Waste Connections, Inc.
Q2 2009 Earnings Call Transcript

Published: 22 Jul 2009

[Operator:]

Good day, ladies and gentlemen, and welcome to the second quarter 2009 Waste Connections earnings conference call. My name is Becky, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating 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, Ron Mittelstaedt. Please proceed.

[Ronald J. Mittelstaedt:]

Okay. Thank you, operator, and good morning. I would like to welcome everyone to our conference call to discuss the second quarter 2009 results and provide our detailed outlook for the third quarter. I’m joined this morning by Darrell Chambliss, our COO; Worthing Jackman, our CFO and several other members of our senior management team. Steve Bouck, our President is traveling today and he is dialed-in remotely. The second quarter provided three months of solid performance, which is quite a turnaround following two quarters of unprecedented volatility and top line erosion late last year and earlier this year. We were encouraged to see volumes in the quarter slightly ahead, exceed our expectations, pricing remains strong and contribution from our recent acquisitions beat our initial expectations. In looking at the quarter, we exceeded our outlook for both revenue and margin, completed the RSG divestiture transactions, agreed to acquire the largest privately-owned franchise solid waste services provider in Oregon, received IRS approval for a change in landfill depreciation method for our tax books, came through this period of record growth with still the strongest balance sheet in our sector and resumed our stock purchase program late in the quarter following the Russell Index rebalancing. Before we get into a more detailed discussion on these and other topics, let me turn the call over to Worthing for our forward-looking disclaimer and other housekeeping items.

[Worthing F. Jackman:]

Thank you, Ron, and good morning everyone. 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 will discuss non-GAAP measures such as operating income before depreciation, amortization and accretion, free cash flow and adjusted earnings. Please refer to our earnings release for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. And other companies may calculate these non-GAAP measures differently. As discussed at length, during our February and April conference calls and as highlighted again in our earnings release. We remind investors and listeners of the three changes in GAAP effective this quarter that impact year-to-year comparisons and the presentation of our financials. These changes require us to expense acquisition related costs that previously have been included as an element of purchase price and capitalized as such transactions. To record a non-cash interest expense, equal to the difference between the cash coupon in our convertible notes and the estimated non-convertible borrowing rate back to the time of the issuance of these notes. And finally, to rename minority interest as non-controlling interest, and change the presentation of such interest on our income statement and balance sheet. With that behind us, let me turn the call back over to Ron.

[Ronald J. Mittelstaedt:]

Okay. Thank you, Worthing. We are extremely pleased with our results in the quarter. Revenue was $302.8 million up 13.4% over the prior year period, driven by a 21.8% increase from acquisition activity. Organic growth was a negative 8.4% broken down as follows

[Worthing F. Jackman:]

Thank you, Ron. In the second quarter, revenue increased 13.4% to $302.8 million. Operating income before depreciation, amortization and accretion excluding certain items increased 16.7% to $94 million. These excluded items totaled $700,000 and included the following, about $2 million of acquisition related cost primarily related to the Republic Services transaction and note that such RSG costs are now behind us. The $400,000 expense related to the company’s prior corporate office lease and $1.7 million gain on sale of assets that Ron discussed earlier. As a percentage of revenue, operating income before depreciation, amortization and accretion for the quarter was 31%, a 90 basis point increase over the year ago period. Margins exceeded our outlook by 50 basis points, primarily on lower than anticipated labor and fuel costs, along with longer expenses in a variety of smaller line items. The following certain line items that moved in the quarter and notable amount year-over-year as a percentage of revenue. Fuel expense declined 280 basis points to average 6.3% of revenue. We averaged about $3.05 per gallon for diesel during the quarter, which is about a $1.30 per gallon below the prior year period. As a reminder, we have about $4.2 million gallons per quarter this year locked in at around $3.35 per gallon, with the remainder purchased at market prices. SG&A, net of the $2.4 million of excluding items increased 100 basis points, 50 basis points of which was due to increased incentive and equity-based compensation costs, 30 basis points from higher legal expenses and 15 basis points from increased bad debt expenses. The majority of this increase in SG&A as a percentage of revenue was due to less absorption of fixed related costs from negative organic growth. Auto and workers' comp insurance costs increased 45 basis points. Leachate treatment and landfill monitoring and maintenance expense increased 20 basis points primarily due to above average rainfall at certain landfills in South East. And finally, landfill engineering and permitting expenses increased 10 basis points from an increase in the number of sites due to the RSG transaction. Depreciation and amortization expenses increased $9.2 million year-over-year to about 11% of revenue, up almost 200 basis points from the prior year. Half of this increase as a percentage of revenue was due to less absorption of fixed related costs by lower top line revenue. And the remaining half of this increase was due to both higher depletion expense from the RSG acquisitions and an increase in amortization of acquisition related intangibles, primarily associated with the RSG transactions. Interest expense in the quarter increased $2.2 million, primarily due to higher outstanding debt balances. I will remind people that both the current and prior year periods reflect the adoption of FSP number APB 14-1 related to [convertible] debentures. Prior year periods included $1.1 million and $1.2 million respectively for such estimated non-cash interest expense. We completed the acquisition of the RSG divestitures during the quarter and ended the period with almost $864 million of outstanding debt. Our leverage ratio was 2.2 times debt-to-EBITDA, and we currently have about $300 million of unused available capacity under our credit facility. Our effective tax rate for the second quarter before the impact of non-controlling interest now reflected below the line, pursuant to the adoption of SFAS 160 on January 1 of this year, was 35.3% compared to 36.1% a year ago period. Our effective rate before the implementation of this new pronouncement was 35.4% in the second quarter, compared to 39.3% a year ago period, when you deduct non-controlling interest from pre-tax income and apply the same dollar amount of tax provision. Our provision in the current period reflected a $1.3 million benefit, primarily from a reduction in deferred tax liabilities, which decreased our effective rate by about 270 basis points. GAAP EPS was $0.38 and adjusted EPS in the quarter was $0.37. As highlighted in our earnings release, GAAP EPS included a combined $0.01 benefit from the gain on sale of assets and decrease in our tax provision, and this mostly offset by acquisition costs primarily related to the RSG transaction and an increase in the write-off associated with our prior corporate office lease. Non-GAAP EPS on a cash basis of $0.42 when also adding back the $0.05 impact of non-cash items related to equity-based compensation costs, amortization of acquisition related intangibles and the non-cash interest associated with the adoption of APB 14-1. Our fully diluted outstanding share count was $80.8 million shares or 19.1% increase from the year ago period due to the equity offering we completed last fall. And as Ron stated, we resumed our share buyback program at the end of June, and we will begin to see the impact of share count in Q3. Free cash flow was $59.2 million in the quarter, or 19.5% of revenue and $104.7 million or 18.5% of revenue through the first six months of the year. Cash taxes in the quarter decreased about $6 million related to the approval we received in May from the IRS regarding the change in depreciation method for ten of our landfills on our tax books. We estimated another $4 million of cash tax savings this year from this approval. Also we hope to file for similar approval for other sites by year-end and approval of these sites, which could occur in the first half of next year would drive another meaningful reduction in cash taxes and boost free cash flow again in 2010. Free cash flow per share through the first six months of the year was a $1.30 or 200% of reported net income in earnings per share. Reported net income grew 9.1% year-over-year through the six months ending June 30, but free cash flow grew 32.2% during that same period. Our reported earnings growth continues to be diluted by an increasing amount of non-cash items running through our P&L such as amortization of acquisition related intangibles, equity-based compensation costs and higher depletion and accretion expense associated with landfills recently acquired from RSG. Changes in GAAP this year also influenced earnings comparison. We continue to focus equity analysts and investors on growth and free cash flow and bridge between net income and free cash flow. As we believe this remains the best measure for how we’re performing. I will now review our outlook for the third quarter of 2009. Before I do, we would like to remind everyone once gain 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 those factors carefully. Our outlook assumes no changes in the current economic environment and very little seasonal improvement in revenue compared to what we typically experience Q2 to Q3. Our outlook assumes Sanipac closes July 31, but excludes the impact of any additional acquisitions that may close in the period and also excludes the expensing of any acquisition related costs. Acquisition related costs expense under the adoption of 141(NYSE

[Ronald J. Mittelstaedt:]

Okay. Thank you, Worthing. Listeners on this call are well known. It’s hard to find a sector that hasn’t been impacted by a weakened economy, rising unemployment, collapse in construction activity and decreased consumption. We believe, however, the worst of this is now behind us and that things are stabilizing. Relative top line stability, contribution from recently completed acquisitions and tight labor and cost controls have driven strong results through the income statement. This increase in profitability combined with working capital management and capital expenditure controls has produced record free cash flow. Again we’re extremely pleased with our results in the quarter, and the position in which we placed ourselves. A position that will allow us to continue executing our differentiated growth strategy, while returning cash to our shareholders. We appreciate your time today, and I will now turn this call over to the operator to open up the lines for your questions. Operator?

[Operator:]

Thank you very much. (Operator Instructions). And your first question comes from the line of Michael Hoffman of WSI. Please proceed.

[Michael E. Hoffman:]

Hi. Good morning and congratulations on a terrific quarter. As you think through the results run that guidance, free cash flow ends up well above the start of the year at 170 kind of nudging it up towards 180 in April. And it looks like you’re sure getting to the 190 range, 200 range. Do you use all of that just to do share buyback and acquisitions, or do we see any thoughts about revising the capital spending plan in light of bonus depreciation and 2010 emissions issues?

[Worthing F. Jackman:]

All of the above. Obviously, we will still to do acquisition funding the second half of the year. Share repurchases as you may recall, when we turn this share repurchase on we typically bought between 5% and 6% of our stock over a 12-month period that will be about 4 million to 5 million shares over 12-month period we now bought back. Again about 1.3 million shares already we still expect to be active in the second half of the year. And again regarding CapEx, you’re right. We may look to pull some new trucks that we otherwise would have gotten in the first part of next year into late Q4 in order to get this year’s pricing as well as this year’s engine and also get the bonus depreciation. But that said, that would only be perhaps $10 million or $15 million of CapEx which is still place reported free cash flow in the 185 to 190 range.

[Michael E. Hoffman:]

Okay. And that’s all additive to the free cash flow though in 2010?

[Worthing F. Jackman:]

Right. Pulling CapEx from ten into nine.

[Michael E. Hoffman:]

Right. And then as you think about the extraordinary strength of this cash flow, is there a point where you anticipate or contemplate a dividend or what’s the thought process with regards to the Board in that?

[Worthing F. Jackman:]

Yeah. Thought process hasn’t changed and that is, we like the flexibility of share repurchase as a way to return cash that likely we did in March of ’08. The ability to turn that off when we see spikes in acquisition activity that exceeds the averages and you combine that flexibility with still remaining uncertainty around the tax code and it still seems prudent at this point in time to keep returning cash through a share repurchase.

[Michael E. Hoffman:]

Okay. And then as you gave I think an interesting sort of way to look forward on volumes of tracking second quarter, third quarter, same starts to dip in the fourth quarter, but that would also suggest then as probably a little bit of tail end to 2010. I mean as you sort of think about a message you would want to convey to the street. How should they think about the pattern of volume as you enter 2010?

[Worthing F. Jackman:]

I think we have been consistent for over a year now. And that is with the look of recovery being more back half of ‘10 and at the earliest because as you recall the sector lags in recovery, number one. Number two, you are still entering or exiting ’09 with negative volume as you go into 2010. And so, it’s likely that the first part of ’10 is negative volumes albeit a lot lower than what's reported this year. And then the question is, do you start seeing those volumes turn flat to positive in the second half of the year or the first half of ’11, really depends on the pace and timing of the economic recovery.

[Michael E. Hoffman:]

Okay. And then, a lot of things are going on in Washington at the moment, cash for clunkers, does that lead to extraordinary amount of car shredded and then there is a lot of auto fluff, climate changed, there are some actions with regards to landfill gas and offsets. Can you talk a little bit about any of that in the context of your business model, where the flexion might be if and do you see any possibility of some benefit even if it’s marginal?

[Ronald J. Mittelstaedt:]

Michael, at this point we haven’t seen anything. Although it’s fairly early in many of the plans you just outlined. Certainly if auto sales ramp from the $8 million, $9 million level they are at right now annually to some of the auto experts would tell you that with this program, it will get back to a $14 million to $16 million range annually. That certainly is a reasonable pickup and we should see some benefit in shredder fluff at many of our landfills, which is down quite dramatically in the 40% to 70% range for that waste stream at many of our landfill. So we would see that. We have not really seen any stimulus money hit any 'shovel-ready' projects yet. Once those start, you are still sort of 3 to 9 months away from seeing roll-off activity for those and that’s assuming they are building related, not necessarily just roads and bridges related, but we haven’t seen that. That would be a benefit. So yeah, I mean. As the different monetary and other programs that are being implemented, gain some traction there should be an improvement to volumes.

[Michael E. Hoffman:]

All right.

[Ronald J. Mittelstaedt:]

But we’re not going to project that yet.

[Michael E. Hoffman:]

Okay. Well, again congratulations. Job well done.

[Ronald J. Mittelstaedt:]

Thank you very much.

[Worthing F. Jackman:]

Thank you.

[Operator:]

And your next question comes from the line of Hamzah Mazari of Credit Suisse. Please proceed.

[Hamzah Mazari:]

Good morning. Thank you.

[Ronald J. Mittelstaedt:]

Good morning.

[Worthing F. Jackman:]

Good morning.

[Hamzah Mazari:]

Just a couple of questions. The first question is could you remind us again the EBITDA you expect to generate off of the Republic assets. What the timing of that is for you to get there. What buckets are your synergies coming from the integration of those assets? How much progress you’ve made so far? Where you are in that process? Since the transactions now closed and, so far we just know the EBITDA number that you expect to generate, but there is a very little details surrounding integration of that.

[Ronald J. Mittelstaedt:]

Yes. Hamzah, this is Ron. To say, the Republic acquisitions, we said that our first year expected EBITDA on those was approximately $56 million in EBITDA. There really is no integration or synergies to get to that number, because there was really no markets except for Denver, where there was any material overlap. And the synergies in the Denver market was just $1 million and $1.5 million and that was in that $56 million and that has been completed. Now what we said on the RSG asset is that we think as the economy recovers and volumes stabilize and special waste opportunities materialize that we can drive a number somewhere around $65 million to $75 million of EBITDA range over an 18 to 24-month period on those same exact assets. That will not really come from synergies or operating integration that will come from volume expansions at four or five of the landfills of the eight landfills we bought from Republic. And as we mentioned today on our earnings call, through the first quarter of ownership or in some cases now almost four months of ownership of the Republic assets. We were at or ahead of that $56 million EBITDA pace. So that’s where we are on Republic.

[Hamzah Mazari:]

Okay. Thank you. That's very helpful. And then, just if you could just add a little more color on your decision to turn on the buyback. Can we expect that, that's a function of fewer, larger acquisition opportunities out there and that you have your hands full currently or how should we be thinking about that going forward?

[Worthing F. Jackman:]

I’d say it’s not the fact that we have our hands full, because the integration of Republic is going to quite well and is ahead of schedule. It’s more function of where as we’ve always said, our mode is to buy between $40 million and $60 million acquired revenues. Sometimes optimistically, you see transactions that take you above that as you saw last year and again this year. But again if all we buy at $40 million to $60 million of acquired revenue that $75 million or $100 million of purchase price, is still another $100 million or more of free cash flow that goes to further delever the balance sheet. And of course the free cash flow of the acquisition that’s bringing more EBITDA that also delivers the balance sheet. And so you quickly start ratcheting down the leverage profile, getting well south of two times leverage. So if you look at that profile with again our view of the value of the stock in the marketplace right now. And we were comfortable that we are back in the mode of again the ability to buyback 5% or 6% of our flow over a 12-month period and complete that $40 million to $60 million of acquisitions and really stay in the low 2s from a leverage standpoint.

[Hamzah Mazari:]

Okay. Got you. Thank you. That’s very helpful. Thanks.

[Worthing F. Jackman:]

Okay.

[Operator:]

And your next question comes from line of Scott Levine of JPMorgan. Please proceed.

[Scott Levine:]

Good morning guys.

[Ronald J. Mittelstaedt:]

Hi, good morning.

[Worthing F. Jackman:]

Good morning, Scott.

[Scott Levine:]

So at the beginning of the year you guys were pointing to a full year number on revenue in the neighborhood of $1.2 billion. And I think it’s safe to say, volumes are coming in a little bit late of initial expectations, but you gave clear guidance on Q3. And I guess, we can kind of fill in the blanks and some of the items on the fourth quarter. But any additional things we should take in a consideration regarding any other line items revenue or otherwise as far as expectations to the full year concern that might be moving part?

[Worthing F. Jackman:]

Well. On the P&L side everything is still consistent what we said before, obviously in the free cash flow side we are running, continue to run ahead of pace.

[Scott Levine:]

Okay. And could you comment a little bit on the breakdown in price trends competitive versus franchise and maybe any implications of those trends on pricing beyond 2009?

[Worthing F. Jackman:]

Well. There is, really has not been any material change in the pricing between or the pricing breakdown between competitive and exclusive or franchise as you refer to Scott with competitive running ahead of the core average of 5% and exclusive running below. Obviously, the exclusive, as we’ve said we’ll come down in 2010, at just as a function of the CPI coming down over ’09. So that we’re right now getting it depends on the community, but anywhere from a two to almost of 4% CPI in the West Coast for the most part. And that is projected to come down by probably about half or so next year. So that will be the change in pricing we expect next year on the exclusive bet model right now.

[Scott Levine:]

I’m not seeing any change in competitive behavior either on the part of your major competitors or the smaller folks?

[Ronald J. Mittelstaedt:]

No. Not really any material change there, and certainly no, no trend change. You see one of examples all the time in certain markets, but those are just local market dynamics.

[Scott Levine:]

Gotcha. One last one, you mentioned that the slight upside to volumes versus your initial expectations in the quarter was due to some seasonal strength in select markets. Would you care to elaborate where those markets were and whether those trends were or you’re expecting those trends in those markets to continue into the third quarter?

[Ronald J. Mittelstaedt:]

Yeah. I mean we had a couple of markets in each of our three regions. That did a little bit better than we were expecting. And I would expect those markets to continue. Again they are just strengths driven by local projects that might start up parts of the upper Mid West where a little bit stronger than we had expected due to some projects that started up there. Certain parts of the West Coast and the Northwest did a little bit of better and not necessarily California, but the Northwest did a little bit better than we had thought. And parts of our Southern region also did the same. So again that’s why we said, it was not broad base by any means. These are more project specific driven issues.

[Scott Levine:]

But from a broad base perspective, it doesn’t sound as if those things came in materially weaker than you are expecting anywhere for the most part?

[Ronald J. Mittelstaedt:]

That’s correct.

[Worthing F. Jackman:]

That’s right

[Ronald J. Mittelstaedt:]

That’s right. We really saw things come in and we got a lot more projectability in the business starting in March and April than we had since October. So that level of decline came in dramatically in the second quarter and is continued to come down and visibility improve as we’ve gone throughout the second quarter into July.

[Worthing F. Jackman:]

Scott, I think, it’s Worthing. I think most companies in the sector are talking about stability in the top line as they have come out of February.

[Scott Levine:]

Got it thanks. Nice quarter.

[Worthing F. Jackman:]

Thank you.

[Operator:]

And your next question comes from the line Bill Fisher of Raymond James. Please proceed.

[William Fisher:]

Good morning?

[Worthing F. Jackman:]

Good morning, Bill.

[Ronald J. Mittelstaedt:]

Good morning.

[William Fisher:]

Ron you mentioned special waste, you had a tougher comp there year-over-year this quarter. Are there any opportunities there in the second half? And I think there is a big TVA job, [I think] some landfills near there anything to talk about there?

[Ronald J. Mittelstaedt:]

Yeah. Bill, I mean nothing really to talk about on TVA. We really don’t know anything definitive on that right now. Obviously if we are fortunate to get a piece of that or all of it or piece of it that would be a certainly a big boost, but we have not heard that at this point in time. We are seeing a more inquiries right now than we seen quite sometime about bids on and RFPs for some clean ups at multiple landfills across the country. So I believe some of that will get done in the third in the beginning of the fourth quarter. How much remains to be seen. We are running at a very tight window here where if things don’t get started usually by the middle of August, they probably not getting it done in this year. So, how much of it is planning versus how much of it actually turns into a finance job for clean up, we are not certain. But I can tell you the activity level is higher than it’s been in a while.

[William Fisher:]

Okay, great. And then you gave some information on the roll-off pulls. Any change in trend on the commercial collection side either volume or pricing?

[Ronald J. Mittelstaedt:]

No, no real change there, I mean obviously, the trends on the commercial side are still what they were going into Q2, which is still that service decreases outpace service increases, loss business, it’s very close to new business. And those are two trends that we had seen that go that direction prior to October of last year, actually prior to January of this year. So that pace on the commercial side is still is there.

[William Fisher:]

Okay, perfect. Thank you.

[Operator:]

And your next question comes from the line of Corey Greendale of First Analysis. Please proceed.

[Corey Greendale:]

Hi, good morning.

[Ronald J. Mittelstaedt:]

Hi, good morning Corey.

[Worthing F. Jackman:]

Hi, good morning Corey.

[Corey Greendale:]

Ron if you talk to customers, do you have the sense that there are any behavioral or structural changes that may last beyond the downturn? In other words, there are people recycling more than they might have before the downturn and maybe that’s a permanent change that could impact the waste volumes?

[Ronald J. Mittelstaedt:]

You got to separate it Corey, I think on the commercial, the residential, the direct user, the answer to that is no. I have not seen any structural changes. I think on the municipal or the governmental side of how things are being looked at. There is, certainly is a broadening interest spreading sort of through the Midwest and the Southeast of doing more on the recycling and the diversion side than you had going into. I don’t like, I think it was more coincidental with the recession than driven by the recession. It’s really legislatively been a movement that’s been sort of moving West towards the Midwest and the South for the last 5 to 10 years now. And so, I think you will see greater diversion in recycling over the next five years than you’ve seen over the previous five in certain geographies in the country.

[Corey Greendale:]

Okay. And Worthing, I’m sorry if I missed this. Did you say what the impact of acquisitions was on margins in the quarter?

[Ronald J. Mittelstaedt:]

We didn’t talk about it. But obviously as we talked back in April that most of the margin expansion is from the Republic transaction of those assets came in at the higher margin.

[Corey Greendale:]

Okay. And is there any change in your hedge position beyond 2010, are you thinking about the hedge position on fall?

[Ronald J. Mittelstaedt:]

Beyond ’10 so…

[Corey Greendale:]

Okay. And sorry if I missed this.

[Ronald J. Mittelstaedt:]

Beyond ’09, no. We are still hedged about 55%, 60% or so for ’10 at a price about $0.10 below where at this year. And then in the ’11 and ’12, we are still hedging about 20% each of those years, at prices $0.20 and $0.30 below where we are this year.

[Corey Greendale:]

I mean, do you look to hedge more if something specific were to happen in the futures pricing?

[Ronald J. Mittelstaedt:]

I think as we get closer to ’10, we’ll look more if the market comes down at all with more at increasing the hedging through the fixed price distribution contracts that we have. Many of those suppliers won’t go beyond 12 months in duration. And so always keep some capacity to lock in some additional contracts there. Nothing looking at right now, but as we get into October, we will probably take another look at it.

[Corey Greendale:]

Okay. Thank you.

[Operator:]

And your next question comes from the line of Nicole DeLabla of Deutsche Bank. Please proceed.

[Nicole DeLabla:]

Good morning guys. How are you?

[Worthing F. Jackman:]

Good.

[Ronald J. Mittelstaedt:]

How are you?

[Nicole DeLabla:]

Yeah. Great quarter. Most of my questions have already been answered, but couple for you. We are seeing increased focus on waste to energy from DC. Is this an area where you guys would be interested in getting into in the future?

[Ronald J. Mittelstaedt:]

In the call, it’s probably way too early to tell there are countless new technologies that are being bantered around. We have looked at many, at this point in time, a lot of them have either not been proven on a scale or do not have any assemblance of economic sense, not that that means anything in DC. But, we will continue to take a look at some of the emerging technologies. There is really not much of a appetite in the West, and the Midwest and most of the Southeast at this point for waste energy, but we believe that if somebody figures out the black box recipe that’s economical, and competitive with landfilling that we will be taking a hard look at it.

[Nicole DeLabla:]

Great. That’s helpful. And then do you guys have room for further cost cutting. Given the volumes are expected to remain weak into the third quarter or most of the fat already been trimmed.

[Ronald J. Mittelstaedt:]

Yeah. I would say that, we really do not have much room to certainly cut much cost beyond where we are now. Unless there were incremental volume decreases. At this level of volume decrease, our head count reduction has outpaced by several hundred basis points any projected decrease in volumes. So I would tell you that we are very comfortable that we’ve gone above and beyond at this point. If there were another material leg down in the economy and you saw volumes dropped much more certainly that would be a different story, because obviously expenses are certainly correlated to the volume to a certain point.

[Nicole DeLabla:]

Great. Thank you.

[Operator:]

And your next question comes from the line of Jonathan Ellis of Merrill Lynch. Please proceed.

[Jonathan Ellis:]

Great. Good morning, guys.

[Worthing F. Jackman:]

Hey, good morning, Jon.

[Ronald J. Mittelstaedt:]

Good morning.

[Jonathan Ellis:]

Just on the landfill volumes, I think you mentioned in the quarter you were down 7.5% with half coming from special waste activity in the prior year. Just out of curiosity, is special waste going to continue to be a drag on the year-over-year landfill volume comparisons in the third quarter?

[Worthing F. Jackman:]

No. There is a very little second half of last year to worry about comping.

[Jonathan Ellis:]

Okay. So then presumably landfill volumes, if all held steady should be down somewhere between 3% and 4% in the third quarter. And then, I'm just trying to understand where would the incremental weakness be coming from if total volume declines are consistent with the second quarter?

[Worthing F. Jackman:]

Well. First off, the way I look at it is, is that revenue per a month. If you look at our revenue per month it’s fairly flat coming out of June as we projected it, July through September. Therefore, it’s just a mathematical answer if that gives you the results on volumes. Obviously, roll-off continues to be down approaching 17% or more percent on an activity standpoint. Obviously transfer revenue also is down because that’s a pass through with logistics costs being down. Obviously, the landfill while volumes one measure, the question is where what is it per ton, because obviously if you are losing volumes at higher price per ton sites you’re getting a bigger impact on volume growth on a dollar basis, but not on a volume loss on per ton basis.

[Jonathan Ellis:]

Right.

[Worthing F. Jackman:]

So mix on the landfill volumes also plays a key piece of that assessment, when it comes to organic growth.

[Jonathan Ellis:]

Okay. So roll-off and transfer volumes in addition to the landfill volume mix, you think could make up for the lack of drag from special waste activity?

[Worthing F. Jackman:]

That’s right.

[Jonathan Ellis:]

Okay, great. And then just if you could talk a little bit about the commercial business, I know you said you didn’t see any real change in the volumes during the quarter, relative to what you seen earlier in the year. But I guess in terms of the mix, any difference in terms of request for less frequent pickups vis-à-vis small container sizes or it sounds like I know in the past that you said really the requests come from some of your less frequent pick ups. Is that still the case, or you see more request for smaller container size at this point?

[Ronald J. Mittelstaedt:]

It’s both Jon. I mean what I think it was Bill that asked the question, I forget now. But yeah, I mean really we saw a fairly more change happening about January or February, where for the first time our commercial service decreases, which measured both frequency and container size that started outpacing by a fairly wide margin our service increases in that same system. And that has stabilized at somewhere between 50% and 60% above service increase requests in that system. So, yeah that is a material change that happened in about January and February and is really sort of stabilized that number. So it is a combination of both.

[Jonathan Ellis:]

Okay, great. Excuse me, and then just on your fuel surcharges. And I know you early this year, you did get some benefit from fuel surcharge conversion into core pricing in some markets. Just to make sure, I understand though when you look at the hedges that you have in place, which are prices that are above market. Are the surcharges that you have being driven by your hedged price or actually the market price for fuel right now?

[Ronald J. Mittelstaedt:]

The market price.

[Jonathan Ellis:]

Okay. So surcharges are driven by the market price irrespective of what the hedge prices that you are paying right now.

[Ronald J. Mittelstaedt:]

Yeah. I mean that’s correct. In other words, we do not, we are not charging customers a surcharge that reflects the fact that our fuel cost as a company in certain markets is above market spot pricing. I mean no, that they’re reflecting market price for diesel in a local market basis.

[Jonathan Ellis:]

Okay, great. That’s helpful. And then just at the labor savings that you’ve talked about earnings by about 11% headcount reduction. I think last quarter you had mentioned that equated to about $20 million annualized savings rate?

[Ronald J. Mittelstaedt:]

That’s correct….

[Jonathan Ellis:]

Okay.

[Worthing F. Jackman:]

That’s right what we did, say, last quarter.

[Jonathan Ellis:]

Okay. Had A has it changed all, and B how much of that is sustainable if volume starts to improve, how much is really linked to volumes and how much is kind of a sustainable change in your cost structure?

[Ronald J. Mittelstaedt:]

Well. I mean the second part of the question that you asked. I think it’s heavily linked to volumes. I’m not saying that if we get back to flat volumes or nominal growth in volumes that you should expect to see an 11% increase in headcount. But if we get back to volumes where we were prior to this contraction you would see the vast majority of that headcount come back, because where we’ve lost it is in the roll-off system, we’ve reduced the roll-off system greater than the 17% or 18% that is down right now, and that is completely capacity driven. So, assuming it comes back there, assuming it comes back in our third-party landfill volumes, and our commercial systems, you would see most of that come back. There are certainly some SG&A level position that we would expect to get leverage on and you wouldn’t see all of that back. But I would expect to see 90% or thereabouts of the headcount returned once volumes were back at or above the levels they were at prior to the downturn we saw starting in October. And the answer is we’re still running between sort of that $20 million and $25 million of annualized labor savings from the 11% or thereabout the headcount we reduced.

[Jonathan Ellis:]

Okay, great. And then just my last question. On the Republic assets, excuse me, and you spoke to the strategy around increasing volumes into those landfills. Just out of curiosity, when you look at the haulers in the market areas that you are now serving with those Republic assets. Is there any concentration of when their existing contracts with other landfills for disposal may come up, not in terms of an actual year, but seasonality do many of those contracts come up around year end or mid-year. And I guess if I know every market is somewhat different, but maybe if you could curtail your remarks to the LA market, which I know it’s a pretty sizable opportunity?

[Ronald J. Mittelstaedt:]

Yeah, the truth of the matter is Jon in most of these markets that the volumes are not under contract by the other major players. And most of these markets that we acquired, the larger independent haulers have not entered contracts with our landfills. So I would say that it’s not necessarily contract driven for pursuing volume. It’s volumes returning from an economic standpoint and it's pricing that moves those volumes around more so. Now there are certain markets like the Bay Area market and Potrero Hills, where we have the Potrero Hills landfill where it's all contracts. So that's a very different contract from the LA Basin market, where there is very few.

[Jonathan Ellis:]

Great. That's very helpful. Thanks guys.

[Ronald J. Mittelstaedt:]

Thank you.

[Operator:]

(Operator Instructions). And your next question comes from the line of Brad Meeks of Morningstar. Please proceed.

[Bradley Meeks:]

Hey guys. I think all my questions have been answered at this point.

[Ronald J. Mittelstaedt:]

Okay.

[Bradley Meeks:]

Thanks.

[Ronald J. Mittelstaedt:]

Thanks Brad.

[Operator:]

Thank you, gentlemen. I’m showing that there are no further questions at this time.

[Ronald J. Mittelstaedt:]

Okay. Well. If there are no further questions on behalf of our entire management team, we appreciate your listening to and your interest in our call today. Worthing and I will be in the office. If there are any direct questions that we did not cover and that we’re allowed to answer under Regulation FD and Regulation G, we will be happy to do so. We thank you and we look forward to speaking with you at upcoming investor conferences or on our next quarterly call. Thank you.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.