[MAKING CONNECTIONS]

Kathleen M. White

AT A TIME WHEN SOME OF the top waste management companies have either scaled back acquisitions, downsized or both, Waste Connections Inc., Folsom, Calif., is convincingly bucking the industry trend. Indeed, since its inception almost seven years ago, Waste Connections has experienced rapid growth and rising profits, garnering the eighth spot on the 2003 Waste Age 100. An unwavering commitment to its strategic plan and investors also helped Waste Connections to secure a place on Forbes magazine's list of the best 200 small companies in America in 2003. These factors, along with a decentralized corporate philosophy that stresses fun and efficiency, have made Waste Connections the current darling of the waste industry.

A Solid Growth Plan

Waste Connections was founded on a strategic plan of providing solid waste collection, transfer, disposal and recycling services to mostly secondary markets in the Western and Southern United States. Adhering to this focused strategy is the nucleus of the company's acquisition plan and has led to the company's enormous growth.

Waste Connections was formed in September 1997 with the acquisition of five Washington- and Idaho-based waste management operations from Browning-Ferris Industries. From there, the company rapidly expanded into secondary markets in California, most notably with the purchase of Madera Disposal Systems.

By May 1998, Waste Connections went public — it currently holds the record as the fastest company to go from formation to public offering — and within a year, was yielding revenues close to $100 million, according to the company. (The company is traded on the New York Stock Exchange under the symbol “WCN.”)

“We saw a niche that needed to be filled in small markets,” says Ron Mittelstaedt, president, CEO and the company's founder. “The big guys were focusing on large metropolitan areas in the East and South that were already highly competitive,” he adds. “Our model is and remains a non-urban focus.”

Specifically, Waste Connections targets acquisitions in suburban or rural areas where the population growth is at least 2.5 percent per year and where it is able to maintain the No. 1 or No. 2 position in market share. The most populous city the company currently operates in is San Jose, Calif., with close to 1.4 million residents. However, a more typical market for the company is Salina, Kan., which has a population of approximately 40,000. The company has operations in 23 states, although it maintains a large presence in Washington, California, Kansas and Tennessee.

“If you look at the industry over the past 30 to 35 years, many markets have largely been consolidated,” Mittelstaedt says. “The area of strong independence that remains is the West Coast,” he says. “The West, Southwest and Southeast are higher population growth areas for this country which, in this business, is very important; you want to target growth.”

These regions also traditionally offer more opportunities to enter into franchise agreements or exclusive contracts than other areas of the country, which has been key to the company's profitability. Indeed, more than half of Waste Connections' revenues are derived from markets where it has exclusive rights to provide solid waste services. Approximately 45 percent of the company's revenues are from competitive markets. The average contract length for the company is 14-plus years.

“Our acquisition strategy from a broad macro perspective is to go into marketplaces where we can sustain a competitive asset position,” Mittelstaedt says. “We go into markets where we can control the landfill or disposal markets.”

In fact, for the most part, Waste Connections eschews markets where a competitor owns and operates the landfill. For instance, one of the company's latest acquisitions of Bowling Green, Ky.-based Scott Waste Services, the largest private solid waste services company in Kentucky, was delayed until a new 688-acre municipal solid waste landfill also could be secured.

“We held off on that deal until we could get fully integrated into the marketplace,” says Darrell Chambliss, chief operating officer (COO). “We don't want to be a collection-only company in a competitive market.”

Overall, the company boasts an internalization rate of close to 70 percent, which is almost 20 percentage points higher than one of its larger competitors. “It really speaks volumes of how we choose our markets,” Chambliss says.

Moreover, Waste Connections is leading the industry in terms of free cash flow margin, which is something company executives see as paramount to their bottom line. “The future of our business will be done generating cash flow,” Mittelstaedt says. For the past two years, Waste Connections' free cash flow margins have averaged around 13.5 percent of revenue, or approximately $76 million in 2003, which is higher than those of the top three U.S. waste management companies, he says. “It is this free cash flow focus that ultimately generates shareholders' returns,” says Steve Bouck, Waste Connections' chief financial officer.

This disciplined approach to market selection and financial margins has paid off. Today, the company has 103 collection operations, 33 transfer stations, 36 active landfills and 26 recycling operations that collectively serve approximately 1.5 million people. In addition, the company serves more than 600 municipalities through contracts. Approximately 65 percent of its business comprises collection, 31 percent disposal and transfer, and 4 percent recycling and other services. Last year, Waste Connections' revenues were approximately $564 million, a 13 percent increase from the previous year.

“We are a growth company,” Mittelstaedt reiterates. “We're still much smaller than the top companies … but we're making our footprint.”

Esprit de Corps

Like its growth plan, Waste Connections' operating strategy is based on a differentiated approach to business in the waste industry. The company also has set itself apart from competitors by offering a corporate culture it believes is simultaneously streamlined, diversified and personal.

“We think of ourselves as the Southwest Airlines of the garbage business,” Mittelstaedt says. “When you look at that company, they've gone head to head in a different way: instead of Boston they go into Providence, instead of San Francisco they go into Oakland,” he says. “Southwest Airlines is a no-frills business, but they work hard.”

In the spirit of said airline, Waste Connections offers a different strategy and subculture. While the company employs 3,650 people nationwide, 65 employees work at the company's headquarters, the latter of who are expected to wear multiple hats.

“We try to limit bureaucracy and to promote a decentralized, autonomous management structure,” Mittelstaedt says. “We've given our employees ownership in the company and, therefore, they get the benefits and detriments of being shareholders.” As a result, Waste Connections' management turnover is less than 10 percent of other rival companies, Mittelstaedt says.

The company also promotes camaraderie in the workplace through team-building events and other social functions. “Not a quarter goes by that we don't offer some sort of fun event for our employees,” Mittelstaedt says. “We encourage that among all our operations.”

This personalized approach carries into the field, which is overseen by district managers who run the company's local operations. “They have a lot of autonomy and are involved in many aspects of the business in addition to local markets,” Chambliss says. Waste Connections also employs five business development people whose charge is to develop and maintain relationships with private industry. In terms of market development, “this business is about building long-term relationships,” Mittelstaedt says.

A prototypical acquisition for Waste Connections is a “mom-and-pop” operation with about $3 million to $5 million dollars in annual revenue, approximately 35 to 40 employees, and has been privately owned by the same family for 30 years or more, Mittelstaedt says. The West still maintains a large number of these types of independent solid waste companies suitable for acquisition, he adds.

“We use the same disciplined financial model in evaluating all potential acquisitions,” Bouck says. “Basically, we look at a discounted free cash flow model over a 10-year period. If the financial metrics line up with our strategic criteria, we can usually get a deal done.”

After Waste Connections acquires a company, it sends in a corporate management team to upgrade operations and consolidate billing and other services. The company also focuses on customer service and improved technology, such as the introduction of modernized equipment, where needed, to further efficiency.

“We always tell our managers if we do our job right, it should be transparent to the customer,” Mittelstaedt says, pointing out that in most cases, the name of the acquired company remains the same.

“We do a good job of explaining how we run our business to our new acquisitions,” Chambliss adds. “We make time and take time to explain the changes to employees.” As the company's head of operations, Chambliss tries to personally attend acquisition transactions or visit the newly acquired company within 90 days of purchase. “We make a point of being visible to all our employees,” he says.

In addition to improving the operations of a newly acquired company, Waste Connections uses an acquisition as a launching pad for more business by expanding the company's range of services or expanding into adjacent regions. In fact, internal growth for the company reached its highest level for 2003 in the last quarter of the year.

“We're always looking to expand our services both internally and by acquisition where it makes sense … and fits our model,” Mittelstaedt says.

On the Horizon

Waste Connections' motto is “connect with the future,” and this concept permeates its operations, most tangibly through the use of modernized fleets and other cutting-edge technology. However, the motto also figuratively applies to the company's longevity, which Waste Connections is attentive to through its long-range plans and operating strategy.

While the company's focus in 2003 was on new market entries, exclusive markets and larger regional private companies, Waste Connections has adopted a plan of “execution and accountability” for 2004 that emphasizes the company's commitment to delivering its 2004 budget and expanding on its industry-leading financial performance.

“Our plan for 2004 focuses more on budgets … and trying to minimize controllable events in our operations,” Chambliss notes. “Acquisition opportunities will also be added where appropriate.”

Specifically, Waste Connections has identified 457 companies representing $1.9 billion as potential future acquisition targets. The company is in active discussion with 36 of those companies, representing $160 million. Since its inception, the company has completed 170 acquisitions.

“Between potential acquisitions and internal growth opportunities, there's more than enough potential for growth in the future,” says Worthing Jackman, vice president of finance and investor relations. “Generally, where companies fall down is where they've stretched for growth in areas that violate their fundamental operating strategy — we call that ‘growth for growth's sake,’” he says. “Most other companies that have grown at our rate have hit an air pocket well before reaching our size.”

Thus, the company's disciplined approach to market selection will continue to drive its future acquisitions. “We will walk away from contracts that don't meet our growth plan,” Chambliss says.

Waste Connections also will continue to target landfill acquisitions, in particular, which represent the most profitable part of the company's business. “To just be a collector of garbage in a competitive market is not enough; there are too many other companies doing that,” Mittelstaedt says.

Beyond 2004, Waste Connections executives are honest enough to admit they can't sustain the same explosive growth they experienced in the beginning. Since its first full year of operation, the company has increased its annual revenues almost 500 percent and its earnings per share by almost 1,900 percent. Revenue for 2004 is expected to range between $620 million and 625 million, a 10.5 percent increase from 2003, excluding external acquisitions.

“Percentage-wise, our growth will slow down, given the law of large numbers,” Mittelstaedt says, pointing out that future growth at the company's earlier rates would be unrealistic. “If we do over the next five years what we've done in the past five years … we would more than double our current operations,” he says. “Our goal is to create the greatest value for our shareholders.”

Indeed, an ongoing focus of Waste Connections is to maintain a healthy company — and investment — for its stockholders, approximately 90 percent of who comprise institutional investors, Jackman says. “Since going public, we have met or exceeded [Wall Street analysts'] expectations in almost every quarter.”

“I'd rather see us not grow than not offer a strong return for our shareholders,” Mittelstaedt continues. Still, he says, “Business is very good, and we feel fortunate to be where we are.”

Kathleen M. White is a Waste Age contributing editor based in Portland, Ore.

WASTE CONNECTIONS AT-A-GLANCE

Founded: September 1997

IPO: May 1998 at $12 per share

Current Stock Price: $39 (up 225 percent since IPO; 21 percent compounded annual growth rate).

Enterprise Value: Approximately $1.7 billion

Service Area: Secondary and suburban markets in 23 states

Number of Customers: Almost 1.5 million

Number of Employees: 3,650

Operations: 103 collection operations; 33 transfer stations; 36 active landfills; 26 recycling operations.

Internalization Rate: Approximately 70 percent

Market Breakdown: Approximately 55 percent of revenues are in exclusive markets, 45 percent in competitive markets.

Acquisitions Completed: 170