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Executives

Tom J. Fatjo, III - Senior Vice President, Finance & Secretary

Tom J. Fatjo, Jr. - Chairman of the Board, Chief Executive Officer

Jerome M. Kruszka - President, Chief Operating Officer & Director

Charles A. Casalinova - Chief Financial Officer & Senior Vice President

Analysts

Leon [Jaleso] - Bank of America

Scott Levine – JP Morgan

Brian Butler – Friedman, Billings, Ramsey & Co.

Noel – Stifel Nicolaus

WCA Waste Corporation (WCAA) Q4 2007 Earnings Call March 5, 2008 8:30 AM ET

Operator

Good day ladies and gentlemen and welcome the fourth quarter 2007 WCA Waste Corporation earnings conference call. My name is Shaquana and I will be your coordinator for today. At this time all participants are in a listen only mode. We will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Tommy Fatjo, Senior Vice President. Please proceed, sir.

Tom J. Fatjo, III

Good morning. Welcome to the WCA Waste Corporation conference call in which we will be reporting results for the fourth quarter and full year ended December 31, 2007. Participating on our call will be Tom Fatjo, our Chairman and Chief Executive Officer; Jerry Kruszka, our President and Chief Operating Officer; and Chuck Casalinova, our Chief Financial Officer.

Part of the call is important to discuss certain risk factors regarding our forward-looking statements. In our presentation today we will be making forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities and Exchange Act of 1934. Forward-looking statements generally include discussions and descriptions other than historical information. Words such as expect, intend, plans, projects, believes, will, outlook, estimates and similar expressions are often used to identify forward-looking statements. Our guidance and descriptions of revenue run rates, acquisition pipelines and acquisition strategy are also forward-looking statements. Since WCA’s business, operations and strategies are subject to a number of risks, uncertainties and other factors actual results may differ materially from those described in the forward-looking statements. In our earnings release and our public filings we identify a number of risks and uncertainties associated with our forward-looking statements including those that are in the following presentation.

I direct your attention to the earnings release and our filings with the Securities and Exchange Commission where we describe risks and uncertainties in detail. The forward-looking statements made today are only made as of this date and the company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Our presentation today also includes certain non-GAAP financial measures including EBITDA and revenue and EBITDA run rates. We direct your attention to our earnings release in our filings for a description of the computation of those measures.

Thank you for joining us and at this time I’d like to turn the call over to Tom Fatjo, our Chairman and Chief Executive Officer.

Tom J. Fatjo, Jr.

WCA accomplished its revenue EBITDA and acquisition goals for 2007. Actual revenue was $184,940,000 exceeding budgeted revenue of $171,633,000. Actual EBITDA was $50,706,000 exceeding budgeted EBDITA of $49,218,000. Our Texas operation performed better than expected while Florida was below budget. EBITDA as a percentage of revenue for the year was 27.4% a performance in the top tier of our industry peers. The company had a goal of investing $100 million in quality acquisitions during 2007. Our actual investment was $104 million. During 2007 the company incurred a $3,948,000 non-cash loss on $150 million interest rate swap as a result of the decline in interest rates. This resulted in a substantial reduction in pre-tax income. Had $150 million been drawn on our bank credit facility there would have been no loss on the interest rate swap. However it is management’s opinion that having the availability on our credit facility provides WCA the capability to take advantage of opportunities during these challenging economic times.

In 2008 WCA expects to increase revenue and EBITDA by 10% for the year as a result of internal growth and acquisition roll forward. This does not include our acquisition goal of investing $60 million in quality acquisitions with a heavy emphasis on tuck-ins in existing markets.

Now I’ll turn the call over to Jerry Kruszka for a more detailed review of the company.

Jerome M. Kruszka

As Tom stated 2007 was a good year for WCA and I thought I’d give a quick overview of this year’s accomplishments. We met our $100 million acquisition goal by investing $104 million on 11 acquisitions, the average multiple paid for these acquisitions were 6.6 adjusted EBITDA. At the end of 2007 we operated 27 collection operations, 24 landfill and 22 transfer stations and serviced approximately 334,000 customers in 12 states with a current revenue run rate of approximately $200 million. Of the five regions and 12 states we operate only one state, Florida, did not meet its internal budget goals for 2007. Florida’s operating income was actually $5 million less than the prior year 2006. Although the revenue and income are down Florida continues to produce attractive margins. Year-over-year 2007 versus 2006 revenue increased 23.7%. This is made up of 2.6% price increases, 3.5% volume growth, 0.8% fuel surcharges and 16.8% from acquisitions. Our EBITDA was 27.4% of revenue in 2007. Excluding fuel surcharges our 2007 organic growth was 6.1%. Including fuel surcharges we experienced internal growth of 6.9%. Excluding Florida our internal growth rate was 12.7%. Our collection segment of our revenue mix increased in 2007 to 50.5% from 46.5% in 2006. Obviously this reduced our margins year-over-year.

As stated we completed 11 acquisitions in 2007. Our acquisition pipeline for 2008 remains strong and we have set a goal of investing $60 million in quality acquisitions during the year 2008. Our acquisition strategy remains the same. We have targeted tuck-in acquisitions for existing markets and plan to enter two to three new strategic markets during 2008. Our revenue segmentation before inter-company elimination at year end 2007 was collection 50.5%, disposal 31.3%, transfer 13.8% and other 4.4%. Our internalization rate for 2007 was 74%. From a cost and service standpoint we saw a significant increase in fuel costs during the quarter. Averaging our two largest markets, Houston, Texas and Springfield, Missouri we saw fuel increase 10% from the third quarter to the fourth quarter for 2007 and approximately 57% since the end of 2006. Although we anticipate recovering a large portion of these increased fuel costs this adds a diluted impact on our margins.

We’re looking forward to 2008. Our acquisition pipeline remains strong. We have a strong field management team which is focused on the price increase versus volume challenges. We do not need to refinance and go to the capital markets for occurring growth plans. In fact our revolver has $133 million in available capacity. With the exception of Florida our larger markets are not currently seeing a slowdown in construction activity and all previously acquired assets have for the most part been integrated and are performing.

I will now turn the call over to Chuck Casalinova, our CFO.

Charles A. Casalinova

In comparing our results operations for the fourth quarter of 2007 to the fourth quarter of 2006 revenue increased 32.9% to $49.7 million from $37.4 million. This 32.9% growth included 1.8 from prices increases, 5.4% from volume growth, 2% from fuel surcharges and 23.7% from acquisitions. Excluding fuel surcharges our organic revenue growth was 7.2% during the fourth quarter of 2007. Our internal growth including fuel surcharges was 9.2% providing good momentum moving into 2008.

There were three major factors causing our cost of services as a percentage of revenue to increase 4.7% quarter-over-quarter. First, the cost of diesel contributed 1.8% to the margin increase. For an example, diesel prices in the Houston and Springfield markets increased over 50%. Second, the cost of insurance contributed 1% to the margin increase and third the operating labor and disposal costs contributed 1% to the increase due to the change in revenue mix. Depreciation and amortization remained at 12.9% of revenue. General and administrative costs reduced to 6.7% of revenue in the fourth quarter of 2007 from 7.9% in the comparable quarter of 2006. Due to the continued decline in the interest rate and the related yield curves on our unrealized loss on the interest rate swap was 2.9% during the quarter. Without this unrealized loss in our interest rate swap our pre-tax income would have been $700,000 for the quarter.

In comparing our results of operations for the 12 months ended December 31st, 2007 to the same period ended December 31st, 2006 revenue increased 23.7% to $184.9 million versus $149.5 million. Cost of services as a percent of revenue increased 1.7% or 65.9% versus 64.2%. Two main contributors to the increase in cost of services included first a 50 basis point increase in diesel expense. As we had previously discussed over time we attempt to cover 100% of our diesel increase through a fuel surcharge to our customers. There is a 30 to 60 day lag between the cost of fuel increasing and recouping the cost through the fuel surcharge. Second, operating labor costs increased year-over-year by 90 basis points. This increase reflects our current mix of business which includes more collection during 2007. Depreciation and amortization increased to 13.1% of revenue from 12.8% while G&A expenses as a percentage of revenue declined to 6.9% from 7.4%. Excluding the non-cash unrealized loss on interest rate swap our pre-tax income would have been $9,213,000 for the full year ended December 31st, 2007. Our tax rate for 2007 was 44.51%. Our 2007 tax rate was negatively impacted by the unrealized loss on the interest rate swap. We are projecting a tax rate of 40% for 2008 prior to any impact of the aforementioned swap.

Our capital expenditures for the year ended December 31st, 2007 included $22 million invested in maintenance capital, $103.7 million invested in acquisition capital and $3.3 million invested in new projects. Our net long term debt was $196.8 million and our equity was $170.4 million. This resulted in a net debt to total capitalization of 53.6% at December 31st, 2007. Our day sales outstanding excluding deferred revenue were 33.7 days for the fourth quarter of 2007 and averaged 33.2 days during the year.

Operator, I would now like to open the call up for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Leon Jaleso with Bank of America. Please proceed.

Leon Jaleso - Bank of America

Just on the margin side, obviously your margins were below expectations and you gave three reasons, diesel fuel prices, insurance and then the change in mix. I’m just wondering diesel fuel prices it seems will go back to normal or it probably already went back to normal with the surcharges, obviously we think about insurance costs and also the change in mix. Is it going to continue to impact you in 2008 particularly the change in mix and the larger portion of revenues coming from collections? How should we think about margins going into 08?

Tom J. Fatjo, Jr.

In terms of margins overall going forward the percentage of revenue for the year was 27.4%. We expect 2008 to be in excess of 27.4%. You mentioned some specific components that impact margins. Actually insurance, one of the ones you mentioned, as you look at insurance claims and adjustments are made they vary from quarter to quarter but we don’t see any major change in trend there. Diesel costs you mentioned that we will recover ultimately from most of the increase from fuel cost and then you mentioned the mix of business affecting it, obviously the margins from the collection business are lower than from the disposal business and I might mention a fact there that one of the best managed companies I think in this industry is Waste Industries. They do an excellent job and have for a long time. They’re EBITDA margin is 24% because of their higher percentage of collection mix so clearly the mix of business is going to impact the margins. But overall, we look at the 27.4% for 2007 to be indicative for us to do better than that in 2008.

Leon Jaleso - Bank of America

Your volumes adversely were pretty good during the quarter, what are you seeing in terms of outlook for C&D volumes? Are you starting to see a slow down because of the slow down in non-residential construction at this point or are volumes still relatively robust and do you expect it to stay robust in 2008?

Tom J. Fatjo, Jr.

For the most part, as we mentioned, Florida without a doubt we’re experiencing a slow down there. We’ve seen 3% to 5% slow down in the Carolinas but on the other hand in states of Texas and say Arkansas, Oklahoma those volumes are up. So each state’s a little different. Some of it’s obviously impacted climatically. Florida is more from the business standpoint that it’s slowed down, construction has come to a near standstill there with an inventory of new homes somewhere in the three year range. But it just depends by market. Fourth quarter was extraordinarily strong for us in Texas primarily because the third quarter was somewhat wetter than the fourth quarter and once the projects were able to be worked on we saw the volumes kick up dramatically the fourth quarter at our sites in the Houston market area.

Leon Jaleso - Bank of America

And last thing for me, I think you mentioned in your comments that you expect revenues and EBITDA to be up 10%. Which EBITDA number are you using? Do you expect it to be up 10% from the $50.7 million of EBITDA that you reported for the full year 07 or is 10% based on kind of a run rate EBITDA which including accreditation is probably around I would guess $57 or $58 million now?

Tom J. Fatjo, Jr.

Either Chuck or I could answer that question. Actually as you concluded your question you actually gave the right number because I heard you say $58 million. But at any rate, Chuck, why don’t you talk what we’ve already disclosed in terms of revenue and EBITDA run rate.

Charles A. Casalinova

We’ve already disclosed that our revenue run rate was approximately $200 million and our EBITDA was running around 28% of that and now we feel that revenue for 2008 before we do any acquisitions is going to be in that $200 to $205 million range and EBITDA will run North of the 27.4%. So we had $50.7 million of EBITDA in 2007, there is $6 to $7 million still out in the timing of acquisitions to come in and in addition to that we have $2 million in non-cash compensation charges which bring it over $60 million. So we’re well within what we’ve already relayed to the market in that range.

Operator

Your next question comes from the line of Scott Levine with JP Morgan. Please proceed.

Scott Levine – JP Morgan

With regard to the core price number, 1.8% is a little bit down from the last couple of quarters. I was hoping you could comment is that seasonality of price increase, has there been any change in the pricing environment in your guys’ view?

Tom J. Fatjo, Jr.

We get asked that frequently I guess on these calls. We usually put our price increases in in the first and third quarter so fourth would typically be down. Fourth quarter is pretty busy for our field people preparing bulk landfill packages and budgets so January, February we have our price increases going on the first rung and then again in the third quarter.

Scott Levine – JP Morgan

As far as competitors either larger guys or the smaller guys in your markets, have you seen any real change in behavior there?

Tom J. Fatjo, Jr.

We’ve seen some when we talk about the price increase I’d have to say that there’s been some deterioration in pricing in the Florida market which you would expect when there’s less waste, there’s more competition for it. But in the other markets the prices are holding as far as we’re concerned. And again we’re not a price leader, we kind of follow up the competition which is much larger than us in those markets.

Scott Levine – JP Morgan

In terms of acquisitions, you mentioned maybe two, three new market entries this year. Can you give us maybe a little bit more color regarding which regions or markets might look appealing to you?

Tom J. Fatjo, Jr.

Well, until we have them signed up I’m not going to name states. Obviously it’s in our footprint and in either cities or states we’re not currently in.

Scott Levine – JP Morgan

One last one on cap ex and free cash flow, in looking at your outlook for 08 you guys said you did $22 million I believe in maintenance cap ex in 07. If we kind of think $60 million in acquisitions, maintenance cap ex as a percent of sales remain kind of roughly the same, is there anything else up or down that might impact what your spending looks like? We’ve heard a couple of your peers mention picking up the spend on trucks this year, any comments? That would be helpful.

Jerome M. Kruszka

Scott, we continue to forecast for that 5% to 6% growth in revenue that we will be able to support that with 12% capital revenue for maintenance and internal growth. We feel comfortable with that number going into 08. There are always opportunity projects that aren’t in that 5% to 6%. New municipal contracts, any new EBITDA generating bid that we can get above the 5% to 6% EBITDA growth that we currently now plan would require additional capital and it usually costs us about $1.00 for $1.00 of revenue. So we can’t project that until the opportunity comes, so that 12% should be in line with our base business.

Operator

(Operator Instructions) Your next question comes from the line of Brian Butler with FBR. Please proceed.

Brian Butler – Friedman, Billings, Ramsey & Co.

I know you talked about the operating costs, the breakdown for this last quarter. Can you talk about the operating costs going forward?

Jerome M. Kruszka

Probably the one thing we didn’t mention and isn’t broken out in there, in the fourth quarter alone from October we did three acquisitions. Our operating costs during the integration period is always slightly higher than once we have them fully integrated and all the bugs worked out of them and I think since mid-year in the second half of the year we spent about $50 million on acquisitions. We’re concentrating now though on those last three and as I think we go through the end of the first quarter most of the costs will be realized and we’ll continue to see improvement in those divisions that these companies were tucked into.

Tom J. Fatjo, Jr.

Jerry, you mentioned several times before in previous calls what the specific types of integration costs are. Why don’t you do that again? Just because we live with it every day and everybody doesn’t necessarily live with it every day.

Jerome M. Kruszka

Obviously when we acquire a company, say it’s a collection company and we have to acquire trucks, that’s a capital cost that goes into the cost of the acquisition. But the trucks that are on the street during our due diligence process we may find that truck needs a set of tires, a set of brakes, hasn’t been serviced in some time so following the acquisition the movement if we’re eliminating a facility of the equipment going in there, the retraining of the drivers, the retesting of the drivers goes in there, safety equipment. There is a lot of integration costs that go into a tuck in especially. A stand alone is a little different. A stand alone we would mostly again upgrade the equipment, change the logo, but when you do a tuck in it’s a little more difficult takes a little bit more time. There is accounting costs involved in that, our IT people are there, so there’s a variety of costs we incur during that process.

Brian Butler – Friedman, Billings, Ramsey & Co.

So about what percentage would you say we would need to expect going forward?

Jerome M. Kruszka

I think as Tom pointed out we’re going to be North, to step out on a limb here we’ll be closer or slightly over that 28% we feel going through 2008. Again, we can’t predict what the fuel is going to do to us and we do have that lag and even though we can collect that through our surcharge process, it does dilute the margins because it shows up both in the revenue and at the cost line.

Operator

Your next question comes from the line of Noel with Stifel Nicolaus. Please proceed.

Noel – Stifel Nicolaus

Looking at the 5% to 6% organic growth you’re looking for in 2008 could you kind of discuss how you see that breaking out between price and volume and then also maybe a little bit of discussion, we saw the big jump in fuel surcharges obviously this quarter, do you think that will jump up even further kind of in the first quarter?

Jerome M. Kruszka

As it worked out, and it wasn’t planned this way because we do the regions individually as we go through the budget process, it did work about to about half and half, 2.5% on the price and about 2.5% on the volume.

Noel – Stifel Nicolaus

Do you think that fuel surcharges will go up even further in the first quarter from the fourth quarter as sort of trying to account for these higher costs, or are we looking at about that –

Jerome M. Kruszka

The fuel surcharge will definitely go up in the first quarter to capture what happened in the fourth quarter and then going forward it will depend what happens with fuel price obviously.

Noel – Stifel Nicolaus

And then do you have an annual run rate for the revenue that you acquired in 2007?

Jerome M. Kruszka

We probably do, Noel, I’ll have to get back to you on that. When you add it all up it’s in that $200 to $205 range is where we’re at with everything of our base business now acquired in place. I’ll have to go back and get back with you.

Operator

At this time there are no further questions. I would now like to turn the call over to Tom Fatjo for closing remarks.

Tom J. Fatjo, Jr.

We sure appreciate those of you that were available for the call and those that may be listening later on. We’re pretty excited about the future for the company. We’re glad to be capitalized and able to take advantage of what we believe will be, we don’t wish anybody bad luck in terms of smaller competitors and that sort of thing, but we believe that there are going to be special opportunities during these economic times and we’re glad to be capitalized to be able to do that. I can tell you, over the years with other companies I’ve been on the other side of it and not able to take advantage of the opportunity but we see them developing now. We also see the, again this might be a little bit too much personal pride involved, but I started the industry in ’66, saw the first major recession in ’72, ’73, went through the ones in the ‘80’s. We consistently had said over that period of time that this is a recession resistant, not recession proof, obviously we can see that in Florida certain things have happened, but we are seeing strong indications in almost all of our markets that this is a recession resistant industry and we see the future of WCA in 2008 to be very good. Thank you for being available and we look forward – certainly if there are other questions, management is here in the office this morning.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a good day.

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Source: WCA Waste Corporation Q4 2007 Earnings Call Transcript
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