WCA Waste Corporation Q2 2008 Earnings Call Transcript

Sep.18.08 | About: WCA Waste (WCAA)

WCA Waste Corporation (NASDAQ:WCAA)

Q2 2008 Earnings Call

August 7, 2008 8:30 am ET


Joseph Serano – Vice President

Tom Fatjo – Chairman, Chief Executive Officer

Jerome Kruszka – President, Chief Operating Officer

Charles Casalinova – Chief Financial Officer


Jeff Beach – Stifel Nicolaus & Company

Scott Levine – J.P. Morgan

Brian Butler – FBR


Welcome to the second quarter 2008 WCA Waste Corporation earnings conference call. (Operator Instructions) I would now like to turn the call over to Joe Serano, Vice President.

Joseph Serano

Welcome to the WCA Waste Corporation conference call in which we will be reporting results for the second quarter ended June 30, 2008. Also 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 Senior Vice President and Chief Financial Officer.

Prior to the call it 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 27A of the Securities Act of 1933 and Section 21E 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, plan, project, believe, will, outlook, estimate and similar expressions are often used to identify forward-looking statements. Our guidance and descriptions of revenue run rate, acquisition pipeline an 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 risk and uncertainties in detail. The forward-looking statements made today are only made as of this day, 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 in EBITDA run rate. We direct your attention to our earning release and our filings for a description of the computation of those measures.

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

Tom Fatjo

WCA reported record quarter revenue of $52.7 million for the three months ended June 30, 2008. This is a 14.2% increase over the $42.6 million reported for the same quarter last year. Even with increasing fuel costs and tougher economic conditions we're pleased with our operating performance. EBITDA increased 9.2% to $13.5 million versus $12.4 million reported during the second quarter of 2007. $13.5 million of EBITDA reported for this quarter is an increase of $2 million over the $11.5 million reported in the first quarter of this year.

Despite higher fuel costs, our second quarter performance was substantially better than the first quarter due to normal seasonality factors and strong management leadership. Fuel surcharges will ultimately recover our increases in fuel costs. However, in a period of rising fuel costs, there is a lag in the recovery of these cost increases.

In addition to our strong operating results, we're pleased to report that WCA is in a strong financial position with $128 million available under our credit facility to allow us to continue our growth acquisition strategy. The cost of acquisitions is currently more of a challenge. However, we continue to see opportunities in the market particularly from the potential divestitures associated with the continued industry consolidation.

I'll turn the call over to Jerry Kruszka to discuss our operating results for the quarter ended June 30, 2008.

Jerome Kruszka

As Tom mentioned, I'll now discuss WCA's operating results for the quarter ended June 30, 2008. Revenue for the quarter increased 14.2% to $52.7 million from the $46.2 million reported for the three months ended June 30, 2007. This 14.2% increase in revenue is broken down as follows: 8.4% from acquisition and acquisition going forward, 7.8% from price increases consisting of a core price fixed increase of 4% and a fuel surcharge increase of 3.8%.

Volume was down 2% resulting in our growth of 5.8% for fuel surcharge or 2% without the fuel charge. The negative volume which we experienced from Alabama, Florida and South Carolina was partially offset by strong growth in the Houston, Texas market.

Our cost of services as a percent of revenue increased through the second quarter of 2008 to 64.9% versus 66.6% for the comparable quarter of 2007. This 2.8% increase in cost as percent of revenue is a direct reflection of a 3.7% increase in the cost of diesel and a percent of revenue. The higher cost of fuel was offset by improvements in operating labor costs, insurance and the second quarter's improvement in the company's safety experience.

Fuel prices year to date 2008 have increased 47.7% over the same period of 2007. In fact, June 2008 fuel price increased 66.6% over June of 2007. We passed on the fuel price increases to our customers in the form of a fuel surcharge. The surcharges lag anywhere from 30 to 120 days depending on the type of service and going by each customer type.

EBITDA for the second quarter of 2008 was $13.5 million, or 25.5% of revenue. This represents a 9.2% increase over the $12.4 million reported for the second quarter of 2007. Again, the margins were directly affected by the increase in fuel costs.

Our second quarter revenue breakdown by segment, devoid of inner company revenue for the second quarter of 2008 was 51.1% collection, 29.7% disposal, 19.2% transfer of other. Our internalization rate which continues to be the highest in our sector was 74.6% for the second quarter of 2008. WCA currently operates 24 landfills, 23 transfer stations and 27 collection operations and services approximately 332,000 customers.

Our employee head count as June 30, 2008 was 1,088 and at this time I'll turn the call over to Chuck Casalinova our Chief Financial Officer for further financial review.

Charles Casalinova

Continuing with our analysis of the second quarter results, net income available to common stock holders was $1.9 million, or $0.11 per share. Excluding the realized and non realized impact of our interest rate swap agreement and the impact of selling a waste services note, the net income available to common stockholders was $0.01 per share.

The swap was put in place in July 2006 to protect the company from the potential impact of long term interest rates. We are exposed to the effects of marketing the swap to market at the end of each quarter. During the quarter, we had a favorable adjustment of $4.8 million due to the decrease in the Treasury yield curve. Year to date, the adjustment is a positive $516,000.

As part of our asset swap with Waste Services Inc. at the end of June 2007, WCA received a note receivable from Waste Services for $125,000 per month for 84 months. WCA sold the note during the quarter to a third party. After discounts and closing costs, WCA took a net cash loss of $194,000 on the transaction.

In comparing our results of operations for the six months ended June 30, 2008 to the same period ended June 30, 2007 revenue increased 17% to $101.6 million from $86.8 million. This 17% revenue growth included 11.5% from acquisitions and 5.5% from internal growth. The internal growth breaks down as 4.1% from base business price increases, a negative 1.5% from volume and a positive 2.5% in fuel surcharge.

Cost of services for the six months ended June 30, 2008 was 69.5% of revenue. Costs were impacted as the cost of fuel as a percent of revenue increased 3.2% year over year. Net income available to common stockholders year to date is a negative $1.5 million or negative $0.09 per share. Excluding the realized and non realized impact of the interest rate swap and the loss on selling the Waster Services note receivable, net loss available to common stockholders was $0.05 per share.

As previously announced, WCA Waste Corporation started a stock re-purchase program during the second quarter. During the quarter, the company re-purchased 311,965 shares of its common stock at a cost of approximately $1.7 million. As of June 30, 2008, the company has $128 million in available capacity at our current credit facility.

Our net long term debt is $196 million and our equity is $170 million. This results in a debt to total capitalization of 53.6%. Our current year to date capital expenditures include $11.9 million invested in maintenance capital, $2.3 million invested in acquisition and $800,000 on new and unbudgeted projects.

Our current effective tax rate which should be used in modeling our performance over the remaining quarters of 2008 is 43.1%. Collections of receivables remain good as our day's sales outstanding as a company are at 31.3 days.

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

Question-and-Answer Session


(Operator Instructions) Your first question comes from Jeff Beach – Stifel Nicolaus.

Jeff Beach – Stifel Nicolaus

The first question I'd like to ask is about the interest rate swaps. Can you tell me how long the swaps are good for?

Tom Fatjo

I believe its November of 2010 they expire, or 11. I would have to look that up. I believe its November '10 though.

Jeff Beach – Stifel Nicolaus

The negative volume – can you describe the economies in the weak states that you mentioned, how much volume is down there and you're talking about Houston being strong. Can you give us an idea of how much volume might be up in Houston?

Jerome Kruszka

We talked about in previous calls we've seen basically Florida slow down dramatically. South Carolina is off somewhat as are parts of Alabama. Birmingham seems strong. The Huntsville area was a little weaker, up in that area. As far as Houston, Houston is a result I think you know we had three new sites as well as the W site we operate here. The C&D market is strong. [inaudible] the MSW we picked up several contracts residentially and the volume as well as the economy is real robust right now in this particular market. We have not seen any downturn whatsoever.

Jeff Beach – Stifel Nicolaus

And regarding your business related to construction, is the weakness in the Southeast states primarily still oriented around residential construction, or have you seen a decline occurring in the non residential construction?

Jerome Kruszka

I would say in Florida and in Alabama, it's primarily residential. South Carolina is just kind of a general slow down and some of it is created by the weather conditions as well for construction. Obviously if it's particularly wet season for them things are just slow.


Your next question comes from Scott Levine – J.P. Morgan.

Scott Levine – J.P. Morgan

Tom, I believe you mentioned on acquisition side that multiples are a bit of a challenge. Can you talk a little bit more detail about what you're seeing there and maybe the difference between what you're seeing on [tuck ins] versus maybe new market opportunities.

Tom Fatjo

The principal factor we see influencing acquisitions is that many of the companies this year are not doing quite as well as they did last year in terms of operating performance and yet the owners still have the same attitude towards the value and therefore with us not being prepared to give a higher multiple, and therefore broach a diluted acquisition, that's what I mean by it being a challenge, that the acquisition opportunities are still there. It's just that we're having a difficult time in terms of seeing owners adjust their prices due to current operating performance.

We're hopeful that some of these major transactions, or one or two of the major transactions are going to turn out and we'll have a real opportunity to acquire divestitures but of course, nobody knows about that until it happens. Does that answer the question?

Scott Levine – J.P. Morgan

With regard to the multiple versus the last couple of years though, is it kind of consistent or is it going up or down? It sounds like there's no change and there should be in your view.

Tom Fatjo

No change in our willingness to pay the higher multiple, that's correct.

Scott Levine – J.P. Morgan

With regard to the cash flow data, I don't think there was any information released. Is there any guidance you can give on CapEx in the quarter and what your thoughts are in terms of expectations for the year? Any change in terms of your anticipated spending levels there?

Jerome Kruszka

We did spend so far this year about $12 million on maintenance CapEx and about $2.3 million on investment capital and probably $800,000 on special contracts like being the successful bidder on municipal contracts. I think we mentioned before we'll probably be spending on maintenance capital between $20 million and $25 million this year. Investment capital, we previously announced that we would spend $60 million of which $10 would be allocated towards our stock re-purchase program.

And again, we won't spend that as Tom mentioned unless we can find acquisitions within our range. And then on budget investment capital, if we're successful and we plan to be on a couple of projects we're working now, it usually costs a dollar for dollar revenue when we're successful on these special projects like the new municipal contract with a five year contract and a five year to renew type situation.

Our capital will probably be in those ranges this year. The hard one to project is the unbudgeted investment type capital.

Scott Levine – J.P. Morgan

I was wondering if you could talk anecdotally about how the year is playing out or organically relative to your expectations, both on the price and the volume side. Are both coming in consistent? It sounds like volume is a little bit below but the price is holding up quite well. Is there any comment you can make there?

Tom Fatjo

We'll have another round of price increases before the end of the year. The trade off and the volume it's kind of hard to define whether or not it's due to economic conditions or the price increases we put in place. In the markets that we put the price increases and surcharges in, we fully expect to catch the diesel. The surcharge will catch the diesel cost as we move forward barring any huge increases in the future.

I think the third quarter should be as good as the second quarter with everything we see on the horizon plus the special projects we're looking at.


Your next question comes from Brian Butler – FBR.

Brian Butler – FBR

When you look at the markets that are weak, especially the construction side in Florida and Alabama there how is pricing holding up in those markets? Is that still under pressure or holding up okay?

Tom Fatjo

They're holding up okay except for Florida. We've seen even the major companies moving pricing down to complete for the volume that's out there. But other markets, the prices are holding pretty good.

Brian Butler – FBR

On the acquisition side, when you look at the divestitures that potentially could come out of any of these deals are you mostly looking at [Hawkins] as a potential that you'd be following or is it a possibility that you would be entering some new markets?

Tom Fatjo

A good acquisition is a good acquisition even if's a new market and we'd look at both, both new markets and tuck ins.

Brian Butler – FBR

How would you classify the general market appetite for waste at this point? How strong is it? It looks like the multiples are a little high but that sounds like it's more from the perspective of what the sellers don't want to lower their price, but is there demand out there for auto waste assets?

Tom Fatjo

There began to be more of a demand about two years ago principally from investment firms, but in the lasts two years we haven't seen much of a change. It's been fairly steady. On the issue of price and performance, it's a pretty simple calculation. Let's say company last year was, operating performance was one and let's say this year it was .85 and let's say we were willing to pay six times last year. If you divide six by .85, you get seven and we're not willing to pay the higher price.

And so that's just a pretty simple explanation of why the pricing is a challenge this year, just because of operating performance being lower.


At this time there are no further questions.

Tom Fatjo

We appreciate very much all of you being available. We continue to be excited about this industry. I will say after having looked at it over a lot of years, been a part of it over a lot of years, and we've said that it is a recession resistant industry, not recession proof but recession resistant, we continue to see that record performance.

I would also say that we were slightly disappointed with our first quarter performance and Jerry Kruszka, the leadership from him; he made a number of management decisions. Obviously seasonally the first quarter is better than the second quarter, but a lot of that $2 million increase in EBITDA was as a result of Jerry's leadership. So as he said, we see the third quarter being strong as well as the second quarter.

We're excited to look at these potential divestitures and see what they might mean to us. We appreciate again very much those of you who have been involved in the call. If you have any questions during the day, feel free to call Chuck Casalinova at the office.

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