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Waste Connections, Inc (WCN)
Q4 2008 Earnings Call
February 10, 2009 8:30 am ET
Ron Mittelstaedt - Chairman and CEO
Worthing Jackman - EVP and CFO
David Feinberg - Goldman Sachs
Scott Levine - JPMorgan
Corey Greendale - First Analysis
Bill Fisher - Raymond James
Jonathan Ellis - Merrill Lynch
Michael Hoffman - Wunderlich
Justin Maurer - Lord Abbett
Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2008 Waste Connections Earnings Conference Call. (Operator Instructions).
I would now like to turn the presentation over to your host for today's call, Mr. Ron Mittelstaedt. Please proceed, sir.
Previous Statements by WCN
» Waste Connections, Inc. Q2 2009 Earnings Call Transcript
» Waste Connections Inc. Q1 2009 Earnings Call Transcript
» Waste Connections Inc. Q3 2008 Earnings Conference Call Transcript
I am joined this morning by Steve Bouck, our President, Worthing Jackman, CFO, and several other members of our senior management team.
As stated in our earnings release, we are extremely pleased with our performance in the fourth quarter. The economy fell off a cliff during Q4. But despite the most difficult economic environment we have ever experienced, operating income before depreciation and amortization, excluding acquisition-related costs, as a percentage of revenue, exceeded our expectations by about 100 basis points.
Additionally, free cash flow was a record $48 million or 18.5% of revenue. Most notably, we achieved this record free cash flow in spite of several factors; weaker than expected revenue due to the contracting economy; a 60% decline in recycled commodity revenue due to the precipitous drop in commodity prices; and severe weather conditions in the Pacific Northwest that shut down many of our operations for five to seven days.
In fact, 2008 was a record year for free cash flow in the face of record fuel prices, and a deteriorating macro economy. The recession-resilient nature of our business is best demonstrated through the stability and growth in free cash flow.
Before we get into a more detailed discussion of our performance, our outlook and the announced deal with Republic Services, let me turn the call over to Worthing for our forward-looking disclaimer and other housekeeping items.
Thank you, Ron. Good morning, everyone.
We must inform those 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 may discuss non-GAAP measures such as operating income before depreciation and amortization, free cash flow, cash earnings and adjusted cash earnings. Please refer to our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate such non-GAAP measures differently.
Now, I'll turn the call back over to Ron.
Thank you, Worthing.
As previously stated, we were extremely pleased with how we finished the year. When the economy contracts by the magnitude it did, volumes get impacted. When ice and snow shut down operations for up to a week, volumes also get impacted. This one-two punch along with the precipitous decline in recycled commodity prices in November and lower intermodal cargo activity resulted in weaker than expected revenue.
Though these items impacted revenue, we are pleased to report that continued pricing strength and our unwavering commitment to drive operating improvements in our business resulted in better than expected margins, net income and free cash flow.
Revenue was $259.6 million, up 4.8% over the prior year period. Organic growth was a negative 3.9%, broken down as follows; a positive 5.9% price, a negative 5.8% volume and negative 4% for recycling, intermodal and other services.
Although pricing in the quarter remained consistent with Q3 at 5.9%, the mix between core price and surcharges shifted, not surprisingly, to more core pricing. Core pricing was 5.2%, which is up about 120 basis points from Q3 and consistent with our focus on core price.
Core pricing for the year was about 4.3%. It's important that core pricing increased in Q4 as this was the jumping-off point going into 2009. We expect core pricing to remain strong in 2009, averaging between 4.5% to 5% for the year, with Q1 starting in the range of 5.5% to 6%.
Surcharges in selected markets due to changes in certain costs such as fuel decreased from 1.9% in Q3 to about 0.7% in Q4, due primarily to the lower fuel prices and our shift to hire core pricing in the quarter. We believe surcharges in 2009 will range between a negative 1.5% to a negative 2% to reflect the recent pullback in fuel prices.
We averaged about $3.30 per gallon for fuel in Q4, which was down about $1.15 per gallon sequentially from the third quarter and up $0.05 over the prior year. Fuel, as a percentage of revenue in Q4, increased 50 basis points year-over-year, primarily due to a shift in revenue this year, resulting from declines in lines of business with little to no fuel use, such as recyclable commodity sales.
We averaged about $3.90 per gallon during the full year of 2008. For 2009, we have locked-in almost 75% of our projected fuel needs at about $3.35 per gallon and are currently averaging about $3.05 per gallon when factoring in the remaining gallons purchased at market rates.
This lower price would result in about an $18 million year-over-year reduction in fuel cost. This decrease absorbs the impact of lower surcharges, but the estimated 70 basis point increase in 2009 core pricing reflects the lag over 2008 fuel cost recovery that hurt us in 2008, but will benefit us in 2009.