Morning. My name is Tia, 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. Thank you. I will now turn the conference over to Mr.
Jim Alderson, Director, Investor Relations. Sir, you may begin.
Thank you, Thea. Good morning, everyone, and thank you for joining us for our Q2 2010 earnings conference call. With me this morning are David Steiner, Chief 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 questions and answers. During their statements, any comparisons made by David and Bob, unless otherwise stated, will be with the Q2 of 2019. 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 ks that includes the press release as an attachment and is available on our website atwm.com. The Form 8 ks, 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 an 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 reflect our fundamental business performance and are not indicative of our results of operations. All of these measures in addition to free cash flow are non GAAP measures and you can find reconciliations to the most comparable GAAP measures in the schedule to the earnings press release, which can be found attached to the Form 8 ks filed today and on the company's website atwm dotcom. Additionally, during the call, you will hear certain forward looking statements based on current expectations, opinion or belief about 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 in our filings with the Securities and Exchange Commission, including the Form 10 ks filed for 2,009.
This call is being recorded and will be available 24 hours a day beginning approximately 1 p. M. Eastern Time today until 5 p. M. Eastern Time on August 12.
To hear a replay of the call over the Internet, access the Waste Management and 87 and enter reservation code 811-16607. Time sensitive information given during the course of today's call, which is occurring on July 29, 2010, may no longer be accurate at the time of a replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Waste Management is prohibited. Now, I will turn the call over to Waste Management's CEO, David Steiner. Thank you, Jim, and good morning from Houston.
We earned 0
point 5 $4 per dollars per share in the Q2 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 continue 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 $206,000,000 or 7% from the prior year period.
This is
the 2nd 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 2nd quarter, a marked improvement compared with the Q1 of 2010. Through our disciplined focus on pricing, we overcame much of the first half effect of low and even negative consumer price indices. 35% of our overall collection business is from 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 two thousand and nine, the contracts that adjusted at the end of 2,009 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 Q2, 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 areas incentive plan for the 2nd 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 Q2, 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 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 2nd quarter. Commercial and industrial yields were 3.1% and 3.4% respectively. The 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 2nd quarter was strongest in our commercial line of business and increased for the 4th straight quarter. Net of service decreases continued to improve during the Q2 of 2010 and are net positive for the 2nd consecutive quarter. They've been steadily improving since the Q2 of 2000 and 9. On the volume side of the business, internal revenue growth from volume declined 2.9% in the quarter, improvement from the Q1 of 2010. This is the 3rd quarter in a row that volume has improved compared with the prior year period.
In our collection business, our commercial and residential collection lines saw volume decline 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 percent in the Q1 of this year. This is the first single digit volume decline in the industrial line of business since the Q3 of 2,008. Despite the lower volumes, we continue to maintain our focus on pricing in 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, 2nd quarter 2010 internal revenue growth from volume moved from negative to flat, which is the best volume performance we've seen since the Q3 of 2008.
Internal revenue growth from volume for special waste was positive 12.4%, which is the 2nd consecutive quarter of positive special waste volumes with yield for special waste 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 and D line, which was negative 13.7%. This is a significant improvement from the negative 25.6% volume decline in the Q1 of 2010. Clearly, the negative volume trends in the CND line of business are showing steady improvement since the lows reached in the Q4 of 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 of our pricing commitment is the 2nd quarter per unit landfill pricing for our C and D business line, which was up 4.3 percent despite the 13.7% decrease in volumes. Over the last three quarters, we 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 Q2 of 2010.
For the second half of twenty ten, we expect recycling commodity prices on average to be somewhat above second half of two thousand and 9 prices and to provide an earnings benefit of $0.01 to $0.03 per diluted share compared with the second half of 2,009. As anticipated, 2nd quarter electricity sales prices at our waste to energy operations were slightly lower than the prior year period, causing a $3,000,000 negative impact to electricity sales revenue. During the second half of twenty ten, 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 continued the expansion of our new Baxter business in the Q2. For those of you not familiar with Bagster, it's a unique retail offering in our industry, in a bag.
Customers can go into a retail store and purchase a Baxter bag and then take it home and use it to dispose of remodeling or major home cleanup 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 Bags 2 Bag increased to 3,200 by the end of the second quarter.
Of course, as in the launch of any new product, there are startup 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 $0.09 to 2 $0.13 per diluted share. So in summary, we're quite pleased with our Q2.
We expect that we will continue to build upon the positive trends that we in the Q2. 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 wheeler breeder plants 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 that we maximize our operating leverage as the economy improves.
And with that, I'll turn the
call over to Bob. Thank you, David. I will begin by discussing operating costs. These costs increased by $178,000,000 year over year. Cost of goods sold increased $77,000,000 in the quarter, mainly because of higher recycling commodity rebates related to the $1,000,000 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 $29,000,000 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 $15,000,000 but also accounted for a revenue increase compared with the prior year period of $22,000,000 In addition, the company had a non cash charge of $10,000,000 in the Q2 of 20 benefit of $22,000,000 in the Q2 of 2019 or a year over year swing of 32,000,000 dollars associated with the accounting effect of a reduction in the 10 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 9 percent that is 80% contracted or hedged and 20% floating. The impact of electricity sales prices at our waste to energy $1 which is consistent with our previously announced guidance. As a percentage of revenue in the quarter of 20 compared with the prior year period. SG and A costs increased by $22,000,000 to $345,000,000 We discussed this increase in costs at our Investor Day in March. And this increase results primarily from the national rollout of our advertising campaign for our new Bag Stir product, costs related to our growth initiatives, and expenses to upgrade outdated information technology equipment 2010, we expect that some of the drivers of higher revenue and higher operating costs versus 2,009 will remain a factor.
Certainly, higher recycling commodity prices and higher fuel prices seem likely. We cannot predict changes to the 10 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 our $10,000,000 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 Q4 of 2019 and the $600,000,000 4.75 percent senior notes issued in June of this year. To use the net proceeds from that offering to repay the $600,000,000 7.3eight percent senior notes that we secure 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 percent 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 $2,400,000,000 revolving credit facility for a new 3 year $2,000,000,000 revolver. Over the past few months, we also added $250,000,000 of additional letter of credit capacity in in 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 2 years. As a result, our interest cost will increase about $7,500,000 per quarter beginning in Q3 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 Q2 of 2010 was 44.2%, reflecting the changes in our estimated deferred state taxes. Excluding this impact, our tax rate for the 2nd quarter was 36.2%.
Turning to cash flow in the 2nd quarter, net cash provided by operating activities was $480,000,000 a decrease of $68,000,000 compared with the Q2 of 2,009. This decrease is due mainly to the working capital effect of an increase in accounts receivables as our revenue increased this year. Our days 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 expenditure for the quarter were about $220,000,000 a decrease of $38,000,000 compared with the prior year period.
Our free cash flow for the quarter was $275,000,000 We continue to be on track to meet our previously discussed full year 2010 guidance of approximately $1,200,000,000 for capital expenditures in a range of $1,200,000,000 to $1,300,000,000 of free cash flow. In the Q2 of 2010, we paid $152,000,000 in dividends and we repurchased 166,000,000 dollars of our common stock. Our dividend yield is currently 3.7%. We are pleased with the results of the 2nd 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, open the line for questions.
The first question will come from Scott Levine with JPMorgan.
Good morning, guys.
Good morning.
So the
anticipating a hike in the environmental fee of 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're tracking relative to your gates and whether your guidance for the second half implies that you'll 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 year. When we look at the drivers, you hit the nail right on the head that the environmental fee was certainly a big driver contributing about 14 $14,000,000 sequentially from the Q1. But with our pricing programs, always the primary driver is going to be price increases and we certainly accelerated those during the Q1 and the Q2. Most of those hit, even though we put them in the Q1, they didn't hit until the Q2.
And so we saw very aggressive 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 that anyway? 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. And so we will, we think continue to expand margins as the year goes on and what we expect will be last
year. But Scott, when we look at margins, certainly, the 10 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, and we normalize to take that out. Okay.
So in thinking about modeling you and margins, we should be excluding that Yes, Scott. It's glad you mentioned that.
In Yes, Scott, it's glad you mentioned that. In April, we entered into we 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 tax credits you'll get. Now going forward, this investment will result in a loss of $6,000,000 to $8,000,000 every quarter that will go through other income or loss. So you'll see you that in this quarter, you'll see that going forward.
Now the tax credits resulting from this investment will reduce our effective tax rate to 36.7 percent. So you need to show both sides. You need to pick up the $6,000,000 to $8,000,000 loss in other income or loss and then you need to show the percent. And we expect this investment will give us an earnings per share benefit in the future of $0.01 to $0.02 every year.
Got it. Great. Thanks, Bob. Thanks, Dave.
All right, Scott. Thank you.
The next question will come from Hamzah Mazari with Credit Suisse.
Hamzah. Good morning. Thank you.
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? And then as you look out towards your pipeline on waste to energy deals and the medical side, what can we expect? How does 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 about $0.01 to 0 point 0 $0.02 of expenses from those positive. So those are positive. So those are expenses that we're glad to put out because they're 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 150,000,000 dollars 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 greenfield sites on the medical waste side, and then we'll be winning bids on the waste to energy side. And with the waste to energy piece, after you win a bid, you still got 3 to 5 years before you're under construction because of permitting and things like that.
Got you. And 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 2, are you seeing acceleration in special waste and industrial early in Q3 that you've seen at Q2?
Yes. From the incremental margin point of view, we haven't seen the full effect of it because we're still having negative volumes, right? As we start to see volumes turn positive, that's when you'll see the full effect of the leverage that you discussed. On the special waste side, the pipeline still looks fairly robust. As you know, we've had 2 consecutive quarters with positive special waste.
We would expect that to be positive in the Q3. 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 3rd quarter.
Thank you very much.
Thank you. The next question will come from Thanks.
Good morning, guys.
First question, and 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 then I think Dave you said 2.3% to 2.6% in the second half. I'm just wondering if 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 sort of the math there or the bridge?
Yes. Jonathan, I mean, basically what we're saying is that it's going to be very difficult to get even to the low end of that 2.5% to 3% price range because of both the negative effect that we had in the first half of the year, but we're 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 had expected it to stay above 2% in the first half of the year, so that we would get a little bit of a tailwind going into 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 basis points to 90 basis point headwind in Q3, it overall guidance to 2 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 to be difficult to get to that 2.5% target that we set.
Okay. All right. That's helpful. Second question, just on your earnings guidance for the year. I know you talked $209,000,000 to $213,000,000 consistent with what you've tried in the past.
But obviously, recycling, if I do the math on the benefit in the 1st and second quarters and then 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 I think previously you guided to $0.04 to $0.08 for the year. So can you just help us understand what perhaps some of the offsets are to the boost from 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 spending on growth initiatives certainly is a headwind. So that pretty much offsets the benefit from recycling. And 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 about on the landfill side, I want 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, anything you're anticipating in the Q3?
Yes. It's interesting that you mentioned that, getting is 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's not a lot of waste generated. But we went in with a lot of different solutions, both for solid waste and for liquid waste.
And so we saw about $20,000,000 of revenue during the quarter at about sort of company average type margins and we'd expect that to be higher in the Q3. 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. 1 on the medical waste side. Any updates on some of the pilot projects you're doing with hospitals to do sort of universal waste management within the hospitals?
How does that seem to be resonating? And also any update in terms of the leadership within that division? Any other changes that have taken place since the departure previous head of that group?
Yes. I mean, 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 6 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 haven't
been
any changes in leadership. But the good news about medical waste is that 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. And we're getting close to being fully staffed from a sales point of view. Obviously, when you're staffing up, that cost you money.
Once you've got that full staff in place and they start making sales is when it turns from negative headwind to a positive tailwind. We'd expect to see that happen in the back half of the year.
Okay, great. And then 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 I think $25,000,000 to $50,000,000 in terms of the range. First
part of
the question is 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. And 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. 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. And then, with all the focus on pricing, can you describe how that's translating into 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. And so but that trade off has always been very positive for us.
It continues to be very positive for us. And so we did see a slight uptick in churn rate. We are seeing a little bit more of 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?
Service. Again, the numbers aren't real, but I'll use them as an example. And that is that if we have a municipality that we pick up twice at $50 per pickup, from a cost point of view, that costs us $100 If we can go into them and say, look, we can pick up once instead of twice, and we can reduce it by 30%, of twice and we can reduce it by $30, $40 we make more money, they save some money, it's a win win situation. And that's been the approach that we've primarily taken with our municipal customers.
Okay, great. And lastly, I may have missed it, any feel for whether we'll see additional increases to environmental remediation reserves? Should we consider that essentially an ongoing charge or is it more one off, would you say?
Well, 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. Thank you.
The next question will come from Corey Greendale with First Analysis.
Hey, Corey. Hey, good morning. Good morning, Corey. A couple of questions for you.
First of all, also on the volumes, could you just speak to volume trends within the quarter and into 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, but you think it's sometime 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 positive IRG in both the landfill and the collection line of business. And so when I look at it, Corey, I like to look at it from a total IRG point of view. That's the first time we've seen positive IRG in probably 2 years.
And so when the volumes turn positive, turn positive in June. We hope to see that continue turn positive in June and we hope to see that continue.
Okay. The question was for entertainment purposes only, no actual wagering?
No wagers will be taken.
Exactly. And then I want to ask you about the comment that 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 volumes are actually getting a little bit better. And 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 gentleman by the name of Paul Pistono in charge of municipal contracts to look at them more from a regional and a national point of view. And so again, Cory, I don't think it's a dramatic change. In other words, as far as the it's both 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 one off. And we're seeing that from local competitors as well as regional and national competitors. So I don't think it's always point of view and that we're making smart business decisions. There's always going to be 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 much 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 that we're getting all of the services into the RFPs 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're seeing, I think, from a competitive point of view are sort of one off localized decisions.
Okay.
And just one last quick housekeeping question if I could for Bob. On the tax investment that you mentioned, would you suggest modeling 36.7% as 36.7% of the tax rate for each quarter or is that an annual and is there a finite duration so this ends at some point? This investment will run 8 to
10 years. So it's going to go a long time.
This investment will run 8 to 10 years. So it's going to go a long time. The 36.7 will be good for the rest of the year, both each quarter for the rest of the year.
Okay. Thank you.
All right. Thanks, Cory.
The next question will come from Bill Fisher with Raymond James.
Hey, Bill.
Hi, good morning. Just another kind of small one here. The other revenue was up like $20,000,000 to $76,000,000 in the quarter. And you mentioned the Baxter that I think $20,000,000 of liquid waste and then you got medical waste. Are they all in that line item or could you help me just walk through some of that?
Some of it is, they're in there a little bit, some of the special waste projects we've got end up in that particular line. So 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. And then just another small one just for Bob. The Chinese joint venture that had closed, is that correct or?
Yes, it is. It did.
And 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 in sepsa, can they that's more of an 11 kind of benefit from an operating perspective?
Yes, that's right. We expect there'll be some small benefit from the Chinese venture this year, less than $5,000,000 as it gets started up and some of the investments we're making and putting in place the infrastructure. Going forward, we expect that to have a much more significant benefit. CIPs is going to take a little longer to turn think we will probably have just a little bit of a negative there, but again, it won't be enough to move the needle.
Okay, great.
Thank you.
All right. Thanks, Joel. Thanks.
The next question will come from Richard Skidmore with Goldman Sachs.
Good morning. Hi, Richard. David, could you just maybe talk about the strategy that you outlined at your Investor Day with regards to the more focused sales force in the key verticals and how you see that accelerating in terms of revenue growth either in the second half of 'ten or twenty eleven and any success stories you can articulate?
Yes, it's a great question, Rick. And as you know, we took our sales force and put it into 6 separate segments. And we're certainly seeing anecdotal successes there. We 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 into 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 our Manufacturing and Industrial segment, we've seen some great successes. We just won the 2nd largest refinery in the United States because we went in and provided a comprehensive environmental solution to them. And so we're 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 into the proper segments. We've begun the training of those folks in those segments. And so we haven't tried to put a dollar amount to that quite yet.
Okay. And David, do you see that more as in 20 11 that it really starts to accelerate in terms of having a meaningful impact on revenue or is it something that's even longer than that?
Yes. No, I think you start to see it kick in, in 2011.
Okay. Thank you.
Thanks, Rick.
The final
down a
little bit on the free cash flow guidance, dollars 1,200,000,000 to $1,300,000,000 Need a fairly substantial improvement in your cash from ops in the second half, which you start disaggregating the pieces, looks like, okay, positive volumes drives operating leverage, kind of need to get 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. The one thing to recognize is that the year is playing out more like 2,007 and 'eight than it is like 2,009. 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 saw this year start getting collected. So I do think that's what we're expecting to see.
Okay. And do you expect to still spend $1,200,000,000 ish
on it?
That's right. We do. And you have to tell you that number changes every year as we get into 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 $1,200,000,000 how much run through free cash flow might adjust a little
bit from that?
And that's kind of a $50,000,000 kind of a swing number usually?
A little bit bigger than that last year, but this year I expect it to be the normal 40% to 60% range. So 50% is a good number.
Okay. And then digging a little bit on that margin issue and not going for the bet on which month, David, but can you talk about the categories? I mean, do I need to go neutral to get this to positive or do I need the C and D? What's the category that you're most focused on that needs to make that switch to have the 2 second half ten be positive?
Yes, Michael, I would look at the cyclical lines of business, right? I'd look at the industrial and the C and D. Now, we certainly don't expect C and D to go from negative 13% to positive, but that's going to be offset by special waste in the landfill side. And so, when you look it, frankly, it comes down to roll off poles. And once we see roll off poles going positive, I think you're that means you're coming out of that cyclical downturn and everything else follows suit.
Okay. So to your comment about positive IRG in June, one would read into that your while you were 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 and D. So 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've got a Noper out there for the from EPA. They're pushing this to be a subtitle C. Where do you think that ends up?
Yes, I mean, 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 should go into Subtitle D landfills. And so we're going to add our voice to that and hopefully we'll see those final regulations by the end of the year.
Okay. And then
interest expense. What number do you expect the interest expense to look like compared to the $116,000,000 in 3Q and 4Q?
Let me get you some more on that. We've got I think we're expecting it to be $127,000,000 $125,000,000 in those two quarters.
Okay. And then G and A, did I hear correctly, you expect the 10.9% as a percent of revenue that trend holds?
What I expect, Michael, is that the percentage that we had last year will carry forward. I think you'll see spending come down a bit in the 3rd and fourth quarter, but I think as a percent of revenue, it will be pretty much the same as last year.
So same as 2Q or 3Q?
Remember, that's just for the investments we're
making now. My personal goal is down to get it down to 9% 2 years out.
And we're 6 months into that?
Actually, no, that was we're actually 6 months into my 3 year goal. So, it's
10.5 years out. But the clock is ticking.
All right,
great. All right, thank you
At this time, I would like to turn the conference back over to Mr. Steiner for any 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 in the road during the rest of the year. Thank you.
Thank you for participating in today's Q2 2010 earnings conference call. This call will be available for replay beginning at 1 p. M. Eastern Time today through 11:59 p. M.
Eastern Time on August 12, 2010. The conference ID number for the replay is 8,111,166 and 7. Again, the conference ID number for the replay is 8,111,6007. The number to dial for the replay is 1-eight hundred-six forty two-six