Covanta Holding's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Covanta Holding Corporation (CVA)

Q2 2012 Earnings Conference Call

July 19, 2012 8:30 AM ET

Executives

Anthony J. Orlando - President and CEO

Sanjiv Khattri - CFO

Tom Bucks - CAO

Alan Katz - VP, IR

Analysts

Daniel Mannes - Avondale Partners, LLC

Ben Kallo - Robert W. Baird & Co.

Smittipon Srethapramote - Morgan Stanley & Co. LLC

Al Kaschalk - Wedbush Securities Inc.

Gregg Orill - Barclays Capital

Carter Shoop - KeyBanc Capital Markets Inc.

Michael Hoffman - Wunderlich Securities

JinMing Liu - Ardour Capital Investments, LLC

Barbara Noverini - Morningstar, Inc.

Presentation

Operator

Good morning, everyone, and welcome to the Covanta Holding Corporation’s Second Quarter 2012 Financial Results Conference Call and Webcast. This call is being taped and a replay will be available to listen to later this morning. For the replay, please call 877-344-7529 or 412-317-0088 and use the replay conference ID number of 10015619. The webcast will also be archived on www.covantaenergy.com and can be replayed or downloaded as an MP3 file.

At this time, for opening remarks and introductions, I’d like to turn the call over to Mr. Alan Katz, Covanta’s Vice President of Investor Relations. Mr. Katz, please go ahead.

Alan Katz

Thank you, Amy, and good morning. Welcome to Covanta’s second quarter 2012 conference call. It’s great to speak with you again. I joined the Covanta team a little over a year-ago and I think we’ve made some great strides in that time in terms of disclosure and investor communication.

We all appreciate the positive feedback that we received from the investment community on this. We’re always looking for other ways to make the story easier to understand. So please feel free to let us know if you have other ideas.

Joining me today on the call will be Tony Orlando, our President and CEO, Sanjiv Khattri, our CFO, and Tom Bucks, our Chief Accounting Officer.

We will provide an operational and business update, review our financial results and then take your questions. During their prepared remarks, Tony and Sanjiv will be referencing certain slides that we prepared to supplement the audio portion of this call. These slides can be accessed now or after the call in the Investor Relations section of covantaenergy.com. These prepared remarks should be listened to in conjunction with these slides.

Now on to the Safe Harbor. The following discussion may contain forward-looking statements and our actual results may differ materially from those expectations. Information regarding factors that could cause such differences can be found in the Company’s reports and registration statements filed with the SEC. The content of this conference call contains time sensitive information that is only accurate as of the date of this live broadcast, July 19, 2012. We do not assume any obligation to update our forward-looking information unless required by law.

Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent of Covanta is prohibited. The information presented includes non-GAAP financial measures. Reconciliation to the most directly comparable GAAP measures and management’s reasons for presenting such information is set forth in the press release that was issued last night as well as in the slides posted on our website. Because these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation from our financial statements, prepared in accordance with GAAP. It should also be noted that our computations of free cash flow, adjusted EBITDA and adjusted EPS may differ from similarly titled computations used by other companies.

With that, I’ll now turn the call over to our President and CEO, Tony Orlando.

Anthony J. Orlando

Thanks Alan, and good morning everyone. Let’s begin with a quick summary of the quarter.

For those of you using the web deck, please turn to slide 3. Our second quarter results were right in line with expectations. Revenue was $410 million, essentially flat with 2011. Adjusted EBITDA was $125 million, a $2 million increase over last year. Our organic growth initiatives were largely offset by lower debt service pass through billings and softness in the energy market. That’s consistent with the outlook we gave you on the Q1 call.

Free cash flow declined by $27 million to $16 million. Again, this result was consistent with our Q1 discussion. The decline was due to the timing of construction working capital. And finally, adjusted EPS was $0.15, $0.01 increase over last year.

Operationally we performed exceptionally well. Boiler availability, waster throughput and steam production were all very good. In fact, we achieved some of our highest performance levels on all three metrics for the first half of this year. We commenced start-up testing at our Honolulu expansion project. We renewed a number of important client contracts and we’ve made some great headway on both revenue generating and cost saving organic growth initiatives. I will give you some concrete examples of those in a few minutes.

The strong operational performance enables us to reaffirm our guidance despite the weak energy markets and the recent downturn in metal prices. We are intent on growing our adjusted EBITDA even in a down market. Furthermore, the work we’re doing this year will pay off in coming years.

Now let’s turn to the business outlook. We will start with waste on slide 4. A few of the waste markets is essentially unchanged from our last earnings call. We are largely contracted and those contracts generally move up with inflation on an annual basis. This provides a nice base to work from. Tip fees continued to be under some pressure, primarily due to low waste generation. Fortunately, we have a relatively small amount of net spot exposure and we’ve been managing our portfolio very well.

We are contracting for waste where it makes sense and we continue to expand our special waste business, which allows us to replace lower price spot waste with higher price special waste. Overall, our tip fee pricing was up about half a percent in Q2.

During the quarter, we also successfully extended waste contracts with two long-term clients. First, we amended and extended the contract relating to our Stanislaus County California facility. This contract now run through 2027 with our municipal clients still delivering virtually all of the waste. But as of July 1st, the contract structure has been converted from a service fee to a tip fee.

We’ve talked many times about what happens when a facility converts from a service fee to a tip fee, but I think its worth reviewing because this is complex with many changes to revenue and expense. We will now receive all of the energy revenue and metal revenues at this plant and we will have the opportunity to implement some of our organic growth initiatives. That’s the benefit for us.

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