Republic Services Inc (RSG) 2010 Q2 法說會逐字稿

Good afternoon, and welcome to the second 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 a 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.

Welcome and good afternoon and thank you for joining us. I would like to welcome everyone to Republic Services' Q2 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 second quarter and first half year performance.

Before we get started I would like to take a moment to remind everyone that some of the information that we discuss today 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 we that we discuss today is time-sensitive. If in the future you listen to a rebroadcast or recording of this conference call, you should be sensitive to the date of the original call, which is July 29, 2010. Please note that this call is the property of Republic Services, Incorporated. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Republic Services is strictly prohibited.

I'm very pleased to report that Republic Services has again outperformed in the second quarter of 2010 due to our continued commitment on -- to improving return on investment, expanding EBITDA margins, and generating additional free cash flow. We have seen a 370 basis point sequential improvement in our volume. And although core prices slightly lowered to the impact of CPI, total price exceeds costs and EBITDA margins continue to expand. Accordingly, we are raising our EPS and free cash flow guidance. We are increasing our adjusted EPS guidance to a new range of $1.69 to $1.71 per share from $1.63 to $1.67 per share. Our adjusted free cash flow guidance is increasing by $25 million, the new range -- to a new range of $725 million to $750 million. Additionally, our board of directors has approved a 5% increase in our quarterly dividend to $0.20 per share, payable October 15, 2010. This action represents the board executing the first phase of our cash utilization strategy, and we expect to finalize the second phase, relating to share repurchase, in the next board meeting in the early part of November. We will discuss the share repurchase plan at that time.

As we complete our integration process this year, Republic has significant operating leverage to benefit from the economic recovery and is positioned to achieve record margin performance. Now I would like to turn the call over to Don Slager, our President and Chief Operating Officer, to discuss the second quarter highlights. Don?

Thanks, Jim. Our second quarter results reflect our continued focus on safety, cost control, operating efficiency, customer service, and pricing. Financial highlights for the second quarter are, we have revenue of approximately $2.1 billion, Republic had positive internal growth of 0.9%, this is the first time we had positive internal growth since Q3 2008. We expect to have positive total revenue growth in the second half of 2010. Net income, adjusted primarily for merger-related expenses, was $166.4 million, or $0.43 per share.

Our adjusted EBITDA margin was 31.3%. This strong performance demonstrated the strength of our field organization to maintain the focus on pricing in a low inflation environment, and cost competitive structure, while completing the integration process. Our total price improvement including fuel surcharges and higher commodity values was 4.2%. Core price increase for the second quarter was 1.6%. Our pricing was down sequentially due to the impact of lower CPI on our index-based business, which represents 50% of total revenue. We continue the use our ROI pricing tools to be sure all business activity meets our requirements. Our volumes declined year-over-year by 3.3%, which is a 370 basis points improvement versus the first quarter.

Our commercial collection business started to see increases in service frequency and we continue to see volume improvement in our industrial and landfill lines of business. We expect that by the fourth quarter our volumes will be flat to slightly positive.

Year-to-date adjusted free cash flow was $402 million, or $1.05 per share. This is a 124% of adjusted book earnings. As you know, free cash flow is the best measure of quality earnings. We remain on track to meet synergy target of $185 million to $190 million, by year end. This strong performance has enabled us to increase our quarterly dividend and increase our earnings and free cash flow guidance as Jim just mentioned.

Before moving on Tod's financial review, I would like to mention a few operational highlights in the quarter. First, we continue to experience positive results from our safety initiatives as accident frequency in the quarter is down more than 10% compared to last year. This is an area of keen focus for Republic and a continuance of a positive multi-year trend. Second, we are seeing a more normal seasonal increase in our temporary roll up business. Although level of business activity is down significantly from two years ago, we have thought seen this level of sequential percentage increase since 2007. Third, during the first half of 2010, we have continued to expand our fleet of alternative energy vehicles with the purchase of 155 natural gas trucks. We will take delivery of an additional 110 natural gas fuel trucks by the end of 2010. Fourth, we brought two additional single stream recycling facilities on line in the Twin Cities and Buffalo marketplaces, and plan to complete one more in central Florida by the end of the year.

I would like to thank our field operations for commitment to achieving a high level of performance in all aspects of our business. Their hard work and ability to execute our operating plan is clearly evidenced in our results. I will turn the call over to Tod for a recap of the second quarter financial performance.

Thanks, Don. Second quarter 2010 revenue, as Don said, was $2.1 billion. After considering the impact of revenues from operations divested in 2009, same store revenue increased $18.4 million, or almost 1%. Again, as Don mentioned earlier, this is the first positive internal growth since the third quarter of 2008, and consists of the following; core price growth of 1.6%.

In total, the collection lines of business saw price increase of about 1.9% in the second quarter. This collection average includes commercial price of about 2%, industrial price a little over 2.5%, and residential price of approximately 1.5%. I would like to remind everybody that our residential business has the largest percentage of index-based customers at over 70% indexed, and was impacted by the low CPI levels during the past 18 months.

We still expect current year CPI to be positive, but at lower levels than originally anticipated . Now, our landfill pricing. Landfill pricing overall increased by 1%. This includes municipal solid waste of 2.7%, and that was partially offset by positive but relatively lower priced C&D and special waste event growth in the quarter. Again, we expect to achieve 2% price for the full year, which within our original guidance range. In the second half, we will benefit from continued strength in our open market price, we will anniversary out lower 2009 index pricing and we will benefit from a 1% increase in environmental recovery fees that began in July.

Now, let's talk briefly about recycling. Recycling commodity revenue had an increase of 1.5%. Prices increased approximately 67%, to an average of $120 a ton in the current quarter, from $72 per ton in the prior year. Second quarter (inaudible) commodity volume of 464,000 tons was up sequentially by about 9%. However, it was flat with the prior year. Currently we are seeing July commodity prices of about $110 per ton, a decrease of $10 compared to the second quarter average.

Lastly, on the price side, fuel recovery fee increase of 1.1%. The increase in fuel recovery fees relates to an increase, obviously, in the fuel costs. The average price per gallon of diesel increased to $3.03 in the second quarter of 2010, from a low $2.33 in the prior year. And it was $2.85 in the first quarter. I might also mention that current fuel prices are $2.90 a gallon, so they've come down a little bit.

Now, let's talk about volumes. Volumes were down only about 3.3%. As Don said, we saw a sequential improvement from Q1 2010 of about 370 basis points. This is favorable to our original expectations where we thought the second quarter would be a negative 4% to 5%. Where is this relatively better performance coming from? Well, we are seeing improvement trends in the collection business. Last year collection volume declines of over 8% the second quarter, year-over-year, and this year we are seeing declines have improved and are in the low single digits at approximately 4% decline. Volumes are also improving in all collection lines sequentially, led by industrial with a 520 basis point increase in the first quarter of 2010. This improvement reflects an increase in permanent calls, primarily from manufacturing customers, and also a more normal cyclical up tick from the temporary business. This level of seasonality was absent in the prior year.

Sequential increase in commercial volumes driven by continued improvement in net service changes and also improvement in retention rates. Now our landfill volumes year-over-year had growth of 2.6%. This is a substantial improvement from the Q1 where we saw year-over-year volume loss of negative 8%. Sequentially improvements in MS, CD and most significantly special waste volumes. Now let's talk briefly about our Q2 margins.

Q2 EBITDA margin increased by 60 basis points excluding divestiture losses, restructuring charges, and cost to achieve synergies. Q2 EBITDA margin was 31.3%, compared to 30.7% in the prior year, and this margin both the Q2 and year to date are somewhat ahead of our original guidance. Most importantly, this was widespread margin improvement that positively impacted most cost categories.

I will briefly comment on some of the significant changes in cost as a percentage of revenue the details of which are available on our web site and will be included in our 10q filing which is going out I believe today. First fuel, fuel expense increased 90 basis points, due to the 30% increase in the cost of diesel. As I mentioned earlier, diesel prices were $3.33 in the Q2 up from $2.33 in the Q2 of 2009. Partially offsetting the increase in fuel costs was increase in the related fuel recovery fees. Revenue from this resulted in net decrease in EBITDA margin of about 20 basis points.

Second our recycling costs of goods sold, 60 basis point increase relating to increases in rebates to customers for volumes delivered to -- costs of goods sold increased to average of $38 a ton to $20 a ton in the prior year. Commodity revenue increases more than offset this cost increase and that resulted in a increase spread of about $30 per ton. Net impact was a favorable 60 basis point improvement to EBITDA margin coming from commodities.

Third, labor and related labor benefit cost we saw a 40 basis point improvement in margin here and primarily due to synergy related staffing reductions due to consolidation in overlapped markets favorable reductions, health care claims and overall improvement in the Company's collection productivity. Fourth, our transfer and disposal costs, we saw a 60 basis point improvement here this margin benefit is coming from incremental landfill volumes that typically carry little or no associated disposal costs.

Fifth, maintenance and repair costs, we saw 40 basis point improvement in margin here, primarily due to procurement driven cost reductions and the benefit realized from our focus on fleet and heavy equipment maintenance practices. Sixth, our transportation and sub contract expenses, we saw a 20 basis point improvement here, resulting primarily from synergy related cost reductions where we redirected waste streams within our more efficient transfer and disposal network.

Next is risk management, as Don said we got good experience from a safety stand point and we saw 30 basis point improvement in margins related to required reserves due to improved frequency of claims, favorable claims development, and also the realization of cost savings for third party premiums and surety costs. Finally SG&A, typically SG&A runs around 10% of revenue. We are seeing SG&A costs excluding costs to achieve synergies of approximately 9.8%. This compares to 10% of revenue in the prior year.

This 20 basis point improvement in margin relates to the leverage benefit of reducing expenses by $5 million, while maintaining a constant revenue base. The favorable variance includes reductions in salaries and other SG&A expenses of about $9 million, however this was partially offset by increases in bad debt provision. You might recall last year we had very low bad debts in the Q2 due to some recoveries for companies coming out of bankruptcy. This year it's a more normal amount of bad debt at about $8 million or 40 basis points of revenue. These changes comprise a majority of the year-over-year 60 basis point improvement in EBITDA margin.

Our DD&A improved by 30 basis point in this primarily relates to reduction in landfill amortization expense. Cumulative impact of expansions and permanent modifications that extend the life and reduce construction costs resulted in a favorable reduction in the per rate charge for landfill air space consume. I might remind everybody DD&A is a percentage of revenue approximately 11.3%. This level of DD&A is higher than capital spending as a percentage of revenues due to the amortization of intangibles arising out of our merger.

Next is interest expense. Again I also want to remind everyone that included in interest expense is about $24 million of non-cash amortization. As we continue to refinance our debt, the portion related to the Allied debt discount will decline.

Now let me talk briefly about our free cash flow for the six months ended June 30. Year to date free cash flow was $402 million. This consisted of cash from operating activities of $595 million, property and equipment received of $328 million, we expect that we will be at the full $790 million of capital spend by the end of the year, so that's unchanged. Plus proceeds from the sale of property of $13 million. Plus the merger related expenditures net of tax of about $12 million, we also as you will recall had a tax settlement related to some legacy issues arriving of $110 million, that was paid in the first half of the year. If we excluded that the adjusted free cash flow would be $402 million. Again, we define adjusted free cash flow based on CapEx received during the period and remind everybody we included a reconciliation of the timing difference between CapEx received versus CapEx paid and it's in our 8k.

Now turning to our balance sheet, at June 30, our accounts receivable balance was $898 million, and our day sales outstanding was just under 40 days, or 25 days net of deferred revenue. Reported debt was $7.1 billion at June 30, and we had excess credit availability under our bank facility of approximately $930 million. Now I will turn the call back to

Thanks Tod. Don and I would like to comment on the process for executive transition here at Republic. As a organization we believe that every successful company needs a plan to build, develop, and retain the appropriate level of management talent. Board of directors has been focused on success planning a high priority for many years. One of the benefits of the merger was a much stronger talent base to draw from. When I announced my intention to retire we began to execute the details of our plan. With a goal to ensure a seamless transition. I'm extremely confident that we are on the course to continue our track record of success and full faith in Don to lead the next chapter of Republic's success.

Most of the investment community already knows Don. If you don't I can tell you he has a proven track record as a leader, extensive experience in the industry, and maybe most important, a deep sense of commitment to our Company shareholders. Over the course of the next five months I will be working with Don to transition responsibilities and ensure a smooth and orderly succession. I look forward to participating in the 2011 planning process. And I'm especially committed to finalizing and closing out the first successful large scale merger in the solid waste industry before I leave Republic Services. Now I would like to turn it over to Don.

Thanks Jim, I agree our transition will be a smooth one. Our succession announcement and related plan was well received across the organization and our transition plan is on track. As you already know, I selected Kevin Walbridge to join the management team in Phoenix to serve as Executive Vice President of operations. I will be working closely with Kevin and his team as I transition my day-to-day operating responsibilities. I look forward serving our employees, customers and our shareholders as CEO January 1st. Jim and I built a strong team at Republic and I have great appreciation for their abilities and their contributions to our success. I welcome the opportunity to work with such a fine group of people. The entire team is committed to fulfilling the goals that Jim and I laid out for the Company at the beginning of the year. And likewise they all share a strong belief in our Company and our strategy.

Republic has a very clear management objective, several objectives, that I would like to reiterate specifically. We will maintain a safe and high quality work environment for our people. We will continually improve our customers experience and ensure that we are meeting their needs and managing their waste streams affectively. We will improve our return on capital through a disciplined approach to cost management, pricing, and capital allocation. We will intelligently grow our business through superior market planning and strategic investments. We will achieve and maintain lasting operational excellence throughout the organization and we will continually develop our people, build our talent, and expand the organizations capability. This of course all leads to our core objectives which are to maintain a strong capital structure, and generate consistent high levels of free cash flow and return increasing amounts of free cash flow to shareholders through dividends and share repurchase. There is nothing new in these objectives so if it sounds like more of the same, well it is.

This focus has delivered significant total returns to stake holders during the past 12 years and we are committed to staying on this path. I'm confident that with the Republic team will optimize the value and strength of our assets and market position, we will continue to deliver on the benefits of the merger, and further Republic's track record of solid execution and value creation. Thanks again to our field management team for delivering outstanding performance during the first half of 2010. I ask our operator to join the call as we open the lines for questions.

Our first question comes from Scott Levine, your line is open.

Thank you, good afternoon, guys. Hoping you could provide a little bit more color regarding the pricing trends that you are seeing in the marketplace. It sounds like discipline but CPI is coming in little bit lower than you expected and maybe a bit more color regarding churn rates that you are seeing within your business as well.

Yes, sure, Scott this is Don. When we first did guidance and built our plan we didn't expect CPI to dip down to 1.1%, in the middle of the year like it did. So again most of the reason for the 1.6% pricing is that CPI adjustment, half our business is CPI index. That's what is driving that. We are seeing good pricing in the marketplace, we got a good process build where we are reviewing the customers annually falling in to equal buckets throughout the year process which works well for us. So we got good pricing across all lines of business we are pretty happy with what we are seeing out there, what was the other part of the question?

Regarding the churn rates, are you seeing any change there?

We are down around 7% for our business for the quarter. We've always looked at that 8% being a good range. We are pretty flat.

Understood. Thought then on SG&A if I can. You went below 10% of sales here, I think you guys signaled 10% is what we should expect, is this about as low as you think it can get and we hold here or is it conceivable we can go lower?

It's realistic we can go lower. Obviously the SG&A is a function of the economy and in the volumes come back we could leverage in to the 9% plus range.

We talked about holding the dollars the reinvestment, whole dollar reinvestment.

As the business grows the percentage drops. Exactly. I think but we are committed to spending that level maintain the quality that we have within the organization.

We are fully staffed. All the departments are functioning well as the volume comes back and the revenue goes up, then it's just math.

Got it. Great, thank you.

The next question comes from Hamzah Mazari with Credit Suisse, your line is open.

Thank you. First question, just how much of your volume improvement is coming from your competitive market and what is price running at in those markets relative to your franchise markets and how much of your residential business is CPI and what particular regions?

The residential business is about 70% CPI. And I think when you look at -- now we do have across the entire country, CPI based contracts but there is a heavier weighting of the CPI in the south and particularly in the southwest and west, where the franchise encompass all lines of business.

By the very nature the franchises business are tied to the CPI index type situations so you tend to get a little bit more pricing in your open market opportunities.

We have modeled CPI and the roll over of CPI quarter by quarter and we have some of the contracts that are anniversarying out as we look in to the Q3 or Q4 the current CPI is a little bit lower at least within this year quarter by quarter. We see up ticks in the second half there.

Okay. Just follow-up question. You talked about normal seasonality returning on the volume side, are you beginning to see operating leverage in terms of incremental EBITDA margin flow through or is it too early to tell you and you need more of a bounce too early to tell you and you need more of a bounce in volumes on both the industrial and the commercial side returning?

It's a little too early while we are seeing the year-over-year volume numbers decline, right, or the gaps decline we are negative in year over year in volume, 3.3%. So we have got to get to a positive environment. That's when we will see the operating leverage as we said in the comments we expect to be zero or slight positive volume situation by a --

I think too that the 370 basis points of improvement in volume, all right is not just the comp not the volume comping out here, we have seen some marginal increases in our small container business through service increases and industrial in Don's comments we pointed out. And we are starting to see some increased landfill volumes especially surrounding special waste. We are seeing some improvement in the economy and we do believe that the business does have operating leverage in it going forward. But I think it's as Don said it's a little early to tell right now when we look at earnings being almost 50/50 versus what -- in a traditional year when we saw traditional seasonality it was 48/50. So I think, we believe the economy is getting a little bit better. We believe that the business is from a pricing perspective is operating on line. We will be at the lower end of our guidance in pricing for full year. So all in all we I mean I believe this is a great quarter. Again, the business is operating just as we saw it would. Other than the idea that the CPI has got a head wind.

Right. Makes sense, thank you very much.

Next question comes from Jon Ellis with Bank of America Merrill Lynch, your line is open.

First question on pricing. Can you help us to understand in the second half of the year what percentage of your revenue is going to be potentially impacted by any further fluctuations in CPI, more is tied to first half of the year, help us understand exposure in the second half of the year and related question there would be what your assumptions are for competitive versus index based pricing for the second half of the year.

I think the pricing now I'm thinking of some of our larger contracts, we have for example Las Vegas, those contracts are July CPI, some larger west coast contracts are September. So I don't know that it's necessarily heavily waited towards the first half it just depends on we are going to get a little bit more CPI price in the second half but that's really a function of that book of contracts that we have and how the terms were written. And how they reset last year versus this year. I don't necessarily have I can't say two-thirds of our contracts are reset in the second half and one-third in the fist half. I don't have that statistic.

To be clear, that means that theoretically you could see the same degree of volatility in the second half of the year if CPI fluctuates on the upside or the down side in the last six months.

A lot of what we are going to see this year is pretty well set. Now that we are halfway through the year. So as we analyze our contracts, we will get a little bit more CPI price in the second half of the year. I think the volatility, you bring up a good point, the volatility CPI picks back up, then we will have a little bit more CPI as we roll in to 2011. It's probably more of 2011 issue than a 2010 issue.

Okay. Then just second question on the repurchases I saw you obviously increased the dividend but you're holding off on the clarification on repurchases, help us understand why we wait until November, why not provide us with sense now as to what your repurchase plans are.

I think one it's a process that we embarked upon early part of last year to start to review where we were in the integration and what the capabilities of the business were to generate significant amounts of free cash flow the other thing is we have been clear that we are looking to announce a share repurchase to be e fact waited in 2007 after we finished completion of our delevering program and so I think it's consistent with the way we approached it and planned that the board will make the decision on share repurchase in the Q3 call. I think we have been clear to say that in a number of conferences we have been at and the order of magnitude we talk apout the share repurchase to be is $300 million to $400 million to be acted on in the 2011 calendar year, and probably with a buy bias to the upper end of that. We will be paying down more debt in the second half of this year and making the board will be looking at that as Jim indicated in November.

Vance Edelson with Morgan Stanley, your line is open.

Regarding the targeted run rate for synergies by year end, when we think about modeling out 2011 would be reasonable to assume more incremental synergies next year, As part of the same question maybe if you could provide update on automating your routes in the past you mentioned you are not quite way halfway through that process.

Yes. Well, first of all I think we have steadily moved the synergies up as we moved through the year and actually in to last year. I think we are reaching sort of a plateau here, there might be a little bit of upside but I think the business is pretty well integrated by the end of probably October we should be pretty much done with this, and you can also see there is not a lot of cost to achieve synergy. We are at maybe 185, run rate, I think our guidance is 185 to 190. And we will be we will be at the 190 probably as we wrap up this year. And we had talks in the past about strategic projects which the Company is working on we are actually spending P&L dollars today, to focus on certain number of areas but the benefits of those really come in probably in 2012 and 2013. So the whole synergy psych and will the cost to achieve cycle really ends in the December.

As far as automation goes, we got plan coming together now essentially five year plan to automate the remaining parts of our residential business that is automatable, and we will be working that through the priorities and as contracts come available to do that over the next five years, those will have bigger turns attached to them, we got a lot of great success we will continue to do that over the next five years.

That's helpful. As a quick follow up can you provide insight in to volume trends in to quarter and the July, has the improvement been fairly steady?

A little bit better in June I think. But again we are not about to declare a victory on the economy. It was a little bit better in June.

Can you comment on July or the numbers aren't in yet.

The only thing we can comment on July, it's July.

We had seasonality that we didn't see last year. Another good fact in the trend.

Got it, thanks, guys.

Our next question comes from Corey Greendale with First Analysis, your line is open.

Good afternoon. I had a question about the pricing, can you help us model the environmental fee increase like how many basis points would that add to pricing before pricing as that rolls out?

Well it's about a 1% increase effective July 1st. So for the fiscal year, it's probably about 20 basis points full year.

When we talk about thrower ends of our guidance we are still at about that 2% range or 1.8% if you backed out the impact of the environmental fee that will take affect in July.

Okay. Then I realize that CPI correct me if there is wrong, CPI related volumes those aren't as much the more cyclical or incremental volumes as the economy recovers but correct me if that's wrong but I think you said that you expect the margin on incremental volume as it returns to be in the range of 40 to 45%.

That's right.

Presumably price is a variable in determining that so I want to confirm that pricing is strong enough that it makes sense.

We believe we are going to have, we will be at or exceeding our guidance for EBITDA margins, which is 31%.

Remember Corey, you know that incremental margin as a function of density, a function of capacity, that we have in the system with trucks that are parked from we had several hundred trucks moth balled ready to go back in service, SG&A discussion we had before where we are fully staffed don't have to add to overhead to manage the new volume. Again that incremental margin is a function of that.

CPI, you know, pricing, remember CPI is lower we are in the low cost inflation situation as well, as Jim said in his comments the key that our pricing activities produce more revenue than our total cost inflation. To continue that margin expansion. And we talked about getting anywhere from 50 bps to 150 bps, you know of price additional to inflation. And we were successful in doing that that's the key so the whole CPI doesn't worry us overall. And if CPI comes back a little inflation is good and we will see that build back. I think we are in a good place for next year.

Next question is from Michael Hoffman with Wunderlich.

For the free cashflow guidance to work you got to have a pretty big working capital swing in the second half. Can you tell us where the flexion is in that what is going first and second half?

That's pretty straight forward. First of all, with a seasonal up tick, we will see it in the queue, our receivables went up by $60 million close to $900 million. So that's just we are carrying higher receivables in the summer months typically that drops off in November, December, and more normal seasonal cycle.

The other is if you remember at the end of last year our payables kind of spiked up in December, we paid a lot of cash out on payables and so there is a normal cycle in payables also which is another maybe $50 million or so. So I think those are a couple of the big items and it's really working capital and as we look at the year again, the CapEx we think is going to be pretty much in line with our guidance, again we move free cash flow up consistent with where the earnings was going. And I think depending on what happens with taxes, there has been some noise about bonus depreciation I'm not sure congress can get its act together on anything but if they did maybe we would have some further upside if bonus depreciation was put back in for 2010 We feel very comfortable with that 725 to 750. We think we are in a very strong position from a cash flow standpoint, delevering through the end of this year, and strong cash flow position next year.

Okay. Just this isn't my second question, I wanted to make sure I understood. The correction of working capital in the Q4 from modeling stand point, right?

Yes, that's why I think the cash -- capital headwinds first half of the year.

You are targeting the Q4 for a big part of the correction?

When we speak to cashflows you speak for the full year. You get noise from cash payment in terms of timing of landfill construction. That sort of thing. It's always lumpy. We will have substantial debt pay down in the second half.

We got a tremendous amount of confidence.

Okay. The share buy back where is the rating agency's head about the dividend policy and the share buy back and will you not buy something back in December? If you announce it in November you wouldn't buy anything in December?

I think first talk about the rating agencies we discussed with them in recent annual update meetings what our plans were so they fully understand what the Company plan is and support the ratings of the Company so we are confident we are in a good position from that perspective. As far as timing that's a decision the board of directors will make at the meeting in early November and it might start in late Q4 but no later than Q1.

The next question comes from Al Kaschalk with Wedbush Securities, your line is open.

It's Kevin filling in for Al. Most of my questions have been answered but a follow up on the volume I guess discussion. I see you guys saw improvements in both commercial and special waste volumes but where there is specific regions in the country where most of that improvement came from or was it more broad based across the entire country?

I think we again probably similar to what we reported in the Q1 call, we saw anecdotal evidence of manufacturing and late industry improving in the Midwest and mid Atlantic states, still not as strong recovery in the south and the west. And so that's where we are really seeing the up ticks there and again, those are good signs special line of business seeing a very strong funnel so we don't see any reason to anticipate any dropoff in special waste, in fact we would predict acceleration.

Appreciate it, thanks.

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

I'm pleased with our Q2 and our first half year results. I know that Don already mentioned this but I wanted to add my appreciation to the field organization and management team here at corporate, for their extraordinary efforts through the integration process and for their excellent financial performance through the first half of 2010.

I would like to remind everybody on the call that there is a recording, it will be available through August 5th by calling 203-369-3404. Additionally I want to point out that our SEC filings and discussion of our business activities along with the recording of this call are available on Republic website at republicservices.com. And finally remind you that Republic's management team routinely participates in investor conferences. When presentations are scheduled the dates and times are on our website, along with the instructions for listening to the live webcast of the event. With that I would like to thank everyone for spending time with us today and have a good evening.