Waste Connections Inc. Q1 2009 Earnings Call Transcript

Apr.22.09 | About: New Waste (WCN)

Waste Connections Inc. (NYSE:WCN)

Q1 2009 Earnings Call

April 22, 2009 8:30 am ET

Executives

Ron Mittelstaedt – Chairman and Chief Executive Officer

Steven Bouck – President

Worthing Jackman – Executive Vice President and Chief Financial Officer

Analysts

Michael Hoffman – Wunderlich Securities

William Fisher – Raymond James

Scott Levine – JPMorgan

Corey Greendale – First Analysis

Jonathan Ellis – Merrill Lynch

[Philip Blackik] for David Feinberg – Goldman Sachs

Justin Maurer – Lord Abbett

Operator

Welcome to the Waste Connections earnings first quarter earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Ron Mittelstaedt, Chairman and CEO.

Ron Mittelstaedt

I'd like to welcome everyone to our conference call to discuss first quarter 2009 results and provide our detailed outlook for the second quarter. 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 start to this year. Though the weak economy continues to weigh on revenue, we exceeded our outlook for operating income before depreciation, amortization and accretion, excluding certain one-time items identified in our press release, increased free cash flow 28% over the prior year period, announced a record amount of acquisitions, saw some recovery in recycled commodity prices throughout the quarter and may be nearing the bottom for volume decline.

But before we get into a more detailed discussion on these and other topics, let me turn the call over to Worthing for our forward-looking disclaimer, some changes in GAAP investors should be aware of and other housekeeping items.

Worthing Jackman

We must inform everyone listening that certain matters discussed in this conference call are forward-looking statements intended to qualify for the Safe Harbor some 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 will discuss non-GAAP measures such as operating income before depreciation, amortization and accretion, 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 these non-GAAP measures differently.

I'd now like to highlight three changes in GAAP effective this quarter that impact year-to-year comparisons and the presentation of our financials. First, SFAS 141(NYSE:R) requires us to expense acquisition related costs that previously have been included as an element of purchase price and capitalized as such transactions.

Second, APB 14-1 requires us to record a non-cash interest expense equal to the difference between the cash coupon in our convertible notes and the estimated non-convertible borrowing rate back at the time of the issuance of these notes. It also requires us to include such non-cash interest costs in both our current and prior year periods.

Finally SFAS 160 requires for current and prior year periods that minority interest be renamed non-controlling interest, that we present amounts of consolidated net income attributable to Waste Connections and to the non-controlling interest, which essentially means we move that below net income and that we move such non-controlling interest to a component of equity on our balance sheet.

With that said, I'll now turn the call back over to Ron.

Ron Mittelstaedt

Well if we get any more accounting pronouncements we won't have time to worry about calls, so. Okay, as previously stated we are extremely pleased with our results in the quarter. Revenue was $262.7 million, up 4.9% over the prior year period driven by a 10.6% increase from acquisition activity.

Organic growth was a negative 5.7% broken down as follow, a positive 5.8% core price, a negative 1.7% from surcharges, a negative 5.8% volume and a negative 4% for recycling, intermodal and other services.

Core pricing of 5.8% came in at the upper end of our original 5.5% to 6% range we had expected for Q1, and this is up sequentially from 5.2% in Q4. Core pricing for the full year remains on track to average about 5%.

But mathematically on a reported basis will decline throughout the year as we begin to comp higher seasonal revenue quarters in the year ago period. Surcharges in selected markets due to changes in certain costs such as fuel, decreased as expected by 1.7% in Q1 due primarily to lower fuel prices.

We believe surcharges in 2009 will average a negative 2% unless there is a material increase in the market price for fuel later in the year. Overall pricing for 2009 is now fairly locked in with an average of 5% core price and a negative 2% in surcharges, resulting in a net 3% plus all in price, no different than what we had communicated for the year in February.

Volume growth in the quarter was a negative 5.8%. This is slightly lower than the negative 5% we had expected in the quarter driven primarily by a more significant drop in roll-off activities than had been anticipated. Roll-off pulls per day in the quarter were down about 16% on a same store basis year-over-year, a continued deterioration from the 12.5% decline we experienced in the fourth quarter 2008. Revenue per pull rose about 3% in the quarter. Decreases in commercial activity also contributed to our volume decline, but not by a material amount. Our residential line of business has remained relatively stable.

It's important to note that an increase in special waste activity helped reported volumes in Q1, but this had been expected and was incorporated into our outlook. Landfill volumes overall were down about 2% year-over-year, a notable improvement from the 10.5% decline we saw in Q4 of '08. Disposal volumes were down about 5% in the quarter when we exclude special waste. And landfill revenue was down more than 5% as volumes increased in some of our lower priced disposal markets.

We had noted during the second half of last year that one particular special waste project kept shifting one quarter into the next. This project finally commenced and finished in Q1, adding about 1.2% to total reported volume growth in the period.

If we exclude this larger special waste project from the 5.8% reported volume loss in the quarter, underlying volumes declined about 7% in Q1. And as noted on our previous calls, volumes in our exclusive markets continue to outperform those in our competitive markets.

The rate of volume declines decelerated as we moved into March and we believe we're close to finding bottom in this economy, barring another material leg down. We are not forecasting much of a seasonal increase in activity from Q1 to Q2 as typical seasonal increases are mostly tied to a pickup in construction activity.

And that's just not something we're willing to predict in this economy. We're anticipating a 7.5% to 8% decline in volumes in Q2, slightly higher than the underlying 7% decline experienced in Q1. Just as we are encouraged to see stabilization in volume decline, the trend in prices for cardboard, one of our more signification recycled commodities, is another stabilizing spot.

OCC prices on the West Coast have risen about 50% since early January, increasing from the low to mid $40 per ton range in the beginning of the year to the mid to upper $60 per ton range currently. OCC in one of our California markets has moved from about $20 a ton at the depth of the market last November to about $75 a ton today.

While the trends are positive, year-over-year OCC prices remain down about 50%. And such comparisons will continue to be unfavorable through October until we anniversary the precipitous drop in prices we experienced last fall.

Prices for other recycled commodities are up only slightly from last year's lows. Operating income before depreciation, amortization and accretion, margin and free cash flow all exceeded the upper end of our outlook in Q1.

Operating income before depreciation, amortization and accretion, excluding one-time items identified in our press release, was $78.3 million, or 29.8% of revenue. As a percentage of revenue this is up year-over-year despite declines in higher margin disposal volume and recycled commodity prices since the year ago period. Free cash flow was $45.5 million or 17.3% of revenue, up 28.4% over last year. We remain on track for a double digit increase in free cash flow for the full year.

We have tried to stay ahead of this economic environment and declining volumes by fluxing down labor, controlling costs and seeking further operational improvements. On our call in February we said that we had fluxed down our workforce about 4.5% primarily through attrition, at frozen salaries for employees at a manager level or above, and generally a capped wage increase between 2 and 2.5% for all other employees.

Two months have passed since then and our total headcount reduction is now 7%, excluding recently completed acquisitions. We have set a further goal of another 2 to 3% reduction by the end of Q2. This will reduce headcount at least a percentage point or two greater than projected volume decline. Also our wage freeze has expanded since then to include additional salaried employees while increases for hourly and lower salaried employees remain capped at 2.5%.

As volumes have declined we have also realized operational savings through re-routing, reduced maintenance and auto-related insurance expense. Traditionally a large percentage of auto-related incidents involve employees in the first 12 months on the job. Fewer new hires have resulted in a lower number of incidents and a corresponding reduction in auto-related insurance costs. Driving financial performance through a weak revenue environment is one part of our story this year.

The other part of our story in '09 is how we are broadening our footprint to expand our potential upside once the economy begins to improve. We were well positioned from a balance sheet standpoint to acquire the vast majority of assets divested from Republic Services while the stressed capital markets kept most other players on the sidelines. Acquiring high quality assets at a lower multiple on a lower run rate provides us a unique entry point to leverage down our purchase price multiple pretty quickly once volumes begin to recover or other operational improvements kick in.

In early April we closed the acquisition of previously announced divested assets from Republic Services in southern California, Denver, Houston, Greeneville, Spartanburg and Flint. And this week we closed on the Potreros Hills Landfill in northern California. These acquired assets total six landfills, three collection operations and two transfer stations. Annualized revenues closed so far are estimated to be around $110 million with EBITDA margins of about 42%.

The final purchase price multiple averaged just under 6.4 times operating income before depreciation, amortization and accretion. Closing of the remaining previously announced assets to be acquired from Republic in North Carolina and Lubbock remains the subject to receipt of necessary and acceptable consent, regulatory approvals and other traditional closing conditions. We anticipate closing those transactions in late Q2 or early Q3. And we remain in discussions with Republic to potentially acquire additional assets.

However, it should be noted that we have now closed or signed on over 85% of the required total DOJ divestitures from the Republic allied merger when looked at on an EBITDA basis. Our traditional acquisition pipeline of private companies remains quite active. This includes a handful of new exclusive market companies, tuck-ins in our existing markets and a couple of potential new competitive market entries.

As we said on our prior call, we believe we will close our traditional $40 to $60 million of private company acquired annualized revenue during 2009 with potential upside from recently entered markets from the Republic Services transaction.

And now I'd like to pass the call to Worthing to review more in-depth the financial highlights of the first quarter as well as provide you a detailed outlook for Q2 of '09.

Worthing Jackman

In the first quarter revenue increased 4.9% to $262.7 million. The operating income before depreciation, amortization and accretion, excluding certain items, increased 5.3% to $78.3 million. These excluded items include about $1.3 million of acquisition-related costs, expensed this year with the implementation of 141(R), a one-time non-cash charge of $1.2 million related to the company's prior corporate office lease due to the relocations of our corporate offices in February, and a $0.5 million non-cash loss on disposal of assets primarily related to the sale of certain reps.

As a percentage of revenue, operating income before depreciation, amortization and accretion for the quarter was 29.8%, a 10 basis point increase over the year ago period. Margins exceeded our outlook, primarily on lower than anticipated fuel, repairs and maintenance and insurance expense. What's also notable about this year-over-year margin increase is that it was delivered despite the declining impact negative organic growth can have on margins as a lower top line revenue provides less absorption for fixed related costs, along with year-over-year decreases in higher margin recycled commodities and disposal volumes.

Ten basis point year-over-year increase as a percentage of revenue resulted from a 70 basis point increase in gross margins, excluding the loss on disposal of assets offset by a 60 basis point increase in SG&A, again excluding the expensing of acquisition-related costs and a one-time non-cash lease charge.

Two expense categories in the quarter moved a notable amount year-over-year as a percentage of revenue. Fuel expense declined 80 basis points to about 6.3% of revenue. We averaged about $3.05 per gallon for diesel during the quarter, which is about $0.35 per gallon below the prior year period. As a reminder, we have about 4.2 million gallons per quarter this year locked in around $3.35 per gallon, with the remainder purchased at lower market prices.

Finally SG&A, know that $2.5 billion of acquisition-related costs in the lease write-off rose 60 basis points, primarily due to less absorption of fixed related costs from negative organic growth, but also to a lesser degree from higher legal expenses and a slight increase in bad debt expense. Reductions in auto-related insurance costs were offset by increases in medical costs related to a handful of larger claims in the period.

Depreciation and amortization expenses increased $4.1 million year-over-year to about 10.4% of revenue in the first quarter, up about 110 basis points from the prior year. Two-thirds of this increase as a percentage of revenue is simply due to less absorption of fixed related costs by lower top line revenue. The remaining one-third of this increase is due to an increase in amortization of acquisition-related intangibles, primarily associated with LeMay transaction.

Interest expense in the quarter increased $1.6 million, primarily due to higher outstanding debt balances. Both the current and prior year periods reflect the adoption of APB 14-1 related to convertible debentures. The prior and current year periods include $1.1 million and $1.2 million respectively for such estimated non-cash interest expense. Interest income increased $800,000 year-over-year due to an increase in invested cash balances as we waited to deploy our high cash balance on acquisitions finally completed in April.

About $300 million or so of excess cash was essentially dead money for us in Q1 as our yield on invested cash only averaged approximately 1%. We ended the quarter with about $860 million of outstanding debt and $336 million of cash. Our leverage ratio was about 2.5 times debt EBITDA, but net debt, or debt less cash, was about $525 million or about 1.5 times debt to EBITDA.

We estimate we'll be around 2.3 times levered once we complete the remainder of the announced RSG divestitures, leaving us with plenty of capacity for additional acquisitions in the year. We believe our capital structure is well positioned with no near-term maturities. Our earliest debt maturity isn't until April of 2011 and we expect to retire that obligation through excess free cash flow if necessary.

Our credit facility doesn't expire until September of 2012 and additional borrowings under that facility are priced at LIBOR plus 47.5 basis points, or currently about a total of 1%. We have about $325 million of available capacity under that facility following the recent close of the Potreros Hills Landfill acquisition.

Looking at our effective tax rate, under SFAS 160 which presents non-controlling interest below the net income line, remember before this year, this was once known as minority interest and deducted above the line, effective tax rate comparison in our base financials was 38.7% this year compared to 36.1% in the year ago period. But as we look at it our effective tax rate was 39.1% in the first quarter, compared to 39.4% in the year ago period, when you deduct non-controlling interest from pre-tax income and apply the same dollar amount to the tax position.

GAAP EPS was $0.27 and adjusted EPS in the quarter was $0.29. As highlighted in our earnings release, GAAP EPS included a $0.02 impact from acquisition cost expense in connection with the adoption of 141(R) and non cash charges from a write off associated with our prior corporate office lease and a loss of disposal of assets primarily related to the sale of certain routes.

Adjusted cash EPS was $0.34 but adding back non-cash tax items, non-cash items, led to the equity-based compensation cost amortization of assets related intangibles and non-cash interest associated with 14-1.

Our fully diluted outstanding cash share count increased 18.6% from the year ago period due to the equity offering we completed last fall. This share increase was a drag on year-over-year EPS comparisons as we sat on this debt capital throughout Q1 of '09.

Free cash flow as Ron said was $45.5 million in the quarter, 17.3% of revenue. We are extremely pleased with this start for the year as free cash flow increased 28.4% year-over-year, despite higher CapEx in the period, due to the [coming] of certain outlays earlier this year.

Free cash flow per share in Q1 was $0.56 or 165% of adjusted cash EPS. Our reported earnings growth is being diluted by an increase in amount of non-cash items running through our P&L, such as amortization of acquisition-related intangibles, equity-based compensation costs, and going forward higher depletion and accretion expense associated with landfills recently acquired from RSG. Changes in GAAP this year such as 141(R) and APB 14-1 also influenced our earnings comparison. We believe growth and free cash flow remains the best measure for how we are performing.

I will now review our outlook for the second quarter of 2009. Before I do I would like to remind everyone once again the actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement, and our various SEC filings. We encourage investors to review these factors carefully.

Our outlook assumes no change in the current economic environment and little seasonal improvement compared to what we typically experience Q1 to Q2. Our outlook also excludes the impact of three items.

First, any unannounced acquisitions that we may close subsequent to this conference call. Second, the expensing of RSG-related acquisition costs which could approach a similar dollar amount incurred in Q1, and third, any impact to our tax provision due to a potential adjustment for a tax liability resulting from a change in our estimated state tax rate following the RSG acquisitions that closed in April.

Looking at our outlook, revenue in the second quarter is estimated between $295 and $300 million up about 11.5% over Q2 '08. Revenue would approach the upper end of this range if the remaining announced transactions with RSG closed before the end of Q2 and contributed in the period.

We expect core pricing to stay north of 5% and surcharges, approximately a negative 2%. Volume growth as Ron said is forecasted between a negative 7.5% and 8% slightly lower than a negative 7% underlying volume growth we saw in Q1 excluding the one special waste project. Recycling, intermodal and other is expected to be about a negative 4.5%.

Operating income before depreciation, amortization and accretion is estimated between $90.5 and $91.5 million reflecting a margin of about 30.5%. Depreciation and amortization is estimated to be about 11% of revenue. The sequential increase over Q1 is driven by the recently acquired RSG assets.

As stated on our February call we estimate these acquired assets will have an average 18.5% D&A percentage initially given higher depletion expense until certain landfill expansions are deemed probable and due to the amortization of acquisition related intangibles.

We note that this assumed percentage could change once purchase price allocations for these transactions are finalized. This process is more complex this year under the newly effected SFAS 141(R).

Operating income for the second quarter is estimated to be about 19.5% of revenue. GAAP net interest expense is estimated to be about $12.3 million which includes $1.2 million of non-cash expense related to APB 14-1 and $500,000 of non-cash amortization of financing fees.

Interest income will be negligible in the quarter as most of our invested cash was utilized in April for acquisitions and reinvestment rates for any remaining cash continue to fall. Non-controlling interest expense should be similar to Q1.

Finally our effective tax rate, again assuming non-controlling interest is deducted above the line, is estimated to be a little over 39%. This estimate as previously noted excludes the impact of any adjustment in deferred tax liabilities resulting from a change in our estimated state tax rate following the RSG acquisition.

Now let me turn the call back over to Ron for some final remarks before Q&A.

Ron Mittelstaedt

Okay, thank you Worthing. In closing again, we're extremely pleased with our start to the year. A weak economy has weighed on revenue but pricing is strong. The pace of volume decline has decelerated and we believe stabilization is beginning.

We've flexed down our cost structure, and exceeded, our outlook for Q1. While the delay in closing of certain of the RSG assets beyond our initial estimate of April 1st, impacts our assumptions for Q2, we believe we are still on track to deliver $1.2 billion of revenue in 2009 with potential upside to our initial outlook for free cash flow.

The main difference in our top line since our full year outlook in February is that revenue from the Potreros Hills acquisition announced and completed since then, offset slightly weaker than expected volumes. Additional acquisitions completed later this year could take this number higher and we expect the acquisition pace to remain active.

We have taken advantage of our strong balance sheet to expand our strategic footprint by acquiring attractive assets and a lower multiple on a lower run rate. These building blocks increase our potential upside once the economy improves.

We appreciate your time today and I will now turn the call over to the operator to open up the lines for your questions, operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Michael Hoffman – WSI.

Michael Hoffman – Wunderlich Securities

Congratulations on a terrific free cash flow number. If we could talk about your purchasing power that you have remaining that is the dry powder between available balance sheet and your expectations for free cash flow? Can you frame that for us?

Worthing Jackman

Yes, Michael, that's about between $450 and $500 million. When you look at the remaining cash flow for the year on top of the $325 million we still have outstanding on the revolver.

Michael Hoffman – Wunderlich Securities

Okay, and then the price paid for the Republic assets given the landfill concentration would suggest that the pricing for tuck-ins the $40 million to $60 million has to be even better, that the market pricing must be really down. So can you share with us some thoughts about that and if it's that low wouldn't you buy everything you can get your hands on that's relevant to your business?

Ron Mittelstaedt

Growth for growth's sake, Michael this is Ron I think the multiples are down. I will exclude West Coast franchises which evaluation is never really necessarily been drivers for why those assets go. So if you take those off the table I would say that in the competitive market all acquisitions I think it's fair to say somewhere in the 1 to 1.5 multiple turn of EBITDA down is a fair number and at least it is at if we're the buyer.

You know we certainly can't control what others may do, but we're seeing a lot of those and tuck-in acquisitions obviously have historically been below other assets and that will continue to be, so we are very active, being very discriminatory and hopefully using good discretion as we're going. But we also have to be very careful as to what's the trajectory of the slope of the decline in a market of a company or we could overpay for if we're not careful, so spending a lot of time on that, too.

Michael Hoffman – Wunderlich Securities

Okay. And then I was with Republic last week on the road. They suggested – well Cleveland's the only piece left not sold and they were pretty clear that you were right there on the table and seemed to indicate that all likelihood you were the winner. But where is that?

Ron Mittelstaedt

You know, what I could tell you Michael is that we remain in discussions with Republic on that. Ohio was a very unique state, with a lot of different political aspects to it, that I think us and Republic and the Justice Department are trying to figure our way through right now. So I think it would be premature to say that there's something that we think that we can get done there yet.

Michael Hoffman – Wunderlich Securities

Okay. And then can you reconcile, Worthing, the second quarter guidance with 1Q results and your physical year guidance given in February.

Worthing Jackman

Well, again for the full year you've got the same outlook of $1.2 billion. So that moves some flow out of Q2 into the second half of the year. So from the top line standpoint, it's similar. I think some of the flow impact is the way the street may have been modeling it, is the street may have been assuming the typical seasonal increase Q1 to Q2, which would be about $8 million to $10 million or so in revenue from that. Again, that's not something we're willing to predict in this economy given that that's primarily driven from construction activity.

From a top line standpoint, you've got some from flow from Q2 in the second half of the year. On a pre-calculus standpoint, as we said, given a strong start to the year, we feel very comfortable that exceeding our initial outlook is probable this year.

Operator

You have a question from the line of Bill Fisher – Raymond James.

William Fisher – Raymond James

Hey Ron, just sounds like you have some good opportunities you mentioned before on expanding the landfill volumes from some of the Republic sites you bought. Other than just the economy improving over the next few years, can you just touch on like – would you agree to look at some tuck-ins there, rerouting waste, or just targeting customers closer to the site? Or just things like that?

Ron Mittelstaedt

I think specifically with regard to the Republic sites that we acquired the landfill, we do think we have reasonable amount of upside, especially as the economy improves. As you just said, tuck in acquisitions around each of the sites that we acquired, additional third party volumes that we can market. Some of those sites were at their caps under Republic's ownership.

And while now Republic has removed their volume which allows them to go – allows us to go into the market and market volume that they previously couldn't take because they were at their caps, so third party volumes and then just general economic improvements.

William Fisher – Raymond James

Okay. And just maybe, Worthing, on the CapEx for the year, maybe the volumes are down a little bit more than you thought even on landfills side. The flipside is you have done quite a bit of the landfill purchases. Any update on the '09 CapEx or is it pretty similar?

Worthing Jackman

I think as you see here today the original estimate of $125 million is still a good number, despite closing the additional landfill acquisition.

William Fisher – Raymond James

Okay. And last thing, did you get the IRS landfill tax ruling or is that still out there?

Worthing Jackman

You know, the good news and bad news. The good news is it was not in our Q1 number and free cash flow is that strong. The bad news is we have not gotten it yet. We still hope to get it this year.

Operator

You have a question from the line of Scott Levine – JPMorgan

Scott Levine – JPMorgan

With regard to the acquisition pipeline, sounds maybe robust. Can you maybe talk a little bit about how comfortable – how high you're willing to go on leverage in this type of an environment? And then, maybe looking out a little bit further, when you might consider restarting buybacks or update us regarding your thoughts on the dividends at some point in time?

Worthing Jackman

Sure. If we – again, just getting through the Republic basket that we've announced, that puts us at about 2.3 times levered. If you get through the balance of the pipeline, just through the $40 million to $60 million without any increase over that, we, in essence, free cash flow that based on what we'll do the remaining of the year. And so actually our leverage would drop a little bit from that 2.3 times as those acquisitions bring you the dialog.

So from a capacity standpoint and an ability to reassess the – turning the buyback program on. You know, as we said back in February give us through the second quarter, again into the third quarter to assess where the acquisition environment is. And we will update you on that.

From a total leverage standpoint in this environment, where would we feel comfortable driving the business to? I think somewhere in that 2.75 plus or minus range is a very comfortable leverage position in this environment.

Scott Levine – JPMorgan

All right. Thought turning to trends and looking at pricing maybe a little bit and volumes a little bit closer. Any notable changes on a regional basis through your footprint, and/or could you comment on any changes we may look for given the acquisitions in the new markets? And maybe an increased presence in some of your markets you're anticipating as you go forward?

Ron Mittelstaedt

Well, I think to the first part of your question, Scott, regarding any noticeable change, there was no real noticeable change in Q1 other than more than acceleration in the earlier part of the quarter of what we saw in Q4. If you go back to the end of Q3, beginning of Q4 last year when we started seeing a real deceleration in volume for the first time, it was predominantly all over our West Coast model.

But we're not seeing a lot of it in the Southeast or many parts of the Plains regions of our model. We really started seeing that in the October, November timeframe in the Plains and in the Southeast. And then we saw that accelerate in both those regions in January and February. And so where those region's volumes were actually down more than the West Coast ultimately by the end of the first quarter. So that was just a continuation of what we had been seeing, whereas the West Coast had really been weak all of '08 and really didn't get materially weaker in the first quarter of '09.

With regard to the Republic assets, I think your question was where we have bought? We have acquired hauling companies in the greater Houston and towards the Galveston market and obviously the Greenville/Spartanburg market. We have not yet closed on the Charlotte market from a hauling company. So obviously those would be the markets were we would be targeting additional tuck-in and pivot acquisitions.

We acquired landfills obviously in Flint, and in southern California, and in Denver. We already had a large collection presence in Denver. We would continue our acquisition footprint growth in the Denver market.

We do not at this time intend to acquire collection operations in the southern California or the greater Flint market. We intend to be a disposal and transfer operator in those markets. There is ample private companies with – to feed those two markets without us having to buy into the collection space there. And so, again as we do other transactions with Republic, if we do, we will update you.

In the Potreros Hills Landfill, obviously that's a northern California landfill we've just closed and we are an active participant on the collection acquisition side of northern California. We have some volumes that we may, that we can divert over to Potreros Hills fairly quickly. And I would expect that we would be more active now that we can internalize other northern California acquisitions into that site over time.

Scott Levine – JPMorgan

Great. Thank you. One last one, if I may, really quickly, any notable storm activity either in Q1 or in early part of Q2 that we should be thinking about on the volumes?

Operator

Your next question comes from Corey Greendale – First Analysis.

Corey Greendale – First Analysis

Ron. So given the relationship-based focus of the company, I would imagine in tough economic times like this municipalities or partners like that might be looking for something back from you, whether it's can you give us some relief on the pricing front or something else. Is there anything that you are finding those people asking for, anything that you are willing to differently, given that you want to maintain a good relationship?

Ron Mittelstaedt

Well, yes. I mean Corey, whether it's good times or bad, municipalities always have their hands out. That's nothing new. It's particularly worse in bad times. And they are under, particularly on the West Coast, under significant economic stress with falling property tax revenues, falling sales tax revenues, and a state budget that is under severe pressure and has been. So, when you look at the West Coast, particularly California, there’s no doubt the municipal government is under pressure and we are seeing a lot of different requests from municipal government.

To be honest, most of it has an upside. And what I mean by that is most of our contracts we are entitled under contract to CPI and other type of escalators, and we have municipalities asking us if we’re willing to take less of a rate increase. So if the CPI is 3.5%, would we be willing to take a 2% rate increase, illustratively, and extend our contract for a two to five-year period for foregoing the 1.5% additional CPI.

Things like that we are seeing and we are making those tradeoffs. It does improve the relationship. It gives us a much greater projectability horizon in the business, so we view those tradeoffs. So we are seeing some of that but that is baked into what we have communicated to everyone.

Corey Greendale – First Analysis

Okay, and then I wanted to ask you about your cost saving efforts. I would imagine in tough economic times you’ll see less voluntary attrition. Is that true, and can you still achieve the kind of headcount reductions you're talking about with voluntary attrition?

Ron Mittelstaedt

Very intuitive, we have achieved headcount reduction through March 31 of about 400 individuals. That has been done virtually all through attrition. I’d say 95% of that has been through attrition and non-replacements if we put a freeze on in October. So, 400 would equate to about 6.5% to 7% of the headcount we started with when we put this on in October.

That has slowed dramatically in the last three weeks and flattened out, and so we have moved to a situation where we’re going to be looking at between 150 and 200 headcount reduction through non-voluntary reductions that we are looking at here over the next ten days or so.

And we believe that'll bring us up to a number of somewhere between 550 and 600, which will get us to about a 9% to 10% reduction from where we started in October. And at that we will have outpaced what we think will be the worst case of volume declines by a couple points, and think we’re very well positioned to ride anything else out.

Corey Greendale – First Analysis

Okay, so that sounds reasonable. Just hypothetically, if the economy does take another leg down and 2010 volumes look kind of like 2009, do you hit a point where you just can’t take headcount out of the system enough, think you hit a point where you’re just down to the bone and you can’t reduce enough to offset the volume loss?

Ron Mittelstaedt

Yeah, I mean the answer to that a lot depends on where the economic decline is, and I mean look we still are doing roll-off pulls, right? I mean, if it all came out of roll-off and there was just zero construction going on in the United States in all markets, I mean we can still take out roll-off drivers and mechanics. So, it depends where it comes out.

But if it just comes out of nominal or incremental loses and residential and commercial and in landfill volume, there’s a fixed number of people required to run sites and run routes irrespective of how much volume is. So, yes, you will hit bone in the rate of your ability to decrease your costs will change, but you will still be able to remove costs. You just may not be able to do it point for point per volume decline as we’ve been able to do so far.

Operator

Your next question comes from Jonathon Ellis - Merrill Lynch.

Jonathon Ellis – Merrill Lynch

I wanted to just talk a little bit about on the commercial side you talked about some weakness in volumes, but could you give a little more context? Are you seeing the volume weakness specifically in terms of the frequency of pickups or smaller container sizes at this point?

Ron Mittelstaedt

We’re seeing it in really two areas. I’d say three areas actually, John that we look at real closely. I mean number one our service decreases, so both the frequency of pickup and the size of the container that is at a commercial location is decreasing by a greater amount than we’ve seen on historical basis and that’s what you expect in a contraction. So customers that were going five days a week are going three. Customers that had a six yarder have reduced to a four yarder. I mean those types of things, so we’re seeing that.

We’re seeing less new business starts or less gross business coming into the system. You would also expect that because there’s not a lot of business opening. And then we’re seeing an increased amount of closed businesses and businesses that have gone out of business where we’re just removing containers. So, those are the three predominant trends that have driven commercial activity, or what we call our commercial system, our frontload and our rear load commercial system down.

Jonathon Ellis – Merrill Lynch

Okay, and then just on the pricing front, you talked about the improvement from 1Q, I’m sorry, from 4Q to 1Q, which I know in parts because of the concentration of the escalators on the municipal contracts that roll through in the first few months of each year, but I’m wondering is there any way to quantify if you look at the improvement from 4Q to 1Q in terms of core pricing, how much of that was a function of the annual escalators versus price increases in your competitive markets?

Ron Mittelstaedt

We’re actually as you’re asking the question Worthing and I are trying to flip a few spreadsheets we have here.

Worthing Jackman

If you look at pricing, I mean it’s very similar to what we typically talk about and that is that pricing in our competitive markets average above the corporate average, where pricing in our franchise markets running in that 3.5 to 4%, so running below the corporate average.

Ron Mittelstaedt

So the short answer would be that a greater proportion of the upside came out of the competitive than the exclusive in Q1, John.

Jonathon Ellis – Merrill Lynch

Right, so that would imply you'd see more improvement in the competitive side than in the franchise side from Q to Q.

Ron Mittelstaedt

Yes, I think it would say we’ve, I don’t know if we’ve seen more, we've seen more improvement because of our positioning, we’ve been able to push price harder.

Worthing Jackman

Right.

Jonathon Ellis – Merrill Lynch

Okay and you did talk about revenue per roll-off pull, but any additional color on pricing in the commercial, residential? I know it’s less important for you, but on the landfill side of the business?

Ron Mittelstaedt

No.

Jonathon Ellis – Merrill Lynch

In your competitive market’s, obviously, we were just talking about.

Ron Mittelstaedt

Yes, no real material changed. I think the only, no real material change on the price at this point and time, John. We’re still seeing sort of that 3% on the disposal side, but what I will tell you is that as fuel abates as it has, the radius that a transfer hauler and a direct hauler can now travel to landfills increases quite dramatically, which is something that has not happened over the last three years.

And with that, you will see that that will start to take pressure, pricing pressure off of the disposal side. And what I mean by that is you will not have as much pricing power at the disposal side throughout all the markets if diesel continues to stay in the, crude in the $45 a barrel range relative to the $100 plus it’s been over the last two plus years prior to that.

Jonathon Ellis – Merrill Lynch

Okay, just two very quick questions, on the labor savings you talked about the number of heads or the number of employees that you’re seeking to eliminate, but is there any way to put that in dollar terms. You talked about a $10 million, I think, annualized run rate for labor savings as of 1Q, or as of the beginning of 1Q. Can you update us on where that run rate is now?

Worthing Jackman

Yes, I mean that run rate was tied to about a 4.5% reduction in headcount, so with reduction up 50% from where we were at the 4.5% from attrition, that puts it at around 15 or 16 million from a run rate standpoint and this upcoming reduction likely brings that number north of 20.

Jonathon Ellis – Merrill Lynch

Okay, and then just my final question, on the recycling business, and obviously commodity prices have started to improve as you noted, but I’m wondering any thoughts or any actions that you’re taking to try to restructure some of your existing recycling contracts to help kind of share the risk, so to speak, with municipalities going forward?

Ron Mittelstaedt

Really not much of an opportunity to do that with the municipalities at this point in time, John, I mean they were the ones wanting to restructure them when commodities were 150, and we as a sector said no we're not too receptive to that. They've reminded us of that several times now that it's reversed, so not much of a chance to restructure them in that way.

What we are looking at is various hedge instruments and supply contracts that we will look to enter on the sale of the commodity side going forward. Not now, not at this price, but at a price somewhere north of where we are now and where things were going into the fourth quarter so that we don't find ourselves in this type of a situation going forward.

Operator

Your next question comes from David Feinberg – Goldman Sachs.

[Philip Blackik] for David Feinberg - Goldman Sachs

I've just got a couple of questions. First one, regarding the acquisition related cost and the non-cash loss on the prior corporate office lease, just wanted to check and confirm which line item are these items coming from?

Worthing Jackman

David, your voice sounds like it's changed a little bit. It's all in SG&A it's about 2.5 million in SG&A.

[Philip Blackik] for David Feinberg - Goldman Sachs

Okay. Another question, are you starting to see a more competitive pricing environment within the collection and landfill segments? I was just trying to see if private carriers are trying to undercut the company price anywhere that you're starting to see.

Ron Mittelstaedt

I would say that we have not yet seen any material change in that environment in the pricing environment. I think for the most part it remains very strong and we really haven't. And part of that could be that a lot of private operators, particularly in this environment, just do not have access to capital.

The government can tell you anything they want. Go talk to a lot of private businesses in this industry or any others and their access to capital is about zero at this point in time. So that would be something that would be necessary to take advantage of deploying and pursuing customers at a lower price, and we're just not seeing that.

[Philip Blackik] for David Feinberg - Goldman Sachs

Okay, and by the way, I had forgot to mention before, this is a [Philip Blackik] calling on behalf of David Feinberg.

Ron Mittelstaedt

We figured that.

[Philip Blackik] for David Feinberg - Goldman Sachs

Two more questions. It's a follow-up to the second question. With regard to landfill pricing behavior, on the more municipalities owned operated landfills, is that more or less competitive on that front also?

Ron Mittelstaedt

Is that, repeat that part of it, is it more or less competitive than historical?

[Philip Blackik] for David Feinberg - Goldman Sachs

Right, as far as the pricing on landfills for the municipality segment.

Unidentified Corporate Participant

That's market by market, [Philip], I would tell you. There are markets and I give you a good one, Southern California, and we looked at this when we were doing due diligence on Republic and we've looked at it since closing.

There are markets where large municipalities, such as the city or the county of Los Angeles have lost dramatic volumes in this contraction as much as 30% to 40% of their disposal volumes they've lost because they were so tied to construction activity. And those sites, some municipal sites have gotten more aggressive on price to attract volumes and so it's market by market. For the most part, we are not seeing a change in behavior in municipal landfill pricing.

[Philip Blackik] for David Feinberg - Goldman Sachs

Okay, last question I had. We're starting to see incremental points, positive data points, out of China, any indication of a pickup in demand for recycled commodities and possibly a subsequent recovery in pricing?

Worthing Jackman

Yes, we continue to see the trend slightly higher through April so far. We're not forecasting a return to pricing we saw last year, which is twice what you're seeing right now. But I think some recovery into that $70 to $85 a ton range as you move through the next quarter or two is probable.

Operator

Your next question comes from Justin Maurer - Lord Abbett.

Justin Maurer - Lord Abbett

Sorry if I missed this, Ron, but could you talk a little bit about the monthly progression in the first quarter of volumes? And the reason I ask is you talk about the commentary about it feeling a little more stable, but yet the second quarter run rate you're assuming worse than the first quarter.

Worthing Jackman

Yes, let me do the math first on the run rate because what you see in the second quarter is slightly lower than the underlying volume loss in Q1. Obviously we're comping a prior year quarter where you had a seasonable increase in activity Q1 to Q2. So, a lot of that is just the absence of an assumed seasonal increase Q1 and Q2 this year.

My last commentary before I hand it back to Ron is, as we move through Q1, the projectability or forecastability in the business improved dramatically. We normally think of this business as having about, at least given our model, about a 1% volatility to expectations on a top line.

And that persisted through most of last year until you got into Q4 when the economy fell of the cliff and all of a sudden what was a 1% projectability became about a 3% to 4% volatility, and we entered the year at the same time volatility but exited the quarter closer to that 1% or 1.5% or so projectability. So, things feel better as we move throughout Q1 and enter into Q2.

Ron Mittelstaedt

Yes, Justin, let me give you just some, I'm sitting here just looking at a few of these statistics. Let us tell you why we say we think it got a little better. Roll-off, although roll-off we said pulls were down 16% in Q1, in January they were down over 18%. In February they were down over 17%, and in March that dropped to 13%. So it improved each month.

Now, if you go back to Q4, in October when we really started seeing it was down ten, in November 13, in December 15, and then you saw it peak at 18 in January, come down a little in February, and then drop fairly decently in March. So we're almost getting back to the December, November numbers.

So that's sort of why we said it appears to be bottoming. Disposal volume is almost the exact same thing as percentages down. Again, if you go back on disposal volumes in Q4, October was down ten, November ten, December 12, and January actually was only down just under five, February and March were less than that.

So that's how we got down to a negative two on disposal normalized down to negative five when you take out special weight. So these trends all seem to correlate to things really where the worst in January, February and saw a little bit, definitely improvement back to November, December levels in March.

Justin Maurer - Lord Abbett

Ron, again, relative to collection versus transverse landfill, does there tend to be a pretty tight range? Do those move within a fairly tight range? And has that widened a bit the last couple of quarters?

Ron Mittelstaedt

I don't know if I'm following the question, Justin.

Justin Maurer - Lord Abbett

Well, just in your statistics in core volume declines, that's a compilation or a mix of those three, correct?

Ron Mittelstaedt

Well, roll-off I gave you is our probably our most, is our most economically and most current real time business indicator.

Justin Maurer - Lord Abbett

But, ex-roll-off. Sorry.

Ron Mittelstaedt

And then what I gave you was landfill volume, and obviously, that's a pretty real indicator of all systems.

Operator

Thank you. You have no other questions. At this time, I would like to hand the call to Mr. Mittelstaedt for closing remarks.

Ron Mittelstaedt

Okay. Well, if there are no further questions, on behalf of our entire management team, we appreciate your listening in and interest in our call today. Worthing, Steve, and I will be in the office if there are any direct questions we did not cover that we are allowed to answer under regulation FD and regulation G, we will be happy to do so. Thank you and we look forward to speaking with you at an upcoming investor conference, or our next call.

Operator

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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