Waste Services Inc. Q4 2008 Earnings Call Transcript

Waste Services Inc. (WSII)

Q4 2008 Earnings Call

February 23, 2009; 2:00 pm ET

Executives

Ivan Cairns - Executive Vice President & General Counsel

David Sutherland -Yoest - President, Chief Executive Officer, Director

Edwin Johnson - Chief Financial Officer & Executive Vice President

Bill Hulligan - Executive Vice President of U.S. Operations

Analysts

Rich Wesolowski - Sidoti & Company

Jason Tuhio - Barclays Capital

Michael Hoffman - Wunderlich

Jonathan Ellis - Merrill Lynch

Larry Taylor - Credit Suisse

Scott Levine - JP Morgan

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Waste Services Incorporated fourth quarter and 2008 conference call. I would now like to turn the meeting over to Mr. Ivan Cairns, Executive Vice President and General Counsel. Please go ahead, sir.

Ivan Cairns

Thanks, Ann and good afternoon ladies and gentlemen. Certain matters discussed during the conference call are forward looking statements intended to qualify for the Safe Harbor for liability established by the Private Securities & Litigation Act of 1995. These statements will generally be identified as such because the context of the statements includes the words such as the company believes, anticipates, expects or words of similar expression. Statements that describe the company’s future plans, objectives or goals are forward looking statements.

Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated. The description of such forward looking statements can be found in the company’s periodic reports filed with the Securities & Exchange Commission.

Shareholders, potential investors and other attendees are encouraged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such statements.

Forward-looking statements made during the conference call today are made only as of the date of the call. The company undertakes no obligation to publicly update those statements. There will be a replay of the call available until March 4, by phoning 888-286-8010 in the U.S. or Canada, or 617-810-6888 International and entering the passcode number 31851212.

I’d now like to turn the call over to our President and Chief Executive Officer, David Sutherland-Yoest.

David Sutherland-Yoest

Thanks, Ivan and thank all of you for joining us for today’s conference call. With us today are Ed Johnson, our CFO and Bill Hulligan, our Executive Vice President of Florida operations.

We are very pleased to report that Waste Services achieved our targets for EBITDA and EPS from continuing operations hitting the high end of our range for EPS guidance for the year. The industry faced significant challenges in the fourth quarter as commodity prices dropped precipitously and special waste volumes such as auto fluff and contaminated soils declined at the landfills.

There’s also been an increased in the number of customers going out of business, but despite these headwinds we hit our key numbers and have several important accomplishments to report that have prepared us better for the upcoming year.

EBITDA for the year adjusting for restructuring charges and the write-off of a landfill development project in Florida, which I will talk about in a minute came in at $107 million. Normalized earnings per share, similarly adjusted and using a normalized tax rate came in at $0.34 per share compared to $0.06 in 2007.

Importantly, we reduced debt by over $70 million in the year. Pricing remain strong, excluding the commodity price drop and fuel surcharges high energy from price was over 4% with commodities our internal revenue growth price was 2.7. Ed will give you a lot more detail in the numbers in a few minutes. In general we are very pleased with our results.

In October, we’re successful in refinancing our bank facilities with the much improved credit agreement allowing us to place debt into Canada, extending our maturities out over five years giving us more relaxed covenants and an attractive interest rate. In hind sight that really was a phenomenal event for us and has removed any credit or liquidity concerns that other companies our size are facing in this volatile financial environment.

After closing the bank deal, we embarked on a cost reduction initiatives program to reduce our SG&A and operations cost. The main piece of the restructuring was the closure of our Boca office, but we also eliminated various other positions throughout the company and streamlined our management. As a result we have permanently eliminated $6.6 million in annual cost.

To protect these savings, during the fourth quarter we instituted a wage and hiring freeze throughout the company. Most of you that follow the industry know that commodity prices felt sharply in the fourth quarter as the recession effected demand in China, a significant worldwide buyer of recycled paper and other products virtually pulled out of the market.

Most of our competitors are much more exposed to commodities than we are, but our commodity revenue was down about $1.7 million from the prior year. Late in the quarter, we implemented something I had not seen before, our commodity surcharge for our recycling collection customers. Now, we cannot apply the surcharge to municipal contracts, but we’ve been very successful in introducing the surcharge to our commercial recycling customers, particularly in Canada where recycling is required.

For the month of January, this amounted to just over $420,000 of revenue that we would not have had. Also during the quarter, we reevaluated our development projects and have decided to discontinue a C&D landfill project in Florida. By doing so, we eliminated the requirement to pay an additional $18.5 million on the site in January of 2009 and another $7.5 million on the site would have become operational.

As we are focusing on cash generation and repayment of debt over the next few years, it just does not seem prudent to proceed to invest today’s variable dollars in such a long-term project. What we are investing in however, is opportunistic low cost acquisitions that can feed additional volumes to our landfills and enhance our market position.

In December, we brought two companies in the Southwest gulf of Florida, at or near tangible book value with immediate synergies within our existing operations. We continue to look throughout the state for similar opportunities. Also, we continue to enhance our disposal advantages in the markets we serve and are bringing our Florida strategy of full integrated operations through our operations in Canada.

With rising disposal prices in Vancouver, Edmonton and Calgary we will reopen our Edmonton transfer station in the middle of April and plan to open a transfer station in Calgary in 2010. Both of these transfer stations will deliver substantial additional volume into our Coronation Landfill in Alberta.

Like many companies in this fluctuating economic environment, we have decided not to provide detailed guidance for 2009. However, Ed will provide some of the key external factors that could cause our financial results to fluctuate from quarter-to-quarter and the relative impact on our numbers.

Our focus in 2009 is to improve our free cash flow, continue to de-lever the company and increase our earnings per share. Our capital expenditures for 2008 came in at $48 million, well below our original forecast of $55 million to $60 million. As we previously announced, we have cut our capital expense budget to between $35 million and $40 million for 2009 and we expect to be at the lower end of that range.

The month of January and the first half of February began strong. We are encouraged with what we see going forward, we will put our total efforts into cost control and increase prices, mainly at our landfills and hauling operations were possible. Effective March 1, we are raising our environmental surcharge to 6% company wide. On average, this increase will yield an additional 2%.

With that I’d like to turn the call over to Ed, who’ll provide you additional detail on our financial results.

Ed Johnson

Thank you, David. This was a very interesting quarter, there’s a lot to go over in the numbers and I’d like to start by providing some color on the charges we took in the quarter relating to our refinancing, our restructuring and the decision to back away from one of our long-term projects. Each of these three charges are the result of a proactive approach to economic circumstances and have significant forward benefit to the company.

We talked about the refinancing on the third quarter call, but good news deserves repeating. We thought, this was a good deal in October and now four month later, we think it was a great deal. The process of refinancing actually started in September of ’07, when we identified our goals for our new facility and determined a tax free method to get some of our debt into Canada.

It took us a year, but we accomplished all of our objectives and ended up with improved liquidity, extended maturities, comfortable covenants and more efficient ability to manage cash in a natural hedging of our balance sheet from a currency standpoint. This last point was generally ignored before, but given the drop in the Canadian dollar we are reflecting $20 million less in debt at December 31, than we would have if we had not been able to move debt into Canada, a direct boost to shareholder value.

With the refinancing, we were required to write-off capitalized financed cost related to the old facility and expense certain cost that are not deferrable relating to the new facility totaling $2.9 million. We also mentioned the restructuring on the third quarter call. We were successful in eliminating $6.6 million in annual cost primarily in the SG&A line. We started the process in October in anticipation of the declining economy and it was substantially completed by mid-December.

There was not a material benefit from the restructuring in the fourth quarter results. The total charge that we took for restructuring, which primarily relates to severance payments in the termination of our lease for the Boca office, amounted to $7.1 million.

The third charge relates to a landfill project in Florida that came to us a few years ago with an acquisition. We have disclosed in our filings that we had an $18.5 million contingent payment to the landowners, due in January of 2009 and an additional $7.5 million payment due upon completion of the permitting process.

The timing of the development and overall economics of the site both deteriorated and the site became a longer term investment than would be prudent in this environment. We wrote-off $9.5 million in non-refundable deposits on the site and about $800 in site permitting and engineering cost and eliminated any further financial commitment on the project.

We provided in our press release, a reconciling table that adjust our numbers for these items and gives you a good comparison to last year and as you can you see our adjusted numbers reflect strong core business results.

We reported revenue for the quarter of a $102.4 million, as compared to $123.3 million last year. $12.8 million of the decline is currency translation. $4.2 million is from the expiration of large municipal contracts primarily the main Miami-Dade recycling contract and $6.6 million is from volume. This is offset by revenue from continued strong price improvement of $3.3 million or 2.7%.

The sharp decline in commodities hurt that number by $1.7 million, so with out that our price growth would have been $5 million or 4.1%. The expiration of the Miami-Dade recycling contract was timely as that contract carried a large exposure to commodity pricing.

Cost of operations was 64.9%, as compared to 64.5% in Q4, ’07 this is due to the revenue decline, but the percentage increases fairly small as we’ve been pretty successful on reducing cost inline with volume declines.

The reported SG&A number includes our restructuring charge, so eliminating that we had $11.4 million in SG&A expense for the quarter or 11.2% of revenue. This compares to $16.9 million in the fourth quarter last year, which was 13.7% of revenue. We expect the SG&A cost as a percentage of revenue continued to decline in 2009 due to the restructuring.

Adjusted EBITDA was $24.3 million for the quarter, as compared to $27.2 million for the fourth quarter of last year. The decline is directly related to the currency conversation from Canada. Our adjusted EBITDA margin improved from 22.6% in the fourth quarter of last year to 23.7%.

Depreciation and amortization decline from $14 million in the last quarter of ’07 to $10.5 million this year. There is some currency effect here, but the decline is primarily due to a reduction in landfill amortization relating to a decline in special waste volumes, contaminated soils and auto fluff. On a percentage basis D&A came in at 10.3% of revenues as compared to 11.4%.

Interest for the quarter includes the finance cost that we wrote off, adjusting for that we had $8.8 million in interest expense compared to $9.9 million in the comparative quarter. You might recall that LIBOR rose sharply in October before falling just sharply in November. So, we did not really benefit overall from lower rates in the quarter.

The decline is primarily due to reduced debt level and the fact that a portion of our interest is now paid in Canadian dollars. Adjusted net income for the quarter was $3 million as compared to $1.9 million in the comparative quarter, a 58% improvement. Adjusted EPS was $0.07 as compared to $0.04.

Looking at the full year revenue for 2008 was $473 million, as compared to $461.4 million last year. Currency translation did not materially affect our annual numbers. The expiration of large municipal contracts for the year, which include several Florida contracts that were negative to earnings, reduced revenue by $16.1 million while the full year effective acquisitions including one quarter of Miami added $8.6 million in revenue.

Volume declines reduced revenue by $19.7 million or 4.3%, which was more than offset by price growth of $28.7 million or 6.2%. Cost of operations as a percentage of revenue were 65.3%, which is exactly the same number as the 2007 figures. SG&A expense excluding the restructuring charge was $59.4 million as compared to an adjusted $60.2 million in 2007. As a percentage of revenue SG&A was 12.5% down from 13% last year.

Adjusted EBITDA came in at a $107.1 million for 2008, an improvement of $3.9 million over the prior year and EBITDA margin improved to 22.6% compared to 22.3% in ’07. Appreciation and amortization dropped significantly again as a result primarily of landfill special waste volumes from $54.9 million in ’07 to $45.3 million in ’08. The percentage of revenue dropped to 9.5% from 11.8%.

Interest for the year adjusted for the $2.9 million in financed cost written-off was $34.6 million as compared to $40.7 million last year. For the year, we did enjoy a significant benefit from lower interest rates as LIBOR defined in the first three quarters of the year and the company’s improving financial results reduced credit spreads on it secured financing during that period.

In addition $43.4 million in debt was paid down in the first half of the year and in the last quarter with the benefit of transferring some of the debt that Canada and making further pay downs our debt went down another $26.6 million. We expect interest to continue to decline in 2008. Adjusted net income for the year was $15.7 million, compared to $2.6 million in ’07, a $13 million improvement. Adjusted EPS was $0.34 as compared to $0.06.

During 2008 and in the fourth quarter in particular, we saw a significant volatility in commodity rates, exchange rates and in special waste volumes into the landfills. In light of this volatility, it is very difficult to provide the type of detailed guidance that we gave last year. The core business and native currencies remains very stable and as we have said in past calls, close to 90% of our collection customers are under long term contract and the over production in municipal solid waste is only slightly affected by recession.

Although, we have elected not to give detailed guidance, we can give you some help on building your models on the company. First, we expect price improvement of another 3% to 5% in the core collection in landfill business. A $10 shift in the average commodity prices per ton results in approximately a $1.6 million change in EBITDA. Just over half of our revenue and income is generated in Canadian dollars and just under half of our EBITDA. The exchange rate for 2008 was 0.9381 Canadian dollars to U.S. dollars.

Interest cost will continue to decline, we expect to pay down from $25 million to $35 million in debt this year. Exchange rates will affect our reported debt and interest on approximately $140 million of our debt, which is in Canada.

That concludes our formal comments and I’d now like to turn it back to the operator to coordinate questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Rich Wesolowski - Sidoti & Company.

Rich Wesolowski - Sidoti & Company

You mentioned for the second quarter in a row at least that the Special Waste volumes were down a lot. Can you give some perspective on how much further they have to fall? Are you just past the peak there or are you nearing at trough?

David Sutherland-Yoest

Rich, when you kind of break it down between the three different operating regions, we were really pretty pleased with what went on during the quarter, comparatively in Florida. It wasn’t terrific, but it wasn’t really as difficult as what we had in Eastern Canada and in Alberta and Western Canada.

Some of that were seasonal fluctuations, but when you dig a little deeper into it and you look at the oil field waste out of Alberta, that’s really what hurt us. Not that the oil field waste wasn’t there, but because of the seasonal factors weather, we just weren’t able to get it in and as I spoke Rich earlier about the strong start to the first quarter, part of that has to do with being able to capture those volumes out in Western Canada that have been committed, that are now committed into the site.

Similarly, in Eastern Canada we’ve got a number of jobs, again somewhat weather related, some timing issues; people are trying to shove stuff off as long as they can to conserve their cash, but we feel real good about this quarter and going into the second quarter with our Ottawa WSI landfill and as to get to the last part, when we look at Florida, I’ll turn that over to Bill.

Bill Hulligan

We see the special waste volumes and Florida seem to have stabilized primarily in January and February compared to last year. We had a number of facilities, auto fluff in particular that had really the price declines and metal had shutdown significantly their operations, they have started back up. We have a number of potentially very large projects on the horizon, but seem to have stabilized in January, so far in February. We are on budget, Florida for special waste.

Rich Wesolowski - Sidoti & Company

Okay, thanks for that. Second, was hoping to square a couple of comments you made; one, here in this call and one in the last. First, did you have $6.5 million or so in annual benefit from the restructuring just completed and second that you’ll be able to get year ’09 SG&A percentage down to 11% or below, which by my math at least would take a little bit more than that $6.5 million. First, is that 11% still the ’09 goal and if so, can you describe what else you’re going to so to reduce those expenses?

David Sutherland-Yoest

Well, I think when you look at the percentages on SG&A, certainly 11% or below remains the goal, but Rich keep in mind that half of or a little more than half of our volume is in Canadian dollars and as Ed mentioned on the call, our average FX was just under $0.95 for the year; currently, we’re at about an $0.80, and Ed also gave some numbers on the revenue impact. I think it was $12.8 million for the quarter of just non-FX alone.

So, you can look at it on a whole dollar basis and we are budgeting a significant reduction in SG&A cost year-over-year, but the numbers kind of get a little goofy because of the reduction in the Canadian dollar revenue to a U.S. equivalency, because of the FX, that accounts for about 1.1% or 1.2% of additional cost, not cost in addition from 11% to 12.1% is an easier way to say it, because of the revenue reduction and I’m saying that clearly enough? Can you add in there?

Bill Hulligan

One other point is by closing the Boca offices and putting most of our overhead up in the Canada we’ve shifted our overhead cost in the Canadian dollars as well.

Rich Wesolowski - Sidoti & Company

Okay, finally if I look at the pricing ex fuel through the quarters of ’08, it looks like you were skirting at around 4% through the first three quarters and it hit three, three here in the fourth quarter absent the commodity effects. So, it looks as though you’re just barely inside the three to five ranges that you provided for ’09. What gives you the confidence with the economy heading downhill that you can maintain that range?

David Sutherland-Yoest

Well, we also stated, we’ve raised our environmental surcharge by 2%, so we’ve already got 2% in the bag there.

Ed Johnson

That 2% Rich, as I mentioned in my comments on the environmental is effective March 1, so we’re going to pickup three quarters plus a month and we have been like others in the industry. We have been really very pleased with our ability to continue to aggressively raise rates and I’m talking about calling out our in-place program that removes, eliminates those customers that are at or negative EBITDA providers. So that’s a cycle that we’ve been working on for a couple years. I think we’ve done a pretty good job of it.

When we look at 3% to 5% on price, with all the things we’re talking about, including the commodity surcharge of over $420,000 a month, we feel pretty confident about our pricing forecast and if you think about the commodities for just a second, I mentioned in the quarter we had a $1.7 million decline in our commodity revenue, but I also mentioned, this $420,000 plus a month that we booked in January, some was booked in November, we started in Eastern Canada, Western Canada started in December.

So, we’ve had three months in Eastern Canada, two months in Western Canada and we’ve had just a traffic success. I mean very few rollbacks, it is what it is. The commodity surcharge is really based upon the yellow sheet index month-to-month, kind of similar to the fuel surcharge index. So it will go up and down, but the point is we’ve been able to recapture these things.

I think we’ve really done some innovative things that some of our bigger cousins haven’t quite done yet, but I think the industry will get around to this commodity surcharge pretty much across the board. So, it’s not just one initiative on pricing. It’s environmental, it’s commodities, it’s core price increases, it’s landfill increases that will drive price increases back to the transfer station and ultimately back to the customers curb.

Our real advantage in this, I think and I talk about this with the investment that we’ve made and continue to make in Canada, to try to broaden our vertical integration in Canada more like our Florida model, is that when you collect, you transfer and dispose, you’ve got the capacity to deal with price at the landfill and take it back in the other direction, it doesn’t start at the curb with customer. So, that’s Rich what gives us the confidence that we have.

Operator

Your next question comes from Emily Shanks - Barclays Capital.

Jason Tuhio - Barclays Capital

This is actually Jason Tuhio in for Emily. First, regarding the debt pay down during the quarter, I just wanted to confirm that you repurchased $1.1 million of your senior subordinated notes, is that correct?

Ed Johnson

No, we didn’t. There was a change in the accounting treatment of deferred finance costs that’s required us to offset it against the debt. So, there’s a tiny number in there that brought the reported number down, but that will amortize and will come back to the 160.

Jason Tuhio - Barclays Capital

Alright great, that is very helpful and then just regarding the overall, this target you mentioned for debt pay down at $25 million to $30 million in 2009, will that all be focusing on the term loan and revolver and not in the bonds?

Ed Johnson

Yes and that was one of the big advantages that the refinancing as well, because we shifted more of our bank financing away from term loan and into revolver, so that we could manage our cash better and just payoff the revolver as we saw fit and not reduce our liquidity.

Jason Tuhio - Barclays Capital

Great, that’s helpful and then just along the same lines, what is the current size of your RP basket right now?

Ed Johnson

I’m not sure, I know what RP mean?

Jason Tuhio - Barclays Capital

Restricted payments basket that allows for payments within the bank debt covenants typically?

Ed Johnson

Are you kind of fishing for what we could use to pay down the sub notes?

Jason Tuhio - Barclays Capital

Well, just trying to get idea if that would be possible, so you have the option to it some point yet.

Ed Johnson

No, that is specifically restricted in the banks deal.

Jason Tuhio - Barclays Capital

Alright, great that does help a lot; and then just one last question, what you expect for a D&A for 2009 if you can give that.

Ed Johnson

Well, I’m very hopeful that D&A percentage will go up and that means our landfills are overwhelmed with volume, but realistically, in our budgeting we’re at about the same percentage as we ended up in the fourth quarter, which I believe I said it was 10.3%.

Operator

Your next question comes from Michael Hoffman - Wunderlich.

Michael Hoffman - Wunderlich

In your press release you gave some inference to free cash flow guidance. The free cash flow guidance is before your debt payment assumptions or after?

Ed Johnson

Yes, it’s before the debt repayment assumption.

Michael Hoffman - Wunderlich

Okay, and if I follow sort of the line of thinking on the free cash flow with regards, the 3% to 5% pricing, the ongoing pressure that we’re getting on volume, year-over-year we should be seeing relatively significant improvement in EBITDA.

David Sutherland-Yoest

Michael, it really depends upon two things; it depends upon how successful we’re with pricing, you right with the 3% to 5% and I’ve been clearly highly confident with the questions that I had from Rich earlier. The other part is what happens with the FX and the Canadian dollar, because as Ed spoke to those issues at the end of his remarks, now that does fluctuate pretty dramatically the results of the company on a quarter-to-quarter basis.

Michael Hoffman - Wunderlich

Okay fair enough, but and I get that within the context of all things being equal though; if the patterns that you’ve laid out, that sort of somewhat optimistic performance so far year-to-date, because it seems the negatives that we’re carrying through the second half of ’08 if stabilized, if currency holds to a relative constant, its not an unreasonable assumption. I assume that we could see a $6 million to $10 million improvement in EBITDA year-over-year.

David Sutherland-Yoest

I don’t want to give specific numbers because we’re trying to stay away from that in our guidance. I think you’ve got it, your pretty good at math.

Michael Hoffman - Wunderlich

The directions, right?

David Sutherland-Yoest

The directions, right. A lot of people are all caught up in this recession thing right now and they think it’s all happened in the last six months, we’ve had it in Florida for the last two years and Canada has been marginally impacted. It maybe impacted a little more, I don’t think significantly and we just build relatively optimistic.

I mean I talked about our 2009 focus improving free cash flow, de-levering the company and increasing our EPS and all those things are on a comparative basis and the drivers for those are the things like the increased environmental surcharge and the commodity surcharges and our core pricing initiatives.

So, I think we really got our hands pretty well around the operational side of this of what we’re doing. I think, we’re driving down cost everywhere we can and we’re leveraging the benefit of our collection transfer disposal assets. That’s really the story and you know what, this story, the WSII legacy story just continues to get simpler and simpler.

I think as we look at 2009 its going to been simpler than 2008. We just don’t know what’s going to happen out there largely with FX and to a certain extent when the economy is going to pick back up.

We’ve not been real aggressive in looking at our forecast for the year and thinking that the economy is going to get some type of a big rebound, but you know what, if it starts to come back towards the end of the year, that’s just great. We haven’t planned on it. We don’t think it’s going to happen, it’s probably 2010, but we’re pretty pleased with where we’re at.

Michael Hoffman – Wunderlich

Okay and then last question, clearly the acquisitions done in the fourth quarter would indicate that there’s a pretty significant resetting of pricing expectations by sellers. There’s a lot more realistic perspective on their part of what they can get to their business. If that certainly was the case on those transactions, are you seeing that beyond that local area; is it broadening across the whole state of Florida? Are you seeing that as well in Canada?

David Sutherland-Yoest

Well, we’re looking at it in both places and it’s really pretty much across the board. We’re focused in the Southwest Gulf in these first couple of deals. Bill’s got a couple of more deals that he’s working on in the Southwest Gulf right now. We’ve got deals on the Atlantic side over in Miami, we’ve got a couple of deals there we’re looking at, one in Orlando; but really what we are focused on is those transactions that we can acquire at a very reasonable cost and tuck them into our disposable network.

Now, these companies that we are talking about and that we are talking to, they don’t have transfer stations, they don’t have landfalls and they’ve got severe pressures with their decline in volume and increased debt in some situations, just to keep the doors opened and we’ve said this earlier, we’ve got this bank deals on back in October, we’ve got quite a bit dry powder and for those companies that have the cash, these are just terrific deals to do and the companies that are selling or maybe sellers, now they are kind of struggling with the cash and now is a good time to buy.

When I talked about the expansion of our disposal strategy in Canada, whether its Ottawa and our Transfer Station and our landfill up there or Alberta with Edmonton and also Calgary for Vancouver, all those markets, and by the way at three of those markets, Ottawa, Edmonton and Vancouver represent half of the EBITDA of our Canadian company and they represent half the EBITDA because we are vertically integrated, which means we are the low cost provider of service.

Now, we’ve got some our big cousins coming to us because their landfills are closed. So, we are going to continue to look at tuck in type acquisitions like we’re talking about in the Southwest Gulf and Florida or in the Atlantic Coast, in those markets where we have the disposal leverage and some pricing leverage.

Operator

Your next question comes from Jonathan Ellis - Merrill Lynch.

Jonathan Ellis - Merrill Lynch

I wanted to just talk briefly. I know in the past you’ve given price and volume data for both Canada and Florida, do you have those available for this quarter?

Ed Johnson

Yes, if you give me a minute and go to your question I’ll look it up.

Jonathan Ellis - Merrill Lynch

Okay sure, no problem. I’m wondering, just in terms of Special Waste since you highlighted that, in a normalized environment I recognize right now, you can’t find necessary normalized, but can you give us a sense of what the breakdown is in terms of the waste streams going in to your landfill between MSW, CND and such Special Waste?

Ed Johnson

Well, it fluctuates by landfill. Focusing on Jet landfill, our municipal solid waste or our waste business is probably around 60%, 65%, Special Waste which is going to include permanent Special Waste such as auto fluff is probably another 25% and we take very little TND at the Jetlag.

The landfills in Canada, the Coronation Landfill has very little minimum municipal solid waste right now. So, when we open up the Edmonton transfer station that will start feeding more significant volumes there. The landfill in Ottawa does not take MSW.

Getting back to your first question, the Florida IRG’s for the quarter, I need to point out the MERF part first, because the MERF price in Florida was down 29%. So, the overall IRG’s, the price was up 0.4%, the volume was down to 10.6% in Florida. In Canada, our volume was flat with price being up 4.9% in the quarter.

Jonathan Ellis - Merrill Lynch

So, it’s 4.9% was price in Canada?

David Sutherland-Yoest

Yes.

Jonathan Ellis - Merrill Lynch

Okay and the commodities surcharge that you talked about, just to be clear, how exactly does that work and you talked about how it scales up and down, but can you give us a sense of what percentage of your total commodity business is covered by this or what percentage of the fluctuations is going to be covered by this? Can you give us some kind of context around how much the surcharge theoretically will recover once it’s fully in place?

David Sutherland-Yoest

Sure, as I mentioned, we had a drop of $1.7 million in the fourth quarter based up on the really sharp decline in October with commodity pricing and if you want to counterbalance that, you need to look at the results of November, December and January commodity surcharge initiative that as I indicated was about $420,000 plus just to the month of January.

So, if you just do the math back to the envelope, it’s pretty quick. Now, let’s say $1.2 million and $1.3 million a quarter worth of recovery on the downdraft of the commodity pricing versus the $1.7 million which is a little blended, because we did have a little bit of up tick in November and a little bit more in December that we saw in the fourth quarter.

So, we can look at it and say, we’re probably recovering right now, about 70% of the drop in the commodities pricing and we would expect that never to continue and now the floor has basically been set, so it’s not really going to change at this point. It’s just really going to go up and down, like the fuel goes up and down. In this case based up on what the yellow sheet says the cost of cardboards.

Lets me give you an example; we were selling our corrugated in Ontario at $135 or $140 a ton back in September and by the end of October that same commodity was $35 bucks a ton. We were selling out in Western Canada for $120 or $130. Corrugated went to $15 a ton and November and December went to minus $15 a ton.

So, keep in mind these are not customers all across the board, these are commercial recycling customers where we have an eight or six yard container. We go out, we pickup the load all corrugated. Like in Miami, we take it back to our MERF, we bail it, we put it on our boat and we ship it to China. So, I hope that answers you question about the scope, but I really think we’ve covered off about 70% of our risk.

Jonathan Ellis – Merrill Lynch

Okay and then just because the $420,000 in January, that’s really going to be full implemented run rate going forward, based on where commodity prices are today or where they were in January I should say.

David Sutherland-Yoest

That’s exactly right. If commodity price don’t change, that $400,000 and change will stay the same; if they go back up it will decline; if they go further down it will increase.

Jonathan Ellis – Merrill Lynch

Okay that’s great. Can you just talk a little bit more specific perhaps to Florida, but in changes in the weight per container on the commercial side or service frequency, what kind of trends are you seeing there?

David Sutherland-Yoest

Well, we have seen a couple of things in Florida reflecting the economy and so we have seen more smaller customers just going out of business turning their keys over to the landlord; they are having more vacancies in strip malls. We have noticed some decrease in service and we have notice some decrease in the weights of the containers.

Jonathan Ellis – Merrill Lynch

And has this trend also been evident in Canada as well, David?

David Sutherland-Yoest

No, not so much.

Ed Johnson

I’ll add to that. Where there has been decreases in volumes and in customers, we have a continuing ongoing redistribution of our routes and reduction in number of routes or changing boundaries etc or change in hour. So, it’s not something that all of a sudden we’re surprised that the truck is bringing in 10% less volume. When this starts changing 2%, 3%, 4%, we move our boundaries and reroute our vehicles on an ongoing basis.

Jonathan Ellis – Merrill Lynch

Okay, alright that’s very helpful and then just two more quick questions. First off, on the capital spending as a $35 million to $40 million; putting aside what you kind of like to do this year from a free cash flow standpoint, what do you view as kind of an absolute bear minimum write down based on your existing asset profile for capital spending.

Ed Johnson

In the low 30s, lower than 35. If we went to bear minimum, we’d be under $35 million, we’ll be closer to 30, but we really want to maintain the average age of our fleet. We have less CapEx as a result of some of the acquisitions that we’ve done in Florida, because we have excess containers, so we’re sitting on that inventory and that’s really a good thing.

It will be sometime before we have to buy containers. Actually we’re looking for to the having to reinvest in them, because we’ve got our inventory containers out, some day that will happen, but low 30s would be absolute minimum and as I said we’re comfortable in the $35 million to $40 million, being at the low-end of that range, being close to 35 million bucks.

David Sutherland-Yoest

I guess the thing on the capital that we project is basically driven by the budgets that our divisions come up with and their capital needs and they are reviewed and they are not arbitrary guidelines that center the visions, what you need, what trucks need to be replaced, what containers need to be replaced, what landfills expansion, etc. So the capital budget is very realistic and it is not starving any of our divisions.

Jonathan Ellis – Merrill Lynch

Okay, great and just my final questions; in terms of the acquisition that you spoke about, how are you looking at those in the context of what an actual, the right EBITDA run rate is; because obviously a trailing 12 months EBITDA figure for those acquisition targets could be much different than a four or 12 month EBITDA figure. So, can you talk a little bit about maybe in the context of EBITDA multiples you’re paying and also how you’re comfortable with the right EBITDA trajectory?

David Sutherland

I’ve been ticking around this business I guess since about 1981 and these are the first two companies that I’ve ever acquired and been part of acquiring at tangible net book value for the assets and if you want to equate that to the EBITDA contribution, we’re probably buying those companies right now at around 3, 3.5 times.

As we look at ’09 and the other acquisitions that we can do, would we pay more than that for business that was larger and even more accretive from a disposal point of view; maybe, probably; but there are just some terrific deals out there and those companies that have the disposal network, and only Waste Management has a disposal network that compares to ours, that’s better than ours in the state of Florida. That’s why we invested so many hundreds and millions of dollars to buy these landfills and transfer stations and MERF’s and collection companies.

That’s why when you look at the map, Miami connects to Central Florida, Tampa connects to JED, Miami also connects to the Gulf. All those dots, the collection transfer and landfill and MERF’s, they all kind of connect one place to another from Central to South Florida. That’s the irreplaceable infrastructure that we acquired, that’s given as the ability to go out in do these really attractive deals and in a time that just difficult for a lot of people that don’t have that type of asset infrastructure.

Ed Johnson

And I guess just to expand on that, it’s kind of hard to come up with a multiple, because the two acquisitions we did in the Southwest, basically we took trucks and equipment and drivers and tucked those into our existing and operations and basically had to know other overhead and whatsoever.

Operator

Your next question comes from Larry Taylor - Credit Suisse.

Larry Taylor - Credit Suisse

I wonder in terms of thinking about acquisitions, if you guys have any thoughts about the potential given your flexibility to expand your footprint, particularly given possibly lower prices and industry consolidation elsewhere?

David Sutherland-Yoest

Larry, could you speak up just a little bit. I’m sorry; we couldn’t quite hear the question?

Larry Taylor - Credit Suisse

I’m sorry. Basically, the question revolves around the possibility for acquisitions which increase your footprint and maybe puts you into new market areas, given your financial flexibility and consolidation elsewhere in the industry?

David Sutherland-Yoest

That’s a great question. Larry we have got not a lot of opportunities, but a couple that we’re looking at, where we’ve got collection and transfer, but we don’t have landfill and that would expand our footprint. We would like to be able to acquire maybe another landfill or two. We do have a another landfill development project that’s going to take a little while and that’s in Florida, but as we look at ’09, we’d be really pleased to acquire a couple of different possibilities.

It wouldn’t immediately expand our collection footprint, but it would do a lot for us on the cost side and it would do a lot for us on the margin side and one disposable site leads to another opportunity; that could wind up broadening our current footprint, both in Florida and more in particular in Eastern Canada, in Ontario. So, we’re out there, we’re won’t be beating the bushes looking for that kind of stuff, because there’s just nothing more accretive for us than disposal sites.

Operator

Your next question comes from Scott Levine - JP Morgan.

Scott Levine – JP Morgan

With regard to the acquisition profile, if you could remind us where your comfort zone is in terms of your financial leverage and if you could also point to whether you guys would be interested in maybe extending the footprint if not necessarily in the near term, within the intermediate term, one to two year time horizon?

David Sutherland-Yoest

Well, if you look at it Scott in two ways. One, we’ve got a goal where we’d really like to get the debt-to-EBITDA ratio down to 3:1. We don’t really want to challenge the balance sheet and when I talk about expanding the footprint and I talk about our landfiller too, we’re really talking about something that is already an existing ongoing business, it generates significant EBITDA that would actually help, depending upon price obviously, but we are not going to do something that’s not accretive. We’re going to keep that de-leverage in our mind as we work down to 3:1.

Scott Levine – JP Morgan

And would it be correct to kind of interpret your tone regarding acquisition as having maybe a little bit more appetite that you have in the last couple of quarters; is that overstating it?

David Sutherland-Yoest

Yes, we’ve got a little more appetite because the pricing has come down so dramatically. Now, if we go back 12 or if we go back two quarters, we can go back 12 or 24 months, the cost of the acquisition activity then as compared to now is dramatically different. One of the two companies that we acquired here in November of the fourth quarter, we’ve been working with for two years. Now, we’ve had a couple of earlier deals that just didn’t workout, now to thankfully for us maybe it didn’t workout earlier, we are thankfully for.

I will give you some color I mean, we had a deal with one company at $20 million that we walked away from a year and a half ago, gave up the deposit and we bought that company for as Bill said net book value, tangible net book value assets less than $4 million and I think Bill can talk about it. Were they running 17 routes the day before we acquired them?

Bill Hulligan

Alright, and what you had is you had the market change to the Southwest too. Their volume wasn’t there as much as it was three years when everything was booming, but we were able to take their 17 routes, ended up taking the trucks, all of the trucks, all of the containers, ended up running an additional 4.5, 5 routes out of our existing operation. The other trucks we were able to use throughout Florida. For instance, we have not had to buy any roll off trucks for the last two years. We don’t see us buying anymore for the next year.

So, we picked up a very good asset, the trucks were in excellent shape the containers, good customer base trucked in and added no overhead whatsoever; disbursed the assets, the trucks are particularly in some containers throughout Florida and actually shipped some vehicles up to Canada and those are the kind of things that are really no brainier and the prices right and we’re looking at more acquisitions like that down there.

This is an old company in the marketplace with very good pricing, very good customer relationships and this is not some failing business. It was the largest scenarios. It was the number one company here for the like 26 to 27 years and Bill made the point correctly. The pie is still big, but over the past 18 and/or 24 months that pie contracted they lost business, their revenue wasn’t in terms of volume, wasn’t what it was two years ago or three years ago or a year ago.

So, that and it didn’t have the transfer and disposal that we have. So, it worked okay for them or worked okay for us and those are the kind of things that we’re looking at and we’ll continue to look at.

Scott Levine – JP Morgan

And it sounds like for me general business trend perspective maybe you can shed some light on how acquisition activity is trended through prior downturns? You guys have been in Florida I think for maybe a shorter period of time then maybe in prior downturns, but is your expectation, that this is going to play new hands as a consolidators as you kind of work through a rough patch here with the economy?

Ed Johnson

I think it will be very positive for our company in the coming year or so I guess

Scott Levine – JP Morgan

Okay. A couple of the quick ones; on pricing, it sounds like a 3% to 5% that you guys got. If you kind of consist in what we’ve see last year, the environmental surcharge, maybe accounting for a little bit more of that or is there any other changes by way of composition, either landfill versus collection and/or geographically speaking, where maybe some change in the pricing even though there isn’t much change in the price growth number in 2009 versus ’08?

Ed Johnson

I think in Florida, what we’re going to see and will show in the results is a more detailed focus on profitability as specific customers. We have scales now in Miami, where we pay by the ton, whether we internalize it or take it to the county sites.

We are now doing route audits, including scales weighing all of our customers, so we know what disposal is, which all of a sudden, you thought you’re doing pretty good on a customer, the size of the container in the time of took and all of a sudden you find customers believe it or not with the disposal, because materials so heavy, maybe greater than your revenues. So, I think just a greater detail on our profitability of customers. You raise the price or in fact you may have to call that customer out.

Bill Hulligan

One of the things you need to thing about on the Canadian side is, the rates have gone up in the last couple of years in Ottawa and Ontario, pretty dramatically they are up at the $85 range now unless you set that as a bar for a second and compared that to some of the markets in Western Canada, where in Vancouver the range has gone from the mid-60s up to over 70, but Calgary’s gone as of December to January 1, from $64 a ton to $75. City council passed a three year pricing program where in 2010 it will go to from $75 to $85 and in January 1, 2011, it will go from $85 to $95.

Edmonton has recently raised their rates, they are in the $60 range and these have been the governors on pricing in those markets. So, we’ve been sitting there with a line of transfer station in Edmonton that hasn’t been opened, it’s kind of been moth-balled.

Now the economics make sense for us to take our waste. We’ll also use that facility, likely did our Ottawa facility, that remember we opened in June of last year, which is 1,000 ton a day facility, it takes about 50% residential waste and 50% commercial. Now we opened that transfer station in June, by the first of July we’re doing 1,000 tons a day and we are the only transfer station in Ottawa. We’ll reopen our Edmonton facilities as I said on April 15.

So, the governor on pricing, whether it’s Ottawa, Edmonton, Calgary or Vancouver is really what the government does, the regional districts, kind of like the counties down here. They raise their rates, it opens the window for us to be able to better utilized, under utilize assets and deploy some additional cash into a additional transfer facilities to access our class one landfill in Alberta, which is a long-life site. It’s great site its been really used for event type business, out of the oil field for the most part, but now we see the ability to bring in substantial additional volumes and quality pricing that are sustainable long-term.

Operator

(Operator Instructions) Your next question comes from Rich Wesolowski - Sidoti & Company.

Rich Wesolowski - Sidoti & Company

You had mentioned plans for the Calgary station in 2010. Can you give a little detail on where you are in terms of buying the property for that?

David Sutherland-Yoest

Yes, there is really Rich two industrial parks that we’ve looking at. We’re more focused on one than the other. Well there is two question, one, can we really get the right deal that we are looking for and we are not really racing to do that at the moment because Calgary’s got a little bit of the downturn, its more of a head office city than Edmonton. Edmonton is more of an infrastructure city, but the price of the propriety has already dropped pretty substantially, so that’s one.

The second as it really to timing, whether do we do it in the first or second or nearly third quarter of next year. I think probably seconds, it’s in the middle and probably a pretty decent guess and that’s all it is. It has to do with development of the infrastructure and completing roads and lights and all that, it’s a new project. So, we are looking at that.

I’m actually going to be out there week after next to look at a couple of parcels and I would suspect between one of the two industrial parks we will find the right property in the relatively near future and we’ll get engaged in that process. Both parks already zoned for industrial and what we need for our transfer facility.

Rich Wesolowski - Sidoti & Company

So the timing of the whole project has been changing more because of the macro environment rather than the company’s desire to ration cash.

David Sutherland-Yoest

No, in this case with those rates that site when it opens will be profitable for us and we would invest in as rapidly as possible, but we which we want to be prudent too where we spend our money and how we invest in it, so just a little bit of balance.

Rich Wesolowski - Sidoti & Company

Okay, separately were there any material contract changes in the fourth quarter, Miami recycling project that was winding down and will affect 2009 comps.

David Sutherland-Yoest

No.

Rich Wesolowski - Sidoti & Company

Okay and then finally when is the absolute earliest you would expect to be allowed to cease booking the deferred liability on your goodwill.

David Sutherland-Yoest

That’s a hard one to guess and we were successful in moving some of the interest to Canada, which improved our taxable or reduce our tax loss in the U.S., but then as you know the volumes declined in the fourth quarter, so we are not quite taxable in the U.S. yet and the auditors have to see a track record of profitability. We are looking at a couple other moves right now that could improve that picture more rapidly. I think you question was when was they absolute earliest, it would be 2010.

Operator

There are no further questions at this time. I would now like to turn the meeting back over to Mr. David Sutherland-Yoest for closing remarks.

David Sutherland-Yoest

Well, again thank you everyone for joining us today, we appreciate your participation. We’re really pretty exited about the results of our fourth quarter and year end and as hopefully you can tell by the tone of our remarks today, looking forward to the way we’re going into 2009 and hopefully at some point in time, the stock market whenever it figures out what’s its going to do, we’ll realize that this company’s really pretty good value. So, thanks again for your time and participation. We look forward to talking to you soon. Bye now.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect. Have a great day.

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