Waste Connections, Inc. (WCN) Q1 2008 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 Waste Connections Earnings Conference Call. My name is Natasha and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. [Operator Instructions] I would now like to turn the call over to Mr. Ron Mittelstaedt, Chairman and Chief Executive Officer. Please proceed sir. Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Okay. Thank you, operator, and good morning. I'd like to welcome everyone to our conference call to discuss first quarter results and our detailed outlook for Q2. We will also discuss the potential impacts of the spiraling fuel costs could have on the full year if diesel prices remain at current record level. I am joined this morning by Steven Bouck, our President; Darrell Chambliss, our COO; Worthing Jackman, our CFO; and several other members of our senior management team. As stated in our earnings release, we are extremely pleased with our results in the quarter. Revenue, margins, earnings, and free cash flow all met or exceeded our expectations despite significant increases in fuel costs during the second half of the quarter. Although, harsher weather conditions and a more difficult economy pushed revenue towards the lower end of our outlook, positive volume growth and rising landfill volumes in the quarter remained a differentiator for us within the sector. Before we get into more details, let me turn the call over to Worthing for our forward-looking disclaimer and other housekeeping items. Worthing F. Jackman – Chief Financial Officer, Executive Vice President: Thank you, Ron, and good morning. 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 they 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 refer to operating income before depreciation and amortization and free cash flow each are non-GAAP measure. Management uses these non-GAAP measures as still the principle measures to evaluate and monitor the ongoing financial performance of our operations. We define operating income before depreciation and amortization to exclude any gain or loss on disposal of assets. Free cash flow is defined as net cash provided by operating activities plus or minus any changes in book overdraft, plus proceeds from disposal of assets and excess tax benefits associated with equity-based compensation plus capital expenditures and distributions to minority interest holders. Where appropriate we will highlight particular items in certain periods to improve comparability. Finally, we note that other companies may calculate these non-GAAP measures differently. Now, I will turn the call back over to Ron. Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Okay. Thank you, Worthing. As previously stated, we are extremely pleased with our results in the quarter as revenue, margins, earnings, and cash flow all met or exceeded expectation. Revenue was $250.3 million, up 14.3% over the prior-year period. Organic growth was 8.1%, broken down as follows. 5.3%, price, a positive 2.2% volume, and 0.6% for recycling, intermodal and other services. Core pricing in the quarter was 4.2% or about 80% of total price. Surcharges in selected markets due to spikes in certain costs such as fuel increased sequentially from 0.6% in Q4 to 1.1% in Q1 and are expected to increase again in Q2. These sequential increases reflect both the lag in recovering fuel prices that started escalating in the latter part of '07 and the more timely recovery in competitive markets of the recent spikes. We expect the pricing environment to remain strong in '08, especially given continuing record fuel prices. With diesel now around $410 per gallon or $0.80 above our original assumption for the year of $330 per gallon, we believe our overall pricing growth for the year will rise about 50 basis points above the original 4.5% to 5% range to capture on a more real-time basis about half of the dollar exposure between $330 and $410 per gallon. Fuel in Q1 was about $500,000 over budget due to the spike in market prices during the last half of the quarter. If it remains at $410 per gallon for the remainder of the year, we would incur about another $12 million in cost above budget on the estimated 15 gallons consumed during quarters Q2, Q3, and Q4. The math is simple, $0.80 times 15 million gallons equals $12 million higher cost. Again, we expect higher pricing and surcharges to recover about half of this cost increase during the period. The net P&L impact for the remaining nine-month period, Q2 to Q4, would be about a 75 basis point margin impact and up to $6 million pre-tax hit, which translates into about $0.06 of earnings per share. Q2 could be hit disproportionately a little harder than the other quarters, given the recent rapid run-up in fuel. This higher fuel cost assumption for the remainder of the year would take our resulting full year margin for operating income before depreciation and amortization from our original outlook of 30.5% closer to 30% on a full year revenue outlook that remains between $1.056 billion and $1.060 billion. Again, this all assumes diesel remains around $410 for the remainder of the year and that we only recover about 50% of the increase within the period. We expect to cover all of this increase over a 12-month period. As we have discussed in the past, our exposure to spiking fuel cost is more of a timing issue as whatever cost we cannot recover in the current year, we should recover in a future period once we lapse the lag in result resetting prices within our exclusive markets. Recent increases in CPI should support continued strength in our pricing into 2009. With diesel now above $4 per gallon and fuel cost as a percentage of revenue increasing about 200 basis points over '07, this year is starting to feel a lot like '06 when fuel as a percentage of revenue rose 200 basis points over '05. The good news is 2009 could look a lot like 2007 if core pricing remains strong as it should given rising CPIs and fuel prices stabilize or decline. In '07, pricing remains strong as we lapse the lag in recovering the higher fuel cost incurred in '06, margins expanded put nicely and EPS grew 20% plus. Our focus on exclusive market in non-urban areas eliminates or reduces our exposure to a rational pricing behavior of others in the face of rising cost, a weakening economy and declining volumes. As a reminder, core pricing accounts for 75% to 80% of our overall pricing strategy another differentiator for us. Our model should result and comparably higher organic growth than others in our sector in both good economies and bad. This quarter was and all of '08 should be a further example of this differentiation. As previously mentioned, volume growth was 2.2% in the quarter, about 1.6% of which was attributed to the two-month of results from our La Salle [ph] collection contract before the anniversary at the end of February. Special ways and associated pass-through revenue contributed about 50 basis points to reported volume growth. Core volume growth was slightly positive not unexpected given the harsher weather we experienced in many markets that we estimate impacted between $1 million and $2 million of revenue or about a half to one full point of volume growth in the quarter. Three of our four regions had positive volume growth in the quarter. Looking at roll-off activity on a same store basis. Similar to last year, increased revenue per pull more than offset the year-over-year decline in number of pulls per day. Pulls per day in Q1 were down about 2.5% while revenue per pull was up about 7.5%. Roll-off pulls per day were slightly positive in January and February but turned negative in March. While a weakening economy certainly contributed to the decline in pulls during March, it's too early to tell how much is the decline also might have been attributed to poorer weathers conditions or timing. Landfill volume growth also similar to last year's strength remained positive in the quarter, up almost 9% on a reported basis and about 6% on a same-store basis. As with roll-off activity, year-over-year changes in March volume growth were weaker than in January and February, likely again due to the combination of a weakening economy, weather or timing. Operating income before depreciation and amortization was $74.1 million or 29.6% of revenue and about 20 basis points above our margin guidance for the quarter despite higher than expected fuel prices and a more difficult weather conditions in the quarter. On a year-to-year comparison, our margin in Q1 for operating income before depreciation and amortization as a percent of revenue declined 60 basis points from 30.2% to 29.6%. As Worthing will review later, almost all of this decline was due to acquisitions completed since the year-ago period. In other words, reported margins would have been almost flat year-over-year excluding the impact of new acquisitions overcoming a significant increase in fuel cost that pushed fuels as a percent of revenue, up above 165 basis points year-over-year. The dilutive impact from previously completed acquisitions should diminish going forward, given the sequentially improving financial performance of the Southern Colorado acquisition, we completed last September. Earnings per share in the quarter was $0.34. This reported number includes $0.03 of non-cash items related to equity-based compensation cost and amortization of acquisition-related intangibles. We've begun to highlight these non-cash items this year as acquisitions or changes in accounting principles can increase such items in a way on reported EPS, but obviously have no impact on free cash flow. We estimate that the combination of harsher weather and higher than anticipated fuel cost impacted EPS by approximately $0.01 in Q1. Free cash flow was $35.4 million or 14.2% of revenue, up more than 40% over the prior year. We continue to expect full-year free cash flow to increase more than 20% over '07, despite rising fuel costs and weakening economy. And turning finally to acquisition activity. We funded early in Q1 the previously discussed acquisition of Cascade Disposal in Bend, Oregon. We also completed four tuck-in acquisitions in Colorado, Idaho, and Nebraska totaling about $4 million in the quarter. Looking ahead, we believe the pace of acquisition activity could pick up later this year giving growing seller concerns over likely increases in capital gains, tax rates next year. And now I'd like to pass the call to Worthing to review more in depth the financial highlights of the first quarter and provide a detailed outlook for Q2. Worthing F. Jackman – Chief Financial Officer, Executive Vice President: Thank you, Ron. In the first quarter, revenue increased 14.3% to $250.3 million, 8.1% from internal growth and the remainder from acquisition activity. Operating income before depreciation and amortization for the quarter was $74.1 million or 29.6% of revenue, which compares to $66.2 million or 30.2% of revenue in the year-ago period. On a reported base only one line item in the quarter, fuel, increased a notable amount year-over-year as a percentage of revenue. Fuel expense increased about 165 basis points to about 7.1% of revenue. We averaged about $3.40 per gallon for diesel during the quarter, which was about $0.95 per gallon or almost 40% above the prior-year period. This 165 basis point margin hit from fuel was reduced by the following line item improvements. Third-party transfer, intermodal drayage and pass-through revenue expense declined about 35 basis points given a shift in revenue mix and strong core price increases. Direct labor declined about 25 basis points given price-led organic growth, disposal cost declined about 20 basis points for similar reasons, insurance cost declined about 20 basis points due to improvements in incident frequency rates, partially offset by increased medical costs, and finally SG&A declined 10 basis points. Acquisitions closed since the year-ago period accounted for almost 50 of the 60 basis points of reported year-over-year margin decline in the current-year period. In other words, margins excluding acquisitions would have been almost flat year-over-year despite the 165 basis points from higher fuel cost. Depreciation and amortization expense increased about $3.6 million year-over-year to about 9.3% of revenue in the current quarter, up 30 basis points from the prior year due to an approximate 10 basis points increase as a percentage of revenue in three line items. Depreciation to higher CapEx, depletion resulting from higher disposal volumes and amortization of intangible associated with acquisitions completed since the year-ago period. Net interest expense in the quarter increased 1.5 million on a year-to-year basis due to higher average debt balances in higher rate... interest rates loss that kicked in about midway through the year-ago period. We ended the quarter with about $758 million of outstanding debt and remained at a leverage ratio of about 2.4 times debt to EBITDA. Our debt balance increased only $25 million during the quarter as the majority of a $64 million that we spent on acquisitions and stock repurchases was offset by strong free cash flow and proceeds from option exercises. Our effective tax rate in the quarter was 39.3% about consistent with guidance and up from 37.5% in year-ago period. I will now review our outlook for the second quarter of 2008 given where we are currently. Before I do, we would like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor statement in our various SEC filings. We encourage investors to review these factors carefully. Our outlook for Q2 assumes fuel prices average about $4.25 per gallon, which would be up about 55% over the $2.75 per gallon we averaged in Q2 2007. This increase would result in fuel expense as a percentage of revenue increasing about 235 basis points rising from 6% of revenue in Q2 ‘07 to 8.35% of revenue this upcoming quarter. Our outlook also excludes the impact of any additional acquisitions that may close in the quarter and to be conservative, assumes roll-off activity and landfill volume trends at certain locations similar to what we experienced in March. Revenues estimated between $266 million to $268 million, up about 10.5% over Q2 '07. We expect internal growth between 4.5% and 5% of which about 5% is price and surcharges. Operating income before depreciation and amortization is estimated between $80.5 million and $81.5 million. As a percentage of revenue, this represents about a 70-basis point margin decline from the prior-year period and assumes that the 235-basis point margin impact from spiraling fuel costs and estimated 25-basis point margin impact from acquisitions closed since the year-ago period are offset by an almost 200-basis point improvement in underlying business from strong pricing growth in a variety of line item improvements similar to what we saw in Q1. Continued sequential improvement in the underlying business from Q1 to Q2 is also noted by the following. In Q1, margins declined 60 basis points despite 215 basis point impact from fuel and acquisitions. For Q2, we are guiding only a 70 basis point margin reduction despite an assumed 260-basis point impact or 45 basis points more than Q1 from fuel and acquisitions. Depreciation and amortization is estimated to be about 9% of revenue. Operating income for the second quarter is estimated at about 21.3% of revenue. Net interest expense for Q2 is assumed at approximately $9 million. Minority interest and other expense are estimated to be a combined 1.7% of revenue. Our effective tax rate is assumed to be around 39%. Looking ahead, our tax rate in Q3 should be closer to 35% rather than the previously estimated 36.5% with Q4 back to around 39%. We estimate our Q2 diluted share count to be about 67.7 million shares, excluding the impact of any option or stock repurchase activity in the quarter. Now let me turn the call back over to Ron for some final remarks before Q&A. Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Okay. Thank you, Worthing. In closing, again we are extremely pleased with our strong start in 2008. Revenue, margins, earnings, and free cash flow all met or exceeded our expectations. Organic volume growth remained positive along with rising disposal volumes. That said some of the hardest work of the year remains ahead of us given spiraling fuel prices in a weakening economy. We believe that the combination of our unique business model, pricing strategy, and a dedicated employee should offset or contain a significant portion of the fuel cost increases in the current year and position us to fully recover these costs in '09. This would set us up for a strong margin expansion and EPS growth in '09 similar to what we experienced during the first half of '07, should fuel prices stabilize or the rate of escalation at least slow. In addition, growth in '09 could accelerate further, should acquisition activity pick up later this year as we currently anticipate. Many strategies or markets perform well during strong economic time. Fewer work well during a recession. We believe our differentiated strategy should produce comparably higher organic growth during a weak economic period and more importantly that our success is less dependent on the pricing discipline of others or the risk of customer churn reaccelerating given our focus on exclusive markets in non-urban areas. We appreciate your time today and at this time I'll turn the call over to the operator to open up the line for your questions. Operator? Question and Answer

Thank you. [Operator Instructions] And your first question comes from line of Jagdeep Ghuman with Credit Suisse. Please proceed. Jagdeep Ghuman – Credit Suisse: Good morning. Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Hey, Good morning, Jag. Jagdeep Ghuman – Credit Suisse: Couple of questions for you. I'm sorry if I missed this, what are you currently paying for fuel? Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Fuel right now is about $410. Jagdeep Ghuman – Credit Suisse: $410. Okay. So, you're assuming some acceleration from there. Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Yes, I think it's rising about $0.10 a week over the past few weeks. Jagdeep Ghuman – Credit Suisse: Okay. Are there any initiatives that you could put into place to save your... can you step up more purchases or any kind of opportunities to increase on fuel surcharge? Worthing F. Jackman – Chief Financial Officer, Executive Vice President: Yes, as we mentioned in the call, Jag, fuel surcharges moved up about 50 basis points Q1 over Q4 and there are expected to move up again by a similar amount or more in Q2. So absolutely that is occurring. There are also a variety of both operating and maintenance initiatives that we have designed to minimize the amount of fuel being used on the routes and those are almost too numerous to detail from automatic shut-off idling devices on engine to shut-off engines when they are idling beyond a certain amount of time to re-routing the logistic changes. So there is a number of things being done on both the revenue enhancement side, as well as the cost minimization side. Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: And, Jag I'd also add that our focus isn’t solely on surcharges so where possible and where appropriate, we try to roll those into core pricing. So you may not see as a big step-up in Q2 in the surcharges given that focus. Jagdeep Ghuman – Credit Suisse: Okay. I appreciate it. Also I was wondering, I guess as it relates to your acquisition strategy, particularly in light of fuel, we are hearing comments from the trucking industry that there are a number of the independents out there that are kind of the rolling dead in the sense that as fuel costs have continued to spiral, they are basically not really in business, even though they are still on the roads. Are we seeing the same trends here in the environmental services base? Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: I think that would be a major stretch to say that, Jag. I mean the reality is in the trucking industry, fuel might be as high as 50% to 60% of revenue dollars as an expense and in this business we're still talking 5% to 10%. So the magnitude is still a huge differential and white fuel is a... rapidly rising, I don't think it’s rising to the point of putting people out of business in the waste industry. Jagdeep Ghuman – Credit Suisse: Okay, fair enough. And just one quick one. I apologize if I missed this earlier. How many shares did you repurchase in the quarter? Worthing F. Jackman – Chief Financial Officer, Executive Vice President: We repurchased a little over 1 million. That's in the press release. Jagdeep Ghuman – Credit Suisse: Got it. Thank you.

Your next question comes from the line of Leone Young with Citigroup. Please proceed.

Yes, good morning.

Hi, Good morning.

Could you talk a little bit about the continued strength in the landfill volumes that you're seeing? Any color on that would be appreciated.

Yes, again just as in prior quarters there are certain sites where we see nice year-over-year increases. Those continue to be in the southern part of the Central Valley, some parts of the plain states where you have seen some recovery from ice damage and ice storms that you saw late in Q4 or early in Q1. And obviously those... some year-over-year increases we have at those sites, you've got some year-over-year decreases in other sites. So, it's not a... we are not trying to apply that at 6% at every location, but obviously some were up and some were down and that it’s about 6% up on a same-store basis.

Great. And also in terms of the weather impact, and I understand that it's really difficult to tell what's the economy and what's the weather in the first quarter, but were the storms in your particular geographic area more concentrated in March than would you say? Worthing F. Jackman – Chief Financial Officer, Executive Vice President: Pacific Northwest could have been... that statement could be said for all the three months. But in other parts, you are right, it was more of a March weighting.

Great, thanks.

Your next question comes from the line of Corey Greendale with First Analysis. Please proceed.

Hi, good morning.

Good morning.

Question first of all on the volumes, you talked about kind of overall and by region, was there any weakness in non-residential construction, if you can break that out, or in the commercial business and if you haven't seen weakness in the commercial business people downsizing their service level is the reasonable thing we might start to see that as the years goes on? Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Yes. Corey, there was... I would tell you there was no, I mean, first off there's not a not a lot of non-residential construction that goes on January through March in most parts of the country. So it's tough to know if there was much decline there. We did not see any material movement there and we have really, to be very honest, not seen... we took a look back quite a number of years, knowing this question might come up, we have not seen a material move on the commercial side to service decreases. There is no one negligible move at this point in time across all four of our geographies.

Okay. And then, Ron, you were talking about it's the lag in recovering increases in fuel prices given your model. Is that inevitable? I mean, if fuel presumably at some point stabilizes but fuel continues to go up at this rate as the year goes on. Is there a scenario where you're only going to get the CPI increases or the average for the years so maybe you're not going to recover everything next year? Is that not how it works? Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: That's not how it works.

Okay. Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Again, there was a timing issue and it does depend on the slope of the curve, you're correct, Corey, in that in that depending on what contracts are speaking off and when it reset, could you miss a recent spike? The answer to that is yes. The reality is that you can offset that in other areas but on any given period, you should see recovery of what occurred in the prior 12 months. That's the lag. So, you're not... you're always going to be behind that curve somewhat if the curve is anything but flat.

Okay. And just one last question, Ron, I was just wondering how you're feeling, how the recovery is going and if you're full speed working on acquisitions or if that is the... if you pull back a little bit, you're getting more back into the swings of things now?

Corey, thank you for asking. I'm doing well and I am off of crutches and out of a wheel chair and walking on my own as of a week ago. So I am... we're back trying to look for acquisitions.

Great. Anyway thanks.

Your next question comes from the line of Bill Fisher with Raymond James. Please proceed. Bill Fisher - Raymond James & Associates: Good morning. Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Hi. Good morning, Bill. Bill Fisher - Raymond James & Associates: Just back on the landfill side. Can you touch on this… the overall landfill pricing trends and if there are any special waste opportunities at all this year? Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Bill, number one, landfill pricing really has remained unchanged and I would expect that from the year again. We do our price changes for both the hauling and the landfill side predominantly in early Q1. So those are done and so that price would... has been pretty consistent between about 3% and 4% depending on the site. Number two, yes, I mean, we had special waste in the first quarter, we had special waste in the fourth quarter, we will have some in Q2 as far as whether it is accelerating over sort of historical or prior year level. We are not anticipating that right now in this environment because those limited speculative real estate development going on right now and that's what drives most special waste in this industry. So as you see a recovery in real estate market, which we're not anticipating any time soon, you would see a corresponding escalation in special waste activity. There are some river bed drayage and clean-up jobs out there, we are bidding on that obviously do not relate to a real estate development and we could see some of those in Q2 and Q3. Bill Fisher - Raymond James & Associates: Okay, great. And then you mentioned the acquisitions, opportunities, and [inaudible] capital gains, higher taxes, are you actually getting some enquiries on that, just from people that you have talked to in the past that certainly have more interest? Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Yes, we actually are. I mean, I think and again we wouldn't want anyone to read anything into that by any means. I would just tell you that if you are a quality company and you are at all thinking about selling at some point over the next one to three or four years that with the prospect of capital gains tax is potentially doubling and going from 15% to approaching 30% depending on what happens in the election that is a significant impact to a seller going forward that we're not going to be observing the cost of they are. So I mean they're thinking through whether they want to take the risk of, therefore business improving beyond 15% or more or whether they are better in this environment to look at an exit now. And know what their capital gains exposure will be. Bill Fisher - Raymond James & Associates: Okay. Great. Thanks a lot.

Your next question comes from the line of Scott Levine with JPMorgan. Please proceed. Scott Levine – JPMorgan: Good morning, guys. Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Good morning. Scott Levine – JPMorgan: On margins, came in a bit better in the quarter than we expected, I guess the fuel is really kind of partial quarter impact. In second quarter on the margin side, are there any drivers in the cost side or is the integration of Colorado may be proceeding a little better than you expect, can you talk about some of the factors that are driving the margin outlook in the face of fuel price increases? Worthing F. Jackman – Chief Financial Officer, Executive Vice President: Yeah, I guess it was in the question as to how we’re able to recover more of the fuel in Q2 than we saw in Q1. Scott Levine – JPMorgan: Correct. Worthing F. Jackman – Chief Financial Officer, Executive Vice President: Again, we saw a lot of the same line items, we expect to show improvement year-over-year. I think the other one that kicks in a little more in Q2 than we saw in Q1 is just an improvement in the overall cost of maintenance given a lot of the preventative maintenance programs, and a lot of the capitals are put in the business, we're starting to see more of a benefit this year and reduced maintenance costs and that should be evident in Q2. On the acquisition side, again the improving performance of Colorado Springs is evident by the fact that we set the 50 basis point margin hit to overall margins from acquisition, which means primarily Colorado Springs is expected to be cut in half in Q2 to about 25 basis points. So that is still trending nicely in its improvement and obviously by Q3, it’d be... it should be less than 25 basis points as we begin to anniversary it and you got continued improving performance there. Scott Levine – JPMorgan: Okay, and could you remind us about a bonus depreciation, how that factors into the cash flow outlook and maybe give us some insight on timing that should flow through throughout the year? Worthing F. Jackman – Chief Financial Officer, Executive Vice President: Sure. There was no benefit for bonus depreciation and reported cash flow in Q1, you'll start to see that kicking in, in Q2. Last year in Q2, I think we paid about $14 million in cash taxes and you'll see that number fall this year. Again, our tax payments are typically Q2, Q3, and Q4. So bonus depreciation will start kicking in. I think the benefit in Q1 was close to $4 million, I mean the benefit from CapEx spent in Q1 should benefit Q2’s cash flow by about $4 million and again that's not factored in our overall guidance with regards to free cash flow for the full year. Scott Levine – JPMorgan: Okay. One last one on the volume outlook, obviously it’s still too early to tell regarding the economy versus weather, but historically when you guys generally have a better sense and as by waste exposed, by May, June timeframe and is it surprising versus your expectations or really kind of too early to tell here? Worthing F. Jackman – Chief Financial Officer, Executive Vice President: Yes, I think the best read from us will be late... the evening of the party at which that's spoke. Scott Levine – JPMorgan: All right. We never will be there. Worthing F. Jackman – Chief Financial Officer, Executive Vice President: So, it May the better time, a better parameter once we get through May. Scott Levine – JPMorgan: All right. Great, thanks guys. Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Thanks.

Next question comes from the line of Jonathan Ellis with Merrill Lynch. Please proceed.

Thanks. Good morning, guys.

Good morning.

Ron, I am glad to hear that you are on the mend.

Thank you.

Just very quickly on revenues. If I caught this correctly, it sounds that your revenue guidance for the year is roughly equivalent to what it was that’s compared to as part of your fourth quarter call. And just given the escalation in fuel prices, I would have thought that higher surcharge revenues would have driven the top line for full year a little bit higher than you had guided to previously.

Yes.

Ellis, remember there is a $10 million band in the revenue guidance, a little bit high.

Okay. So you are utilizing that flexibility.

There is no reason to change revenue guidance at this point, given the concerns over the economy.

Okay. And on the surcharges that you have in place, if you could tell us what roughly… what percentage of your, either from a customer standpoint or total revenue base, is being surcharged right now? Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Yes, on a... you've got to break it down into sort of the two footprints of our business, Scott. On the 45%... excuse me, Jonathan, on the 45% of our business that is competitive, approximately 90% of that is being surcharged. Right? On the 55% of our business that is exclusive, it breaks down in a number of different ways, effectively about 75% of that business in this year we're getting either a higher CPI or a fuel surcharge. 25% of it we're not getting one of those two. So if you look at it in that way there is about 30% of our business in total that is not getting a surcharge or equivalent. Okay? Of that business that is exclusive we're getting about half of that in surcharge, so call that 30%.

Okay. All right. And what you've seen thus far, given the escalation of fuel prices, are you starting to get any pushback from municipalities given that obviously your surcharges are becoming a larger and larger portion of the total bill?

Yes.

Consumers don't have a limitless pocketbook.

Yes, I mean consumers do not have a limitless pocketbook, number one, and number two, many municipalities due to the economic condition, following sales tax revenues, following property tax revenues are having significant economic issues as well. Now there is a silver lining to that because we are, in many cases, a very large tax collector for those municipality. So, they… some of them are using the opportunity to increase the fuel surcharge or the price as an opportunity to increase their franchise or host fee to help balance the budget. So that is occurring and we're getting some upside surprises in some communities that we didn't expect from that. But others are reticent to increase surcharges right now and because of the economic times and their our overall budget play.

Okay.

But price sensitivities are not just limited to municipalities. Ronald J. Mittelstaedt – Chairman of the Board, Chief Executive Officer: Yes. Worthing F. Jackman – Chief Financial Officer, Executive Vice President: They make no mistake. It goes across competitive markets as well.

All right. And just to be clear, the assumption that you're going to be able to fully recover the escalation in fuel cost this year as you move into '09, did that assume... does that give any flexibility in terms municipalities pushing back on surcharges or does that assume that existing customers will continue to allow you to scale up surcharges appropriately?

Well, it obviously assumes that we will be able to do a combination of the both and it also assumed a projected failure rate in certain municipalities and certain competitive market customers. So we still have that confidence despite the fact that there is potential for some pushback from specific customers. We have factored that in.

Just got to remember rising CPI, as you track the data leads to stronger core price sticking in the municipalities.

Okay. And just very… one last question on volumes for the second quarter, it appears, if I'm doing the math correctly, that your expectations for volumes in the franchise markets may be a little softer than previously anticipated and/or you are seeing further deterioration in competitive markets vis-à-vis the guidance you provided last quarter. Could you just comment maybe on volume trends in your second quarter for the franchise versus competitive markets?

Yes, I think our caution is geared more towards competitive markets.

Okay. Would you say that the volume trends in franchise market is held relatively steady?

Well, obviously it is not steady but it is projected to remain positive.

Okay. Thank you, guys.

Your next question comes from the line of Brian Butler with FBR. Please proceed.

Thank you. Good morning, guys.

Hey, good morning, Brian.

Just a question back on pricing, real quick, can you kind of compare and contrast the different pricing levels, the franchise versus the competitive markets?

Sure, I mean Q1 was no different than what we have discussed in the past. And that is that pricing within our competitive markets is close to 2x what we were getting in our franchise markets at this point in time.

So, competitors are still also following through and pushing price.

Sure, I mean definitely. It's a cost push price increase.

Also to circle back on that price, not price, the pressure or kind of the push back from the municipalities and the franchise business, are you guys going down the road of kind of renegotiating the contracts in order to maybe not raise prices as much as that occurring at all in the franchise market?

No, that's really not occurring too much. We are in several cases renegotiating contract where we are capping CPIs in the current year or perhaps the following year in exchange for instituting fuel surcharges in the current year and in the following year to protect ourselves going forward in those contracts. So that is something we are doing and the reality is I'm happy to cap the CPI at 3% to 4% in exchange for the fuel surcharge on an ongoing basis in those... in many contracts.

No, it sounds like a... that's a good trade-off. And then last question, intermodal business, has that been benefiting at all from the higher fuel prices and just could if you comment on that how that’s been going over the last quarter?

Overall... first of all I'd say the railroads definitely are pushing through higher fuel surcharges. I think the railroads are pushing through a surcharge that exceeds 30% in the upcoming quarter. So that is getting passed through. That said it's not... the higher surcharges are not a big driver to our intermodal business, just given the percentage of overall cost that the rail service represents.

Right. Have you seen any increase in just… in volume to that business? Are you people deciding to use the rail versus ground transport, or I mean trucks? Worthing F. Jackman – Chief Financial Officer, Executive Vice President: No appreciable difference right now.

Okay. Thank you very much, guys.

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

This concludes the presentation and you may all now disconnect. Good day.