美國廢棄物管理公司 (WM) 2010 Q2 法說會逐字稿

Good morning, my name is Thea and I will be the conference operator today. At this time, I would like to welcome everyone to the second quarter 2010 earnings release conference call. After the speaker's remarks there will be a question-and-answer session. (Operator Instructions) Thank you, I will now turn the conference over to Jim Alderson, Director Investor Relations. Sir, you may begin.

Thank you Thea. Good morning everyone and thank you for joining us for our second quarter 2010 earnings conference call. With me this morning are David Steiner, Chief Executive Officer; and Bob Simpson, Senior Vice-President and Chief Financial Officer. David will start things off with a summary of the financial results for the quarter and a review of the details of our revenue growth, including price and volume trends. Bob will cover the financial statements, we will conclude with question and answers. During their statements any comparisons made by David and Bob, unless otherwise stated, will be with the second quarter of 2009.

Before we get started, let me remind you that in addition to our press release that was issued this morning, we have filed a Form 8-K, that includes the press release as an attachment, and is available on our website at wm.com. The Form 8-K, the press release and the schedules to the release include important information that you should refer to. In some cases David and Bob will discuss our results on as adjusted basis, including, net income, earnings per diluted share which they may refer to as EPS, operating expenses, effective tax rate and income from operations margin. These financial measures have been adjusted for items management believes do not our reflect fundamental business performance, and are not indicative of our results of operation. All of these measures, in addition to free cash flow, are non-GAAP measures and you can find reconciliation to the most comparable GAAP measures in the schedules to the earning's press release which can be found attached to Form 8-K filed today, and on the Company's website at wm.com. Additionally, during the call, you will hear certain forward-looking statements based on current expectation, opinion or belief of all future periods. Those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. Some of these risks and uncertainties are detailed in our press release this morning and filings with the Securities and Exchange Commission, including the Form 10-K filed for 2009.

This call is being recorded and will be available 24 hours a day beginning approximately 1 PM Eastern Time today, until 5 PM Eastern Time on August 12. To hear a replay of the call over the internet, access the Waste Management website at wm.com. To hear a telephonic replay of the call, dial 800-642-1687, and enter reservation code 81116607. Time sensitive information given during the course of today's call, which is occurring on July 29, 2010, may no longer be accurate as the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Waste Management is prohibited. Now I will turn the call over to Waste Management CEO, David Steiner.

Thank you Jim. Good morning from Houston. We earned $0.54 per share in the second quarter, consistent with our quarter and full year expectations. We did this despite a $0.01 headwind from accounting adjustments related to remediation reserves at our landfills and a $0.01 headwind from increased advertising relating to our new Bagster product. We also continued to see positive signs in volumes that point to further volume improvements throughout the remainder of the year. Which reinforces our belief that we will see volumes turn positive in the second half of the year.

Revenue increased by $206 million or 7% from the prior year period. This is the second consecutive quarter of year-over-year revenue growth. Major drivers of our revenue improvement were improved recycling commodity prices, acquisitions, and year-over-year increases in revenue growth from yield. Internal revenue growth from yield on our collection and disposal operations was 2.3% in the second quarter. A marked improvement compared with the first quarter of 2010.

Through our disciplined focus on pricing, we overcame much of the first half effect of low and even negative consumer price indices. Our municipal and franchise contracts are generally adjusted based upon a CPI Index. Approximately 35% of our overall collection business is from municipal and franchise contracts. Due to the low to negative CPI in the second half of 2009, the contracts that adjusted at the end of 2009 contributed much less to our pricing results than in prior years. In Q1, we had a 70 basis point drag to our reported yield from these adjustments. And in the second quarter, we had a headwind of about 90 basis points. My congratulations go to our pricing team and field management for overcoming these pricing headwinds. But, we need to be just as diligent in the second half of the year.

As I mentioned last quarter, each field management team has a specific pricing plan tailored to their customer base, and designed to meet their area's 2010 pricing goals. We remain committed to our pricing discipline. And we've designed our annual management incentive plan, for the second year in a row, with minimum pricing targets. Targets were set for the areas, groups, and Company-wide. Overall, those targets increased by 50 basis points in 2010. These targets must be met in order for eligible employees to receive a bonus under the 2010 annual incentive program. Despite the yield improvement we made in the second quarter, we still have not met our Company-wide pricing gate. And 2010 bonuses are still at risk. As you can imagine, that has our managers focused on utilizing all of their pricing levers to meet their pricing plans.

So, for the second half of the year we expect revenue growth from yield to continue to improve, and to be in a range of 2.3% to 2.6%. The combined internal revenue growth from yield in the industrial, commercial, and residential lines of our collection business was 2.7%, in the second quarter. Commercial and industrial yields were 3.1% and 3.4%, respectively. A yield component of internal revenue growth in our residential line of business was 1.8%, reflecting lower prices from CPI adjustments in the first half of the year. New business pricing for the second quarter was strongest in our commercial line of business, and increased for the fourth straight quarter. Service increases, net of service decreases, continued to improve during the second quarter of 2010, and are net positive for the second consecutive quarter. They've been steadily improving since the second quarter of 2009.

On the volume side of the business, internal revenue growth from volume declined 2.9% in the quarter, a significant improvement from the first quarter of 2010. This is the third quarter in a row that volume has improved compared with the prior year period. In our collection business, our commercial and residential collection line saw volume declines of 4.8% and 4%, respectively. In our more economically sensitive industrial line of business, volumes were down 5.9%, a significant improvement compared with the volume decline of 12.4%, in the first quarter of this year. This is the first single digit volume decline in the industrial line of business, since the third quarter of 2008. Despite the lower volumes, we continue to maintain our focus on pricing in the industrial line of business, which resulted in revenue growth from yield of 3.4% for the quarter. Overall, we continued to expand our income from operations margin in the collection line of business. Which increased by 60 basis points compared with the prior year period.

In the landfill side of the business, second quarter 2010 internal revenue growth from volume moved from negative to flat. Which is the best volume performance we've seen since the third quarter of 2008. Internal revenue growth from volume for special waste was positive 12.4%, which is the second consecutive quarter of positive special waste volumes, with yield for special waste being up slightly. For MSW, internal revenue growth from volume was negative 1.6%. Volumes continue to be the softest in our more economically sensitive C&D line, which was negative by 13.7%. This is a significant improvement from the negative 25.6% volume decline in the first quarter of 2010. Clearly, the negative volume trends in the C&D line of business are showing steady improvement, since the lows reached in the fourth quarter 2009. On the pricing front, MSW per-unit landfill pricing was up by 3.1%, continuing the strong pricing we've seen in recent quarters. Another sign of our pricing commitment is the second quarter per-unit landfill pricing for our C&D business line, which was up 4.3%, despite the 13.7% decrease in volumes.

Over the last three quarters we've seen a steady improvement in volumes in our most economically sensitive business lines, namely landfill and industrial. We expect this trend to continue and we believe volume comparisons will continue to improve, with volumes turning positive in the second half of the year. Increased commodity prices contributed about $0.05 of positive year-over-year earnings per diluted share in the second quarter of 2010. For the second half of 2010, we expect recycling commodity prices on average to be somewhat above second half of 2009 prices, and to provide an earnings benefit of $0.01 to $0.03 per diluted share compared with the second half of 2009. As anticipated, second quarter electricity sales prices at our waste-to-energy operations were slightly lower than the prior year period, causing a $3 million negative impact to electricity sales revenue. During the second half of 2010, we anticipate electricity sales prices will be higher than the prior year periods. Resulting in a benefit of $0.01 to $0.03 per diluted share. Which is consistent with previously issued guidance.

We continue the expansion of our new Bagster business in the second quarter For those of you not familiar with Bagster, it's a unique retail offering in our industry, a dumpster in a bag. Customers can go into a retail store, and purchase a Bagster bag and then take it home and use it to dispose of re-modeling or major home clean-up debris. When the bag is full, our customers call us and we pick it up for disposal. We kicked off a national advertising campaign, including television commercials on cable stations. We added 53 metropolitan markets to the service footprint, which now includes markets in 40 states, and most of Canada. The number of retail locations selling the Bagster bag increased to 3,200 by the end of the second quarter. Of course, as in the launch of any new product, there are start up costs and we had about $0.01 of those costs in the quarter.

During our investor day in March of this year, we said, that we anticipated the economy would slowly but steadily improve. The signs we saw during the second quarter are consistent with this view. And therefore, we're on track to meet our full year earnings forecast of $2.09 to $2.13 per diluted share. So in summary, we are quite pleased with our second quarter.

We expect that we will continue to build upon the positive trends that we saw in the second quarter. Internal revenue growth from yield was up and should continue to improve in the second half of the year. Volumes should turn from a negative headwind to a positive tailwind. Electricity prices at our Wheelabrator plant should show year-over-year improvement in the second half of the year, and commodity prices should continue to provide benefit. These are all positive signs, and our management team is prepared to execute to ensure we maximize our operating leverage, as the economy improves. And with that, I will turn the call over to Bob.

Thank you, David. I will begin by discussing operating costs. These costs increased by $178 million, year-over-year. Costs of goods sold increased $77 million in the quarter, mainly because of higher recycling commodity rebates, related to the $129 million increase in recycling revenue. The net effect of this was a $0.05 EPS benefit, year-over-year, in the quarter. Direct fuel costs increased approximately $29 million, primarily because of a 30% increase in fuel prices. Fuel costs increased by more than our fuel surcharge revenue in the quarter, and caused a negative year-over-year impact to EPS of $0.01, and a negative impact of 30 basis points to our income from operations margin.

Foreign currency translation for our Canadian-based operations accounted for an additional increase in operating costs of approximately $15 million. But also accounted for a revenue increase compared with the prior year period of $22 million. In addition, the Company had a non-cash charge of $10 million in the second quarter of 2010. And a non-cash benefit of $22 million in the second quarter of 2009, or a year-over-year swing of $32 million, associated with the accounting effect of a reduction in the ten-year treasury rate used to discount remediation reserves. These accounting adjustments to our remediation reserves impacted our income from operations margin by 110 basis points.

I would now like to discuss how we manage volatility in prices received for electricity production of our waste-to-energy plants. Today, we sell approximately 46% of our waste-to-energy electricity on a merchant basis. We expect this to increase to approximately 53%, by the end of 2010. The balance of our electricity is sold under long-term contracts. We currently have hedges in place on about 21% of our merchant energy stream, which means our total energy portfolio is currently 64%, contracted or hedged. The hedges are short-term ranging from 60 days up to nine months. If we see an opportunity, we will lock-in portions of our portfolio longer term. Over time, our goal is to move towards an energy portfolio that is 80% contracted or hedged, and 20% floating.

The impact of electricity sales prices at our waste-to-energy operations, caused a year-over-year negative impact to EPS of less than $0.01, which is consistent with our previously announced guidance. As a percentage of revenue in the quarter of 2010, SG&A remained unchanged at 10.9% compared with the prior year period. SG&A costs increased by $22 million, to $345 million. We discussed this increase in cost at our investor day in March. And this increase results primarily from the national rollout of our advertising campaign for our new Bagster product, costs related to our growth initiatives, and expenses to upgrade outdated information technology equipment and applications.

For the remainder of 2010, we expect that some of the drivers of higher revenue and higher operating costs versus 2009 will remain a factor. Certainly higher recycling commodity prices and higher fuel prices seem likely. We cannot predict changes to the ten-year treasury rate, but as I discussed, movements in the rate may result in adjustments to accruals for remediation. We continue to manage our reserves -- our controllable expenses -- closely, and we expect to maximize our operating leverage as volumes improve. As anticipated, our interest expense net of interest income for the second quarter increased by $10 million compared with the prior year period. This is primarily due to an increase in our average debt balance, as a result of new debt issued in the fourth quarter of 2009 and the $600 million, 4.75% senior notes issued in this June of this year. We plan to use the net proceeds from that offering to repay the $600 million, 7.375% senior notes that mature in August of this year.

On June 30, our weighted average cost of debt was 5.23%. Our debt-to-total capital ratio for the quarter was 59.9%, in line with our target ratio of about 60%. The floating rate portion of our total debt portfolio was 18%, at the end of the quarter. In June, we replaced our $2.4 billion revolving credit facility for a new, three year, $2 billion revolver. Over the past few months, we also added $250 million of additional letter-of-credit capacity in a separate facility. Our $2.4 billion revolver would have gone current next month, and given that a substantial portion of the facility for letters-of-credit, we needed to replace it before then.

As we previously mentioned, the cost of the revolving credit has increased substantially in the past two years. As a result, our interest cost will increase by about $7.5 million per quarter, beginning in the third quarter. And our weighted average cost of debt will be about 5.6%. We communicated this type of increase when we gave guidance at the beginning of the year, and we want to remind you of that increased cost. Our income tax rate for the second quarter of 2010 was 44.2%, reflecting the changes in our estimated deferred state taxes. Excluding this impact, our tax rate for the second quarter was 36.2%.

Turning to cash flow in the second quarter, net cash provided by operating activities was $480 million. A decrease of $68 million compared with the second quarter of 2009. This decrease is due mainly to the working capital effect of an increase in accounts receivables as our revenue increased this year. Our day sales outstanding improved by 1.3 days and our bad debt expense decreased slightly. We continue to manage all of our receivables very closely. Our capital expenditures for the quarter were about $220 million, a decrease of $38 million compared with the prior year period. Our free cash flow for the quarter was $275 million.

We continue to be on track to meet our previously discussed full year 2010 guidance, of approximately $1.2 billion for capital expenditures, and a range of $1.2 billion to $1.3 billion of free cash flow. In the second quarter of 2010, we paid $152 million in dividends, and repurchased $166 million of our common stock. Our dividend yield is currently 3.7%. We are pleased with the results of the second quarter, and recognize that the results are due to the effort and dedication of each of our fellow employees. We are grateful for their fine work. And with that, Thea, let's open the line for questions.

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. The first question will come from Scott Levine with JPMorgan.

Good morning, guys.

Good morning.

So the pricing accelerated nicely in the quarter and sequentially, and you'd indicated on the last call, that you were anticipating a hike in the environmental fee about 150 basis points. Can you talk maybe to some of the other drivers of acceleration in the face of, what looks like, increased headwinds from inflation? And then also, if you can provide a sense, from a secular standpoint maybe of--how you are tracking relative to your gates, and whether your guidance for a second half implies you will meet those gates with some room for -- comfort there?

Yes, certainly. Scott, as we said, we expect the program to pick up in the back half of the year. We're actually very close to the gate right now, and so our plans absolutely have us exceeding the gate in the back half of the year. When we look at the drivers, you hit the nail right on the head, but the environmental fee was certainly a big driver contributing about $14 million sequentially from the first quarter. But with our pricing programs, always the primary drivers going to be price increases and we've certainly accelerated those during the first quarter and the second quarter. And most of those hit--even though we put them in the first quarter they didn't hit until the second quarter. We saw very agressive pricing action on our commercial and industrial lines of business.

Got it. And then on the margins, I think your prior guidance was that you would see EBIT margins expand this year. Is that still your expectation, or does this change with the environmental liability accounting assumption affect that in any way? What are your thoughts on margins?

Our margins will expand this year. One thing to focus on is that our--half of the financial component of our annual incentive performance plan requires margin expansion. So, we will, we think, continue to expand margins as the year goes on and what we expect will be last year.

Scott, when we look at margins certainly the ten year-treasury going down is something that is out of our control. So, when we look at margins, frankly, we normalize for that, whether it's positive or negative. We've had times when it's gone the other way. We normalize to take that out.

Okay. In thinking about modeling, you and margins we should be excluding that headwind for Q2?

Yes.

Okay. One last one really quickly, any change on the guidance for the tax rate for the full year?

Yes, Scott. Glad you mentioned that. In April, we entered in to--invested in a low-income housing tax credit partnership, that has a return of about 30%. So, it's a very good investment for us, and it's one of those investments where there's a little bit of money up front but then every further payment you make is actually less than the tax credit you'll get. Going forward, this investment will result in a loss of $6 million to $8 million, every quarter, that'll go through other income or loss. So you'll see you saw that in this quarter, you'll see that going forward. Now, the tax credits resulting from this investment will reduce our affective tax rate to 36.7%. So you need to show both sides. You need to pick up the $6 million to $8 million loss in other income or loss, and then you need to show the affective tax rate at 36.7%, and we expect this investment will give us an earnings per share benefit in the future of $0.01 to $0.02 cents every year.

Got it. Great, thanks Bob. Thanks Dave.

The next question will come from Hamzah Mazari with Credit Suisse.

Hamzah, good morning. Could you maybe just touch on the cost side of your business and how investors should think about your spend on growth initiatives. You talked about that in your release and your comments, particularly, how we should think about that going forward. As you look out towards your pipeline on waste-to-energy deals and the medical site, what can we expect, how does the acquisition landscape look like, if you can touch on some of those topics?

Sure. When you look at the cost side of growth, in the first and second quarter, we saw $0.01 to $0.02 cents of expenses from those initiatives. We would expect that to continue in the short-term but then to turn neutral and, obviously, ultimately turn positive. So, those are expenses that we're glad to put out because they are going to lead to growth in the future. As far as medical waste and waste-to-energy, primarily we made an acquisition, as you know, for $150 million in the waste-to-energy space. We've made some smaller acquisitions in the medical waste space. We don't see any large expenditures for acquisitions in either of those areas going forward. Mostly we'll be doing green field sites on the medical waste side and then we will be winning bids on the waste-to-energy side. With the waste-to-energy--piece--after you win a bid, you still got three to five years before you are under construction, because of permitting and things like that.

Got you. Then just last question, you talked about incrementally positive volume trends and you've also flagged out your incremental EBITDA margins, maybe close to 50% on volume coming back. First question, are you beginning to see some of that incremental margin pull through in your numbers right now? Or is that just too early for you guys? And number two, are you seeing acceleration in special ways, in industrial early in Q3 than you've seen at Q2?

Yes. From the incremental margin point of view, we haven't seen the full affect of it, because we are having negative volumes, right. As we start to see volumes turn positive that's when you will see the full affect of the leverage that you discussed. On the special waste side, the pipeline still looks fairly robust, as you know, we've had two consecutive quarters with positive special waste. We would expect that to be positive in the third quarter. It's going to be difficult to continue to get that 8% to 12% type of growth, but we certainly expect it to be positive in the third quarter

Thank you very much.

The next question will come from Jonathan Ellis with Bank of America.

Thanks. Good morning, guys. First question, I want to make sure I'm clear about the pricing guidance that you've given for the year. Based on the first half results, and I think Dave you said 2.3% to 2.6% in the second half. I just want to make sure I understand how that gets you to the low end of the 2.5% to 3% range that you had previously provided. Just help us understand the math there or the bridge?

Jonathan, I mean basically what we're saying is that it's going to be very difficult to get even to low the end of 2.5% to 3% price range, because of both the negative affect we had in the fist half of the year. But we are also seeing a little bit more of a headwind in the back half of the year from CPI. As you saw, CPI spiked in December and then it started to go down ,culminating in June, in a 1.1% CPI. We expected it to stay above 2%, in the first half of the year, so we get a little bit of a tail-wind going in to the back half of the year. So, In the first half of the year we had 70 basis points of headwinds in Q1. We had 90 basis points in Q2, we expect to have a similar sort of 70 to 90 basis point headwind in Q3. It starts to abate in Q4. So, given that we aren't going to get as much from CPI in the back half of the year, we dropped that overall guidance to 2.3% to 2.6% for the back half of the year. Obviously, when you average those out, you can tell it's going be difficult to get to that 2.5% target that we set.

Okay. That's helpful. Second question just on your earnings guidance for the year. You talked $2.09 to $2.13, consistent with what you had in the past. But obviously, recycling, and if I do the math on the benefit in the first and second quarters, and what you said about recycling for the second half of the year. My math suggests it's going to be a $0.12 to $0.14 EPS benefit for the year and previously you guided at $0.04 to $0.08 cents for the year. Can you just help us understand what, perhaps, some of the offsets are, to the booster in recycling, in terms of the EPS guidance for the year?

Sure. We just talked about one of them and that is the effect on yield of the lower CPI. And then secondly, as we talked about before, the $0.01 to $0.02 that we're are spending on growth initiatives, certainly is a headwind. So that pretty much offsets the benefit from recycling. Then you saw, in the last couple of quarters, we haven't been recovering all of our fuel costs with our fuel surcharge. That should continue for the back half of the year. So we've got a couple of headwinds that basically offset that recycling gain.

Okay. That's helpful as a summary. On the--one question on the landfill side I wanted to ask about. Any material benefit this quarter from--I know you have a contract in the Gulf Coast for disposal of oily sand; was there any material contribution this quarter or anything you are anticipating in the third quarter?

It's interesting that you mentioned that Jonathan. Because as we've looked at that from the event in the Gulf, what we found is that we aren't--less than half of the revenue that we are getting is actually coming from collection and disposal. That's because we went in and said we were going to provide a comprehensive environmental solution. So, when we went in--if we had gone in just on collection and disposal, we wouldn't be getting much revenue out of it because there is not a lot of waste being generated. But we went in with a lot of different solutions, both for solid waste and for liquid waste, and so we saw about $20 million of revenue during the quarter, at about, sort of Company average type margins. And we'd expect that to be higher in the third quarter, but as you know, with the--capping of the well, it's not clear how long that will continue.

Okay. That is helpful. Just two more quick questions if I may. One on the medical waste side, any updates on some of the pilot projects you are doing with hospitals to do universal waste management within the hospitals? How is that resonating and also, and update in terms of the leadership within that division? Any other changes that have taken place since the departure of the previous head of that group?

Yes. We've actually seen some very good traction on the medical waste side. We just had a very large hospital chain that we did a pilot for, here in Houston. And they've just added six additional hospitals to add to the number, and hopefully at some point in time, we'll continue to add to that. From a leadership point of view, we wanted to make sure that our medical waste offering integrated with our solid waste offering, and so we put one of our former market area general managers in charge of that business segment. Other than that there haven't been any changes in leadership.

But, the good news about medical waste, is that, we talked about it from a growth initiative point of view the $0.01 to $0.02 that we're spending on growth initiatives, certainly, medical waste would be one of those. We are getting close to being fully staffed from a sales point of view. Obviously when you're staffing up, that costs you money, once you've got that full staff in place and they start making sales is when it turns from a negative headwind to a positive tail-wind. We'd expect to see that happen in the back half of the year.

Okay great. And just my final question. On the guidance for cash flow, if my math is correct, it looks like you slightly revised your cash flow from operations guidance down $25 million to $50 million, in terms of the range. First part of the question, does your guidance now include the legal settlement? And the second part is what can be attributed to the downward revision?

It was just a review of the--second question. Well, the answer to the first question is, yes, it does include that. Second--the downward revision is just updating from the standpoint of looking at where we are at this point in the year. It's not a significant change.

Okay, great. Thanks, guys.

Thank you.

The next question will come from Vance Edelson with Morgan Stanley.

Hi, thanks a lot. First, just one more question on the volumes. David, in your prepared remarks you mentioned overall volume comparisons turning positive during the second half, I think is the way you phrased it, which could mean turning positive late in the quarter. So, I just want to clarify, do you expect overall positive volume comparisons for the second half, as a whole?

Absolutely.

Okay, great. Then, with all the focus on pricing, can you describe how that's translating in to customer retention rates? Is it competitive enough out there that you're seeing some customers walk, upon facing higher rates?

Yes. And again, we got very aggressive on price increases, we knew we had to get aggressive on price increases, to overcome the effect of the CPI headwind. And that caused an increase in our churn rate, not a substantial increase, but our churn rate did hit 11%, in the quarter. So, but that--the trade-off has always been very positive for us, it continues to be very positive for us. And so, we did see a slight up-tick in churn rate. We are seeing a little bit more action by competitors around municipal contracts and school contracts and things like that. But overall, we see the pricing environment very positively.

Okay. So, municipal budget constraints, you'd say, are affecting the negotiations a bit? Is that mainly price concessions or is it reduced services being agreed upon, any color you can provide there?

Yes, for us, it's mostly a reduced service. Again, the numbers don't--aren't real, but I will use them as an example. And that is--that if we have a municipality that we pick up twice at $50 per pick-up, from a cost point of view, that costs us $100. If we can go in to them and say, look, we can pick up once instead of twice and we can reduce it by $30 to $40, we make more money they save some money. It's a win-win situation. So, that's been the approach that we've primarily taken within our municipal customers.

Okay, great. Lastly, I may have missed it, any feel for whether we'll see any additional increases to environmental remediation reserve? Should we consider that, essentially, an ongoing charge or is it more one off, would you say?

It really depends on the issue and how far each specific issue is. We do, I think, a very good job of keeping track of that and adjusting, as the facts develop, but I don't see any specific trend here just yet.

Okay. Got it. Thanks, guys.

Thanks Vance

The next question will come from Corey Greendale with First Analysis.

Good morning. Couple of questions for you, first of all, also on the volumes, could you just speak to volume trends within the quarter and in to July. And David, not to pin you down too much; but if you had to give an over, under on what month volumes actually turned positive, you think it's something in Q3, or what would you say?

I think gambling is illegal in the United States, Corey. So, I'm not sure if I can give an over, under.

But what we did see, as you can imagine we saw, the volumes track-up fairly consistently through the quarter. In June, we actually had, when you look at the combined price and volume--in June we actually had positive IRG, in both the landfill and the collection line of business. When I look at it, Corey, I like to look at it from a total IRG point of view. It's the first time we've seen positive IRG, in probably, two years When the volumes turn positive, I think it's probably anyone's call. But the IRG did turn positive in June. We hope to see that continue.

The question was for entertainment purposes only, no actually wagering.

No wagers will be taken.

Exactly. And then, I wanted to ask you about--the comment you made about seeing maybe smaller competitors, I don't know if you meant necessarily smaller; but generally, competitors getting more aggressive in some municipal contracts, I had two questions about that. First of all, why do you think that's happening now, because obviously the economy has been bad for a while and it seems like times are actually getting a little bit better? Secondly, could you just remind us of what your process is for bidding on municipal contracts, how much that's done at the local level and how much either regional or central oversight there is over that?

Yes, it's a great question because it used to be done completely locally, and when we moved to segmenting our customer base, we actually put a gentlemen by the name of Paul Pistono in charge of municipal contracts, to look at them more from a regional and national point of view. Again, Corey, I don't think it's a dramatic change, in other words, as far as the--municipal contracts and school contracts we've seen some increased competition, not enough to identify a trend. So, I don't think that what you're seeing is people reacting to the economy. I think it's more just a one off. And, we are seeing that from local competitors as well as regional and national competitors. I don't think it's creating a trend I think those are just one off examples.

So, when we look at the municipal business, we want to make sure that we look at now it from a more centralized point of view and that we're making smart business decisions. There is always a trade-off when you're looking at new business versus retained business. Sometimes with retained business you can keep current capital in place, so you have a better return on capital. And as you know, we're focused on return on capital. But from a bidding point of view, we want to make sure we are getting all of the services in to the RFP's that we are able to offer, so that we can provide a city--a comprehensive environmental solution. So, we will certainly look at it from a more centralized basis, what you are seeing, I think, from a competitive view are sort of one off localized decisions.

One last quick housekeeping question, if I could, for Bob. The tax investment that you mentioned, would you suggest modeling 36.7%, as a tax rate for each quarter? Or is that an annual and is there a finite duration, so that this ends at some point?

This investment will run eight to 10 years. It's going to go a long time. 36.7% will be good for the rest of the year--in each quarter, for the rest of the year.

Ok, thank you.

Alright, thanks Corey.

The next question will come from Bill Fisher with Raymond James.

Hello, good morning. Just another small one. The other revenue was up like $20 million to 76%, in the quarter. And you mentioned the Bagster, I think $20 million of liquid waste and then you got medical waste. Are they all in that line item or could you help me walk through some of that?

Some of it is -- they're in there a little bit. Some of the special waste projects we got end up in that particular line. Well--that's mostly what that is.

But does--to the extent all that stuff continues to improve, that should help and show up there essentially?

Yes.

Okay. Just another small one just for Bob. The Chinese joint venture, that had closed, is that correct?

Yes, it is. It did.

To the extent it shows up as equity income, it would just be down in that other, as well?

Correct.

Okay, and then, I think you said you had some lower expectations this year. But with that [insepsa] can they--that's more of a $11 million kind of benefit from an operating perspective.

Yes, that's right. We expect there will be some small benefit from the Chinese venture this year, less than $5 million, as it gets started up. Some of the investments we are making and putting in place the infrastructure. Going forward we expect that to have a much more significant benefit. [Sipso] going to take a little longer to turn significantly positive as we get in and do the start up things we have to do to get that plan up to specs. We hoped to get a little bit of benefit from that this year, but it was small. I think, we will probably get just a little bit of a negative there but again, it won't be enough to move the needle.

Okay. Great. Thank you.

The next question will come from Richard Skidmore with Goldman Sachs.

Good morning. David, could you just maybe talk about the strategy that you outlined at your investor day, with regards to the more focused sales force and the key verticals and how you see that accelerating, in terms of revenue growth, either in the second half of '10 or 2011. And any success stories you can articulate?

It's a great question, Rick. As you know, we took our sales force and put it in to six separate segments. We are certainly seeing anecdotal success there. We've talked about the Gulf Coast incident. That's--one where we had specialists that were dedicated just to that. You've heard us talk about our stepping in to coal ash, and we've dedicated a team to that. Medical waste, you've heard us talk about the value proposition that we can provide to customers. And then on a manufacturing industrial segment, we've seen great successes. We just won the second largest refinery in the United States because we went in and provided a comprehensive environmental solution to them. We are certainly seeing that gain some traction, we haven't even tried, Rick, quite frankly, to put numbers to it because we are just finishing--we literally, just finished moving our sales folks in to the proper segments, we've begun the training of those folks in those segments, so, we haven't tried to put a dollar amount to that quite yet.

Okay. David, do you see that more as 2011--it really starts to accelerate, in terms of having a meaningful impact on revenue or is it something that's even longer than that?

I think you start to see it kick in, in 2011.

Thank you.

Thank you, Rick.

The final question will come from Michael Hoffman with Wunderlich Securities.

Good morning, everyone. Can we drill down a little bit on the a free cash flow guidance, $1.2 billion to $1.3 billion, need a fairly substantial improvement in your cash from ops in the second half which if you start desegregating the pieces looks like, positive volumes, drives operating leverage. You kind of need to get a 100 basis points of margin improvement for that? And then you need a pretty big working capital improvement.

Yes, I think that's right Michael, I think you've got it. I think you hit the nail right on the head. One thing to recognize, is that the year is playing out more like 2007 and 2008, than it is like 2009. So, we typically see a working capital benefit coming through cash from ops in the second half of the year, as receivables from seasonality that drive up, like we saw this year, start getting collected. I do think that's what we're expecting to see.

Okay. Do you still expect to spend $1.2 billion-ish?

That's right, we do. Now I have to tell you. That number changes every year as we get in to how much gets accrued at the end of the year versus actually paid versus what was carried over from the prior year. But the actual spending will be a $1.2 billion, how much runs through free cash flow might adjust a little bit from that.

That's a $60 million swing number usually ?

Bigger than that last year, but this year I expect it to be in the normal $40 million to $60 million range. So, $50 million is a good number.

Taking a little bit on the margin issue and not going for the bet on which month, David. Can you talk about the categories, do I need MSW to go neutral to get this to positive or do I need C& D--what's the category that you are most focused on that needs to make that switch--to have the second half '10 be positive?

Michael, I would look at the cyclical lines of business, right? Look, I'd at the industrial and the C&D. Now, we certainly don't expect C&D to go from negative 13% to positive, but that's going to be offset by special waste in the landfill side. When you look at it frankly, it comes down to rolloff poles. Once we see rolloff poles going positive--that means you are coming out of the cyclical downturns and everything else follows suit.

Okay, so to your comment about positive IRG in June. One would read in to that your -- while you are down 13%, for the whole quarter, you were significantly less than that in June?

Well, what I'm talking about, Michael, is the overall collection and overall landfill. So, you've got basically special waste offsetting the negatives in C&D. It wasn't that all the lines went positive, it's that, within the business lines within landfill when you combine them and the business lines within collection, when you combine them, had positive IRG.

Okay. The coal ash issue, we got a noper out there from EPA, they are pushing us to be a Subtitle C, where do you think that ends up?

We certainly think it ends up Subtitle D, as you know, the current regulations do have it Subtitle C. Those regulations are in a comment period right now and from what we understand the overwhelming majority of comments are that it should go in to Subtitle D landfills. We are going to add our voice to that and hopefully we will see those final regulations by the end of the year.

Okay. Two income statement items Bob, just so I'm clear, on--you gave that $7.5 million number on interest--what number to do you expect interest expense to look like, compared to $116 million in 3Q and 4Q?

Let me get you some more on that. We are expecting it to be $127 million, $125 million in-- those two quarters.

Okay. And then, G&A, did I hear correctly you expect a 10.9% as a percent of revenue that trend holds?

What I expect, Michael, is that it'll-- the percentage that we had last year will carry forward. I think you'll see spending come down a bit in the third and fourth quarter. I think, as a percent of revenue, it'll be pretty much the same as last year.

So, same as two Q--or three Q.

Remember, that's just for the investments we're making now, my personal goal is to--which I have been given, is to get it down to 9% and two years out.

And, we're six months in to that?

Actually no. That was--we're actually six months in to my three year goal. The clock is ticking.

Great. Thank you very much.

Thanks, Michael.

At this time I would like to turn the conference back over to Mr. Steiner for closing remarks.

Thank you, as you can see, from our second quarter results, the strategy continues to work, and we look forward to giving you more on our strategy as we get out on the road during the rest of the year. Thank you.

Thank you for participating in today's second quarter 2010 earnings conference call. This call will be available for replay beginning at 1PM. Eastern time today through 11:59 PM. Eastern time on August 12, 2010. The conference ID number for the replay is 81116607. Again, the conference ID number for the replay is 81116607. The number to dial for the replay is 1-800-642-1687. Or 1-706-645-9291. Thank you ladies and gentlemen, you may now disconnect