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Waste Connections, Inc. (NYSE:WCN)

Q3 2011 Earnings Conference Call

October 19, 2011 8:30 AM ET

Executives

Ron Mittelstaedt – Chairman and CEO

Steve Bouck – President

Worthing Jackman – CFO

Darrell Chambliss – COO

Analysts

Scott Levine – JPMorgan

Hamzah Mazari – Credit Suisse

William Fisher – Raymond James

Al Kaschalk – Wedbush Securities

Michael Hoffman - Wunderlich Securities

Matthew Dodson – Edmunds White Partners

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2011 Waste Connections Inc. earnings conference call. My name is Diana and I’ll be the coordinator for today. At this time, all participants are in a listen-only mode. Later we will conduct a Question-and-Answer Session. [Operator Instructions] As a reminder, today’s conference is being recorded for replay purposes. I would now like to turn the call over to your host Mr. Ron Mittelstaedt, Chairman and CEO. Please proceed sir.

Ron Mittelstaedt

Okay, thank you operator, and good morning. I'd like to welcome everyone to our conference call to discuss our third quarter 2011 results and provide a detailed outlook for the fourth quarter. I'm joined this morning by Steve Bouck, our President; Worthing Jackman, our CFO; Darrell Chambliss our COO and several other members of our senior management team.

We are extremely pleased with our results in the quarter as revenue, margins, earnings per share and free cash flow once again exceeded the upper-end of our expectations. The same core contributors that drove solid operating results in the first half of the year, continued throughout the third quarter. Strong pricing, increased special waste volumes, record recycling commodity values and continuing cost controls.

Margins in the quarter expanded year-over-year despite an 80 basis point increase in fuel expense as a percentage of revenues. This resulted in year-over-year percentage growth in EBITDA and earnings per share once again surpassing revenue growth.

On a 16.8% increase in revenue, adjusted operating income before depreciation and amortization grew 17.5%, and adjusted EPS grew 20% compared to Q3 2010. Free cash flow through the first nine months of 2011 was 19.5% of revenue, up 26% over the prior year period on a dollar basis.

We’ve signed or completed acquisitions totaling over $200 million of annualized revenues and returned about $110 million to shareholders through stock repurchases and dividends so far this year. And as also announced yesterday, our Board of Directors authorized a 20% increase in the quarterly cash dividend as a result of our strong operating performance and capital position.

Looking at 2012, the combination of about $80 million of acquisition rollover growth and expected core price at least equal to what we achieved in 2011, should position us well in the upcoming year. Before we get into much more details, let me turn the call over to Worthing for our forward-looking disclaimer, as well as other housekeeping items.

Worthing Jackman

Great. Thank you Ron and good morning. We must inform everyone listening that certain matters discussed in this conference call are forward-looking statements intended to qualify for the Safe Harbors from liability established by the Private Securities Litigation Reform Act of 1995, including statements relating to expected volume and pricing trends, including recycled commodity prices, contribution from closed acquisitions, signed or potential acquisition and privatization activities, share repurchases, dividends, available borrowing capacity and anticipated capital expenditures, as well as our fourth quarter and full year 2011 outlook for financial results.

Such forward-looking statements are subject to various risks and uncertainties, which could cause actual results to differ materially from those currently anticipated. These risks and uncertainties are set forth in the Company's periodic filings with the Securities and Exchange Commission.

Stockholders, potential investors and other participants are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are made only as of the date of this conference call and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

On the call, we will discuss non-GAAP measures, such as adjusted operating income before depreciation and amortization, adjusted earnings per share, and free cash flow. 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'll now turn the call back over to Ron.

Ron Mittelstaedt

Okay, thank you, Worthing. We are extremely pleased with our performance in the third quarter. Revenue was $404 million, up 16.8% over the prior year period. Internal growth in the quarter was a positive 5.2%, broken down as follows; positive 2.6% from core price, positive 0.9% from surcharges, negative 0.2% from volumes, and positive 1.9% from recycling, intermodal and other services.

Net pricing or core price plus surcharges was 3.5% or slightly above our expectations for the quarter due to higher surcharges. We expect net pricing to remain above 3%, again in Q4. For the full year, this would result in net price of almost 3.5%, with core price at around 2.7%.

We expect core pricing growth in 2012 to be at least equal to what we’ve achieved this year. Volume growth in Q3 was negative 0.2%, a notable improvement over our negative 1% outlook for the quarter, due primarily to better than expected special waste volumes and roll-off activities.

Disposal volumes in the third quarter, adjusted for the impact of acquisitions were up about 4% year-over-year due to increases in special waste and C&D volumes. About half of our landfills reported year-over-year increases in overall disposal volumes in Q3. Special waste jobs in the period were more widespread and smaller in size than the stimulus driven large jobs we called out in Q3 of last year.

MSW disposal volumes were down 3%, a portion of which is attributed to increase recycling in several of our competitive markets. As a reminder, any organic increase in amount of recycled commodities is captured and reported in recycling revenue growth rather than the volume growth line.

Roll-off pulls per day in the third quarter were up about 3% year-over-year on a same-store basis, and revenue per pull also increased 3%. Pulls per days were up in every region during the quarter and most notably in our central region where the majority of markets freeze activity.

The western region, including California was also up in Q3 and revenue per pull increased the most within the western region. Just as we said on our call in July, we remained cautious on our general outlook for volume growth given the weak sentiment around the economy, political ranker and the continuing fiscal mess within both the federal government and many states and local municipalities. As far as we can tell, nothing subjective has changed since July except for periodic speculation about possible double dip.

Therefore we believe it’s prudent looking ahead to expect volume growth to remain between zero and negative 1%, until we see indications of a sustainable recovery. We remain confident that if an improving economy does generate volume growth, we will see it in our numbers, given both the exclusive nature of almost half of our business and high market shares in many of our competitive markets.

We try not to anticipate the timing of a positive turn in volume growth but instead wait until we see sustained improvements in the economy and reported volumes.

Turning out to recycling commodities. Proceeds from the sale of recycled commodities increased almost 90% year-over-year, with about 55% of the growth due to increases in commodity values and volumes and the remainder due to contribution from the County Waste acquisition. This resulted in revenue from the sale of recycled materials totaling 6.3% consolidated revenue in the period, up from about 3.9% of revenue in the third quarter of 2010 and 6.1% of revenue in Q2 of 2011.

Prices for OCC, or Old Corrugated Containers, averaged about $197 per ton during the third quarter, up about 37% from the year ago period and 7% sequentially from Q2. However we have already seen recycled commodity prices drop almost 10% since early October and think prices could decline at least another $10 per ton from the current levels beginning in November.

We have averaged $177 per ton for OCC in Q4 2010, so the upcoming quarter and for the first time this year, recycling prices could become a headwind and weigh on margins, if prices due in fact drop further. As a reminder, we estimate that a 10% decrease in recycled commodity values from Q3 levels would result in about 50 to 60 basis point impact to margins and a $1.5 fit to EPS in the quarter.

We also note that in Q3, we spent about similar dollar amount on fuel expense as we realized in recycled commodity revenue. So any correlated reduction in fuel cost could offset a portion of the margin and EPS impact from a decline in commodity value.

In the third quarter 2011, we reported $25.6 million of recycled commodity revenue and $25.9 million of fuel expense. As noted earlier, margins in the quarter expanded despite an 80 basis point increase in fuel expense as a percentage of revenue. Adjusted operating income before depreciation and amortization as reconciled in our earnings release was $135 million or 33.4% of revenue, up 20 basis points year-over-year and almost 40 basis points above our outlook for the quarter.

Regarding acquisition activity, in August we announced that we have entered into agreements to acquire Alaska Waste, which is a largest solid waste services company in Alaska, with total amount of revenue of approximately $65 million. Alaska Waste provides solid waste collection, recycling and composting services in Anchorage, Mat-Su Valley, Fairbanks, Kenai Peninsula and Kodiak Island.

The transaction remains subject to closing conditions including regulatory approvals, which at the state level in Alaska, is a six month process as well as receipt of certain local government consents. Closing is expected to occur in the first quarter 2012. In late September we completed the privatization of the Town of Colonie, New York landfill. This transaction now makes us an integrated provider in the Hudson Valley market and will enable county waste to internalize about a 100,000 tons per year of its collection volumes under the landfills existing permit restrictions.

These two transactions together with the County Waste acquisition in early April and a few tuck-ins we’ve completed, put us a little over $200 million of acquired annualized revenues, already signed or closed year-to-date in 2011. About $80 million of this amount provides rollover growth for 2012 in addition to our outlook for continuing strong core pricing growth.

And finally, we remain on track to return between 5% and 6% of market cap to shareholders this year via share repurchases having dividends. We were pleased to announce yesterday that our Board of Directors authorized a 20% increase in the quarterly cash dividend and we hope to develop a track record going forward for continuing annual increases in the dividend amount.

And now, I’d like to pass the call to Worthing to review more in-depth the financial highlights of the third quarter as well as provide you a detailed outlook for Q4 2011.

Worthing Jackman

Thank you, Ron. In the third quarter revenue increased 16.8% from the prior year period to $404 million, 11.6% from acquisitions and 5.2% from organic growth. Adjusted operating income before depreciation and amortization in the quarter increased 17.5% from Q3 2010 to $135 million. As a percentage of revenue this was 33.4% in Q3 or a 20 basis point increase over the year ago period.

On a consolidated basis, the following of line items that moved a notable amount from a year ago period as a percentage of revenue. SG&A, net of acquisition cost decreased 80 basis points due primarily both to the impact of the County Waste acquisition with this lower SG&A percentage and to a reduction in our deferred comp plan liability resulting from the dip in the stock market during the quarter.

The $700,000 reduction in SG&A that was attributed to the decrease in deferred comp plan liability was offset by a corresponding loss on related plan asset investments which reflected in the other expenses line item, netting that full impact to about zero at the pretax level.

Direct labor cost decreased 30 basis points, brokerage pass through and recycled material cost decreased 30 basis points and insurance expense decreased 20 basis points. These improvements as a percentage of revenue were mostly offset by an 80 basis points increase in fuel expense and a 60 basis points increase in third-party disposal and transfer expenses in Q3.

The increase in third-party disposal costs reflects another impact of the County Waste acquisition, given the size of its collection operations and use of third-party sites. This impact will start to decline now that we are internalizing a portion of County Waste’s disposal volume into the Colonie landfill.

Fuel expense was about 6.4% of revenue; we averaged approximately $3.50 per gallon for diesel during the quarter, which was $0.50 a gallon or 17% above the prior year period. Our multi-year hedging strategy limited the year-over-year increase to 17% on a per gallon basis, despite an approximate 32% increase in the average spot fuel prices since the prior year period.

Depreciation and amortization expense for the third quarter increased $5.9 million year-over-year, but as a percentage of revenue declined 10 basis points to about 10.9% of revenue. Amortization of intangibles as a percentage of revenue increased approximately 25 basis points due to the County Waste transaction and this was more than offset by a 35 basis point reduction in depreciation and depletion expense as a percentage of revenue due primarily to the lack of depletion expense associated with County Waste revenue and to a lesser extent top-line leverage from organic growth on a more fixed line depreciation expense.

Net interest expense in the quarter was $11.9 million or about $2.6 million above the prior year period. This increase was primarily due to increased borrowings associated with the County Waste acquisition and higher borrowing spread associated with the recent refinancing of our credit facility, all this was offset somewhat by the exploration since the prior year period of certain higher cost interest rate swaps.

We ended the third quarter with about $1.1 billion of outstanding debt and a leverage ratio is defined our credit facility remained unchanged, which is around 2.3 times debt-to-EBITDA at the end of Q3. We have about $600 million of available capacity under our new credit facility.

Our effective tax rate for the quarter was 39.1% and our fully diluted outstanding share count for Q3 was 113.2 million shares, a decrease of about 3.6 million shares in the year ago period due to share repurchases completed since then. We repurchased almost 1.4 million shares during the third quarter. GAAP EPS in the third quarter was $0.41 and adjusted EPS was $0.42, up 20% over adjusted EPS in the prior year period. Free cash flow in the quarter was $74.3 million or 18.4% of revenue, free cash flow for the first nine months of 2011 was $219.8 million or 19.5% of revenue, up 26% over the prior year period on a dollar basis, and up about 30% per diluted share.

We now expect full year free cash flow to trend toward the upper end of the $240 million to $250 million range we provided in July, despite deciding to pull forward about $10 million of next year’s CapEx into Q4.

I will now review our outlook for the fourth quarter of 2011, before I do; I would like to remind everyone once again that 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 excludes the impact of additional acquisitions that may close during the quarter and expensing of any acquisition related costs.

Revenue in the fourth quarter is estimated to be between $379 million and $382 million, up a little more than 13% over Q4 2010. Organic growth is estimated to be between 2.5% and 3% with the components as follows

Net price, a little over 3%, recycling intermodal and other between flat and a positive 0.5%, assuming no further deterioration in recycled commodity values in current levels and volume growth around negative 1%.

As Ron noted earlier, we think it is prudent to remain cautious on volume growth, given the negative sentiment around the current state of the economy, to the extent that there is an improvement, we will let that be upside for the quarter.

Operating income before depreciation and amortization and accretion for Q4 is estimated to be between $120.5 and $121.5 million, reflecting another slight margin increase year-over-year, despite expected flat year-over-year prices from recycled commodities and fuel at current flat prices, being forecasted up about 70 basis points as a percentage of revenues compared to the prior year period.

Again, our Q4 outlook assumes a 10% decrease in recycled commodity values from Q3 levels, to average prices we realized in Q4 of 2010. We were quite pleased to be able to absorb both this impact and slightly higher year-over – significantly higher year-over-year fuel prices and still guide to potential margin expansion compared to the year ago period.

Depreciation and amortization for the fourth quarter is estimated to be about 11.1% of revenues, up from 10.9% in the third quarter due to the typical seasonal decrease in revenue from Q3 to Q4.

Operating income for the fourth quarter is estimated to be between $78.5 and $79.5 million, net interest expense in Q4 is estimated to be about $12.4 million, as a side note, this quarterly amount translates into an annualized run rate for interest expense of about $49.5 million, and this will increase to almost $13 million per quarter or an annualized $52 million, following completion of Alaska Waste acquisition, in late Q1 2012.

Our effective tax rate in Q4 is estimated to be about 39.1%. Non-controlling interest is expected to reduce net income in the fourth quarter by almost $300,000, and our diluted share count in Q4 is assumed to be about 112.7 million shares, excluding the impact of any option exercise activity or additional share repurchases that we may complete during the quarter.

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

Ron Mittelstaedt

Okay, thank you, Worthing. We have much to be thankful for already in 2011 and looking at 2012, despite a difficult economic backdrop, we are able to deliver strong pricing growth and increased disposal volumes while also receiving long-term extension of certain franchise contracts. We’ve also benefited from record recycle commodity values and manage to offset a significant increase in fuel cost, in spite of the volatility around fuel.

And finally, we’ve enjoyed a record year for acquisition activity including attractive new markets in New York’s Hudson Valley and in Alaska. We’ve also continued to expand services and reinvest in our business. We’ve now rolled out recycle rewards programs in 50 markets, partnered with multiple potential providers of alternative waste treatment technologies and reinvested more than $130 million in our business over the past 12 months, including alternative fuel vehicles and expanded recycling and composting programs.

Hidden from your view, but not from the results of the continuous efforts we’ve made to expand training, reduced turnover, improved safety, optimized routing, rollout new productivity improvement tools and keep it fund. We’ve also kept our eye on the ball and delivered strong operating performance.

Through the first nine months of the year, revenue has grown 14% year-over-year, and adjusted EBITDA has increased 16%. Margins expanded 60 basis points, adjusted earnings per share grew 23% and free cash flow increased 26%. We’ve returned $110 million to shareholders through share repurchases and dividend and increased our dividend 20% and maintained the lowest leverage and strongest balance sheet in this sector.

And as mentioned earlier, we have already made, have many of the building blocks in place that should make for another strong year in 2012, which will mark our 15th anniversary. We appreciate your time today, and I will now turn the call over to the operator to open up the line for your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) And the first question will come from the line of Scott Levine JPMorgan.

Scott Levine – JPMorgan

Hi, good morning guys.

Worthing Jackman

Good morning Scott.

Scott Levine – JPMorgan

So, I’m trying to get a sense of how conservative to think about your fourth quarter volume guidance. It seems like the third quarter came in better than you expected and some of that at least was cyclical in nature. So, in terms of what you are seeing in the business, or activity levels, it seems like they are better than you expected, if you could provide a color regarding how conservative we should think about the fourth quarter and whether this is just factoring in prognostication from economists and relate that to what you are actually seeing in the business, to get a sense of how likely that you can better than down one in the fourth quarter?

Worthing Jackman

Hey Scott, I’d say we are not smart enough to be economists and so I think as we say in the conference calls and the script it’s prudent to be cautious right now. As we watch TV, as we talk to business leaders out there that sentiment clearly is negative. The numbers don’t support that, but what I hate to do is be more optimistic looking at on a forecast or guidance and find that the sentiment becomes reality and it creates a down sided risk. So just leave volume improvements as upside to any guidance we provide.

Scott Levine – JPMorgan

Understood and if you could remind me how much call it the outsize special waste in the third quarter of last year if you were to normalize what you would consider to be outsized, what a normalized volume number for Q3 approximater look like?

Worthing Jackman

Well, remember in the guidance that we gave before, it was negative 1% for Q3 and we said on an adjusted basis that would normalize out to about flat if we took out the large special waste project. Now again while we didn’t have a sizable one to call it out specifically, the fact that some of that be in the volume numbers in Q3 were due to just increased special waste activity but across multiple jobs. And so I’d say on an adjusted basis, the numbers would be slightly positive, but against special waste it did exceed expectations for us in the quarter.

Scott Levine – JPMorgan

Understood. Turning to the M&A pipeline, you’ve had a couple large deals closed and I guess Alaska Waste next year, but could you comment on the acquisition pipeline in general and what your expectations are going forward? Any reason to think activity levels to be any different than what we’ve seen from you guys historically as you look into 2012?

Worthing Jackman

Certainly no reason to assume things would be any different than they have on an historic basis Scott. I mean, on a historic basis, probably a low year has been somewhere in the $50 million to $60 million range. Obviously this year it was a highest year ever at $200 million and we’ve been anywhere in between those bands in between. So, I don’t think there is anything out there to believe that it would be not up to our historic norms. Obviously we have closed a couple of large transactions, but the pipeline continues to remain strong. We have a half dozen to a dozen transactions that are between $10 million and $50 million each as well as 15 to 20 tuck-in acquisitions that we are looking at right now. So, the pipeline is several hundred million dollars plus in terms of total size, but right now of deals we are looking at.

Scott Levine – JPMorgan

Got it. One last one if I may, last quarter it sounded like you guys were a bit more encouraged to California which is starting to flatten out and judging from your comments in the script it sounds like that continues to be the case if you could confirm that, maybe provide a little bit more detail regarding what you are seeing close Homeland, California?

Ron Mittelstaedt

Yeah, I’d say California is still very, very spotty. Certainly there are areas of improvement. When we look at places like Southern California, and when we look at places like the Bay Area, those areas have firmed up and are improving as real estate inventory has come down and pricing has solidified there and of course the Silicon Valley is really going gangbusters still growing at about 5% a year right now. So and our operations in the Bay Area and in LA we have seen that. Now, outside of those areas, such as where we are based here in the Central Valley of California, that area remains very sluggish with very, very high real estate inventory continuing decrease in housing prices and really no construction activity and office vacancies sitting at all time highs of 30% to 35% in many markets. So, it’s a different picture in California depending on which micro economy you are looking at.

Scott Levine – JPMorgan

Got it. Thanks guys.

Worthing Jackman

Thank you.

Operator

The next question will come from the line of Hamzah Mazari, Credit Suisse.

Hamzah Mazari – Credit Suisse

Thank you. Just, first question on pricing. If you could break out just what you saw in franchise versus competitive markets? And then also, what has to happen for pricing to be flat year-over-year instead of goes up year-over-year? Is that just surcharges being lower or you are also being cautious on volume which is then reflected in price being flat? How should we think about that comment? Thanks.

Worthing Jackman

First off the data on pricing and the exclusive half of the business pricing was between 2% and 2.5% in the quarter and a competitive piece between 4.5% to 5% again that’s all including surcharges. So we broke out in our discussions about 2012, we were specific around core price, because again you’re right we don’t know where the surcharges will be next year based on the direction of fuel. If fuel stays flat from here on now, surcharges will start to anniversary themselves and start approaching zero as you get to the second half of next year. And so therefore total price to be closer to 3% all in. Ron, do you have any update to that?

Ron Mittelstaedt

No.

Hamzah Mazari – Credit Suisse

Okay and then on the volume side, maybe if you could just speak about, how MSW volumes came in relative to your expectation? You talked about special waste being the bulk of the upside and roll-off, as well as what you are seeing on the commercial side of the business? Is that business still pretty flat sequentially, or are you seeing early signs of that business pick up?

Ron Mittelstaedt

Yeah, on the commercial side, Hamzah, we saw an improvement in Q3 of this quarter, of this year excuse me, over Q3 of last year and we also saw an improvement of Q3 – sequentially over Q2. So, I would say that, we believe that that portion of the business it at least starting to stabilize relative to prior quarters and prior year. The statistics are not a dramatic change, but there is a slight change in the right direction. On the MSW volumes, that came in about where we expected. We were expecting MSW volumes to be down a little bit and they were. The growth from the disposal as we mentioned was driven by slight increase in C&D and a decent increase in special waste. So, consistent with the economy being about flat to – depending on where you are, and we are thus having a large West Coast presence, I’d say the economy is not quite flat on the West Coast, it’s still a little bit negative.

Hamzah Mazari – Credit Suisse

Gotcha, and then just last question. On your acquisition pipeline, how much of that pipeline is in markets you are not in right now? Any comments…

Ron Mittelstaedt

I would say three quarters is in new market areas, maybe in states that we’re in, but new markets within those states.

Hamzah Mazari – Credit Suisse

Okay, great. Thanks a lot guys.

Operator

And the next question will come from the line of Bill Fisher, Raymond James.

William Fisher – Raymond James

Thank you, good morning.

Ron Mittelstaedt

Good morning Bill.

William Fisher – Raymond James

Hey, Ron, you gave a color on recycling and mentioned some of the healthy volume growth, is that the volume growth is coming from a better participation on the single-stream recycle rewards or you are opening more of the recycling facilities? Let’s get some color there?

Ron Mittelstaedt

It’s really all of the above, Bill. I mean, number one a good chunk of it, about 40% almost came from the addition of County Waste being in the numbers because they have a very large morph in the Hudson Valley. And so, that is just obviously due to acquisition growth that that came on. But, as we said, we’ve added over the course of the last 18 to 24 months, 15 recycle rewards markets where we have rolled out programs and where there was really limited to know residential single-stream recycling. So clearly volumes are up due to us bringing on those programs in those markets and almost all of those markets we have exclusive relationships on the recycle rewards programs with Recyclebank, in fact in all those markets we have social relationships. So we are garnering tremendous share of those single-stream market in those markets. And so, that’s a large part of the volume increases well and then of course obviously you know about the price differentials.

William Fisher – Raymond James

Yes and looking to ’12, I mean, do you see at least the volume side of equation continued growth on that front based on the programs and whatever other investments you are making?

Ron Mittelstaedt – Chairman and Chief Executive Officer

Yes, I do. I think it will the magnitude of the growth will slow because we’ve made a concerted effort over the last 24 months to particularly in our larger competitive market where we wanted to make sure we had that exclusivity.

We made concerted effort to get out there and put it in really ahead of the curve I would say, and that’s paid off dividends this year, as I think everybody has seen. So there is not 50 more markets for us to put it in but there are some markets for us to put it in, so the pace of that recycling growth will slow, but it will – but it should still pick up year-over-year.

William Fisher – Raymond James

Okay, great, thank you.

Operator

And the next question will come from the line of Al Kaschalk with Bush Securities. Please proceed.

Al Kaschalk – Wedbush Securities

Thank you. Good morning guys.

Worthing Jackman

Yeah, good morning.

Ron Mittelstaedt

Hi, Al.

Al Kaschalk – Wedbush Securities

Ron, just to follow-on that on the additional comments you did provide on the commodity pricing in particular, so you expect – you are suggesting to us that the rate of growth on recycling or the concentration of revenues, which still I think subs way below 10% that’s going to just – you are going to evolve with your customer base or you are going to be opportunistic start a little bit more colors you go forward because we’ve certainly had two or three years of tailwind on the commodity pricing.

Ron Mittelstaedt

Yeah, well as far as the pricing I mean, obviously, we’re not exactly sure what’s going to – we are not sure at all what’s going to happen with pricing. You know pricing in 2011 has been at historic level it’s come off a little bit about $20 to $30 to fund this time here in the early part of in October.

However, I would also note that that is fairly typical and consistent with the last 15 plus year pattern of coming off right before the holiday because inventories have been filled for linerboard out of the Far East, and then after the February, March timeframe it typically comes back up and starts building in price from there. So we do not see this is anything out of the ordinary from a price change on that.

As far as for our customers, yeah, the rate of growth; and you are right it’s well less than 10% Al, it was 6.9% of revenue and that’s at record recycling level for pricing. So, it will be less than that in Q4 at current pricing, probably back down also to 6%. So I expected say between depending on pricing between 6% – 5.5% and 7% of revenue. I don’t really expected to grow beyond that at this point of time and it will – we will add nominally to it both through acquisition and as we roll out programs in markets we do not have Single-Stream Recycling today.

But as I mentioned earlier the vast majority of our markets that we plan to put single-stream in we’ve done so. So, it is not like this recycling commodity number is going to grow from 6.5% of revenue to 9% or 10% that’s not going to happen.

Al Kaschalk – Wedbush Securities

Great. I guess that will imply that the P&L won’t take that more risk than you have historically at least at the moment. Just a follow-up and maybe a two part and I’ll wrap it up for myself. Could you just restate or clarify your comments on the landfill privatization here, what does the volume trend look like over the next one to two years, you need some more time for permitting approval expansion et cetera?

And then secondly, I know it moves around with acquisitions and you have not only talked about in the past about the internalization rate and given everything else you have with the structure of your end markets it may not matter. But is 60% sort of that right level or is it no such thing in your view on the level of internalization? Thank you.

Ron Mittelstaedt

Well, in our model I do not think there is such a thing at the right level. I think it’s a very important thing to focus on when you look at the urban centered competitive market guys like WM or an RST because the reality is they make virtually no money on the hauling side, so you’ve got to have high internalization level.

In our model that’s just not – when we have a 60% internalization level it means in our competitive markets we have a 90% plus internalization level, which is also why there is a significant margin differential between us and the other guys. So in our model, you really need to look at what’s our internalization in the competitive market it’s a non-issue in the exclusive markets. Where we have it in the exclusive markets it’s just tremendous upside. So, that’s – I think something that we don’t even talk about because it’s not a critical driver to us like it is the others. I think as far as –

Worthing Jackman

As far as the privatization, as we’ve said the county was already a customer of the Colonie landfill. There is additional capacity within the site to direct more tonnage at the colony landfill. As we’ve said, we think about 100,000 tons of county’s volumes will go to that site that still leave almost 400,000 tons to address the other sites or through recycling and other reference.

To the extent that the permitted capacity increases over time we are not counting on that but we’ve said it does happen we could direct more volumes to it because it really have enough volumes to direct more to that site.

Ron Mittelstaedt

And the permitting process; the permitting process in New York is very complex like it is in most states, Al, and it’s a couple year period, but we do plan on looking at a higher daily capacity and annual capacity for the site, we believe that will happen. And when it is I mean, that is an upside for us depending on how much incremental capacity we get as Worthing said, we have ample additional volumes that can go there once if we are successful on the permitting front.

And lastly with regard to your comment on, I would say that there is not incremental risk to use that word in the P&L through recycling or single-stream recycling. Yes, there is incremental volatility and you can define that as risk but the reality is that is a far better option than not having the volumes at all because the operative assumption is that they would have just stayed in the landfill and as you are seeing another companies that is not in fact the case.

Al Kaschalk – Wedbush Securities

All right. Because my point there was that the margin – if prices stay where they at, the margin is pretty good, if margins or if prices drop and OCC and OMP are on the proxy that may hurt?

Ron Mittelstaedt

I would tell you that nobody should make capital allocation decisions on commodity value. We do not do that we make a capital allocation decision based on the price per ton that we can charge for processing and the price per customer that we get for pick up and that has a stand on its own. Anything we get from commodity is pure upside. There are people out there making decisions both large and small companies to site single-stream recycleries and everything works at $150 to $200 a ton, at $50 none of it does.

Al Kaschalk – Wedbush Securities

I agree. Thank you, Ron.

Operator

(Operator Instructions) The next question will come from the line of Michael Hoffman, Wunderlich.

Michael Hoffman - Wunderlich Securities

Hi, good morning, and nice job on the quarter.

Ron Mittelstaedt

Thank you, Mike.

Michael Hoffman - Wunderlich Securities

Can we focus in a little bit of details on some of the questions that had touched on earlier. On your container weights on front end loader business what were you seeing as container weights just so I am clear on your comments about the third quarter is better than the year-end sequentially?

Worthing Jackman

Well, what I was referring to specifically had nothing to do with what I was referring to was that are new customer start and commercial outpaced or closed or loss customer starts or increases in service outpaced or decreases in service and outpaced by a larger margin than our Q2 did over last year’s Q2. So the rate of increases in services was accelerating the rate of decreases in service was decelerating and the spreads were growing. So I was not looking at on a weight basis.

Michael Hoffman - Wunderlich Securities

Okay. So on container weight side, are weights down and then if they are can we talk little bit about how you think about the mix of that based on the types of customers?

Ron Mittelstaedt

Yeah, I do not even have that at my hand to tell you honestly, Michael. The exact weights I would tell you that I would expect that the weight are effectively flat and what we are seeing is a revenue quality improvement and but that weights are relatively flat. Obviously, where we are introducing single-stream commercial recycling we are seeing those weight per yard go up because we are taking the higher volume material out that is lighter in weight in terms of recycling.

Michael Hoffman - Wunderlich Securities

Okay. And then if I were to read into that, you know, front-end loader business has a lot of consumer aspect to it and now you are seeing some more stability in consumers, another data point that says things are stable. Like you have growth but its stable?

Ron Mittelstaedt

I think we’ve tried to say that we think that the business has been stable for the last few quarters and we are and that’s why we said, flat to up to a negative 1% because you can have up to a negative 1% just in a few individual markets that are continuing to have difficultly like California or you can have up to a negative 1% by driving as we said 4% to 5% price in a competitive market and I would take that trade-off over there.

Michael Hoffman - Wunderlich Securities

Got it. I think I heard you say that you think 0:45:11 that we are seeing in recycling process at this point is the seasonal pattern that is long-term and existed in the business ex the great recession and we’re kind of back in that cycle of dips in the fourth quarter, early first quarter and rises again kind of middle of the spring through the fall and dips again?

Ron Mittelstaedt

Yeah, I mean, that’s our belief right now, Michael, I mean, I think that the reality is, look, one of the reasons that we have seen all time record pricing in 2011 and beginning at the end of 2010 was approximately 8 million to 9 million tons a year of new recycle fiber content capacity coming online in Far East at the middle to the end of ’10 that have to be soaked up. And with demand or supply not exploding by that amount when you found an imbalance and they drove pricing in the domestic mill side to compete. The reality is that paradigm or that imbalance is not changed. It’s just the seasonal demand has come down some so I do not think we go back to pricing that looks like we have historically I think it is permanently notched certain amount because of this incremental demand out of the Far East. Now over time over longer periods of time that may change.

Michael Hoffman - Wunderlich Securities

Okay. And one of the thing should we think about G&A in the fourth quarter around $21 million or there is some year-end adjustments ticking up a little bit?

Ron Mittelstaedt

That 41 is a good number to look at.

Michael Hoffman - Wunderlich Securities

Okay. And then I had a meeting with about fifty private garbage operators and they are seeing what you said a little bit of C&D activity and their sort of message was it’s no longer going to be negative, but the company is getting excited there is a little bit of traffic hitting us what I am hearing how you are describing it as well?

Worthing Jackman

I would say that’s correct. When you are comping a low number, I mean a little activity mix the number get distorted a bit, Michael, so we are bit cautious about that. But we would say that we have seen in the third quarter and the beginning of the fourth an increased amount of roll-off pulls which there is without question, some of that is tied to some construction activity by market and that is indicative of stabilized phenomenally improved environment.

Michael Hoffman - Wunderlich Securities

Okay. And then but as depreciation rolls up from 100% to 50% in ’12 unless something happens. Do you think if something happens and the 100% is pushed forward again?

Worthing Jackman

We haven’t heard any speculation on that. So right now we are just planning on 50%.

Michael Hoffman - Wunderlich Securities

Okay. And then given public market valuations have come down as to private markets, so I appreciate that and the rise would come down a little?

Worthing Jackman

I would not say that Michael, the private market is the private market and at the end of the day there most sellers are looking at, what’s the after-tax amount I can put in my pocket and what I can go invest that in and how does that equate to what I am drawing out of the company today. And the reality is, is that it’s obviously a very, very, low fixed income market. So the after-tax proceeds going to work, it’s hard for them to get the lifestyle they had when they owned a private company. So I would say while that correlation may exist it doesn’t exist in this interest rate environment.

Michael Hoffman - Wunderlich Securities

Okay. And then in your guidance for the fourth quarter sales, what is your assumption about your special waste year-over-year comparison in 4Q?

Ron Mittelstaedt

Special waste should be up nominally in Q4.

Michael Hoffman - Wunderlich Securities

Okay. So given the rationale of the adjustment, do you think there is a opportunity there might be some uses of money amongst the consumer base and so you could see there is a potential for that up-tick?

Ron Mittelstaedt

I think we would be speculating Michael, I mean, I think you’ve got a lot of different things driving increased special weight activity. I think you’ve got people that have sat on the sidelines private developers that have sat on the sidelines for a long periods of time arguably since ’07 or ’08 and finally feel that the market is stable enough to go forward with some redevelopment. You have that going on, you’ve got, well federal stimulus money still getting appropriated out to states and states doing clean up river dredging and other things that they had put off in hopes that things would improve when they hadn’t improve they finally the states have released money. We have a number of different things, I think it’s just that things have been this way long enough that this is the new norm and people are making some investments in real estate construction activity and also redevelopment activity in number of downtown.

Worthing Jackman

Okay, fine. It’s Worthing, I looked again on the special waste sides a nominal increase on a tonnage basis whereas a decrease on a dollar basis just given what reasons we are seeing in this year versus last year.

Michael Hoffman - Wunderlich Securities

Okay, great.

Worthing Jackman

And the drag on volume on a quarter basis.

Michael Hoffman - Wunderlich Securities

Okay. And then last few questions, the cycle bank is not defending its patent anywhere in the country, does that constrain you at all about the fact that lots of little players are showing up and so there is a little bit of bleed on that opportunity?

Worthing Jackman

We probably got a concern on waste more after last week than but it doesn’t concern us dramatically again where we have it we have an exclusive deal with recycle banks in those markets we have very, very high share in those markets and we generally have the only processing facility in our markets. So, you know, the reality is, the private haulers in our market they can have access to any proprietary information they want. They don’t have the capital to do anything.

Michael Hoffman - Wunderlich Securities

Okay. And lastly, if you add up all the volumes across your collection business, your recycling business and your third-party disposal, assuming that the collection volumes that go into your landfill accountability, are you flat up down across the whole business model?

Worthing Jackman

Ask that question again Michael?

Michael Hoffman - Wunderlich Securities

So added a fall, this diversion for recycling trends and can give you a misperception of these landfill volumes down…

Ron Mittelstaedt

We are up.

Michael Hoffman - Wunderlich Securities

Most recycling that was happening so you added everything together then you processed?

Ron Mittelstaedt

Yeah, we are up.

Michael Hoffman - Wunderlich Securities

Flat or up.

Worthing Jackman

Yeah, we are up about – we are up 2%.

Michael Hoffman - Wunderlich Securities

Right, okay. Another point of - things are stable albeit maybe lower?

Worthing Jackman

We would concur.

Michael Hoffman - Wunderlich Securities

Okay. Thanks.

Operator

And the next question will come from the line of Matthew Dodson, Edmunds White Partners.

Matthew Dodson – Edmunds White Partners

Hi, quick question, okay, commodity prices are coming in what is the headwind is going to be through 2012 earnings?

Worthing Jackman

Well, we don’t have the crystal ball right now on 2012 pricing. If you look at the average for 2011, we’ll probably be somewhere close to about $185 and so if you could, if you had a crystal ball on the market relative to $185, you know, we gave a sensitivity in the prepared remarks around what every 10% up or down decline or increase would be relative to that.

Matthew Dodson – Edmunds White Partners

Yeah, I mean, if you use today and you said that it was 175 and it stays 175, that is – that is exactly….

Worthing Jackman

About a 5% dip we’ll half of the impact was about 20 to 30 basis point impact.

Matthew Dodson – Edmunds White Partners

About 20 to 30 basis points about $0.03 of EPS?

Ron Mittelstaedt

Right.

Matthew Dodson – Edmunds White Partners

Perfect. Thank you.

Operator

And there are no more questions at this time, I’d like to turn the call back to Ron Mittelstaedt for any closing remarks.

Ron Mittelstaedt

Okay, well, thank you operator. Well, if there are no further questions on behalf of your entire management we appreciate your listening to and interest in our call today. Worthing, Steve and I will be here today to answer any direct questions that we did not cover that we are allowed to answer under Regulation FD and Regulation G. Thank you again, and we look forward to speaking with you on our next earnings call or earlier at an upcoming investor conference.

Operator

And ladies and gentlemen this concludes today’s conference. Thank you once again for your participation. You may now disconnect and have a great day.

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