And we've repaid $1.1 billion of debt and have the highest credit ratings in the industry. And we returned to Republic's long term strategy of paying free cash flow to shareholders through share repurchase now and our annual dividend. Now, I'd like to turn the call over to Don Slager to discuss our third quarter highlights.

Thanks, Jim. Our third quarter results reflect our continued focus on safety, cost control, systems integration and intelligently pricing our business. Financial highlights for the third quarter and year to date are -- revenue of approximately $2.1 billion. This is the second consecutive quarter with positive internal growth. Net income, adjusted primarily for merger related expenses, was $173 million, or $0.45 per share. Adjusted EBITDA margin in the third quarter was 30.8%. As Jim just mentioned, we are on track to meet or exceed our full year EBITDA margin guidance. Our field organization has maintained their focus on pricing and continues to achieve open market pricing in excess of inflation. Core price increase for the third quarter was 1.5%. If we adjust for a few isolated areas where we were required to divest of operations, core price was approximately 2%.

Our total price improvement, including fuel surcharges and higher commodity values was 2.6%. We continue to use our ROI pricing tools to be sure all business activity meets our requirements. Our volumes declined year-over-year by 2.5%, which is an 80 basis point improvement versus the second quarter. The areas that show the strongest volume improvement were in the commercial and industrial businesses with sequential improvements of 110 and 230 basis points respectively. Landfill special waste continues to be strong, which resulted in year-over-year volume growth in the landfill business for the second quarter in a row. Third quarter adjusted free cash flow was $177 million and $579 million on a year to date basis. Adjusted free cash flow per share of $1.51 for the year is 117% of adjusted book earnings. As you know, free cash flow is the best measure of the quality of earnings.

I would now like to mention a few of our achievements in the quarter that demonstrate our ongoing focus on cost controls. We continue to experience positive results from our safety initiatives as accident frequency is down more than 15% compared to last year. Ensuring a safe environment is key to our long term success. Our field management has continued to achieve labor productivity gains over the prior year and reduced labor costs in absolute dollars, as well as a percentage of revenue. We adjusted our maintenance headcount to the proper ratio of collection routes. This resulted in a lower maintenance cost per engine hour and a reduction in maintenance cost as a percentage of revenue. I would like to thank our field operations for their commitment to achieving high level of performance in all aspects of our business. I'll now turn the call over to Tod for a recap of our third quarter financial performance.

Thanks, Don. Third quarter 2010 revenue, as Don indicated, was $2.06 billion. After considering the impact of revenue from divested operations, same store revenue increased by $2.4 million, consisting of the following. Core price growth of positive 1.5%. In total, the collection line of business saw a price increase of 1.6%, and the disposal business saw a price increase of 1.1% with all lines of business reporting positive price increases in the third quarter. Right now our pricing was down sequentially, and this includes the impact of lower CPI on our index based business.

As you know, approximately 50% of our customer contracts contain pricing restrictions, the majority tied to CPI. Within the collection business, these restrictions are weighted to residential and commercial businesses. The pricing on these contracts has been negatively impacted by low levels of CPI. Our original 2010 guidance assumed a full year CPI of about 2.5%, and the most recent CPI for the month of September was 1.1%. Our landfill prices increased by 1.2%. Now, this includes MSW up 2.2%, partially offset by positive, but relatively lower priced construction and demolition in special waste event driven work. It's important to note that the majority of our MSW volume is tied to index based pricing. We expect our full year 2010 price to approximate 1.6%.

Commodity revenue increase of 0.6%. Our commodity prices increased approximately 29% to an average of $119 per ton in the current quarter from $92 per ton in the prior year. Our third quarter [MERF] commodity volume of 455,000 tons was down sequentially about 2% and relatively flat with the prior year. Current October commodity prices are approximately $134 a ton, an increase of $15 compared to the third quarter average. Now, our fuel recovery fee had an increase of 0.5%. The increase in fuel recovery fees relates to an increase in fuel costs, the average price per gallon of diesel increased to $2.94 in the third quarter of 2010 from $2.60 in the prior year with current fill prices at $3.07 per gallon.

Turning to our volumes, our volumes were down 2.5%. This is a sequential improvement from the second quarter of about 80 basis points. We continue to see improvements in the collection business, which is now down less than 3% over the prior year. You will recall last year, we saw collection volume declines of over 8%. Volumes are also improving in all collection lines sequentially, led by industrial with the 230 basis point increase from the second quarter of 2010. This improvement reflects an increase in permanent hauls, primarily from manufacturing customers and a more normal cyclical uptick from the temporary business. Our landfill volumes had year-over-year growth of 1.4%. Last year, we saw landfill volume declines of over 18%. This improvement in volume is due to an increase in special waste received at our landfills.

Now, I'll turn to our third quarter year-over-year margins. Third quarter 2010 EBITDA margin decreased by 10 basis points to 30.8% from 30.9% in the prior year. EBITDA margins exclude divestiture losses, restructuring charges, cost to achieve synergies and prior year remediation recoveries. The decline in margin is driven by 100 basis point increase in risk insurance expense. As we've said before, we do actuarial adjustments on a quarterly basis, and reserve adjustments tend to be lumpy. In the third quarter of 2009, we benefited from adjustments to prior period plans that did not repeat to the same level in the current third quarter. Year to date insurance expense is less in 2010 than 2009 and lower as a percentage of revenue. The increase in the current quarter was due to the timing, again, of actuarial adjustments. Excluding the change in risk insurance expense, our third quarter EBITDA margins improved 90 basis points over the prior year.

Now, I'll comment on the other changes and costs as a percentage of revenue, the details of which are available on our website and will be included in our 10-Q filings which will be coming out in the next couple of days. First, fuel. The unfavorable fuel expense increase of 40 basis points was due to the 13% increase in the cost of diesel. And again, I indicated diesel prices of $2.94 in the third quarter versus $2.60 in the third quarter of the prior year. Partially offsetting this increase in fuel cost was an increase in related fuel recovery fee revenue, resulting in a net decrease in EBITDA margin of about 10 basis points.

Second, recycling costs of goods sold. The unfavorable 30 basis point increase in expense relates to increases in rebates to customers for volumes delivered to our recycling facilities. Cost of goods sold at our recycling facilities increased to an average of $36 per ton from $27 in the prior year. Commodity revenue increases more than offset this increase in cost, resulting in an increased spread of approximately $18 per ton. The net impact was a favorable 30 basis point improvement in EBITDA margin. Third, labor and related benefits costs. The 10 basis point improvement in margin is primarily due to synergy related staffing reductions due to route consolidations in overlap markets, favorable reductions in health care claims and an overall improvement in collection productivity. Fourth, transfer and disposal costs. The 50 basis point improvement, again, primarily relates to the margin benefit of incremental landfill volumes that carry little or no associated disposal costs.

Next, transportation and subcontract expenses. The 20 basis point improvement in margin results from synergy related cost reductions from redirecting waste streams within our more efficient transfer and disposal network. And finally, SG&A. SG&A, excluding costs to achieve synergies, was approximately 9.8% compared to 10.5% in the prior year. The 70 basis point improvement in margin relates to the leverage benefit of reducing expenses while maintaining the revenue base and a reduction also in incentive compensation expense. Looking ahead, we believe SG&A should be in the range of approximately 10%. These cost improvements collectively as a percentage of revenue are enabling us to meet or exceed our full year EBITDA margin guidance of 31%.

Now, let me turn my attention to depreciation, depletion and amortization. This improved 40 basis points, which primarily relates to a reduction in landfill amortization expense and accretion. The cumulative impact of expansions and permit modifications that extended the life and reduced construction costs resulted in a favorable reduction in the per ton rate we charge as landfill air space is consumed. DD&A as a percentage of revenue approximated 11.2%. DD&A is higher than capital expenditures as a percentage of revenue due to the amortization of intangibles resulting from the merger.

Looking at other aspects of our income statement, interest expense. I want to remind you that in interest expense, we have $24.3 million of non-cash amortization. As we continue to refinance our debt, the portion related to the Allied debt discount of approximately $11 million will decline.

Now, I'll discuss our free cash flow for the nine months ended September 30. Year to date adjusted free cash flow was $579 million, which consists of cash provided by operating activities of $964 million, less property and equipment received of $535 million, plus the proceeds from the sale of used equipment of $17 million, plus merger related expenditures net of tax of $16 million, plus divestiture related tax payments of $6 million plus the legacy tax settlement related to BFI of $111 million. That equals the adjusted free cash flow of $579 million.

As Jim discussed earlier, we are raising our 2010 adjusted free cash flow guidance to $800 million. This includes the impact of the benefit from bonus depreciation expense of approximately $50 million and also an increase in capital spending of about $45 million. Our previous guidance for capital spend was $790 million and as a result of bonus depreciation, we are now planning to spend $835 million this year. Again, the $800 million of adjusted free cash flow includes both of these items. Just to remind you, we define free cash flow based upon capital expenditures received during the period, and we have included a reconciliation of the timing difference between capital expenditures received versus paid in our 8-K filing.

Now, let me talk briefly about our balance sheet. At September 30, our accounts receivable balance $896 million, and our day sales outstanding was 40 days, of 25 days net of deferred revenue. Reported debt was approximately $6.9 billion at September 30, and excess credit availability under our bank facility is approximately $1.4 billion. Onto our taxes, the tax rate included an adjusted EPS -- excuse me, concluded in adjusted EPS for the third quarter was lower than the full year estimate due to the closing out of certain state tax positions in the quarter. We expect full year 2010 tax rate for adjusted earnings to approximate 40.6%. Now, this full year tax rate estimate includes the benefit of 1.1% arising from favorably resolving certain federal and state tax items.

Before I turn the call back over to Don, I'd like to share a few comments about Jim since this is his last conference call before he retires. Jim took over Republic in 1998, revenues were $1.4 billion and we had about 10,000 employees. Since that time, revenues have increased over $8 billion, margins have improved by 250 basis points and free cash flow has increased by almost 800%. And in the process, we were able to complete a very successful merger with Allied Waste and Republic Services.

Now, there's always a downside, and on the downside, Jim's handicap has slid from 3 to 9. That's an unfavorable variance of 600 basis points. My outlook is, this will improve over the next few years. I think if Jim didn't retire soon, his handicap would be as high as mine, and that's trouble. In all seriousness, look. I speak for all of Republic employees. We've had 13 years of Jim's leadership, challenging our actions and business plans. Open to debate, willing to accept other points of view, dealing directly and honestly with issues, both good and bad. His legacy is strong team and a clear vision for the future for Republic. So, thank you, Jim. Now, I'll turn the call over to Don.

Thanks, Tod. I would like to provide some early comments on 2011. As we have said many times, this is a business that regularly produces earnings growth in the mid to high single digit percentage range. With a stock buyback, earnings growth can be in the low double digit range. This has been Republic's track record, one of steady and consistent earnings growth. 2010 earnings growth will be higher than usual because of the realization of synergies, including the benefit from refinancing activities. And since the majority of the synergy benefit has already been realized, about $0.01 of additional EPS benefit will rollover into 2011. Our approach to the business remains steady and consistent. Based on what we see in the economic and business environment, we expect 2011 EPS to grow by about 10% which includes the benefit of our share repurchase program. We are currently in the middle of our 2011 business planning process and will provide detailed guidance for 2011 in our Q4 earnings call in February.

As you know, Jim will be retiring as CEO at the end of the year, and I will become CEO at that time. We have had an orderly transition process during the past four months. Kevin Walbridge , who I recently named Executive Vice President of Operations is now officed here in Phoenix. Kevin is an exceptional operating executive with deep industry experience. He is now actively involved in operating reviews and detailed planning as we develop our future business plan.

This plan will constantly advance safety while gaining productivity. This plan will persistently price our assets and services while protecting our business and getting our share of market opportunity. This plan will continually elevate customer experience and employee engagement while controlling costs. As I said before, steady and consistent. We have an outstanding team at Republic, and we're maintaining our focus on improving return on invested capital, increasing free cash flow and returning our strong free cash flow to shareholders.

Before I turn the call over to Jim to wrap up our review of the quarter, I'd like to thank him publicly for his leadership in building a great Company. I want to thank him personally for his support and guidance that he's given me over the past several years. And on behalf of the entire team, express our appreciation for his many years of devotion to the people and to the owners of Republic Services. Thank you,

Thanks, Don. Thank you for those kind words, and Mr. Holmes has been my business partner for the approaching 13 years. Thank you for those kind words. I appreciate that very much. Maybe more importantly, I need to thank all of the employees of Republic Services for allowing me to take a ride with them. So, it's been 12 years that I've been the CEO of Republic Services. You, we, have achieved many successes during that period of time and have delivered a total return to our shareholders of over 178%. During that same period, the S&P 500 had a total return of 26%.

More importantly, I've had the privilege of being the CEO of an organization that has the strongest management team that's met the challenges of economic uncertainty, set industry standards for financial transparency and disclosure and never lost its commitment to developing future leaders and reinvesting in the best operating platform in the industry. I've worked with Don and known Don for much longer than the two years that the Company have come together. I have total confidence in Don's leadership and his ability to take the Company to the next plateau. And as I can tell you, he is as focused as I have been in continuing to improve shareholder value. Thanks again to our field management team for delivering outstanding results in 2010 and again, thanks to everyone out there for taking me along for the ride. With that, operator, we'll open up the lines for questions.

Thank you. (Operator Instructions) One moment for the first question. And our first question comes from Jonathan Ellis with Bank of America Merrill Lynch.

Thanks. Good evening, guys.

Hi, Jonathan.

Hi. First off, Jim, just wish you best of luck in retirement and hope to hear that that handicap comes down.

Send me a couple dozen golf balls, will you?

(Laughter) So, first off, just wanted to ask a quick question about the quarter and then also about the outlook for 2011. Can you talk a little bit about customer churn? Did you see any pickup in churn in any of your end markets? And then also a related question is pricing on new customers versus existing customers, did you see a widening out of that spread at all?

So, let's first talk about the definition of terms. When we talk about churn internally, we're talking about the spread between what we sell new business at and what we lose business at. So, we talk about defection, some people sometimes use is word churn to describe defection. Defection is the amount of business that we lose in a given year, and part of that defection is structural which is bankruptcies and businesses closing. Part of that defection is competitive. So, our defection rate has been consistent over the last several quarters and actually down just slightly.

So, when we haven't seen much change really in the makeup of that defection being generally half competitive and half being structural. On the churn, we have seen -- we've seen pretty consistent rates in the dollar per unit that we're losing revenue at. And I would say on a multi-quarter basis, pretty consistent in what we're losing -- we're signing new business at. So, not much movement there overall.

Okay. But suffice it to say that you are bringing -- the new customers are coming in at lower price points than existing customers? Is it just that the spread between those two numbers hasn't changed much?

That's great, as always, there was a time in, probably a couple years ago when we were walking away from business that was very unprofitable, and you saw that churn number flip positive. But generally speaking, that spread the negative. So, we're typically losing business at a higher rate than we're gaining new business, and that's the way the industry has been for four decades.

Sure, understood. Just turning to 2011, I'm recognizing that you're not giving formal guidance until you go to the budgeting process. But since you laid out a growth expectation, I feel obligated to ask what the drivers are behind that. I understand where CPI is today and theoretically, how that will flow through for next year. But if you could talk a little bit about your expectations for pricing in the non-CPI based markets and then any insights on volume. Is the anticipation that you may see seasonal trends next year? Or are you anticipating a flat lining of voluming through next year?

Yes Jonathan, we're not going to give you detailed guidance today. As I said on the call or in my comments, we're going to wait until February to do that. We're right in the middle of building the business plan. All of the divisions and the areas of regions are working at that diligently today. We're in the process of rolling that up. We've given guidance to our people on how -- what we expect to see next year, but it's too soon to see how the whole plan is going to come together.

Okay, maybe just then a sort of a clarifying question. To the extent that your going out with pricing today in your non-CPI based markets, maybe you can talk a little bit about what you're seeing today in terms of a spread over CPI. Is it getting more difficult to raise pricing, or is there really no change in terms of the spread over CPI?

I think generally it's more difficult to raise prices than it has been historically because the prolonged nature of the downturn. This thing now has been going on, some would say three years. Customers are more sensitive to price. And that's just the nature of, sort of Economics 101, right? So, we are still pricing persistently, as I said in my comments, and we're going to continue to do that. That's part of our business model. We think the assets that we own allow us to continue to do that. So, it's always been a very competitive business. That's still the case today. Customers are a little more sensitive than they have been in the past. We have municipalities who have been feeling the pain of a bad economy for a number of years. And these are long partnerships that we've had that in some cases, were repriced but a little bit of the business today, more than we have in years past. That's just a cycle that we're in today, and that's a cycle that we'll work ourself out of the next couple of years, we believe.

Okay, great. Thanks, guys, and Jim, I'll see what I can find in the B of A golf shop for you.

There you go. Thank you, Jon.

Our next question comes from Hamzah Mazari with Credit Suisse.

Hello, good afternoon. Just a couple of questions on pricing. Your core price was weaker than we were expecting. Just trying to flesh out some of your comments. One is, in effect, are you bringing down pricing guidance from 2% to 1.6%? And then, how much of that weakness in pricing in core pricing is CPI, and how much is the divestitures that you talked about? I think you made a comment saying that if you adjust for the divestitures, your core price was 2%. And then just lastly, if you could talk about any kind of CPI resets. Is that all done with? How should we think about that -- all these things?

That was three questions. I'll take the first one and Don will take the second couple, Hamzah. Yes, definitely the CPI is having an impact. We have -- when we put our business model together and thought we'd have 2% price for the year, that was in an environment of 2% to 2.5% CPI. And where we are is about, I think this month they said was 1.1%. So-- and there's a little bit of a lag, but we've had some resets as we move through the year, particularly in the summer months and through the fall, which we believe drives that number down. So, CPI is certainly a significant factor here and again, it lags as it works its way through the business. So, I think we'll see it, depending on what your assumption is for CPI, somewhat in the future.

Yes, so the second question Hamzah, is on the price and some of my comments about the market. So, if you think of our business, it's 40 states. We manage it through 28 area teams. But we're in 200 marketplaces, a little over 200 marketplaces across the United States. So, when we look at in isolation several markets, there are a couple of markets that are really driving some pricing pressure, some negative price. And one of those is LA, it's a very competitive marketplace, it has been for many years. We've got a great landfill position there. We've talked to many of you before about the fact that there's a big municipal landfill in the marketplace that used to close by 11 o'clock. Today, they're open all day long. That changes the dynamic in the marketplace. We had to divest of a landfill in that market as the condition of the merger. That causes a certain competitive aspect or new dynamic in the marketplace that will take a couple of years to sort of settle itself out.

So again, that and another market, Houston, and again, a very competitive marketplace, another divestiture market. We've had some activity there. We've had -- we shared with you, I think many quarters ago now, we had to take a price reduction in one of our large municipal transfer station contracts there, and we're about to anniversary that, I think, next quarter I think, isn't it? So, those things tend to play havoc with our numbers. But in the other marketplaces, and that was my comment earlier. When you factor out those isolated issues in the broad section of our marketplaces, we're getting 2% PI.

And so our goal is always to, in absolute terms, get a spread between absolute inflation and absolute price, right? And that's how we get margin expansion. If you look at our numbers, you're seeing margin expansion. So when we talk about price, remember, we're talking about absolute price which includes the effects of churn, includes the effects of mix, okay? It's a pure price number. So, as long as we can continue to price that spread between real inflation and real price, we're going to continue to give you margin expansion. And that's what you're seeing in our numbers today.

Right. And just follow-up, on your buyback, is it fair that that's going to be front end loaded, given where the stock is at right now?

I don't think we want to comment on exactly how we're going to execute the share repurchase program. We will be in the market as we have been in the past. And typically, we announced the $400 million share repurchase, so we will complete that by the end of 2011. Now, how we do it I think depends upon a number of factors, including the broader market, which is out of our control. So, we will be opportunistic in buying the stock and if you're asking it to model, I'd say just model it ratably.

Okay, alright, just last comment. Jim, look, Jim, congratulations and thank you. Look, I enjoyed working with you and look forward to keeping in tough with you.

Me too, I enjoyed it, and it's been quite a ride. And some of you are more -- some of you have been bigger characters in my life and Hamzah, you are one of them. But thank you for the comments. I appreciate it. Send golf balls.

Exactly.

Our next question comes from Al Kaschalk with Wedbush Securities.

Good afternoon.

Hi, Al.

I'm going to try to comply with the one and the follow-up here, but on the volume front, could you talk about the trend of what you saw on specialty waste? Because it appears that it may wound up or fell off faster than maybe some of the others in the market.

Special waste for us sequentially was strong. It's basically the same as it was over last month. So, it's up. We described we had a couple of large event jobs, larger than we've typically seen that have helped carry the day. We've got a pretty good pipeline of special waste today. Our special waste team is pretty positive about what's going on out there. So, if special waste is a leading indicator, great. But we haven't put that stake in the ground yet. But we're continuing to get a pretty good piece of business there. We had a little bit of BP work in the quarter, but very, very little, like a couple million dollars of revenue. So, it was mostly other types of end businesses.

Would that be something you're encouraging us to look at as perhaps as an indicator of some of the recovery, or is that just more of anecdotal comments?

I think what we're seeing today, the two big jobs I mentioned, one of them is a government job. So, it's land clearing for development of a government facility. So, I don't know that that necessarily reflects a change in our outlook on commercial construction because it's the government. Normally, when we start to see nice special waste jobs because they're clearing soil from old industrial sites and building new commercial real estate, again, that's more of a private sector issue. We haven't begun to see any of that yet.

The other large job is a mandated cleanup that (inaudible) dated, so there really want wasn't a lot of flexibility in that. One of things we think about in special waste is when, let's say a large industry, maybe a steel mill, has a stockpile of special waste. And their budgets free up a little bit, and they have some discretionary spending, and then they'll start to move some of that material. So, it tends to be an indicator of discretionary spending easing up. But we'll keep you posted.

Okay. And then on the specific commercial part of the business. Could you give us maybe an on the ground current update on what you're seeing in that marketplace? And how we should think about it, maybe over the next one to two quarters?

Commercially, we're just -- kind of just running even. We have -- as I said in the earlier question, we -- our defection has been pretty static. We've -- our sales -- we tend to be sort of net even. For what we lose, we gain. So, we're not necessarily growing the business on a net sales basis on the competitive side of things. And as far as our service decreases, we haven't seen any further signs of service decreasing but have not yet seen the signs of life on the increasing side.

So, what we'd like to be able to tell you is that at some point, we'll see container weights improve so as customers throw out more waste, that container weights, the pounds per yard increase, and that converts at some point to service increases. But we're watching diligently for that and just have not yet seen any movement. On the volume side, we did see some decline in MSW at the landfill, which has driven our volume numbers a little bit.

And that's what we -- what I describe as competitive MSW in a couple of cases where we've had, in one case, a large competitor who's has had their own landfill, but it was 70 to 80 miles away, I think, and for many years they were under a contract with us. That contract was below market. The contract came to term. We tried to negotiate a price that was more consistent with market, they elected to drive the extra distance to their own landfill. We've got a few other examples like that. We've got a landfill that we sold in a divestiture in the Midwest to a competitor, and the first thing they did with it was go out and secure some waste in the market so they could pay the mortgage on that new landfill. And not unexpected, we've seen this happen in the past. And these things take a little while to settle down. But it did show up in our volume this quarter.

Thanks a lot, Don.

You bet.

Our next question comes from Vance Edelson with Morgan Stanley.

Hi, thanks a lot for taking my questions. Just to close the loop on the Allied related synergies, I think in the past you had mentioned that December 31 might be the end of the synergy capture period, so to speak. Is the 190 that you've achieved the most that we'll get, or is it possible that between now and year end that number creeps a little higher?

The 190 is really where we are. I think as we look ahead into next year, the rollover benefit from synergies that we secured during this year are probably worth about $0.01 in earnings. Now, I will add, we have this internal definition of synergies which is a measurement period from the date of the merger through the end of this year. There are other opportunities, most notably some financing opportunities to call some legacy Allied debt and replaced that with lower cost, investment grade debt. So, we do have some opportunities beyond this synergy measurement period. But it's -- we'll be characterizing that next year as a normal refinancing opportunity.

Okay, and then if I'm not mistaken, beyond anything related to Allied, I think you've mentioned some brand new initiatives you'll probably be able to implement over the next year or two to further help margins. Could you just remind us when these plans might get set in motion? Is that an early 2011 timeframe? And when do the benefits start to flow?

Yes, we've talked about those a number of times. We're in the process of building those initiatives out today. Some of them are underway, some of them are in the piloting and launching phase. But as we've said, consider that to be $40 million or so. But that is a 2013 event.

Okay. Got it. And then just a quick follow-up, really a clarification on the timing for the buyback. You'll be opportunistic, but could you if you wanted start tomorrow, or is this more of a 2011 authorization?

We could certainly start here in the fourth quarter and buy back some stock at this point in time, definitely.

Got it. Okay. Thanks a lot, guys.

Our next question comes from Michael Hoffman with Wunderlich Securities.

Hi, Michael.

Thank you very much.

Hello, guys. It's been a great run, Jim. I've had a lot of fun with you. Thanks.

Me too, Michael.

Internal revenue growth, IRG, can we try and frame Q4 and 2011 in the context of one, should the overall internal revenue growth be positive? And two, can you talk about the direction of the price and volume? Q4's price, is it flat or better than in Q3? Volume, is it flat, better or worse? And the same for 2011. Just the direction, I'm not looking for numbers, just the direction.

Yes, so -- (dog barking) Does he have a question too? Q4, we've said that we were aiming at getting Q4 to flat on a YOY basis. And we could be flat to slightly negative, still depending on what happens here over the last couple of months. So, but trending, directionally, we're still trending to close that gap. And if we don't see flat Q4, we'll certainly see it right after this. And again, we're not giving guidance for 2011 at this point.

Okay, but we should think about IRG should be positive? At least that?

Michael, as Don said earlier, we're in the middle of our bottoms up business planning process. So, the combination of building up that detail coupled with the fact that we've got probably two or three months before we come out in January and economic conditions may change. We're really not in a position to be specific about 2011 right now. I think what you're seeing from us is sequentially kind of flattish. And so then it's a question of what you want to assume for CPI next year and also economic recovery.

Okay. That helps a lot. And then how should we think about the $800 million in free cash? Is it fair to characterize it that you've hit a baseline of free cash in a stable, low growth economy, and we should be comfortable about that number?

Yes, that's right.

Yes, definitely. And when you look at the use of that cash, again, we've got about -- just simplistically, on $800 million, we should have this, call it mid single digit, high single digit free cash flow growth typically in this business through a longer term period of time. So, if you look ahead to next year, we've got a $400 million share repurchase, a dividend that's a little bit above $300 million, or say $300 million. We're going to grow the dividend a little bit as we've done in the past and then we're going pay down a little bit of debt. And then beyond that, in 2012, it will really be dividend and share repurchase. And of course, we always look at opportunities to grow the business internally, whether it's investing in our infrastructure and particularly, recycling infrastructure, automation investment and tuck-in acquisitions. So, those are the focuses for our cash flow.

Yes, I think overall, we think the worst is behind us. And things are leveling off, and we're going to continue to do the things that we've done, that you've seen us do to run the business and generate cash. And I think we're all comfortable with the $800 million as our base going forward.

Now, let me just add one thing here. We've got the benefit of bonus depreciation this year. So, I want to remind everybody, as had occurred in the past, when the government stopped it, that's a quick reversal. $50 million results in a $25 million reversal unless Congress goes ahead and reinstitutes bonus depreciation again for 2011 to help stimulate business investment. So, that is a little bit of noise in the cash flow number.

Our next question comes from Scott Levine with JPMorgan.

Hi, Scott.

How you doing? And Jim, I'd like to add my congratulations. Best of luck with retirement.

Thanks, Scott. I appreciate it.

Following up on the volume commentary. I think on the last call, you'd kind of indicated or had indicated that you expected flat to maybe up in the fourth quarter. So, flat to maybe slightly down is a little bit of a change, not a big one. But wondering what you're seeing to drive that change? And is it the commercial business? Is it industrial? And maybe we'll just leave it there. Because obviously, it seems like something has changed within the past three months.

Yes, Scott. On the second quarter call, we shared with you some new life we were seeing in certain parts of our business. We shared -- specifically, we saw some manufacturing coming back in the east, in the Midwest. And it was a new revelation for us. We hadn't seen anything like that in a number of quarters. So, we were anxious to share it with you and tell you that we're seeing some life out there in the economy, and we were hoping it would continue. Just like when the economy started to fall away from us a couple of years ago, we saw it start in the east, go to the Midwest, and then go west and south after that. And we saw it start to gain momentum. In these few examples we shared in the east to Midwest, we were hopeful we'd see a little bit more of that continue. We haven't seen it continue. We haven't seen further decline, but we haven't seen it build. So, we're patiently waiting for volumes to come back to us and for our customers' businesses to improve. But we haven't got anything better to report than that. So, it's just kind of steady at this point. No further decline, no further improvement, and we're hanging in there. And I think as we do get some of that volume coming back our way, we'll get our share as I said, and we'll see operating leverage as a result.

Understood. One follow-up on margins. If I understood, Tod, your comments, you had an insurance headwind. Was that -- I don't know, is that contemplated at the beginning of the year? I'm guessing it's not very meaningful, but is your expectation still --

Sure -- excuse me. It's not really an insurance headwind. It's really a benefit that we had in the third quarter of last year. If you think back to October, November, we'd almost been through one year with the merger. We were able to get our hands around what is really two different sets of actuarial numbers and able to adjust that based upon the excellent safety performance of the Company. So, we took about a $21 million positive actuarial adjustment in the third quarter of last year ,whereas -- and then, of course, our risk costs have continued to trend down. But where we are this quarter, there was no big positive benefit. So, that really highlights that one time year-over-year change.

Okay. And then to follow that up, there was no real drag from an insurance adjustment?

There's not a drag from an insurance -- again, as we look ahead, I'll speak to the fourth quarter but not next year. As we look ahead into the fourth quarter, we feel very comfortable with margins at or slightly above 31%. And obviously, that's for the full year.

That's for the full year. So, then maybe the last thing I would ask about is irrespective of direction of CPI. You're still comfortable that you're pricing above the rate of cost, inflation and levels that should produce margin expansion on the base business.

Yes, absolutely. That's our focus. And remember though, as we're thinking about CPI, we do have this lag if CPI comes back, right? So, we have got that big chunk of our business that's index based. It renews lumpy throughout the year, and so it renews, not all at the same time. It renews different quarters -- or different months. And some of that business renews based on the 12 month trailing CPI and some of that business renews on a point in time CPI, one month, okay? And so that mix tends to play a little havoc with us there. But it's kind of a 12 month lag to work our way through all that CPI noise. But nevertheless, our focus, as I said, is to get in absolute terms that spread. And as we said many times, we think we can get 50 bips to 150 bips of price in that spread between true inflation and price. When the economy is tough and challenged and CPI is low and customers are sensitive, it's closer to 50 bips. The economy's screaming and inflation is high and people are less concerned, we get better pricing. And so that's what -- it's where we're going to focus.

Got it. Thanks.

Our next question comes from Bill Fisher with Raymond James.

Thank you. Good afternoon.

Hi, Bill.

Jim, I'd like to echo the -- it's been -- congrats on the 12 years. It's been great following you over that period, and you've really made some huge changes from the late '90s when it was I guess Republic Industries, and hope you enjoy the retirement.

Thank you, Bill. I enjoyed working with you too.

Thanks. And just for Tod, actually on -- you mentioned some of the free cash and the bonus depreciation. But, I know you haven't done the budget, but just on CapEx on the color, wouldn't there be some pull forward on the flip side? Just CapEx this year, and can you talk about what are some of the moving parts there looking --

Sure. Again, if we pulled capital forward by about $45 million, I think you can expect to see -- we're not going out in the future years to move capital from 11 to 10. It's essentially trucks and chassis and (inaudible) or Caterpillar yellow iron that we're moving from the first part of 2011 into '10. So, there's a natural pull forward and therefore, a reduction of 2011 capital. Now obviously, if bonus depreciation were to be reestablished next year, maybe we get to the third quarter of 2011, we would reconsider another pull forward. But certainly, this should serve to boost our cash flows for next year by reducing our capital spend next year.

Okay.

So it's just the flip, Bill. We'd spend it early, we won't spend it next year.

Okay, and then I apologize in you mentioned this already, Don, but did you say how much the special waste was up year-over-year this quarter? And did that have -- does that have an impact on your reported price due to mix change?

It does a little bit, yes. The special waste was up 24% this quarter over last, over last year. But it was also up 24% last quarter. So sequentially, it's the same. And again, those are specifically those big jobs. Now remember in -- just to give you a little history, right? In Q3 of last year, special waste was down 21% from the prior year. Okay, so last year at this time, we were sucking wind on special waste. So, we're about -- we're actually back to '08 levels.

'08. Okay. Okay, and then price, it does have a mix on the price too?

Yes, it does, absolutely.

Okay, alright. Thank you.

Our next question comes from Corey Greendale with First Analysis.

Hi, good afternoon. And Jim, it's been a pleasure working with you, thanks.

Thank you, Corey.

Most of my questions have been answered, so just one kind of big picture strategic question. Again, not asking you to go into specifically what your plans are for 2011 yet. But from a strategic point of view, You've talked about in the past about needing to price at the landfill at a level that generates a sufficient return on your capital investment there. Are you where you think your need to be to get that kind of return? And how do you think about the tradeoff between the economy and therefore, presumably customers being more sensitive on price versus the fact that as a larger company now obviously, you've got more power in the market and potentially testing on how flexible people might be on price under those circumstances?

Well, I think you're asking the question more specifically to landfill. But I'll tell you, we look at it a little differently across lines of business. We've talked about the fact that we've had to reprice some of our large residential business because of CPI, the timing of CPI. Because customers have come to us and said, look, I'll willing to extend the contract, but I need a little price concession. We've been successful pricing over the years, we've got a good partnership. We've done some of that.

So we make intelligent price decisions with our existing customer base to keep our business. It's fairly profitable work. We're through the days of pricing that negative tail that we used to talk about. As it relates to the landfills and you said it Corey, these landfills are -- they're expensive to build, to develop, they're expensive to operate.

The environmental rules continue to get more stringent. We're going to spend a couple million dollars a year next year more in air quality controls and testing. That's going to continue to impact the price of landfills. These landfills are expensive to own into infinity. And as it relates to landfill pricing, we continue to move landfill pricing up.

As I said earlier, we talked about some of the volume, we're down year-over-year in MSW. And -- at the refill, and some of that is directly related to the fact that we priced that business. And some of that volume, those customers have chosen to leave and move onto another disposal site, in many cases, many miles farther than ours, and we've allowed that business to leave. And we're going to continue to take that approach. These landfills are too costly and too valuable just to give the air space away. So, we're going to continue to do that. Would I like to see our price be higher at the landfill? Absolutely I would, and we're looking at that as well. We're looking at that not only through our third party customers, but with our own internal customers. So, we're going to continue to focus on it.

Great, and just one quick one for Tod. I understand all the moving pieces to the risk management costs, but just for modeling purposes, is (inaudible), is something like $50 million a quarter a good number to use?

Well I would say where we are this quarter from an expense standpoint is probably a pretty accurate expense number.

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.

Okay. I'm going to pitch hit for Jim today. This is Don. Thank you, operator and everybody. In summary, I'm very pleased with our third quarter and year to date performance. And even with the interesting economy that we've had as a backdrop, we continue to execute our business plan. We're meeting the needs of our customers. We're consistently and appropriately pricing our business. We're demonstrating timely and responsible cost management, and we're expanding margins.

I would like to remind everyone that a recording of this call is available through November 11 by calling (203)369-3404. Additionally, I want to point out that our SEC filings and a discussion of business activities, along with a recording of this call, are all available of Republic's website at republicservices.com. And finally, I want to remind you that Republic's management team routinely participates in investor conferences. When presentations are scheduled, the dates and times are posted on our website, along with instructions for listening to the live webcast of the event. Thank you for spending time with us today, and have a good evening.

Thank you. That does conclude today's conference, and you may disconnect at this time.