Waste Connections, Inc. (WCN)

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Waste Connections, Inc. (WCN)

Q3 FY08 Earnings Call

October 22, 2008, 8:30 AM ET


Ronald J. Mittelstaedt - Chairman and CEO

Worthing F. Jackman - EVP and CFO


Scott Levine - JPMorgan

Corey Greendale - First Analysis

Bill Fisher - Raymond James & Associates

Brain Butler - Friedman, Billings, Ramsey

Jonathan Ellis - Merrill Lynch

David Feinberg - Goldman Sachs



Good day, ladies and gentlemen and welcome to the Q3 2008 Waste Connections Earnings Call. My name is Heather and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We'll be facilitating a question-and-answer session towards the end of today's conference. [Operator Instructions].

As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Ron Mittelstaedt, Chairman and CEO. Please proceed.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Okay. Thank you, operator, and good morning. I'd like to welcome everyone to our conference call to discuss third quarter results, provide our detailed outlook for Q4 and discuss the unique position we believe we are in regarding capital available for future acquisitions or divestitures.

I am joined this morning by Steve Bouck, our President, Worthing Jackman, our CFO and several other members of our senior management team.

As stated in our earnings release, we are extremely pleased with our performance in '08, especially in light of significantly higher year-over-year fuel costs and weakening economy. Our results in the third quarter met or exceeded the upper end of our outlook provided last month and fell within the original guidance for the quarter, provided back in July. But more importantly we now have over half a billion dollars in cash and are uniquely positioned for additional growth opportunities. The strength of our balance sheet and access to capital are significant differentiators for us in these turbulent markets.

Before we get into additional details, let me turn the call over to Worthing for our forward-looking disclaimer and other housekeeping items.

Worthing F. Jackman - Executive Vice President and Chief Financial Officer

Thank you, Ron, and good morning. We must inform everyone listening that certain matters discussed in this conference call are forward-looking statements intended to qualify for the Safe Harbors from liability established by the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. These risks and uncertainties are set forth in the company's periodic filings with the Securities and Exchange Commission.

Shareholders, potential investors and other participants are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this conference call and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

On the call, we refer to operating income before depreciation and amortization and free cash flow, each a non-GAAP measure. Management uses these non-GAAP measures as two of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We define operating income before depreciation and amortization to exclude any gain or loss on disposal of assets.

Free cash flow is defined as net cash provided by operating activities plus or minus any changes in book overdraft plus proceeds from disposal of assets and excess tax benefit associated with equity-based compensation, less capital expenditures and distributions to minority interest holders. Where appropriate, we will highlight particular items in certain periods to improve comparability.

Finally, we note that other companies may calculate these non-GAAP measures differently.

Now I'll turn the call back over to Ron.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Okay, thank you, Worthing. As previously stated, we remain extremely pleased with our results in the quarter. Revenue was $272.7 million, up 8.7% over the prior year period and above our updated outlook for the quarter. Organic growth was 3.9% broken down as follows; 5.9% price, and negative 2.1% volume and a positive 0.1% for recycling, intermodal and other services.

Pricing in the quarter increased 50 basis points sequentially from Q2. Core pricing was 4%, which is up about 30 basis points from Q2 and consistent with our focus on core pricing.

Surcharges in selected markets due to spikes in certain costs such as fuel increased from 1.7% in Q2 to go about 1.9% in Q3, due primarily to sequentially higher fuel costs in the quarter. The third quarter was clearly our difficult quarter in '08 for recovering fuel increases. And it does reflect in the lag inherent in how we recover such spikes.

Fuel averaged about $4.45 per gallon in Q3, and as a percentage of revenue rose year-over-year about 315 basis point to 9.2% of revenue. As a reminder we have a hedge in place through the year end that covered about 45% of our fuel needs in Q3, and should provide for 35% of our needs in Q4 at about $4.69 per gallon.

This hedge is above market as fuel we are now buying at market is averaging about $3.35 per gallon. At these prices we would average about $4 in Q4 or around $0.45 per gallon below Q3's rate, providing us a little bit of tailwind into the fourth quarter.

With Q3 now behind us and fuel prices declining, our exclusive market model and focus on core pricing should start to out perform. Remember, core pricing is much more resilient as fuel prices drop, versus the fuel surcharge that must be given up when diesel prices decline.

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