Republic Services, Inc. (RSG) Q3 2011 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Third Quarter Call for Investors in Republic Services. Republic Services is traded on the New York Stock Exchange under the symbol RSG. Your host for today's call are Don Slager, President and CEO; Tod Holmes, CFO; and Ed Lang, Republic's Senior Vice President and Treasurer. Today's call is being recorded. [Operator Instructions] It is now my pleasure to turn the call over to Mr. Lang. Good afternoon, Mr. Lang.

Thank you. Welcome, good afternoon, and thank you for joining us. This is Ed Lang, and I would like to welcome everyone to Republic Services' Third Quarter 2011 Conference Call. Don Slager, our CEO; and Tod Holmes, our CFO, are joining me as we discuss our third quarter performance. Before we get started, I would like to take a moment to remind everyone that some of the information that we discuss on today’s call contains forward-looking statements, which involve risks and uncertainties, and may be materially different from actual results. Our SEC filings discuss factors that would cause actual results to differ materially from expectations. Additionally, the material we discuss today is time-sensitive. If in the future you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is October 27, 2011. Please note that this call is the property of Republic Services, Inc. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited. With that, I would like to turn the call over to Don.

Thanks, Ed. Based on our third quarter performance, Republic Services is on track to achieve the earnings and cash flow guidance provided earlier this year. Financial and operational highlights include: Revenue of approximately $2.1 billion for the quarter; total price growth in the quarter was 3.6%, with core price of a 0.7%; our MSW landfill price was up by 3%, which is an improvement from Q2 levels; Q3 had positive volume growth, this is the ninth consecutive quarter of collection volume improvement; our third quarter adjusted EPS was $0.53 and $1.43 year-to-date; our third quarter adjusted free cash flow was $266 million; we repurchased 6 million shares in the third quarter for $167 million. During the past 12 months, we have repurchased 16 million shares or 4% of our stock for $470 million. We remain committed to an efficient cash utilization strategy, which includes increasing cash returns to our shareholders through repurchase and dividends. Total cash returned to the shareholders in the quarter was $242 million and $657 million year-to-date. We continue to be successful in retaining a high percentage of our existing contracts, and have secured a number of new contracts that will improve our performance in 2012. During the third quarter, we started a new contract that privatized a residential collection operations of Toledo, Ohio. Privatization continues to be a source of revenue growth and assist municipalities with allocation of financial resources. Additionally, we will begin servicing a number of new contracts during 2012, including San Jose and Fresno, California and Hernando County in Florida. Our field organization continues to target profitable growth and effectively manage our cost structure. We saw a 20-basis-point sequential improvement in our collection volumes. Our industrial collection volumes are now positive on a year-over-year basis. Our cost of operations, as a percentage of revenue, improved by 50 basis points after adjusting for the net impact of higher fuel. SG&A expense was 9.8%. We have increased the automated portion of our residential fleet by 15% this year. 58% of our residential fleet is now automated, which is already ahead of our full goal. Our safety performance continues to improve with our frequency rate down 7% year-over-year. I would like to thank our field operations for their continued success in executing our strategy of achieving profitable growth, controlling costs and maintaining a safe work environment for our people. Tod will now update our financial performance.

Thanks, Don. Third quarter 2011 revenue was approximately $2.1 billion, a $55 million increase in the third quarter reflects internal growth, which totaled approximately 2.5%. This is the highest level reported since 2008. The change in revenue from prior periods includes the following key components: Core price growth of 0.7%. Our commercial and industrial price were on average, up about 1%, with residential remaining more competitive due to municipal and franchise contract pricing environment and the lagging impact of prior year's CPI. Since our price on an index-based contract tends to lag, we are impacted by the lower CPI environment of 2010, which is not fully anniversaried. Given the current CPI environment, we expect index-based pricing to modestly improve in the second half of 2012. Our landfill MSW price, as Don indicated, was about 3%, a slight improvement from the second quarter. Within that component of our business, our third-party open market landfill customers where we are increasing prices in the range of 4% to 5%. Second is our fuel recovery fee, which increased by 1.2%. This increase in fuel recovery fee relates to an increase in fuel costs. The average price per gallon of diesel increased to $3.87 in the third quarter from $2.94 in the prior year, a 32% increase. Currently, the price of fuel is $3.83 per gallon. We are assuming that fuel prices remain at this level for the remainder of the year. And the third key component is commodity revenue increase of 1.7%. Commodity prices increased 36% to an average price of $160 per ton in the third quarter or $118 per ton in prior year. Third quarter recycling facility commodity volume of 492,000 tons was up 8% from the prior year, and up 2% on a same-store basis. In mid-October, export commodity prices declined. At current prices, our fourth quarter weighted average price is expected to decline from third quarter levels by about $20 per ton. This would negatively impact fourth quarter earnings by about $0.01 to $0.015 on an EPS basis, which includes the benefit of reduced cost of goods sold. Turning to our volumes, our volumes were positive 30 basis points year-over-year. We continue to see volume improvements in the collection lines of business. Again as Don mentioned, this is the ninth straight quarter of sequential improvement. Q3 collection volume of negative 0.4 improved 20 basis points over Q2 levels. Industrial volume is now positive year-over-year and commercial volume is only slightly negative. Our disposal volumes, consisting of landfill and transfer activity, were up 2.8% from the prior year. This increase is due to year-over-year favorable special waste and C&D volumes. Looking forward, we expect collection volumes to continue to improve. Disposal volumes will be negative due to high levels of special waste in the fourth quarter of 2010, giving us therefore a difficult year-over-year comp in the fourth quarter of 2011. So in total, we expect fourth quarter volumes to be flat to slightly negative. Now I'll discuss our third quarter year-over-year margin. Third quarter 2011 adjusted EBITDA margin was 30.7% compared to 30.8% in the prior year, a 10-basis-point decline. The impact of fuel cost increases, partially offset by an increase in related fuel recovery fee revenue resulted in a net decrease and EBITDA margin of 60 basis points. Excluding the net impact of fuel, our margins would have been 31.3% or a 50-basis-point expansion from the prior year. Other significant changes in the margin include labor and labor-related benefits. We saw an 80-basis-point improvement primarily relating to labor productivity gains in the collection business. As Don mentioned, this includes the benefit of our fleet automation. Transfer and disposal costs, there was 50-basis-point improvement, which relates to decreased external disposal expense. The decrease was primarily due to our decision to divest a 3 New York City transfer stations, which had higher than the average disposal costs. Our transportation and subcontract expenses, we saw a 20-basis-point improvement, which results from redirecting waste streams within our transfer and disposal network, and less transportation expense as a result of the expiration of our City of Toronto contract in December of last year. While there is a favorable margin impact to this line item, the net impact to total margin is flat as the contract was at our total company margins. This benefit was partially offset by an unfavorable incremental surcharge from transportation providers due to increased fuel surcharges. Our risk management, we saw a 60-basis-point improvement relating to reductions in insurance premiums, as well as the continued improvement in our claims experience, as Don mentioned. Next is our recycling cost of goods sold. Here, we saw an unfavorable 80-basis-point increase in expense, which relates to increased rebates to customers for volumes delivered to our recycling facilities. Cost of goods sold at our recycling facilities increased to an average of $55 per ton from $35 in the prior year. Commodity revenue increases more than offset this increase in costs and resulted in an increased spread of approximately $22 per ton. The net impact was a favorable 50-basis-point improvement in EBITDA margin. Finally, SG&A. SG&A expense was 9.8% of revenue, which was flat with the prior year excluding costs to achieve synergies in the prior year. We remain comfortable with our full year SG&A expense at approximately 10%, which includes 20 to 30 basis points of investment in our major initiatives. Our DD&A, as a percentage of revenue, was 11.1% in the current year versus 11.2% in the prior year. The 10-basis-point improvement primarily relates to reductions in landfill amortization expense as a result of expansion secured during the quarter. DD&A is higher than capital expenditures, as a percentage of revenue, due to the amortization of intangibles resulting from our 2008 mergers. Now Ed will discuss interest expense, our taxes and our free cash flow.

Thanks, Tod. Third quarter 2011 interest expense of $108 million includes $18 million of noncash amortization. As we continue to refinance our debt, a portion related to the Allied debt discount of $3 million will decline. Our effective tax rate includes a $0.04 benefit resulting from the normal process of reconciling our provision to our 2010 tax return, which was filed in September. Excluding the benefit realized in the quarter, our adjusted tax rate was about 40.5%. I will now discuss free cash flow. Third quarter adjusted free cash flow is $266 million, which consisted of cash provided of -- by operating activities of $490 million -- $491 million, less property and equipment received of $214 million, plus proceeds from the sale of property of $7 million, plus divestiture-related tax payments of $6 million, less cash tax benefit from debt extinguishment of $24 million. Therefore, the adjusted free cash flow was $266 million. Year-to-date adjusted free cash flow is $701 million, and we remain comfortable with our full year guidance range of $875 million to $900 million. At September 30, our accounts receivable balance was $901 million, and our days sales outstanding was 39 days or 26 days net of deferred revenue. Reported debt was approximately $7 billion at September 30, and excess credit availability under our bank facility was approximately $1.5 billion. I will now turn the call back to Don.

Thanks, Ed. Before moving to Q&A, I'd like to make a few comments on our performance. Although core price was below our expectations, we continued to raise price and achieve productivity gains, which resulted in an improvement in our controllable costs as a percentage of revenue. If you adjust our EBITDA margins for the net impact of fuel, we would have seen a 50-basis-point improvement in the third quarter. We have reached the point in our volume performance where we are through the trough created by the recession, and expect that 2012 will have positive volume growth on a full year basis. We have completed the balance sheet restructuring process and have locked in a low cost of capital with no debt maturities for the next 6 years. We are focused on investing in our core business to expand our market capabilities and generate higher returns and cash flow. Our investors will continue to benefit from our commitment to cash, total cash returns, through share repurchase and dividends. At this time, operator, I'd like to open the call to questions.

[Operator Instructions] Our first question comes from Hamzah Mazari of Crédit Suisse.

The first question is just on pricing. Could you give a little more color on 2 items related to price? One is, what is the residential price running at? I assume it's well below 1%. And any color on how competitive that is, your negotiations with municipalities there? And when does that get begin to get better? And then secondly, could you remind us the CPI impact related to price? What the reset is for the second half of this year and what the reset is for next year? And how much of your business resets? Just if you could walk us through those 2 items?

Sure, Hamzah. This is Don. And I'll let Tod follow me with some information on CPI. As you know, half of our business is index-based, good portion of that is coming from the municipal sector, both in our collection and landfill lines of business. We have seen a little more attention given to the municipalities on business extensions as it relates to price this year and in the quarter than we first anticipated. Having said that, the team's doing a great job of still extending the business. As I've said to you before, job one is to protect the cash flow and job two is to grow it. So we're doing a great job of getting business extended. Although as we said before, this are private/public partnerships that we've enjoyed for a long time. And as these municipalities have been through this tough economy, they have looked for a little bit price relief. So we've given back a little price there in extending the business through quarter. But we think that frankly, as we said in our comments on the volume, we've come through the volume trough, and we're looking at positive volume in '12. Only a portion of our residential business renews every year or terminates every year through contracts. So as we work through this process, we think we're kind of at the bottom working our way out. So overall, we've seen still pretty good rational behavior in the marketplace on the residential business, but some of the municipalities, as you know, have been suffering with their tax base. But all-in-all, and you can look at the margin, you can see the cash flow generation. We're doing a good job on costs, and we're going to continue to be strong on pricing in the marketplace.

And Hamzah, on your second question, if I understood correctly, kind of that restricted headline price was about 1.3% currently. So we're getting something that's really pretty close to what the CPI had been on a trailing basis. And then as we look ahead to next year, we're expecting that 2011 CPI to be some place in the 3% range. And so what's detracting from that was really what Don was describing, which is some rollbacks with some municipalities to keep the work and work with them on a long-term basis, and then some churn with -- maybe we're securing some new business at good returns at current market rate, but certainly somewhat less than what we might have seen with bids that we've made 5 or 6 years ago.

Got you. That's helpful. And as a follow-up question. As you guys think about the free cash you're generating, it seems like you've bought back 4% of your shares. Do you -- what can we expect on buybacks over the next 12 months or looking to next year? Is 4% to 6% what we can expect out of you? How do you think about that? I realize you're going to be opportunistic in that process, but what can investors assume on a buyback?

Yes, Hamzah. In August there when the market dropped off, the Board came out with an authorization for $750 million of additional share repurchase because we were burning through the previous $400 million repurchase. So at September 30, we actually purchased $72 million out of that $750 million authorization. And October 1, we're sitting with $678 million available. And I think investors need to look at our past behavior, which is to complete that repurchase on an opportunistic basis over the time frame that we've described, which is really into the next 26 months.

Yes. And remember, Hamzah, that $750 million authorization was 2 years, over a 2-year period. And we, as Tod said, our track record is kind of a 3% to 4% a year. We're being opportunistic, so it gives us flexibility to do what we need to do.

And as Don said earlier, we're committed to -- obviously we're committed to investing in the business, both from an internal standpoint and with some acquisitions. But certainly, our dividend, which has a yield of over 3% and then that share repurchase gives the owners a consistent cash yield both direct and indirect, that share repurchase at somewhere in that 6.5%, 7% range.

Our next question comes from Al Kaschalk from Wedbush Security.

Don, just to push a little bit on this core price with the business extensions, et cetera, is it fair to say that this will be moderately lower in '12 and '13, given these are multi-year contract adjustments, if you will? Or is it just very much short-term period in defending the volume?

Let's start with, again, only a portion of that business reaches term every year. So we go through a portion of that book of business every year. We think, certainly a lot of it's driven by the economic conditions that the municipalities are living within. It's not -- it's, as I said, we're kind of coming through the trough now. We've got the volume declines behind us. We're looking at positive growth for next year. So we think we'll be in a better environment next year from that perspective. Now there is a rollover impact as you renew part of your business at a lower price, so that factors into your next year's price. But we're not giving '12 guidance, but what I think is important for everyone to understand is we're, as committed as we've ever been, to consistently and intelligently price our business. But we're also were very much focused on free cash flow. And so we're not going to walk away from good return business just because we've got to extend business at a lower price for the long-term resi customers. So we're not really disturbed by, it's just a fallout, if you will, of a long and tough economy. The sector is still fairly rational, and we'll work our way through it. So we'll give you more on that when we talk about '12 guidance. But I think all-in-all, if you look at the cash flow, look at the margin, the cost control, we're working through it pretty well, and I think people should be happy with that.

And Al, another thing to note that how we calculate price is a yield on the total book of business. And on the contracts that are just in the normal course of renewing, we are getting the resets at the levels we expected. So kind of that 1% to 1.5% range. It's just that due to the state of municipal finance, and when new contracts are -- come up for renewal or new business opportunities, it's a little bit lower pricing environment that did put pressure only on the one line of business, meaning the residential line of business. So we had positive price again across all lines of business in both the open and restricted market. It's just really in that residential business where you do see these type of issues on the average price.

And then maybe just a follow up and then -- and Don, you talked a little bit about, and I think you gave us an alert about the commodity market. Could you maybe just address these changes taking place in the market in terms of commodity prices and your multi-year strategy on looking at this evolving tone in that recycling as a greater component? Are you thinking anything different here in the near term as you stomach the near-term headwinds on the commodity price?

No, we're not. I mean, the commodity prices have settled down a little bit here starting Q4. And the fact is when we look at the investments for our recycling infrastructure, we look at those investments over the cycle. So we build our ROI performance kind of about a 10-year. We know commodities are going to flex up and down, but the fact of the matter is that the tonnage is evolving, the waste stream is changing, customer demand is changing, there is more attention on recycling today. We think it has really weathered the storm of this economy even through a downturn, our customers still are demanding more recycling services. So we need to invest correctly in that. So we're going to continue to do that. The -- as I said, so recycling is a little bit or commodity prices are down a little bit, but over the 10-year cycle, we think the investments still make a lot of sense for the company we invested in.

Your next question comes from Scott Levine of JPMorgan.

A bit surprised to hear you commit to -- or not really commit to, but suggest 2010 volumes will be positive. I'm just wondering whether that's a function really of some contract wins that you guys have had or whether you're seeing some things within this more cyclical side of your businesses that are surprising you to the upside. Would you agree that you're more upbeat regarding volume outlook than you were maybe 3 months ago? And a little bit of color as to why.

Well 3 months ago, we weren't even -- we don't want to talk about 2012, so that's for starters. But we've seen some good things in the quarter. Again, 9 sequential quarters of volume improvement. That's a pretty good story in and of itself. For the first time now, we're reporting positive volume here in Q3. That calls for a little celebration. We've seen some good signs in our temp roll off business. Special waste holding up pretty well, a lot of small jobs, are not just the big wins, but a lot of activity heading unilaterally on special waste. So we feel pretty good about that. In the trenches, so to speak, our customer defection is still very low at kind of 7%. We're doing a good job on net sales. So we're competing effectively in the markets. We're winning in a lot of our markets on that basis. We've got a couple of big wins here, the privatization of Toledo certainly is a nice rollover for us. We've got the win in San Jose. So we've got the -- the organization is very focused on market growth across 243 markets on finding sort of niches where we can take advantage of volumes that exist there that maybe weren't there before. And we're still very effectively moving price out into the business. So we think we've lived through the trough here pretty well. And well we're not economists, we're not going to necessarily play that role for you. We were thinking '12 will be a good positive volume year for us.

That's good to hear. And one follow-up, I think, Tod, you mentioned that the positive effect of CPI-linked resets not expected to really have much impact until the second half of '12, is that a function of the timing of the resets within your CPI-linked business in general that we shouldn't expect much benefit in the first half, not really pricing through the middle of next year, but those trends are going to be more a function of just competitive market trends in general, a little bit more color there.

Well I think it goes really in 2 steps. And the first step would be a little bit more muted and then we get a fair bit of particularly some of our Western franchise, price resets on July 1 and again in September, October 1. So there's probably 2 steps to it. And again, we have this municipal dynamic that Don described. We will just have to see how that sector unfolds. But as Don said, we've been successful at both retaining some of our business and then also securing this business at decent returns. So that churn rollback activity may mute a little bit the pricing that we'd see in that restricted residential side of the business or the franchise side of the business.

Our next question comes from Bill Fisher of Raymond James.

I guess maybe for Tod, you mentioned the SG&A, you've been spending some on productivity for a while initiatives. And you've touch on automated side loader. Anything else that you're investing in that you feel could start having some benefits in '12 and '13?

Maybe I should let Don talk to those initiatives. I'll give you a kind of a dollar sense that we might be spending somewhere on, an annual basis, in the range of 20 to 30 basis points on P&L. And certainly, we're putting some capital into that also in terms of higher cost of automated side load trucks, for example, or a CNG vehicle. So there is both the P&L and the capital cash flow spend are investment for that.

Thanks, Tod. Bill, we're still building out our fleet initiative, and that's going to carry through '12, '13 and into '14. It takes a lot of hard work and time to go through a change management initiative of this size. So we're having great results with it. We just -- we really are just scratching the surface. So '12 will be a big year for us there. We've continued to invest in our procurement group on spending. The national account program here, we think national account business is a good business. Again, customer buying habits are changing there. There's a substantial number of customers that we think would want to buy more regionally and nationally if we have the right skill set and service offering for them. So we're building out that capability. And those things will start to pay big dividends in '12 and beyond. But these things are all slow-moving as far as the integration process and the change management. So these things don't get done overnight. But we've been working on some of these things now all year with really a drag on earnings. And next year we'll start to see some of those things begin to pay dividends for us.

Okay, great. And just to follow up on that, would some of that be more like on the maintenance side or just general productivity on vehicles?

Well, experts would tell you that if you improve your maintenance, you're going to improve productivity, you're going to improve safety, you're going to improve driver turnover. So we're measuring our fleet initiative value just on the R&M line, Bill. And the other value or benefit that we get will come. But we're -- we'll do it with the ROI on the investments just against the R&M expense line.

Our next question comes from Corey Greendale of First Analysis.

Ed, just on the guidance, have you changed your CapEx outlook? What are you assuming on CapEx? And if you could just kind of remind us in your -- prior to this quarter, in your guidance have you been assuming commodity prices would come down or is that a change?

Well commodity pricing is something that we just saw here in mid-October, so it is a change. And again, there's some seasonality, as you know, to commodities. So where they are today or where they may be a month or 2 from now maybe very different from where they are in the spring time, when -- particularly when Asia starts to build up activity in preparation for the following holiday season. Regarding capital spend, yes, we -- our original free cash flow guidance is $875 million to $900 million. Again, we're very comfortable with frankly, the higher end of that range. We have stepped up our capital spend this year. I think our original guidance was probably somewhere in the $740 million range, and we're probably about $100 million more than that. Based upon some of these contracts and the opportunities that we saw there to get decent return on that additional capital. But also based upon, again, the uncertainty with bonus appreciation, where we're going to take advantage of 100% bonus appreciation again this year. Next year it's supposed to go to 50%. Who knows what Congress is going to do, but we're planning that it goes to 50%, and therefore, we have a little bit of capital pull forward activity here to take advantage of that.

But Corey, you know that we're pretty consistent on the capital spend, right? So we're keeping our fleet age consistent. We're investing correctly in automation in CNG vehicles, but we're reallocating our CapEx spend to do that, and we've invested some in recycling, as we've talked about. But generally speaking, it's pretty flat spend for us. But as Tod said, we always keep a little powder dry for these winds in the municipal side, and then we just got to take advantage of the tax benefits when we get them. So -- but generally speaking, it's a pretty consistent spend approach here.

Right. That's -- right now, we're right at about 10% of revenue, maybe slightly over 10% of revenue for our capital spend. And as the business grows, there needs to be a little bit more capital invested for that growth, if we get some modest growth next year.

That's helpful. Just one other follow-up on the volume side. Don, you've mentioned some new contracts and municipalities looking to outsource as a budgetary control. On the other side of that, there was the Dallas announcement about flow control. Is that something that's going to impact you in a meaningful way? And is that something that you're seeing more broadly or does that seem limited to Dallas at this point?

Well, they will impact us a little bit in '12 because we've got a pretty good landfill position there in Dallas. And so now we're going to have to bring over our volume there going forward. But it's not material. We'll give you more on that when we give you guidance. But that's not keeping us up at night. The fact is, Dallas is really one of the few major cities that has a landfill of any size like that, that flow control could be an impact. And when you think about the other big markets, places like L.A., Chicago, these people own their own landfill. So it's kind of an anomaly to have a city that size of Dallas that has the ability to legally do flow control. So we're not concerned about it overall. You could see a little movement over the next few years and some of them maybe smaller counties and municipalities. But it's not anything for us to worry about.

That's also very unique because that site has a lot -- a long life.

Yes, yes. That's a great point, Tod. I mean, if --

As far as the value of cash flow of that city, they beat their budget shortfall.

Yes. That landfill is a really, really big hole. It's Texas, right? There's a lot of land in Texas, so.

Our last question comes from Michael Hoffman of Wunderlich.

If we could revisit price environment for a second. One of the things you've talked about before, Don, is the willingness to defend business. And that defense is across your experiences being across all the business lines? Or is this pressure for a defense basis mostly that's residential? I just want to make sure I understand this mix issue correctly?

Well let's talk about it just, I guess, as far as philosophically. Now, on the collection line, the collection lines of business, the organization, the industry has been able to consistently do a good job on pricing over the last several years prior to this economic malaise, right, that we're -- that we've kind of have been through here. So year-on-year-on-year, good positive price growth. You've got these collection accounts that have great returns, and then you get some competitive activity. You get some municipal activity to try to take some price out of that collection. Philosophically, that's the collection business. On the landfill side of business, again half of our business there comes from municipalities. These municipalities don't compete with us. They're on large or long-term contracts with kind of CPI escalators. We take a probably a similar approach to that kind of volume. But then we have open market landfill business. These are people who are in the business with garbage trucks competing with us, and we don't necessarily take the same approach there. So we've -- we; consistently raised prices there. As I said, about 3% on landfill in total. On that nonrestricted open market volume in the landfill, it's been more like 4% to 5%. So we've consistently priced that business. And if those volumes aren't willing to pay a higher price, then we let the volume leave our system. So we're not -- we're still really safeguarding the value of our assets. We think the landfills certainly should be able to be priced higher, and that's our philosophy. So when I say fiercely defend, think collection business, think municipal business, don't necessarily think open market landfill. It's a different sort of a pricing strategy theory. On the collection side, you've got -- you do have these small haulers who aren't -- don't have shareholders and don't have sort of the same sort of rationale in their pricing behavior, who get a little fidgety where there's no organic growth and tend to compete a little harder. We have done a good job of defending our business in the commercial small container business. And that tends to be a little more competitive behavior. In the residential system, these are much bigger accounts; primarily a lot of times larger companies because of the big capital outlay. They tend to be more rational. But you have cities who are really looking for some price relief. And with these long-term contracts and relationships, we need to step up and extend that business, and we do that. So it's all-in-all, that really is the reason that we're at 70 bps price than a little lower than maybe we thought we'd be. But overall, we're still pricing every month in the marketplace through our RPM process. We continue to look to adjust services or upsell customers. We actually even have a couple of examples where we've actually raised prices at municipal accounts, and extended business with additional services. So we're doing everything we can to do there. It's working pretty well for us. And as I said, I think we're at the trough here, and we're going to come through it. So other than that, it's always been a competitive business. It's -- the open market's, I think, been consistent with what we've seen over the last couple of quarters. And the teams did a great job on the cost control side. And if you look at the margin and the cash flow, you can see that defending good business is the right strategy. And it doesn't mean that we're out there lowering prices on new business across the board, but we are being selective and opportunistic for certain opportunities.

Okay. And then I know you're not doing guidance, but we have to model. So if I frame something, can you just tell me if we're in the right ballpark? Thinking about the business environment being what it is today, is it the right way to think about 2012 core prices kind of 1% to 2% because you did get a 1.5% CPI escalator to -- for 2010. Volumes are 0% to 1%, acquisitions are kind of 1% to 2%, fuel is flat because your -- this last year, it's about $3.84 and you're at $3.83 and recycling is the unknown.

Well that's a nice try, Michael, but we're not giving 2012 guidance. So we -- I'm willing to tell you that we think the volume is -- we're through the trough. And as I said, 2012 looks positive. I think pricing we're coming to the trough, and we're climbing out of it pretty well. We have it reengaged, as you know, in the acquisition business here. And we've got a little pipeline of some acquisitions that we're doing now. We'll do some of those in '12 consistently as we've said. And overall, we're still focused on our total cash returns for our shareholders, and we're going to be very efficient in the way we do that through growth internal -- to growth development of our recycling the assets, growth around acquisitions, and we're going to manage the heck out of the business and stay focused on what we do really well. And we're going to continue to produce strong cash flow and solid margins. So that's kind of the heritage here. And that's what we'll continue to do in '12. And that's just close to the guidance that you're going to get out of me. Anything, Tod?

No, that was good. That sums it up.

Well, that works for you. Well, do you expect free cash flow to be up next year or flat?

Michael, we'll talk to you in January or early February.

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

Thanks, operator. In closing, I'd just like to say thank you to the entire Republic team for all your hard work, and the performance here in the third quarter. We are focused on business fundamentals that deliver continued success here at Republic Services. As a reminder, a recording of this call is available through November 3, 2011 by calling (203) 369-1018. Additionally, I want to point out that our SEC filings, our earnings press release, which includes GAAP reconciliation tables and a discussion of business activities, along with the recording of this call, are all available on Republic's website at republicservices.com. And finally, I want to remind you that Republic's management team routinely participates in investor conferences. When presentations are scheduled, the dates and times are posted on our website, along with instructions for listening to the live webcast of the event. Thanks for spending time with us today, and have a good evening.

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