Nov 5, 2010
Operator
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 host this afternoon are Republic Chairman and CEO, Mr. Jim O'Connor; and Republic President and COO, Mr.
Don Slager. [Operator Instructions] At this time, it is my pleasure to turn the call over to Mr.
O'Connor. Good afternoon, Mr.
O'Connor.
James 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, 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 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 04, 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 expressed 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're 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 closing of our merger, we have 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 have achieved $190 million of run rate synergies and exceeded our goal by 27%, and we have 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.
Donald Slager
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 [ph] 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 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 showed 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 reduce labor costs in an 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 reduction in maintenance costs 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.
Tod Holmes
Thanks, Don. Third quarter of 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 a 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.
By now, a pricing was down sequentially, and this includes the impact of lower CPI in our indexed base 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 rated to Residential and Commercial businesses.
The pricing on these contracts has been negatively impacted by the low levels of CPI. Our original 2010 guidance assumed the 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 & Demolition and 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 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 a 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 fuel 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 a collection volume declines of over 8%. Volumes are also improving in all collection lines sequentially, led by industrial with a 230 basis point increase from the second quarter of 2010.
This improvement reflects an increase in permanent hauls, primarily for manufacturing customers, and a more normal cyclical uptick from the temporary business. Now 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 margins decreased by 10 basis points to 30.8%, from 30.9% in the prior year.
EBITDA margins exclude divestiture losses, restructuring charges, cost of achieve synergies and prior-year remediation recoveries. The decline in margin is driven by a 100 basis point increase in risk-insurance expense.
As we 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 some of the other changes in costs as a percentage of revenue.
The details, of which are available on our website, and will be included in our 10-Q filing which are 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 costs was an increase in related Fuel Recovery Fee revenue, resulting in a net decrease in EBITDA margin of about 10 basis points. Second, recycling cost 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 increase spread of approximately $18 per ton. The net impact was a favorable 30 basis point improvement in EBITDA margin.
Third, labor and related benefits cost. The 10 basis point improvement in margin is primarily due to the 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 cost. The 50 basis point improvement, again, primarily relates to the margin benefit of incremental landfill volumes that carry a little or no associated disposal cost.
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 cost 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 to 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 accumulative 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 aerospace 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 9 months ended September 30.
Year-to-date, adjusted free cash flow was $579 million, which consist of cash provided by operating activities of $964 million, less property and equipment receives of $535 million, plus the proceeds from the sale of used equipment of $17 million, plus merger-related expenditures net of tax of 16, 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 was $896 million and our days sales outstanding was 40 days, or 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 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 about $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 led 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.
It's a strong team and a clear vision for the future of Republic. So thank you, Jim.
Now I'll turn the call over to Don.
Donald Slager
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 the 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 roll over into 2011. Our approach to the business remain 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 we'll 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, now I'll 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 in 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 has given me over the past several years.
And on behalf of the entire team expressed our appreciation for his many years of devotion to the people and to the owners of Republic Services. Thank you, Jim.
James O’Connor
Thanks, Don. Thank you for those kind words.
And Mr. Holmes has been my business partner for I guess 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 delivered a total return to our shareholders of over 178%.
During that same period, the S&P 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, has 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 in 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 our standard 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.
Operator
[Operator Instructions] And our first question comes from Jonathan Ellis with Bank of America Merrill Lynch.
Jonathan Ellis
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?
Donald Slager
So let's first talk about 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 when we talk about defection, some people sometimes use that 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, it's 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'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 or we're residing a new business at.
So not much movement there overall.
Jonathan Ellis
But in spite to say that you aren't bringing to new customers are coming in at lower price points than existing customers, is that the spread between those two numbers, is that a statement?
Donald Slager
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 the churn number flip positive.
But generally speaking, that spread is 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 decades.
Jonathan Ellis
Just turning to 2011, recognizing that you're not giving formal guidance until you go to the budgeting process. But since you laid out the growth expectation, if you're obligated to ask what the drivers are behind that.
Just I understand where CPI is today and, theoretically, how that will flow through for next year. But I guess if you could talk a little bit about your expectations for pricing in the non-CPI base markets?
And then, any insights on volumes? Or is the anticipation that you may see seasonal trends next year, or are you just anticipating sort of a flatlining of volumes through next year?
Donald Slager
Yes, Jonathan. We're not going to give you detailed guidance today.
As I said in the call or in my comments, we're going to wait until February to do that. We're in right in the middle of building our business plan.
All of the divisions in the areas of regions are working at that deal we're in today. We are in the process of rolling that up.
We've given guidance to our people on what we expect to see next year, but it's too soon to see how that whole plan is going to come together.
Jonathan Ellis
Maybe just sort of a clarifying question. To the extent that you're 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 it really no change in terms of the spread over CPI?
Donald Slager
Yes, I think generally, it's more typical to raise prices that it has been historically because the prolonged nature of the downturn. This thing now has been going on somewhat, let's say, three years.
Customers are more sensitive to price, and that's just the nature sort of economics one-to-one, right. So we are still pricing persistently, as I said in my comments, we're going to continue to do that.
That's just 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 still the case today.
Customers are a little more sensitive than it has been in the past. We have municipalities who have been feeling the pain of a better economy for a number of years.
And these are long partnerships that we've had that. In some cases, we're repricing a little, but a little bit of that business today, more than we have in years past.
That's just the cycle that we're in today, and that's a cycle that we'll work ourselves out of over the next couple of years, we believe.
Operator
Our next question comes from Hamzah Mazari with Crédit Suisse.
Hamzah Mazari
Just a couple of questions on pricing. Your core price was weaker than we were expecting.
I'm just trying to flush out some of your comments. One is, in effect, that you're bringing down pricing guidance from 2% to 1.6%, and then how much of that weakness 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 restarts, is that all done with? How we should think about that all of these things?
Tod Holmes
That was three questions. I'll take the first one, and Donald will take the rest a couple ones.
Yes, definitely, the CPI is having an impact. When we put our business model together, we thought we'd have 2% price for the year, that was an environment of 2% to 2.5% CPI.
And where we are is about, I think, this month, I said it was 1.1%. And there is a little bit of a lag of, 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 through its way through our business.
So I think we'll see it depending on what your assumption is for CPI somewhat in the future.
Donald Slager
So the second question, Hamzah, is on the price and some of my comments about the markets. So if you think of our business, 40 states, we managed it through 28 area of teams, but we're in 200 marketplaces, a little bit 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 pressures, some negative price. And one of those is L.A., it's a very competitive marketplace.
It has been for many years. We've got a very great landfill position there.
We've talked to many of you before about the fact that there is a big municipal landfill in the marketplace that used to close by 11:00. Today, they're open all day long.
That changes the dynamic in the marketplace. We had to divest over landfill in that market as position of the merger that causes a certain competitive aspect with the new dynamic in the marketplace that will take a couple of years to sort of settle itself out.
So again, that at 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 there I think the next quarter I think.
And 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 so 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.
And 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.
Hamzah Mazari
And just to follow up, on your buyback, is it fair that, that's going to be in front end loaded given where your stroke is at right now?
Tod Holmes
Well, 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 a $400 million share repurchase, so we will complete that by the end of '11. Now how we do it, I think it 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 are asking it to model, I'd say just model that ratably.
Operator
Our next question comes from Al Kaschalk with Wedbush Securities.
Albert Kaschalk
I'm going to try comply with a one and a follow up here. But on the volume front, could you talk about the trend or what you saw on specialty waste because it appears that it may wound up or thought sell off faster than maybe some of the others in the market?
And then...
Donald Slager
Special waste for us sequentially was strong. It's basically the same as it was over last month.
So it's up. We describe we had a couple of a large event jobs larger than we typically seen that have helped here today.
We've got a pretty good pipeline in 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 steak 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, very little, like a couple of million dollars of revenue. So it's mostly other types of end businesses.
Albert Kaschalk
Was that something you're encouraging us to look at is perhaps as an indicator of some of the recovery, or is that just more of anecdotal comments?
Donald Slager
No, I think what we're seeing today two or three jobs that 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 their clearing soil from old industrial sides of building the 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 EPA mandated.
And so they're really wasn't a lot of flexibility in that. One of the 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.
Albert Kaschalk
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?
Donald Slager
Yes, commercially, we're kind of just running even. We have -- as I said in an earlier question, our defection has been pretty static.
Our sales, we tend to be sort of net even. 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, the container waste per pounds pretty are decreased, and that converts it at some point to service increases. But we're watching diligently for that, just have not seen yet any movement.
On the volume side, we did see some decline in MSW at the landfill, which is driven our volume numbers a little bit. And that's what we would kind of describe as competitive MSW.
In a couple of cases, where we've had, in one case, a large competitor who has had their own landfill but it was 70 to 80 miles away, I think, and for many years, they run to a contract with us. The contract was below market.
The contract came to term. We try to negotiate a price that was more consistent with market, they elected to drive the extra distance their own landfill.
We've got a few other examples like that. We've got a landfill that we sold in the 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 happening in the past.
And these things take a little while but to settle down, but it did show up in our volume this quarter.
Operator
Our next question comes from Vance Edelson with Morgan Stanley.
Vance Edelson
Just to close the loop on the Allied related synergies. I think in the past, you had mentioned December 31 might be the end of the synergy capture period, so to speak.
Is the 190 that you achieved the most that will get? Or is it possible to between now and year-end that number creeps a little higher?
Tod Holmes
The 190 is really where we are. I think as we look ahead into next year, the rollover of benefit from synergies that we secure during this year probably worth about $0.01 in earnings.
Now I will add that 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 replace that with lower cost investment grade debt.
But we do have some opportunities beyond the synergy measurement period, but we'll be characterizing that next year as a normal refinancing opportunity.
Vance Edelson
And then if I'm not mistaken, beyond anything related to Allied, I think you've mentioned in the past 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 sort of an early 2011 timeframe?
And when do the benefit start to flow?
Donald Slager
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 just kind of in the piloting and launching phase.
But as we said, consider that to be $40 million or so, but that is a 2013 event.
Vance Edelson
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 to start tomorrow, or is this more of a 2011 authorization?
Tod Holmes
We could certainly start here in the fourth quarter and buy back some stock at this point in time definitely.
Operator
Our next question comes from Michael Hoffman with Wunderlich Securities.
Michael Hoffman
Internal revenue growth, IRG. Can we try and frame 4Q in 2011 in the context of one, should the overall internal revenue growth to be positive?
And 2, can you talk about the direction of the price and volume? 4Q, does price is it flat or better than 3Q?
Volume, is it flat, better or worse? And the same for '11?
Just the direction, not the numbers just the direction.
Donald Slager
Q4, we've said that we were aiming at getting Q4 to flat on a y-o-y basis. And we could be flat to slightly negative, still depending on what happens here over the last couple of months.
But trending directionally, we're still training to close that gap. And if we don't see flat Q4, we'll certainly, I think to see it right after that.
And again, we're not going to give you guidance for '11 at this point.
Michael Hoffman
But we should think about IRG in '11, should be positive? I mean at least that?
Tod Holmes
Well, 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.
Michael Hoffman
And then, how should we think about the $800 million in free cash? Is it fair to characterize that you've hit sort of a baseline of free cash in a stable low growth economy?
And we should be pretty comfortable that number.
Tod Holmes
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 the next year, we got a $400 million share repurchase of dividend. That's a little bit above $300 million or, let's 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 to pay down a little bit of debt.
And then beyond that, in '12, 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.
Donald Slager
Yes, I think overall, we kind of think the worst is behind us and things 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 in turning cash. I think we're all comfortable with $800 million is our base going forward.
Tod Holmes
Let me just add one thing here. We've got the benefit of bonus depreciation this year.
So I want to remind everybody as it had occur 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.
Operator
Our next question comes from Scott Levine with JP Morgan.
Scott Levine
Following up on the volume commentary, I think on the last call, you kind of indicated, we had indicated that you expected flat to maybe up in the fourth quarter to flat to maybe slightly down. There's 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 change within the past three months.
Donald Slager
Yes, Scott. On the second quarter call, we shared with you some new life we were seeing in certain parts of our business we've shared.
Specifically, we saw some manufacturing coming back in the East, in the Midwest. And it was kind of 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're hoping that 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 then go West itself after that, and we saw start to gain momentum in these few examples we shared in the East to Midwest. We're hopeful that we'd see a little more of that continue.
We haven't seen it continue. We haven't seen a further decline, but we haven't seen it build.
And so we're kind of patiently waiting for those volumes to come back to us and for our customer's businesses to improve, but we haven't got anything better to report on 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 some operating leverage as a result.
Scott Levine
I want to follow-up on margin. If I understood, Tod, your comments you had this insurance headwind.
Was that contemplated in your guidance at the beginning of the year? I'm guessing it's not very meaningful, but is your expectation still ...
Tod Holmes
Sure, 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 mid-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. And then, of course, our risk costs have continued to trend down.
But where we are at this quarter, there was no big positive benefit. So that really highlights that one-time year-over-year change.
Scott Levine
And then to follow that up, so there was no real drag from an insurance adjustment?
James O’Connor
It's not a drag from an insurance. Again, as we look ahead, and I'll speak to the fourth quarter but not to next year.
As we look ahead into the fourth quarter, we feel very comfortable with margins, either or slightly above 31%, and obviously that's for the full year.
Scott Levine
So then, maybe the last thing I would ask about is irrespective of the direction of CPI. Are you still comfortable that your pricing above the rate of cost inflation and levels that you should produce margin expansion on the base business?
Donald Slager
Actually that's our focus. And remember though is we're thinking about CPI, we do have this lag at CPI comes back, right.
So we've got that big chunk of our business that's index-based. It renews kind of lumpy throughout the year and it renews not all of the same time, it renews different quarters or different months.
And some of that business renews based on the 12 month trailing of the CPI and some of that business renews on kind of 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 that worked our way through of all that about CPI noise.
But nevertheless, our focus, as I said, is to get in absolute terms that spread. And as we've said many times, we think we can get 50 bips into a 150 bips of price in that spread between true inflation and price.
When the economy's tough and challenged and CPI is low and customers are sensitive, it will be 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 where we're going to focus.
Operator
Our next question comes from Bill Fisher with Raymond James.
William Fisher
For Tod actually, 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 CapEx this year?
And just can you talk about what are some of the moving parts there looking a lot?
Tod Holmes
Sure, again, our full 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 loader or Caterpillar Yellow Liner that we're moving from the first part of '11 into '10.
So there's a natural pull forward, and therefore reduction of '11 capital. Now obviously, a bonus depreciation were to be re-established next year and maybe when we get to the third quarter of '11, 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.
Donald Slager
So just a flip, Bill. We spend it early.
We won't spend it next year.
William Fisher
And then, I apologize if you mentioned this already, Don, but did you say how much the special waste was up year-over-year this quarter? Does that have an impact on your reported price just due to mix change?
Donald Slager
It does a little bit. Yes, I mean the special waste was up 24% this quarter over last year, but it was also a 24% last quarter.
So sequentially is the same. And again, those are specifically those big jobs.
Now remember, 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 stuck in wind on special waste.
So we are about we're actually back to like '08 levels.
William Fisher
And then price, it does have a mix on the price to?
Donald Slager
Yes, it does, absolutely.
Operator
Our next question comes from Corey Greendale with First Analysis.
Corey Greendale
So just one big kind of picture strategic question. Again, not asking you to go specifically what your plans are for 2011 yet, but just from a strategic point of view.
I know you've talked in the past about beating the price at the landfill at a level that generates a sufficient return on your capital investment there. Are you where you think you need to be to get that kind of return?
And how do you think about the trade-off between the economy and therefore presumably consumers 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?
Donald Slager
Well, I think you're asking the question more specifically in the landfill. But I'll tell you, we look at it a little differently across lines of business.
And 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'm willing to extend the contract, but I need a price concessions." We've been successful price 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 just to keep our business. It's really profitable work.
We're through the days of pricing that negative tail that we used to talk about. It's a waste in the landfills.
And you said it, Corey, these landfills they're expensive to built, to develop, they're expensive to operate. The environmental rules continued to get more stringent.
We're going to spend a couple of million dollars a year or 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 it's a release to landfill pricing. We continue to move landfill pricing up.
As I said earlier, we talked about some of the volume, and we're down year-over-year in MSW and the landfill. 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 on to 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 get the air space and so on. So we're going to continue to do that.
But I'd 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 to our third-party customers but our own internal customers.
So we're going to continue to focus on it.
Corey Greendale
Just one quick one for Tod. I understand all of the moving pieces to the risk management costs.
But just for modeling purposes is, I think it was something like $50 million a quarter a good number to use?
Tod Holmes
Well I would say where we are at this quarter from an expense perspective, it's probably pretty accurate expense number.
Operator
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.
James O’Connor
Okay, I'm going to pinch 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 the recording of this call, are all available on Republic's website at www.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.
Operator
Thank you. That does conclude today's conference, and you may disconnect at this time.