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Executives

Ronald J. Mittelstaedt - Chairman and CEO

Worthing F. Jackman - EVP and CFO

Analysts

Jagdeep Ghuman - Credit Suisse

Scott Levine - J.P. Morgan

Leone Young - Citigroup

Corey Greendale - First Analysis

Bill Fisher - Raymond James

Jonathan Ellis - Merrill Lynch

Brian Butler - Friedman, Billings, Ramsey

Waste Connections, Inc. (WCN) Q4 FY07 Earnings Call February 11, 2008 5:00 PM ET

Operator

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2007 Waste Connections' Earnings Conference Call. My name is Melanie, and I will be your coordinator today. At this time, all participants are in listen-only mode. We will conduct the question-and-answer session at the end of this conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to Mr. Ron Mittelstaedt. Please proceed.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Okay. Thank you, operator, and good afternoon everyone. I'd like to welcome you to our conference call to discuss the fourth quarter results and to provide you a detailed outlook for the first quarter and the full year 2008.

I am joined this afternoon by Steve Bouck, our President; Darrell Chambliss, our COO; Worthing Jackman, our CFO and several other members of our senior management team.

We are extremely pleased with our results, both in the fourth quarter and for the full year 2007. Revenue in 2007 grew 16.3% with double-digit internal growth. Reported operating margins exceeded our initial expectations, expanding about 80 basis points in the year, despite the dilutive impact of acquisitions completed during the year, higher fuel cost, particularly in Q4, and incremental costs associated with an unanticipated labor disruption in El Paso that commenced right before Thanksgiving.

In addition, we deployed more than $250 million for capital expenditures and acquisitions to build foundation for future growth, exiting the year at more than $1 billion revenue run rate. We also returned $110 million to shareholders through our stock repurchase program, repurchasing over 5% of our outstanding shares. Despite these capital outlays, our leverage ratio improved during the year, due to the continuing strength of our operating result and increased free cash flow.

Our strategic positioning and operating strength were also recognized midway during the year, when S&P upgraded our credit to investment grade. Put simply, we enjoyed record results in 2007, our Company's tenth anniversary year, and are well positioned for the next decade.

But before we get into the details, let me turn the call over to Worthing for our forward-looking disclaimer and other housekeeping items.

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

Thank you, Ron. Good afternoon. 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. 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'll refer to operating income before depreciation and amortization and free cash flow, each a non-GAAP measure. Management uses these non-GAAP measures as two of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We define operating income before depreciation and amortization to exclude any gain or loss on disposal of assets.

Free cash flow is defined as net cash provided by operating activities plus or minus any changes in book overdraft plus proceeds from the disposal of assets and excess tax benefit associated with equity-based compensation less capital expenditures and distributions to minority interest holders. Where appropriate, we will highlight particular items in certain periods to improve comparability.

Finally, we note, that other companies may calculate these non-GAAP measures differently.

Now I will turn the call back over to Ron.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Okay. Thank you, Worthing. In 2007, internal growth help differentiate our results from other public players, and this differentiation should continue in 2008. Strong price and positive volume growth have been and should continue to be primary driver to double-digit revenue growth and margin expansion.

Margin expansion in our underlying business is usually easy to see through reported results. However, some times, the strength of it is masked by significant increases in fuel costs or the dilutive impact of acquisition. Q4 was the first time in 2007 when both these items influenced reported results in a material way. As we go through today's call, we will highlight the impact these items had on Q4's result and are expected to have during 2008.

Looking at the fourth quarter, revenue was $247.7 million, or almost $2 million above the high end of our guidance. Organic growth was 10.3%, broken down as follows: 4.6% price, 3.5% volume and 2.2% for recycling, intermodal and other services.

Acquisitions closed during the quarter contributed approximately $1 million to reported revenue in the quarter. As forecasted, core pricing in the quarter was 4%. Surcharges in selected markets due to spikes in costs such as fuel, increased sequentially from about 20 basis points in Q3 to about 60 basis points in Q4. This sequential increase was primarily due to significantly higher fuel cost as we... that we began to incur in Q4. We expect the pricing environment to remain quite stronger in 2008, especially given continuing high fuel prices. We believe our overall price growth should average between 4.5% and 5% for 2008, with Q1 starting out slightly above 5%, due both to the timing early in the year for when we implement a majority for our price increases, and to expected increases in surcharges, as well as having a seasonally lower revenue denominator in Q1.

Core pricing growth should remain around 4% of overall reported price growth with the remainder being surcharges. As previously mentioned, volume growth was 3.5% in the quarter. About 2.6% of which was contributed from two new long-term municipal contracts we started in Q1 of 2007 in, both, Washington and Northern California. Core volume growth was an additional 1%, while special waste and associated pass-through revenue was actually slightly down year-over-year. We expect volume growth to average about a positive 1% for 2008 with Q1 expected to be between 2.5% and 3%. About 1.5% of which would be attributed to the two month of results from our West Valley collection contract, contributing to organic growth in the period before finally anniversaried.

Roll-off activity during Q4 remained about similar to what we had experienced in Q3. Pulls per day on a same-store basis were essentially flat year-over-year in Q4 and revenue per pull was up about 6%. As many listeners know, activity in Q4 can be influenced by weather, either good or bad. We saw continued weakness in the Central California and Rocky Mountain market, and pockets of the Northwest and Southeast. These declines in the quarter were almost fully offset by increases in number of pulls, particularly in parts of the Southwest and the Plains states.

Landfill volumes remain strong in the quarter, up almost 14% on a reported basis and a little more than 6% on a same-store basis. Geographic areas where some of our sites experienced notable increases during the quarter included the Lower Central Valley of California, the Pacific Northwest and the Upper South East.

Operating income, before depreciation and amortization, was $72.8 million, or 29.4% of revenue. This is about 80 basis points below our margin guidance for the quarter, due to about a 100 basis point net impact from higher than anticipated fuel prices and costs associated with the labor disruption in El Paso. In October, we had provided Q4 guidance based on a then current fuel price, which was about $0.40 above the $2.45 per gallon we had averaged in Q4 of '06. After our call, a quick addition of $0.40 run-up in the market prices resulted in an average price of about $3.25 per gallon in the quarter or $0.80 above the average paid in the prior year's period. The additional $0.40 increase translated into another $2 million of cost above our guidance, based on approximately 5.1 gallons of fuel used in the quarter.

In El Paso, mechanics and certain container shop personnel along with about a third of our drivers initiated an economic strike in their attempt to force a collective bargaining agreement. These 55 employees were immediately and permanently replaced. The majority of our strike-related costs were associated with Waste Connections' employees from around the country who flew down to assist in local operations during the holiday period and subsequent to train new hires. The El Paso matter cost us approximately $700,000 of direct cost in the fourth quarter and we estimate an additional 200,000 of related cost in early Q1.

On a year-over-year comparison in the fourth quarter, our margin for operating income before depreciation and amortization as a percent of revenue also declined 80 basis points from 30.2 to 29.4. I'd note that a 100% of this decline was due to acquisitions completed and new contracts commenced, since the year ago period. In other words, reported margins would have been up 30 basis points year-over-year excluding the impact of new acquisitions and contracts and the El Paso strike, despite the significant increase in fuel. This is a good example of how our ability to expand margins can sometimes be masked by spikes in fuel costs or new acquisitions and contracts.

Earnings per share in the quarter was $0.33. This reported number includes the $0.02 hit from the $2.7 million of higher than anticipated costs already discussed; fuel and the El Paso strike. Free cash flow was $25 million or 10.1% of revenue in the quarter and $106.2 million or 11.1% of revenue for the year.

CapEx in 2007 was $124.2 million, up almost 30% over 2006, primarily due to the start-up of our West Valley City's long-term collection contract in Northern California. We expect CapEx in 2008 to decline to approximately $110 million or about 10.5% of revenue. As such, free cash flow in 2008 should rise to almost 12.5% of revenue, up more than 20% on a dollar basis over 2007.

Acquisition activity in 2007 totaled approximately $55 million of annualized revenue, excluding the approximate $22 million of revenue in Eastern Kentucky that we have closed on January 1, 2007. We completed eight acquisitions since the third quarter with combined revenue of about $20 million. The two largest were Cascade Disposal and Clarksville Disposal. Cascade Disposal is a provider of collection and recycling services under long-term exclusive contract with the City of Bend and Deschutes County, Oregon. Bend is one of the fastest growing metropolitan areas in the U.S. benefiting from an influx of retirees and vacationers.

Clarksville Disposal is the largest collection provider in Clarksville, Tennessee and services a 12-county area in Northern Tennessee and South Central Kentucky. Clarksville currently utilizes third-party disposal sites, given the number of competitive disposal alternative this market has. We are working on a permit modification at our Hopkins County landfill outside of Bowling Green, Kentucky to allow for out of state ways and could look to internalize Clarksville, depending on our economics once this permit modification is received.

We also completed six tuck-ins in Washington, Oregon, Iowa, Nebraska and Tennessee, including the acquisition of an approximate $1 million long-term contract from Waste Management, which served the contiguous area near Port Angeles, Washington.

On our last call, we reviewed the Colorado Springs acquisition and stated that integration costs were expected to lower near-term EBITDA margins until Q2 2008. Unfortunately, that prediction is proving correct, as we continue to expense a significant amount of maintenance costs at these locations to bring the fleet there up to our standard. Margins will be diluted by this until approximately the end of Q2 of '08.

Before handing the call off to Worthing, I'd like to review how we did in 2007 on improving returns on invested capital. On this same call last year, we stated that improvements in ROIC were expected across all our regions in 2007 with exclusive market regions expected to expand by as much as 90 basis point, given the fact that they have a lag in '06 recovering spikes in fuel costs; and that our competition market regions were expected to expand ROIC at a more normalized 30 to 50 basis points. I am pleased to report that actual results exceeded our expectations as ROIC within our exclusive regions expanded as much as 120 basis points, while competitive market regions increased between 55 and 65 basis points. ROIC for the Company expanded almost a 100 basis points in 2007 over '06.

For '08, we are targeting an overall 50 basis point increase in returns on invested capital over 2007, somewhat less than '07's increase, since we are expecting another lag in some of our market, recovering the expected increase in fuel costs. Such a lag could set up a potential for outsized ROIC improvements and margin expansion in 2009, similar to what we experienced in the first nine months of '07, coming off the high fuel of 2006.

And now, I would like to pass the call to Worthing to review more in-depth the financial highlights of the fourth quarter, and provide you a detailed outlook for full year... for first quarter and full year '08.

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

Thank you, Ron. In the fourth quarter, revenue increased 17.6% to $247.7 million; 10.3% from internal growth and the remainder from net acquisition activity. Operating income, before depreciation and amortization for the quarter, was $72.8 million, or 29.4% of revenue, which compares to $63.6 million, or 30.2% of revenue in the year ago period.

On a reported basis, the following line items in the quarter moved a notable amount year-over-year, as a percentage of revenue. Fuel expense increased about 115 basis points to about 6.9% of revenue. We averaged about $3.25 per gallon for diesel during the quarter, which was about $0.80 per gallon above the prior year period.

Insurance cost increased about 95 basis points, due to, both, increased medical expense and incidence severity. Cost associated with the El Paso strike accounted for almost 30 basis point of negative impact.

On more positive note, third-party transfer and intermodal drayage and pass-through revenue expense declined about 75 basis points, given the shift in revenue mix and strong core price increases. SG&A declined 65 basis points, due primarily to reductions in incentive compensation, professional fees and bad debt accruals; and following disposal costs, declined about 35 basis points.

As Ron had noted, acquisitions closed since the year ago period and the two long-term contracts that commenced in early 2007, accounted for about 80 basis points of dilution to operating income before depreciation and amortization as a percentage of revenue in the current year period. In other words, margins, excluding acquisitions and new contracts, would have been flat year-over-year despite the 145 basis point hit for higher fuel and strike cost.

For full year '07, operating income before depreciation and amortization was $292.9 million, or 30.6% of revenue, which compares to $247 million, or 30% of revenue in the year ago period. This represents an 18.6% increase in operating income before depreciation and amortization on a 16.3% increase in revenue, and exceeds our initial margin guides of 30.2% provided last February, despite the impact of lower margin acquisitions, higher fuel and strike-related costs incurred during the year.

On a reported basis, the following line items for the full year '07 moved a notable amount year-over-year as a percentage of revenue to contribute to the 60 basis point expansion in reported margins. Third-party transfer, intermodal drayage and pass-through revenue expense declined almost 35 basis points, again given a shift in revenue mix and strong core price increases. Insurance cost for the year declined about 15 basis points, due to improvements in incident frequency rates, partially offset by increased medical cost and incidence severity.

Professional fees declined about 15 basis points and direct labor cost declined about 10 basis points. These improvements were offset by increases in incentive and equity-based compensation cost, which increased about 40 basis points.

Fuel, as a percentage of revenue, was about flat and almost 6.2% for the year, as we averaged almost $3.10 per gallon, or about $0.50 per gallon or 20% above the average price paid in 2006.

Turning back to the fourth quarter results, depreciation and amortization expense increased about $4.1 million year-over-year. They are about 9.2% of revenue in the current quarter, up 30 basis points than the prior year, due primarily to increased depletion expense from higher disposal volumes and increased depreciation expense.

Net interest expense in the quarter increased $1.3 million on a year-to-year basis, due to a combination of higher interest rates and average debt balances, since the year-ago period. We ended the quarter with about $733 million of outstanding debt and a leverage ratio of about 2.4 times debt-to-EBITDA. Our debt balance increased $33 million since the end of Q3 due to acquisition activity and increased stock repurchases. Our effective tax rate in the quarter was 39.2%, up slightly from the 38.5% we had in the year-ago period.

I will now review our outlook for the full year and first quarter of 2008, given where we are currently. Before I do, we 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 for 2008 is based on the following five assumptions. First, no change in the current economic environment, including recycled commodity prices.

Second, fuel prices averaging about $3.30 per gallon resulting in fuel expense as a percentage of revenue increasing approximately 70 basis points year-over-year. We will likely see the highest negative year-over-year margin comparisons in the first two quarters of 2008, given the significant potential year-over-year price per gallon increases in these periods, as we average about $2.45 and $2.75 per gallon in Q1 and Q2 of 2007, respectively.

Third, we assume about $30 million of non-cash related cost or about $0.12 per share EPS impact, including $8 million for equity-based compensation costs, which is up about $2 million from 2007, and $5 million for amortization of acquisition-related intangibles; and that number is up almost $1 million from the prior year.

Fourth, an increase in the amount of stock repurchased in the year to $125 million or slightly more than 6% of outstanding shares at current prices.

And then finally, our outlook excludes the impact of any additional acquisitions that may close in the year.

For full year 2008, revenue is estimated to increase about 10% and range between $1.05 billion and $1.06 billion, with internal growth of approximately 6%; of which 4.5% to 5% is from pricing surcharges.

We expect SG&A, which includes increased equity-based compensation cost, to be approximately 10.5% of revenue, again, subject to quarterly fluctuations, or about 9.7% of revenue, excluding equity-based compensation costs.

Operating income, before depreciation and amortization, is estimated between $320 million and $323 million, or about 30.5% of revenue. This margin for the full year would be about flat to 2007, despite the expected 70 basis point hit from higher fuel cost and about a 30 basis point hit from rollover contribution of lower margin acquisitions already completed. In other words, the underlying business is expected to show about a 100 basis point margin improvement, before potentially being met by the impact of higher fuel prices and acquisition activity.

Depreciation and amortization, which includes non-cash expense for amortization of acquisition-related intangibles, is expected to be approximately 9% of revenue, subject to quarterly fluctuations. Operating income is estimated to be approximately 21.5% of revenue; and this is subject to quarter fluctuations, primarily due to seasonality.

Net interest expense is estimated at approximately $36.5 million, assuming projected interest rate for the year and our all in cost of debt currently is about 5%. Minority interest and other expenses are estimated to be a combined 1.5% of revenue with some quarterly fluctuations.

And finally, our effective tax rate is assumed to be 38.5% for the full year, with the following quarterly breakdowns: Q1, Q2 and Q4, should be around 39%; with Q3 closer to 36.5%.

We estimate our average diluted share count to about 67 million and this assumes a 125 million of stock that's [ph] repurchased ratably during the year. We sifted out an average share count for Q1 of around 68.5 million before the impact of any stock repurchases.

Net cash provided by operating activities for the full year is estimated at approximately 24% of revenue. We could approach 25% of revenue, due to a reduction in cash taxes that we haven't yet factored in that is primarily associated with the near-term benefit of bonus depreciation in a recently passed economic stimulus package. This is similar to what we saw in 2004, when bonus depreciation was last available.

Capital expenditures are estimated at approximately $110 million.

And now turning to our outlook for the first quarter; revenue is estimated between $250 million and $252 million, up almost 15% over Q1 of '07. We expect internal growth of approximately 9% in the quarter; of which, a little more than 5% is price and surcharges and a little less than 3% volume, with the balance split between growth in, both, intermodal and recycling.

Operating income, before depreciation and amortization, is estimated at about 29.4% of revenue, or between $73.5 million and $74 million. Our Q1 outlook assumes that fuel, as a percentage of revenue, increases about 140 basis points to 6.9% of revenue, compared to 5.5% of revenue in Q1 of '07. On a reported basis, this 29.4% margin outlook would be down approximately 80 basis point from Q1 of 2007, and this is due primarily to the dilutive margin impact of acquisitions completed since a year ago period, mainly Colorado Springs, given the near-term increases in maintenance costs that Ron has discussed.

After the impact of acquisitions completed since a year ago period, margins in Q1 would have been about flat year-over-year despite the assumed 140 basis point margin hit from the significant year-over-year increase in fuel costs. We expect comparative quarterly year-over-year margins to improve sequentially, as we move through the year and comp higher fuel prices incurred in 2007 and anniversary the impact of new acquisitions in the prior year.

Depreciation and amortization is estimated to be about 9.1% of revenue, and therefore, our operating income for the first quarter is estimated at about 20.3% of revenue. Net interest expense for Q1 is estimated at approximately $9.5 million, and minority interest and other expenses are estimated to be a combined 1.5% of revenue. And as previously stated, we estimate our diluted share account to be about 68.5 million shares, excluding the impact of any option or stock repurchase activity in the quarter.

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

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Thank you, Worthing. In closing, again, we are extremely pleased with our results in 2007. Revenue increased 16%, operating income rose 21% and earnings per share increased 28% on a reported basis, showing exactly the type of operating and financial leverage we should see with this type of revenue growth. We exceeded, both, the revenue and margin guidance we provided earlier in the year, and which we increased after our Q2 2007 call as well.

As we look at 2008, our outlook already assumes a 10% increase in revenue and more than a 20% increase in free cash flow. Acquisition activity during the year could provide additional upside and push revenue growth up a couple more percentage points along with corresponding flow though.

The combination of strong pricing and positive volume growth will continue to differentiate our results and should enable us to deliver strong margin expansion. The amount of which will depend on fuel prices and the diluted margin impact of any new acquisitions. We expect to return our free cash flow to our shareholders through the repurchase of more than 6% of outstanding shares, a meaningful increase over 2007's activity while still maintaining a strong credit profile and a flexible capital structure.

On a more personal note, I'd like to thank many of our listeners for their kind thoughts and get well wishes as I've been recovering from a broken pelvis and associated internal injuries from a skiing accident over the New Year. I am thrilled to finally be back in the office, even if in a wheelchair for a while.

We appreciate your time today, and more importantly, your accommodating us and moving the time slot up for this one call to fit with my recovery process. We'll get back to our regular morning schedule for our Q1 call.

With that, I would now like to turn the call over to the operator to open up the lines for your questions. Operator?

Question And Answer

Operator

Yes sir. [Operator Instructions] And our first question comes from the line of Jagdeep Ghuman with Credit Suisse. Go ahead.

Jagdeep Ghuman - Credit Suisse

Good afternoon.

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

Hey, good afternoon.

Jagdeep Ghuman - Credit Suisse

Couple of quick ones here. On the landfill side, you had mentioned that you guys saw 6% same-store improvement in volumes there. What's driving the volume up-tick there, and can you also comment on the pricing environment for your land process?

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

Sure. Just as you've seen in some other quarters, we typically have a couple of sites that drive the majority of that kind of increase year-over-year. As you know, we've been ramping up a landfill in the Southern part of Central Valley, California, that's drawing waste for the LA Basin. That continues to show an up-tick. That combined with just increased disposal activity we see in the Northwest region also has helped, up the reported volume.

Jagdeep Ghuman - Credit Suisse

Okay.

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

And as we've said before, our tune on pricing hasn't change for landfills. Our strategy is to push pricing in that 3% to 4% range for landfill. We believe that pushing it too much hard could dislocate volume flows.

Jagdeep Ghuman - Credit Suisse

All right, fair enough. Can you comment just a little bit on the acquisition environment, the focus going forward? Are you guys, kind of, focusing of tuck-ins or can we also think about new markets being entered?

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

Sure, go ahead.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Yes, I think, number one, nothing's changed. From an acquisition standpoint, we'll certainly continue to have a number of tuck-ins each quarter. And that's just our regular protocol in those markets. And opportunistically, we will usually do one to two, sort of, new market entries per year, as we did this year, one in Eastern Kentucky and one in Southern Colorado. And we would hope to do one to two of those per year. And that provides the platform to build out for the following years with a number of... tuck-in acquisitions. So, it will be the combination.

Jagdeep Ghuman - Credit Suisse

Okay. Fair enough. That's all I've got.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Okay.

Operator

Our next question comes from the line of Scott Levine with J.P. Morgan. Go ahead.

Scott Levine - J.P. Morgan

Good afternoon.

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

Hey Scott.

Scott Levine - J.P. Morgan

A quick question on special waste. It sounded like that kind of reversed course, I guess, a little bit. Is there anything to that, as your general quarter-on-quarter noise or your comment on the general trends there?

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

No. Again, we look at Q4 and Q1; those are typically the seasonally lowest periods. So, when we say down slightly, it's just that down slightly. When we look at... our thoughts on Q1, we're seeing that to be flat to slightly up, potentially in the quarter.

Scott Levine - J.P. Morgan

Okay. With regard to diesel fuel, you've talked in the past about maybe hedging exposure. You put on a couple of one quarter hedges. I mean is there anything you guys would look to do, or could think about doing to kind of mitigate your exposure in the franchise markets there? Is kind of like the norm, I guess, kind of going forward?

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Yes, I mean, Scott, the issue is, is that... I mean, again, our hedges are not purely a financial hedge, they're really a guaranteed purchase contract. And right now what you'll find... and it's been this way all throughout 2007, and that's one of the reasons we haven't done it... is that on a historical basis, the long-term supply contract market is usually only around a $0.05 to $0.08 above the spot market. And at those levels, we would do that. But right now you're finding an as much as about $0.30 to $0.40 above the spot market. And so that would be a $6 million to $8 million hit to current projection to lock in certainty. Quite honestly at $95 a barrel crude, I'm not thinking there will be an $8 million upward move from that, so it's just not a bet I'm willing to make right now.

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

Yes we wouldn't want to be locked in high prices and see the economy rollover, and not be able to recoup that.

Scott Levine - J.P. Morgan

Understood. One last one on acquisitions, if indeed we do get the bear case, and we are looking at a recession or can you talk a little about your views on how a scenario like that might impact the acquisition pipeline?

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

It will slow it.

Scott Levine - J.P. Morgan

And... okay.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Yes, I mean, it's pure and simple. What happens is, we're already seeing that nominally somewhat is it's like people trying to sell homes in California and Florida right now, they want what they were worth two years ago, not what they're worth today.

Scott Levine - J.P. Morgan

Understood, thank you.

Operator

Our next question comes from the line of Leone Young with Citigroup. Go ahead.

Leone Young - Citigroup

Yes, good evening. And first of all, Ron, I think I speak for a lot of people when I am saying we're very glad to hear you are on the mend.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Thanks, Leone, I appreciate it.

Leone Young - Citigroup

Have you seen any change at all in your commercial business, any sign of a weakened consumer or sluggish economy there?

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

No, not on the commercial side, Leone, which as you know for us is a front-load and the roll-off... the front-load and the rear-load commercial business to restaurants, hotels, strip malls, that kind of thing. No, we have not.

Leone Young - Citigroup

And a little bit more on the acquisitions. You had mentioned that in the event the economy rolls over they can slow. But in general, how would you characterize the activity now, say, versus two years ago?

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

The activity level is actually fairly high, Leone. Our guys are as busy, or actually busier than I have seen in quite some time. We just got to do a good job of being very discerning right now, because you do have somewhat of the phenomenon I was mentioning to Scott where people want what their business was worth pre run-up of fuel and other costs. And we just have to do our job in vetting through that. And so you might see a little lower success ratio, but we're very active right now. And I wouldn't expect any material change from sort of our last few years' acquisition activity.

Leone Young - Citigroup

Terrific. Thank you.

Operator

Our next question comes from the line of Corey Greendale with First Analysis. Go ahead.

Corey Greendale - First Analysis

Hey, good afternoon.

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

Hey Corey.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Hey Corey.

Corey Greendale - First Analysis

A couple of questions. Ron, can you speak to what you are seeing in non-res construction through your markets?

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Yes, I mean overall, Corey, we are... I am stumbling around, because the answer is different by geographies, is the short answer. As you saw what we saw in the fourth quarter and what we've actually seen in January, because I'm sitting here and looking at January, is that our pulls are effectively flat to up across the Company, and our revenue per pull is up. So, actual volume and revenue growth in the roll-off system is positive in January and was in the fourth quarter.

That's the amalgamation of a number of markets. So, some places we are seeing non-residential construction weaken, because there is associated residential weakness in those markets and it's spilling over. And in other areas, like lot of parts of the Midwest and the Southeast and the Southwest, residential construction is staying strong as is commercial. So, they're pretty much pushing each other and offsetting each other right now.

Overall, I would tell you that things... we definitely saw a move throughout Q4 of a softening, not huge but definitely noticeable relative to Q2 and Q3, which is I think what everybody has been saying occurred in Q4.

Corey Greendale - First Analysis

Okay. And actually, can I ask you for some historical perspective, just looking back to the last downturn. There was a period through the first few quarters of '03, when volumes went negative. Do you think is... are we still, given that this industry can lag somewhat, is that still a risk given the way things are going? Or do you think something is different this time around that we shouldn't see volumes going negative, assuming things don't continue to get worse from where they are at [ph]?

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Specific to us or the industry?

Corey Greendale - First Analysis

For you guys.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Okay, because as you know, a number of the others have already reported negative. So, clearly, there is an impact and more of a correlation to real-time results. We're going to lag the others, and we're going to lag the downturn, Corey; and we did last time. And that's because of the amount of business we have in that exclusive area relative to the competitor, gives us somewhat of a buffer in both circumstances. Do I... is there a risk of volume going from the 1% positive we've guided, excluding municipal contract to a negative? Sure there is. I mean, do I think that risk is high? No, I do not; knowing what I'm seeing right now. I do not believe things decline as much in Q4 as they did the last time we started to go into this, or as quickly. So I don't believe it will be as deep. So could it be closer to zero than one? That possibility exists, but I don't really see it going negative right now.

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

Corey, I think the encouraging news as you look at the other folks in the industry is that they're still pushing through margin expansion and improvements in free cash flow because pricing is holding up.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Yes.

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

So, could we go negative on volume? Sure we could. You could see that at the end of this year or early next year. But our outlook on prices continue to strengthen in that 4% to 5% area, which means while the volume is up 1% or down 1%, strengthened prices is that the focus should be on.

Corey Greendale - First Analysis

And I appreciate it. And, Ron, glad to hear you're doing better. Thanks.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Thanks, Corey.

Operator

Our next question comes from the line Bill Fisher with Raymond James. Go ahead.

Bill Fisher - Raymond James

Hi good afternoon.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Hi Bill.

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

Hi Bill.

Bill Fisher - Raymond James

Hey just back on the landfill volumes, the 6% you had in Q4, could you just maybe give some color on some sites you might have in '08 that might, kind of, keep that momentum going or... like you mentioned Hopkins, or are there any other permanent expansions you might get?

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

Sure well I just... I'd say just, anecdotally, first, on the tonnage. You start with January, January is close, as Ron said; tonnage on the same store basis is actually up a little over 10%, that's excluding acquisitions. And, again, the ones you have seen contribute to that continues to be the lower part of Central Valley, California. We actually had some good weather and some storm work clean-up in the Plains States and Oklahoma City areas. So, you've seen pick-ups there; and some parts of the Northwest, depending upon when the special waste is flowing through.

So, the volume strength has continued as we are now one-third into Q1. When it comes to expansions, as you know, we are looking to do an expansion at Harper County outside of Wichita. But that one is still in the process. And if we are successful on that, that should be in '08 which allow us to increase the flow within that cycle.

Bill Fisher - Raymond James

Okay, great. And then just actually on your... you mentioned about the 100 basis points on margins, taken out fuel, if you will, in '08, would the bulk of that be kind of pricing outstripping cost inflation or just some other... can you touch on some of the productivity things you might get to drive that?

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

Yes, I think it's... the primary drivers is strength in pricing, Bill.

Bill Fisher - Raymond James

Okay, perfect. All right, thank you.

Operator

Our next question comes from the line of Jonathan Ellis with Merrill Lynch. Go ahead.

Jonathan Ellis - Merrill Lynch

Thanks, good evening guys.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Good evening.

Jonathan Ellis - Merrill Lynch

I want to talk a little bit about revenues per pull in the roll-off business. You mentioned that it can go up 6%, which is fairly comparable to last year. I am curious though what was the contribution to that from weight versus price? And did that mix change from the prior quarter at all?

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

What was the contribution... I am sorry, Jonathan, of weight versus price?

Jonathan Ellis - Merrill Lynch

Yes, weight versus price in that revenue per pull number?

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Don't have it broken down. Only have it on a total basis, so I would not be able to tell you. My gut tells me that it's dramatically nine-tenth price versus weight, but I do not have that.

Jonathan Ellis - Merrill Lynch

And you don't think that has changed much since, since the third quarter?

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

I do not think it has changed materially, because you've got to remember, Jon, that almost 85% of our pulls or more are non-construction oriented. So, I don't think there has been a material change there.

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

We've had a slight up-tick. And as Ron said the number of pulls in January is up year-over-year. We've also seen revenue per pull sequentially go up from what the average was in Q4 to January position, that we put a lot of our price increases in place in early part of the year. And so revenue per pull was actually up about 9% in January.

Jonathan Ellis - Merrill Lynch

Okay, great. And just in terms of the... if I did my math correctly... in the base business in the fourth quarter, looks like volumes were up about 0.9%. And if I went back to guidance from the third quarter call, I think, it was calling for about 1.2% growth... excuse me, growth in the fourth quarter on base business volumes. I'm just wondering is that deceleration relative to the original guidance a function of roll-off business or where is that volume weakness coming from... from third quarter guidance?

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Around here.

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

That sums it up, Jon. And tell me when it rained and you got your answer.

Jonathan Ellis - Merrill Lynch

Okay, all right, great. And then just finally on the guidance for 2008. Could you provide a little more detail on price versus volume for the competitive versus franchise markets?

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

Yes it's about... it's about... no matter what we saw in '07 in that; the franchise business is averaging in that 3.5% to say 4% range. And we are getting somewhere in the 6% plus range within competitive markets.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

And that's on the price side, Jon. And on the volume side, we are getting a greater contribution, probably actually close to approaching 2% on the exclusive market and 0% to 0.5% or so in the competitive market.

Jonathan Ellis - Merrill Lynch

Okay, great. And Ron, good luck with the rest of recovery.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Thanks Jonathan.

Operator

Our next question comes from the line of Brian Butler with FBR. Go ahead.

Brian Butler - Friedman, Billings, Ramsey

Thanks. Good evening.

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

Hey Bryan.

Brian Butler - Friedman, Billings, Ramsey

Just wanted to... most of my questions have been answered. But just want to follow up on the intermodal business. Is there any contract opportunities, kind of, coming up in 2008 that could be accretive for you guys? And also just how is that business holding up in a weaker economic, kind of, environment?

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

Yes, that business actually saw its first year-over-year increase since we bought it. It got out of block strong in its first year then it was flat to down. And then last year it was actually up year-over-year as we finished the year. And it's budgeting... some continued slight positive up-ticks in the first part of this year. It got hit a little bit with some slides in the bad weather in January. Some trains didn't run for a couple of days, but again the container count seems to be holding up in this economy so far.

With regards to bids, there are some bids going on in that marketplace; nothing that would impact '08; these are all things that are in the preliminary stages for future years.

Brian Butler - Friedman, Billings, Ramsey

Would they possibly going to be impacting '09 or is it further out than that?

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Yes, Jon, most of the... excuse me, Brian, most of the large bids that would be impactful and noticeable come up for bidding in the '09 to '10 timeframe, but they really don't begin until the latter part of '10 through actually early 2012. So, we're re a little for large ones. Now there are a couple that we will be bidding this year that if successful could contribute in '09 but not '08.

Brian Butler - Friedman, Billings, Ramsey

Okay, great. Thank you very much.

Operator

[Operator Instructions] And our next question comes from the line of Nicole Dobroski [ph] with Deutsche Bank. Go ahead.

Unidentified Analyst

Hi guys.

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

Hello.

Unidentified Analyst

Quick question for you on your free cash flow guidance. It looks like... well,

operating cash flow, sorry, it looks like you're guiding for about $250 million in 2008 which is $30 million higher than you saw in 2007. What is really driving this?

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

Well I mean, it's a number of things... it's first of all, higher top-line, right. Secondly, you've got increase in deferred taxes, meaning lowering of cash taxes. Cash taxes are likely going to be down year-over-year, looking at 2008 versus 2007. And I think you'll see also some improvement in DSOs that we've not factored into our guidance that could provide additional upside. DSOs were, essentially, about flat year-over-year. And so far we're off to a good start in our first month of '08.

Unidentified Analyst

Okay. Thank you.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Thank you.

Operator

And I am showing no further questions at this time. I'd like to turn the call back over to management for any closing remarks. Please proceed gentlemen.

Ronald J. Mittelstaedt - Chairman and Chief Executive Officer

Okay, thank you operator. Well, if there are no further questions, on behalf of our entire management team, we appreciate your listening and interest in the call today. Worthing, Steve and I will be in the office for the remainder of the day as well as tomorrow. If there are any direct questions that we did not cover that we are allowed to answer under, either, Regulation FD or Regulation G, we would be happy to do so.

Thank you and we look forward to speaking with you on the next call or earlier at up coming investor conferences. Thank you very much.

Operator

Ladies and gentlemen thank you for your participation in today's conference. That does conclude the presentation. You may disconnect. Have a wonderful day.

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