Waste Connections, Inc. (WCN)

WCN 
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Waste Connections (WCN)

Q2 2013 Earnings Call

July 24, 2013 8:30 am ET

Executives

Ronald J. Mittelstaedt - Chairman, Chief Executive Officer, Chairman of Special Equity Award Committee and Chairman of Executive Committee

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

Analysts

Hamzah Mazari - Crédit Suisse AG, Research Division

Usha Chundru Guntupalli - Goldman Sachs Group Inc., Research Division

William H. Fisher - Raymond James & Associates, Inc., Research Division

Michael E. Hoffman - Wunderlich Securities Inc., Research Division

Corey Greendale - First Analysis Securities Corporation, Research Division

Joe Box - KeyBanc Capital Markets Inc., Research Division

Adam R. Thalhimer - BB&T Capital Markets, Research Division

Barbara Noverini - Morningstar Inc., Research Division

Jeffrey D. Osborne - Stifel, Nicolaus & Co., Inc., Research Division

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Tony Bancroft - Gabelli & Company, Inc.

Stewart Scharf - S&P Capital IQ Equity Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Quarter 2 2013 Waste Connections Earnings Conference Call. My name is Matthew, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

And now I would like to turn the call over to Mr. Ronald Mittelstaedt, who is the Chairman of the Board and CEO. Please proceed, sir.

Ronald J. Mittelstaedt

Okay. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our second quarter 2013 results and provide a detailed outlook for the third quarter. I'm joined this morning by Steve Bouck, our President; Darrell Chambliss, our COO; Worthing Jackman, our CFO; and several other members of our senior management team.

We are extremely pleased with our results in the period. Favorable trends experienced earlier in the year accelerated during the second quarter, resulting in revenue, adjusted EBITDA and adjusted free cash flow all exceeding the upper end of our expectations for the quarter. Most notably, solid waste landfill volumes increased double digits, with municipal solid waste volumes up 14% in the quarter, the strongest increase we've experienced in several years.

Put simply, volume recovery for the solid waste sector, which typically lags an improving economy, is finally materializing. This improving environment drove about a 200-basis-point increase in organic volume growth relative to our outlook for the quarter. As a result, revenue in the second quarter exceeded the upper end of our outlook by almost $8 million and adjusted EBITDA was 34.6% of revenue or about 40 basis points above our outlook. Adjusted free cash flow generation through the first 6 months of the year remained strong, up more than 18% year-over-year to $175.7 million or 18.7% of revenue.

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

Worthing F. Jackman

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, including statements related to expected volume and pricing trends, E&P activity, recycled commodity prices, expectations regarding period-to-period comparisons, potential acquisition activity, contributions from closed acquisitions, the timing of permitting activities and inquiries related to MLP treatment, the impact of the relocation of the company's corporate headquarters from California to Texas and our third quarter outlook for financial results.

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. Stockholders, 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 will discuss non-GAAP measures, such as adjusted EBITDA, adjusted net income and adjusted net income per diluted share and adjusted free cash flow. Please refer to our earnings release for 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 these non-GAAP measures differently.

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

Ronald J. Mittelstaedt

Okay. Thank you, Worthing. Revenue in Q2 was $489.4 million, up 19.1% over the prior year period. Internal growth in the quarter was almost 3%, broken down as follows: positive 2.6% from core price, positive 0.2% from surcharges, positive 0.9% volume, negative 0.8% from recycling and negative 0.5% from intermodal and other services.

As previously noted, volume growth in Q2 was about 200 basis points better than expected. We had guided volume growth between negative 1% and negative 1.5% for the quarter due to the approximate negative 1.2% headwind in the period from prior year items we have discussed on previous calls that have yet to anniversary, primarily the wrongful termination late last year of a municipal contract in Madera, California that we are now litigating.

A notable ramp in solid waste disposal tonnage, which typically leads a waste -- a sector recovery, drove reported volumes up 0.9% in the second quarter. More importantly, underlying volume growth for the quarter, net of the headwinds, was closer to 2%. And we expect volume growth in Q3, despite similar headwinds as Q2, to increase sequentially to a reported 1.5% or about 2.5% net of the headwind.

Landfill volumes on a tonnage basis in the second quarter adjusted for the impact of acquisitions were up about 13% year-over-year. All 3 solid waste streams increased year-over-year in the quarter, as MSW disposal volumes grew 14%, construction and demolition debris-related volumes rose 26% and special waste volumes were up 7%. Year-over-year trends in MSW volumes improved throughout the quarter from up 8% in April to up nearly 20% in June. More than 70% of our landfills reported increases in disposal tonnage in the quarter.

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