Jim W. Perry - President, Chief Executive Officer
Carol Dalton - Investor Relations
D. Stephen Grissom - Chief Financial Officer
Harry M. Habets - Chief Operating Officer
Waste Industries USA, Inc. (WWIN) Q1 2008 Earnings Call May 2, 2008 2:00 PM ET
Welcome to today's Waste Industries first quarter 2008 earnings release conference call. (Operator Instructions) I would like to turn the conference over to Mr. Jim Perry, President and CEO of Waste Industries USA, Inc.
Jim W. Perry
Thank you for joining us to discuss our performance in the first quarter of 2008.
In a moment Steve Grissom, our Chief Financial Officer, will provide a detailed analysis of our financial results, followed by Harry Habets, our Chief Operating Officer, who will provide you with operational highlights for the quarter. Also with us today, it's a pleasure to have Lonnie C. Poole, Founder and Chairman of our company, with us, Ven Poole, VP of Corporate Development, and so is Mike Durham, our Vice President of Administration and Support Services.
If you will bear with me a minute, I'll read a prepared statement that some of you will recall I read at the last conference call.
As Waste Industries has reported, the company has entered into a merger agreement with a group of investors, of which I am one, to take the company private by acquiring all of the outstanding shares of Waste Industries stock. A Special Committee of the Board of Directors reviewed the merger agreement with the assistance of its financial adviser, J.P. Morgan Securities, and its independent legal counsel. The merger agreement is included as an exhibit to Waste Industries Form 8K filed with the SEC on December 20, 2007.
The company has also filed with the SEC proxy materials for the special meeting of the shareholders to be held next Thursday, May 8, at which the merger agreement will be voted upon and you are directed to those preliminary materials for information regarding the proposed transaction. Waste Industries will issue further announcements regarding the proposed transaction and make additional filings with the SEC when and as appropriate.
Neither I nor any other Waste Industries employee on this call will address the proposed transaction or respond to question on the proposed transaction, and with that, let me turn over to Carol Dalton, who will also read the standard and customary safe harbor statement. Carol?
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. Additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the company's SEC filings. Such filings include but are not limited to the company's 10K for the year ended December 31, 2007. Copies of these filings are available on our website at www.WasteIndustries.com or may be obtained by contacting the company or the SEC.
Jim W. Perry
Overall, we were pleased with our results for the quarter. Total revenues increased 5.4% to $85.7 million compared to $81.3 million for Q1 '07. Operating income increased to $12.3 million, an increase of 7.7% over the year earlier period.
When you add back about $700,000 in fees related to the proposed going private transaction, income from continuing operations would have been $6 million or about $0.42 per share.
Our CapEx for the period was $13.9 million compared to $4.5 million for Q1 '07, and our free cash flow for the quarter was $5.3 million. And considering the current business climate, we were very pleased with a DSO of 31 days, which was achieved in large part by the great team in our centralized AR management group.
Our balanced service revenue mix continues to be one of our core strengths. We've talked about it often. For example, as work at our roll-off Industrial segment declined about 9% for the quarter, we experienced a 7% increase in a number of Commercial stop service and about a 4.4% increase in our Residential work.
After adjusting for the impact of acquisitions, growth in the Commercial area was a bright spot for the quarter. Our sales team continues to do a great job in identifying and securing new accounts on desired routes. I'll highlight in a minute how this focused effort is also helping us to improve our productivity and margin for our Commercial work.
As our customers deal with rising costs, we continue to look for ways to deliver our services as efficiently and safely as possible. Being able to adjust and respond quickly to changing service frequencies in waste volumes in each market is important, and our management team and has done a great job in this area. Harry's going to talk about that in just a minute.
For example, in the first quarter we performed over 300 re-routes, following 1,400 re-routes in 2007. Rightsizing the fleet to meet a changing workload is critical in our efforts to control costs. In no place is this more evident than in our roll-off segment, where the truck count at the end of the first quarter 2008 was 84 units less than a year ago. To have an efficient fleet means less fuel, less insurance cost, and better productivity.
To give you another example, for the quarter our front-loader route serviced about 71,000 more containers than a year ago with 19 fewer trucks, for an overall productivity improvement of 4.2% or 15 seconds per stop. It is a game of inches and a game of seconds, which again highlights the importance of adding new work along existing routes.
In line with our goal to curb costs and improve energy efficiency, David Peck, our Fleet Manager, has rolled out an initiative to install clean technique bypass oil filters on our collection trucks. Using this system will allow us to extend the oil change frequency, reduce oil consumption, and reduce our overall maintenance cost. Our philosophy has been and is to adopt new energy saving technologies and practices, but only after they've been proven to be effective.
We were also pleased with our safety results for the quarter. Access frequency for both workers' comp and trucks was considerably lower when compared to 2007 results. With greater emphasis on productivity and cost containment, it's some time easy to lose sight of our responsibility to deliver outstanding service but to do it safely. I'm proud of our safety record for the quarter.
As you may recall, we opened the South Wake Landfill on February 7, and for the quarter, tonnage averaged about 640 tons per day. Both revenue and margin were in line with our projections for the period.
Tonnage at our other landfills declined about 8% for the quarter, and our C&D site's volume was down about 800 tons per day. However in our three MSW landfills, daily tonnage was up about 200 tons per day.
On the pricing side, revenue per ton improved by about 10%, primarily as a result of the significant change in tonnage mix. For example, in the first quarter of 2007 C&D tonnage made up 42% of our total landfill volume, but for the first quarter of 2008 C&D tonnage declined to 30% of our total volume. And Steve will speak more to that in a moment.
Also in the sluggish C&D tonnage for the quarter was about $400,000 in additional special waste disposal revenues. We're continuing to aggressively market our special waste capabilities and have targeted a number of opportunities for the balance of 2008.
As we've talked about often, managing disposal costs continues to be one of our top priorities. During the quarter, disposable costs versus total collection service revenues declined to 15.5% compared to 16.5% a year ago, a very healthy 1% change. And our waste internalization rate improved from 26.1% to 28.3% compared to the same period in 2007.
Recovering rising fuel costs is challenging, but our oil energy adjustments are lining up to effectively track the erratic movement in fuel on a weekly basis. For the quarter, we paid an average of $3.42 per gallon compared to $2.39 per gallon a year ago, and while our consumption remains relatively stable at about 570,000 gallons per month, total fuel costs for the quarter increased to $5.9 million, an increase of $1.8 million or 43% above the cost in the first quarter of 2007. We have fuel [heads] in place for 100,000 gallons per month through June 30 and all of them cost about $3.40 per gallon, which is currently in the money at about $40,000 to $50,000 per month.
On the M&A front, we acquired one tuck-in acquisition in National during the quarter, with about $3 million in annualized revenues. Our objective remains to acquire similar operations that will help improve our route density and where possible help us internalize more waste volume into our landfills. This strategy has been very effective over the past several years and has contributed significantly to the positive results we continue to achieve.
Before I turn you over to Steve and Harry, let me emphasize several points regarding our recent performance.
First of all, we try to pay close attention to conditions within each of our markets and adjust our service delivery capabilities quickly.
Secondly, our diverse business mix, which we've talked about often, and location and favorable markets have allowed us to take advantage of limited growth opportunities when they occur but without going outside of our footprint.
And finally, our ability to control costs, improve operating efficiencies and effectively price our services has helped us sustain and actually improve our operating margins.
With that, I'll turn you over to Steve for more color on the financial side of things.
D. Stephen Grissom
Let's first begin a review of the first quarter results with a discussion of revenue. Again, as Jim mentioned, our revenues for the quarter increased 5.7% to $85.7 million. Pricing growth was 1%, the fuel energy surcharge increased 2.3%, and internal volume declined 2.3% for total internal growth of 1%.
Recycled commodities pricing continued strong and grew 1.2% versus prior year. Acquisition growth was 3.2% for total service revenue growth of 5.4%. Pricing growth was primarily the result of reduced C&D volume at the landfills, and Harry will provide more details on volume development later in the call.
Now let's talk about the year-over-year change in the operating margin. The operating margin increased 40 basis points to 14.4% of revenue. The operating margin would have been 15.1%, excluding the $0.7 million of going private transaction costs incurred in the quarter.
As a percentage of revenue, SG&A costs were favorable 40 basis points, gains on sale of surplus equipment contributed 40 basis points, and operations costs were unfavorable 40 basis points.
The operations costs were higher as a percentage of revenue because of the 200 basis point increase in fuel costs. Our fuel costs, as Jim said, were 43% higher than prior year and averaged $3.42 a gallon for the quarter, with even higher prices paid in March and April. Our oil and energy surcharge is offsetting for the most part the year-over-year dollar increases in fuel, but during periods of rapid cost escalation, such recovery tends to lag.
One other unfavorable item was medical claims costs, which was 50 basis points higher.
We did experience some favorable cost developments in the quarter, beginning with lower disposable costs of 100 basis points due to an [inaudible] internalization; secondly, reduced labor costs of 40 basis points reflecting increased productivity, and third, lower fleet R&M costs of 40 basis points which Harry will elaborate on later.
SG&A costs for the quarter declined 40 basis points as a percentage of revenue to 14.1%. Excluding the going private transaction costs, SG&A costs would have declined 120 basis points or $0.4 million lower than prior year.
Operating income before depreciation, amortization and accretion, again excluding the transaction costs [inaudible] 25.3% of revenue compared to 24.2% for the prior year quarter.
Next let's discuss free cash flow. The first quarter free cash flow was $5.3 million. This is based on cash provided by operating activities of $18.7 million less purchases of property and equipment landfill construction of $13.8 million plus proceeds from the sale of equipment of $0.5 million.
The higher level of capital expenditures for the quarter was attributable to the equipping of the South Wake County Landfill, which initiated operations in early February, and also the payment for about $5 million of collection vehicles in the first quarter.
Our balance sheet is again healthy, with receivables at 31 days outstanding versus 32 days outstanding at 12/31/07 and a debt to total capitalization ratio of 50%.
Also in the first quarter we hedged $80 million of our debt for five years at a blended fixed rate of about 3.6% plus the credit facility spread.
Now we'll turn to Harry for more details on the quarterly operations.
As you've heard from the other public companies, the downturn in the housing construction market has had a significant negative impact on C&D landfill revenue and C&D roll off activity. I'd estimate that it's probably had about a $3 million negative revenue impact on our Q1 revenue results.
However, I'm also cautiously optimistic that things have definitely bottomed out and that they're holding steady, and I base this on the number of C&D roll-off services in April, which was the most number of services since November of '07. And also encouraging is the following leading indicator: The number of deliveries, roll-off container deliveries, was up 17% over March, and return to stock containers declined by 3%.
And I'd also like to highlight some specific markets. Our Raleigh-Durham C&D roll-off operation, it's primarily focused on commercial construction and their YTD results are actually ahead of last year's. However, if you look along the Coast from Tidewater down to Charleston, the C&D roll-off work is really not showing any signs of improvement or getting really any worse, for that matter.
The commercial construction in Atlanta is a real bright spot. February was the bottom. We are seeing steady increases in C&D tonnage at Safeguard Landfill. And Safeguard Landfill, if you'll recall, is totally dependent upon third parties for their tonnage. In fact, April's tonnage at Safeguard was up 17% from March.
Now due to the fact that the western suburbs have bedroom communities, the C&D roll-off activity over there is primarily limited to housing construction and demotion, and to date this is still a very soft market and we have not seen a turnaround. All of our Atlanta collection operations and Grady Road Landfill and Safeguard, they all continue to show steady but sustainable improvement.
So it's anything but doom and gloom. For the most part, the competition is still pricing permanent work in a very rational manner, and I believe the primary reason for this is that we're facing very high industry specific inflation for our cost of goods sold. Diesel, just as an example, diesel prices rose from $2.80 a gallon on October 1 to over $4.00 in just this recent work.
The purchase cost of vehicles has been rising by 10% or more each as a result of unprecedented steel price increases and the cost of clean air technology designed to meet the new federal emissions laws. The cost of steel containers and residential plastic carts has also been climbing much more rapidly than the general inflation rate. And of course, the driver maintenance technician shortage has also driven up wage expectations.
So I see people continuing to focus on rational pricing.
Now you'll recall that we decided in late 2006 that we had to start making a course adjustment. For the most part, by then we had identified and price adjusted all of our commercial customers who were not meeting our margin expectations, and we knew we had a jump on the competition and we were in position to start to grow this segment of our business. By design, our sales team's production in Q1 '08 was 21% greater than Q1 '07, and as a result, as Jim mentioned, we're enjoying strong organic growth in our commercial product line, which is our most profitable product line. Our very tight route density and motivated productive work force is focused on customer service, and that gives us a distinct advantage over the large national firms who are not as nimble or quick to react.
The company's cost of operations was 61.9% in Q1 '08 versus 61.4% in Q1 '07. Now the primary reasons for the margin slippage are the new Wake County Convenience Center contract that now requires us to pay the disposal charges. The North Wake Landfill did not charge disposal rates, but the South Wake Landfill does. And this has everything to do with revenue sharing among the inter-local governments that are all using that South Wake Landfill. So we have to pay $1.4 more in disposal costs. But in spite of that additional third-party disposal cost, disposal was down to 14.2% of revenue as compared to 15.1% in Q1 '07.
Now, the margin also slipped because of the $1.8 million worth of fuel surcharges in the quarter, which offset comparable fuel cost increases. You take those things out, and we were right back at the 61.4%.
Now we're starting to see the results of our fleet maintenance initiatives that we kicked off in early 2007. Fleet maintenance cost was 8% of revenue versus 8.4% in Q1 '07. Now the result reflects the fact that our maintenance technicians are much more productive as a result of a new planning and scheduling procedure as well as our safety lane initiative that's now pretty much company wide, being implemented company wide.
However, we are concerned about the impact the post-emission engines will have on our maintenance costs going forward. As information, we only have four post-emission engines in our fleet. And the various manufacturers have taken one of two approaches to meet the new federal emission standard, and we found that the active system seems to be working the best.
Jim also mentioned that our routing optimization initiatives have led to a 4% productivity improvement on our frontend load fleet, but it's not just on front ends. We're also working on our residential and our roll-off fleets, and the results can really be seen in our personnel costs, which were 18.1% of revenue in Q1 '08 versus 18.2% in '07.
Sequentially, revenue for Q1 was, as Jim mentioned, $85.7 million versus $84.6 in Q4 '07, and the following three things had the most impact on our revenue, the change in revenue from Q4 to Q1: [Temp] roll-off was down 7% and third-party C&D was down about 10%, however, as I mentioned, April's results are promising. So I think we're definitely on the upswing.
Probably the biggest impact was transfer station revenue, which was down 47% and really two reasons: The South Wake transfer station was closed when the South Wake Landfill opened up, and the other transfer station that was impacted was our west side of Atlanta transfer station - in Dallas, Georgia, we have two of them over there the one in Dallas, Georgia is a C&D transfer station and, due to the housing, the softness in the housing market, we temporarily idled that facility.
And if you take a look at our fuel surcharge revenue, from Q4 to Q1 it was up 17% as fuel prices surged. Our employees really did an outstanding job of adjusting our cost structure to the dramatic decline in C&D roll-off and C&D disposal revenue. Our cost of operations were back down to 61.9% as compared to 63.6% in Q4 '07.
Now as expected, the soft economy is having an impact on a lot of little things. One of them, of course, is bad debt, particularly on the subscription residential. We're seeing that. And we're seeing more requests for service reductions from our commercial accounts.
But our employees are doing an outstanding job during these really soft economic times. They are working with our customers to meet their current service needs and also continue to streamline our internal processes and route optimization efforts in order to minimize our service delivery cost.
Jim W. Perry
[Inaudible] a lot of information about the company and our operations and the local markets we serve.
And with that, Heather, why don't we open it up for Q&A to see if we left out anything anybody wants to talk about.
(Operator Instructions) And it appears we have no questions at this time, sir.
Jim W. Perry
Well, good, Heather. And for those of you who are on the line on a beautiful Friday afternoon in North Carolina, let me close by saying the first quarter of '08 marked the beginning of our 34th consecutive profitable year in our 37year history. That's something that everyone in the company can be proud of, those who've begun here recently and those who've been here for a long time.
But we understand clearly that it would not have been possible without loyal customers, dedicated employees many on the line today the support of our bankers and suppliers, and the confidence of our many stakeholders. And we can assure you that we will continue to work hard to earn the trust of everyone who has placed their confidence in our company.
With that, let me thank you for joining today and I look forward to speaking with you in the future. Thank you very much.
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