Folsom-based Waste Connections collects small companies

Aug 23, 2009 (The Sacramento Bee - McClatchy-Tribune Information Services via COMTEX) -- WCNX | Quote | Chart | News | PowerRating -- The management of Folsom-based trash hauler Waste Connections Inc. gathered at a local restaurant in January 2000 to figure out just where the 2 1/2-year-old startup company was going.

The firm's stock price had plunged by two-thirds, some negative publicity had shaken the waste management industry and many U.S. investors were more interested in buying stock in showy high-tech companies than in an industrialized firm in the business of handling garbage.

Ron Mittelstaedt, Waste Connections' chairman and CEO, asked the assembled brass whether it would be better to seek a buyer or press on and try to make something bigger and more permanent.

Mittelstaedt recalled last week that the vote to keep growing was unanimous: "We've never looked back."

Nine years and billions of earned dollars later, Waste Connections is one of the area's business success stories.

While others have struggled amid the recession, Waste Connections has prospered. Executives say part of the company's resilience is tied to a basic principle: Businesses and consumers might cut back on transportation and entertainment spending during tough times, but they continue to generate waste that must be collected, disposed of or recycled.

Waste Connections now serves about 2 million residential, commercial and industrial customers in 26 states. It topped $1 billion in revenue for the first time last year and is on track for more this year.

From a sparkling building with 55,000 square feet of office space along Highway 50, the company oversees nearly 6,000 employees spread over more than 1,000 municipalities. Workers drive trucks, oversee landfills, man transfer stations and recycle materials on a massive scale.

Was all this part of the master plan when the company launched a mere 12 years ago?

"Actually, no," Mittelstaedt said. "Back when we went public (in 1998), the thinking was that we'd get to $200 million and maybe there would be a buyer for the company. We thought it would take us five years to get to $200 million. We got there in one-and-a-half and kept getting bigger.

"It was like: 'Now, what do we do?' "

"A lot of companies look to punch out when they get to that size, but we saw an opportunity to keep going," said Worthing Jackman, Waste Connections' executive vice president and chief financial officer.

Pushing on meant sticking with the company's plan of expanding by acquiring small, privately held waste firms.

"That was our plan from the beginning," said company President Steven Bouck. "That's our bread and butter."

Starting in May 1998, when Waste Connections went public, the company made 112 acquisitions over the next 20 months. Many were what Jackman called "mom-and-pop" operations.

No acquisition seemed too small. Waste Connections might purchase a family owned company with two trash-pickup routes, generating maybe $200,000 to $400,000 in revenue a year.

Yet all the small parts added up to make Waste Connections grow in the West.

In 2001, Waste Connections started acquiring waste companies in Southern states, making inroads in Tennessee and Mississippi.

"That series of transactions in states just east of the Mississippi River just made a lot of sense for what we were already doing in (the West)," Mittelstaedt said.

And they paid off.

By 2003, annual revenue hit $563 million. Over the next three years, it swelled to $629 million, $721 million and $824 million. From 2001 to 2007, net income more than tripled, from $30.7 million to $99 million. Profit in 2008 totaled $105.6 million.

Bouck explained that many of Waste Connections' acquisitions have been a byproduct of common life circumstances: "You might have a business owner retiring, or his children didn't want to be in the business ... or a disability or death in the family might result in the business being sold."

"We're rifle-focused in our acquisitions," Mittelstaedt said. "By that, I mean we acquire private, not public, companies. We've never acquired a public company, and while you never want to say never, we probably never will."

While public waste companies have some advantages, they also pose some financial disadvantages, Mittelstaedt said, adding that the company prefers the surgical approach it developed from its beginning: expand into secondary markets that have strong demographic growth trends.

Waste Connections has purposely avoided large urban markets where it would face stiff competition. In most of its markets, Waste Connections has exclusive rights to provide its services.

"That's going to stand them well in this economy," said Michael E. Hoffman, director of research with Wunderlich Securities in Baltimore. "(The company) has been very disciplined in its acquisitions and has run them efficiently."

Mittelstaedt, Bouck and Jackman have been the key managers overseeing the company's growth, yet their backgrounds did not scream waste management.

Mittelstaedt chuckled when recalling that he started as salesman for an overnight delivery company in 1985 after graduating with a degree in finance from the University of California, Santa Barbara.

He learned the ropes of the waste industry with stints at Browning-Ferris Industries and USA Waste Services. He started Waste Connections with former colleagues from those companies.

The company was established in Roseville, but later moved to Folsom, closer to Mittelstaedt's then home in El Dorado Hills.

Jackman and Bouck were "the finance guys" when Mittelstaedt was taking Waste Connections public and ultimately joined the company, Jackman from Baltimore and Bouck from Chicago.

All three agreed that their business plan had huge potential to operate with strong cash-flow margins. They knew there was money to be made in the industry. Houston-based giant Waste Management Inc. was an example.

WMI, with about 45,000 employees, has posted annual earnings of more than $13 billion and profit exceeding $1 billion for the past several years.

"Whether they're finance guys or not, (the Waste Connections executives) are very well-trained in generating return for investors and creating value," Hoffman noted. "In my opinion, dating back to when they went public, they benefited from watching others and learning from the mistakes that were made by others in the industry. They avoided those."

The brisk pace of acquisitions might strike some as risky, but company executives don't see it that way. Jackman said they scoop up companies that have established customers and a track record, "so we already know the revenue expectations going in."

Over the past couple of years, Waste Connections has slowed its rate of acquisitions, settling in at 15 to 20 a year. But it has been buying bigger companies during that time.

In November, the company purchased Washington state-based Harold LeMay Enterprises, billed as the largest privately owned solid waste services company in the Pacific Northwest, for $303 million. Earlier this year, the company said it was paying $313 million for a group of landfills and other assets owned by Phoenix-based Republic Services Inc.

Last month, Waste Connections said it had entered into an agreement to acquire Eugene, Ore.-based solid waste services provider Sanipac Inc.

Financial terms of that deal, expected to be finalized in the current quarter, were not disclosed, but Mittelstaedt said it will boost his company's annual revenue by $165 million.

Revenue growth does not mean the company has been problem-free.

When diesel fuel topped $4 a gallon last year, the company instituted a comprehensive fuel-conservation plan to reduce expenses amassed by nearly 3,000 trucks using 20 million gallons a year. From 2005, when diesel could be had for less than $2 a gallon, to 2008, Waste connections absorbed "a $50 million hit," according to Mittelstaedt.

When the recession hit hard in the last quarter of 2008, Waste Connections instituted staff reductions that ultimately resulted in the loss of 175 jobs. Another 400 reductions came via attrition.

Bouck said the company also has been hit by reductions in housing starts and other construction activity, which resulted in less solid waste to handle. Consumers losing their homes in the housing crisis likewise cut into accounts.

"There's always a need for our services, but we can still be affected by a bad economy," Mittelstaedt said. "That's why we say we're not recession-proof. It's more like we're recession-resilient."

Call The Bee's Mark Glover, (916) 321-1184.

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