Waste Connections, Inc. (WCN)

WCN 
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Waste Connections (WCN)

Q3 2013 Earnings Call

October 23, 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

Alex Ovshey - Goldman Sachs Group Inc., Research Division

Corey Greendale - First Analysis Securities Corporation, Research Division

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Joe Box - KeyBanc Capital Markets Inc., Research Division

Scott Justin Levine - Imperial Capital, LLC, Research Division

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

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

Barbara Noverini - Morningstar Inc., Research Division

Stewart Scharf - S&P Capital IQ Equity Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2013 Waste Connections Earnings Conference Call. My name is Tracy, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Ron Mittelstaedt, 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 third quarter 2013 results and provide both the detailed outlook for the fourth quarter and provide some early thoughts on 2014. 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 third quarter as revenue, EBITDA and free cash flow once again met or exceeded the upper end of our expectations. On an 18% growth in revenue, EBITDA increased 28% and year-to-date free cash flow generation exceeded 18% of revenue. Volume once again exceeded expectations at over 2% in the quarter, with continued broad-based disposal activity driving another quarter of double-digit year-over-year increases in solid waste landfill volumes. In addition, roll-off activity stepped up sequentially, resulting in a strongest year-over-year increase in pulls in several years.

E&P waste activity again played out as expected, and construction of our new West Texas Permian landfill is running ahead of schedule, with targeted completion by the end of November. We recently signed a $25 million revenue follow-on collection acquisition in Minnesota's Twin Cities region, expanding our footprint in that market following the transfer and landfill acquisition completed last July.

And also announced yesterday, our Board of Directors authorized a 15% increase in our quarterly cash dividend. Despite this increase, our dividend remained less than 20% of our expected free cash flow, leaving us with tremendous flexibility to fund our growth strategy and further increase the return of capital to shareholders.

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, expected E&P and special waste activity, expectations regarding period-to-period comparisons, potential acquisition activity, contributions from closed acquisitions, the timing for announced acquisitions to close, the timing of permitting and construction activities, our fourth quarter outlook for financial results and our early expectations for 2014. 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 Q3 was $503.6 million, up 18.3% over the prior year period. Solid waste internal growth in the quarter was almost 5%, broken down as follows: positive 2.7% from core price and surcharge, positive 2.2% volume and recycling was flat. In addition, intermodal and other services was down 0.5% in Q3. Core pricing plus surcharges has ranged between 2.7% and 3.2% during the year, and we expect this to be about 2.9% in Q4, resulting in a full year average of about 2.9%.

Continuing strength in solid waste disposal tonnage resulted in a 70 basis points better-than-expected volume growth in the period. Reported volume growth was positive 2.2% in Q3, with underlying volume growth for the quarter a little over 3% when factoring in the headwinds discussed on previous calls, both notably the wrongful termination late last year of the municipal contract in Madera, California that we are now litigating.

As we have said throughout the year, we expected that Q3 would show the strongest reported volume in 2013. We believe reported volume growth will change from positive 2.2% in Q3 to between positive 0.5% and 1% in Q4 due to a combination of day counts and a completion of a couple of special waste shops. Q3 had one more workday year-over-year, while Q4 has 1 less day, exacerbating the sequential comparison. We also had a couple of special waste jobs during the third quarter that finished in early October.

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