Casella Waste Systems Inc (CWST) 2003 Q2 法說會逐字稿

Please standby. Good day everyone. Welcome to the Casella Waste Systems Second Quarter Fiscal 2003 Earnings Release Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Joseph Fusco of Casella Waste Systems. Please go ahead sir.

Thank you for joining us this morning and welcome. We are joined by John Casella, Chairman and Chief Executive Officer, Casella Waste Systems, Jim Bohlig, our President and Chief Operating Officer, and Richard Norris, Senior Vice President and Chief Financial Officer. Also with us is Charles Leonard, our Senior Vice President for Solid Waste Operation.

Today we will be discussing our second quarter results for our 2003 fiscal year. These results were released this afternoon. Along with the review of our financial performance, we will update you briefly on the Company's activities, and our business environment, and answer your questions a little later, as well. But first as you know, I must remind everyone that various remarks that we may make about our future expectations, plans, and prospects constitute forward-looking statements for purposes of the SEC's Safe Harbor provision. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, which are discussed in our prospectus and other SEC filings. Having said that, I'll turn it over, now, to John Casella, who will begin today's discussions.

Thanks Joe. Welcome and good morning everyone. Today's agenda -- we'll go through a review of the quarter. Richard will give you an overview of the numbers. Jim will take you through a review of the operations. And then, as always, we'll go through -- go into questions and answers.

To begin discussion about the quarter's performance, I think, it is clear that the performance that we had -- solid performance that we had for this quarter -- is really driven by the basics. After several quarters of predictable, stable results, it's clear that our solid performance is really being driven by our ongoing focus on the basics of our business. I think it is clearer that, that is the single largest factor in that solid performance.

The numbers for the quarter revenue is a 114.5m, EBITDA 25.8m; EPS 13 cents. Clearly, those operating results were in line with budget. Our internal growth for the quarter was 7.8%, just under 2% of that is coming from our core solid waste business, 5.9% is coming from FCR. The core businesses internal growth is nearly all from price, as the volumes were down one-tenth of 1%, in an economy in the Northeast that still remains listless. We are still finding not -- any significant positive activities from economic standpoint, although the results for this quarter are certainly better from a volume perspective in terms of the core solid waste. So, we are not seeing -- certainly not seeing any further deterioration, either.

As I said earlier, our performance is really being driven because of our focus on the basics. And as you know, last quarter, we had talked about some of those clear focuses in terms of our blocking and tackling, particularly in the area of safety, and turnover reduction -- employee turnover reductions. The safety results for the first two quarters demonstrate that the success of those efforts are truly being ingrained into the culture of the business, and I think it is -- it’s also clear that it’s really being incorporated into our day-to-day approach to the business. Compared with the same period last year, our incurred costs for worker’s compensation and fleet incidents are down 54.2% and 23.3% respectively. I think the most significant aspect of that 54% reduction in terms of workers' comp, and 23% reduction on fleet is as compared to the performance -- the improved performance -- that we had last year. So those are really, truly significant improvements. And as we indicated in the first quarter conference call, we also had laid out a plan where we were focused on reducing employee turnover. Based on the second quarter results annualized, we have a 21.8 almost 22% reduction in our turnover rate. And I think most significantly, while this program is clearly in its infancy, I am confident that it will produce improved operating results over time.

With regard to our growth strategy, I think as I said, clearly focused on the basics. We also are really doing that to maximize the value of the assets that we already own. As we add disposal capacity to our franchise, beginning the pursuit of responsible growth. So again, really working hard is the basic to add value to the assets that we own -- own already -- as we begin an aggressive program from an overall growth standpoint. I think that clearly said, when we really look at that again the focus on the basics, adding disposal capacity and then the resumption of a growth strategy is clearly what we have been executing on for the first two quarters of this fiscal year.

I think that, that really does bring us then to the question of our capital structure and the high-yield offering that we attempted and postponed in the beginning of the year. First and foremost I need to say with regard to the capital structure, we don't need additional capital right now to execute this year's plan. Again, our revolver expires in December 2004. We are trying to be proactive rather than reactive to establish a credit facility that would support our multi-year growth plan. We do not feel constrained with regard to our most important development activity, which is in fact, adding additional disposal capacity to our franchise. We are able to execute those opportunities under our existing capital structure. Currently, we have $30m of availability on our line of credit, $20m worth of free cash flow for a total of $50m of availability. Since we are not constrained in terms of what we characterize as our most important business development activity, we think that we are best served by the discipline and commitment to doing a deal when we can get an acceptable coupon. In any case, our borrowing cost over the next several quarters will come down as the swaps come off. We will continue to monitor the market, but again, I think that from our standpoint, we can't stress enough that we have the capability to execute our plans over the next few months. And in fact, we have executed on several small [tuck ins] at the end of this quarter aimed at intensifying our existing hauling operations. And in addition, from a development activity standpoint, which as I said, our most significant focus has been our landfill disposal capacity. I think it is also important to recognize that that ongoing program has been in place for two years now. The opportunity and the program are robust. We currently have eight disposal capacity development opportunities that we are working on, four of which are new in the last quarter. And as I said in the last quarter, we would be disappointed if we were not to add disposal capacity to our franchise before the end of our current fiscal year in April. With that, I will turn it over to Richard, who will take you through a brief overview of the numbers for the quarter.

Thank you, John. As John said, I will take you through the financial results for the quarter. Revenue increased $4.7m from $109.8m to $114.5m or 4.3% in the quarter. Internal growth for the quarter was 7.8% and was comprised as follows. Growth in the core business is 1.9%, FCR brokerage 5.9%, for a total of 7.8. The FCR brokerage breakdown is as follows. Price growth 3.1% and volume growth 2.8%. The core business growth breakdown is essentially [all] priced -- 1.7% price, volume essentially flat a negative 0.1%, and core commodity price and volume increase is 0.3% for a total of 1.9%. Partially offsetting the internal growth, were divestitures negative 4.0% and the positive offset by the partial rollover effect of acquisitions 0.5% for 3.5%. So, if you take the 3.5 from 7.8, you arrive at the net change of 4.3%. The revenue for the quarter breaks down as follows. The core business, 84.5m, FCR 26.4m, and other 3.6m. So, a total of 114.5.

Moving now to EBITDA. EBITDA increased 2% to 25.8m from 25.3m. EBITDA margin was 22.6% in the current quarter versus 23.1% last year. This decrease was mainly due to lower margins in the core business, mainly from high insurance and legal expenses and the effect of Woburn, partially offset by improved performance in the recycling brokerage business. Woburn may have a modest negative impact in Q3, but that impact should be nullified in Q4, as Brockton volumes continue to improve. EBITDA breakdown is as follows. Core business is 22.5m, FCR brokerage 3.9m, and other negative 500,000, for a total of 25.8m. The higher year-over-year negative in other, reflects the divestiture of Multitrade and the lower level of operations at AART, which latter project should be completed and all funds distributed in the third quarter.

Moving now to US GreenFiber, the joint venture lost a piece of its Tampa property to Florida DOT in an eminent domain taking as part of a highway expansion project. The joint venture filed a business hardship claim and it was awarded $2.8m, 2m of which were booked as income. Casella recorded its 50% share with that gain and we eliminated it in the pro forma calculations.

Income taxes. The affective rate moved to 43.8%, a slow decrease from the 45.3% recoded last quarter. This decrease arose from the sale of export brokerage. The tax-gain arising on the sale can be shielded by capital losses. So that benefit is reflected in the rate, and we expect that rate to be affective for the remainder of the year.

The pro forma net income for the quarter ended October 31, 2002, amounted to 3.2m after preferred dividends, and earnings per share of 13 cents pro forma. Now just a comment on the sale of the export business. The export piece of the brokerage business was sold in quarter to former employees who've been managing the business. Because of consideration, 5.5m are being paid out of the future cash flows of the business this transaction is not accounted for as a sale. The net assets are reflected in the balance sheet in one line, as net asset under contractual obligations and the amount of 3.9m. The net assets will be reduced as payments are received. This pay will have no impact on the EBITDA forecast for the year, as the operations were expected to approximately break-even. But revenue for Q3 and Q4 will decrease by about 6m a quarter. This still leaves us with the [inaudible] and domestic brokerage to divest, but they are relatively small.

Moving next in balance sheet statistics, the total debt at the end of the quarter was 283.8m. This is a decrease of 2.1m from last quarter and 5m from yearend, arising mainly from cash from operations. Total equity was 184.1m, giving us a total capitalization, including preferred shares of 467.9m. Net result is a total debt-to-cap ratio of 0.61, which ratio is unchanged from last quarter. The average interest rate for the quarter also remained unchanged at 9.9% including amortization of financing costs. Net of these expenses, it was 9.3%, and at this debt level, we remain at the same place on the interest rate grid. Total cash and cash equivalents on hand as October 31st, amounted to 10.3m. This was unusually high, as we received cash late in the period, which we could not use to pay down debt. Restricted cash was 10.6m. So, debt less cash is 262.9m, which is down significantly, 11.2m from the prior quarter end. Capital expenditures for the quarter amounted to 9.3m and availability at the end of the quarter was 81m, but the amount of our credit line available for acquisitions after ensuring that 20m is available for working capital needs and ignoring the benefit of EBITDA from acquisitions was 30m.

Finally, free cash flow. Free cash flow in the quarter amounted to 13m calculated as follows. EBITDA 25.8m, net closure, post closure a negative 0.5m; cash interest, negative $4.6m. The cash interest is unusually low this quarter due to the timing of interest payments. We had a larger accrual than normal at the end of the quarter. Cash taxes, negative 0.3m capital expenditures, $9.3m; and change in working capital, positive 2.3m for a total of 13.4m. The change in working capital of 2.3m was largely due to increase accounts payable, partially offset by higher level of accounts receivable. With that I will turn it over to you Jim.

Thank you Richard. First a few comments on the economy as an overall perspective from an operations standpoint. I think relative to what expectations there might have been, I think, the economy has been relatively stable, particularly with regards to each of the regions and segments. Western, I think, it is an area that continues to be the softest of our four regions, if you will. With each of our operating divisions they are having -- keep of -- closely focused on every customer and every customer account as they struggle to balance a soft economy in the western region. The central continues to be very stable and flat relative to its economic activity, and the eastern region again is similar to central -- fairly stable with no at all signs of deterioration from an economic standpoint. Moving into landfill permitting status -- we have underway at North Country our stage IV permitting. We do have expectation as a part of the regulatory structure there that we will get comments back from the regulatory agency before the end of the year. And as you know, we are in court resolving various litigations with, and associated with that expansion the trial is scheduled for the 16th of December, and we are hopeful that when that is resolved, that we can try once again to try to re-establish a relationship with the Town of Bethlehem, and see if we can find a way to go forward from there. Stage IV is an application for about 2m yards, and we will provide an additional 10 years of capacity beyond the existing three years at there.

We are also at Highland actively engaged in the next phase of the expansion there, which is a 10-acre expansion and a [secret] process, with hearings scheduled in December, and we believe that would go forward favorably. From an internalization standpoint -- for the quarter our overall internalization is about 53.5. That's a slight decrease from last quarter, which was 54.1. Looking at that from an individual region standpoint, the central region continues to be very steady at 80% of internalization. The western region actually saw a slight increase, which is I think indicative of the ability to do a better job of internalizing the waste into the Highland facility. And the eastern region with a slight decrease, primarily because we picked up some additional tonnage there, and as John indicated, we are yet to have any substantial disposal assets for any additional tonnage that we pick up on the Highland site that shows up as a reduction in internalization if we have no ability to internalize it. That clearly remains the focus, as John said of our development strategy.

I think that one of the overall comments that I would make is, I think, that what we’ve seen in the last three or four months is probably more indicative of a very high stress level that the current municipal and state budgets in the northeast have. We are seeing in Massachusetts and Maine substantial budget deficits projected for next year and all that, I think historically has generally supported an environment where municipalities are not actively involved in investing in solid waste businesses. So, I think that may provide us additional opportunity. We're positive about what we can do, and I think it is reflected in a number of additional opportunities that John identified, as we pursue our growth strategy, particularly anchored by disposal capacity in Eastern Massachusetts. As far as the Eastern Massachusetts, some of you know that Fall River, which is an asset owned by Allied, has had to curtail their capacity as a result of either a dispute or a lack of capacity, at that facility. That does have the effect of tightening the markets significantly. If Allied is able to resolve those issues associated with that 1500 ton for day landfill, then I think the market will return to traditional metrics. If they are unable to resolve them, I think that it will preside to a certain continuing tightening in the market particularly with regards to residuals and [inaudible] disposals.

We have also during the quarter, I think, have successfully transitioned from Woburn to Brockton. We are in the final stages of the Woburn closure. We expect to have that fully closed by the end of this month. As you know, that project has been a very good project for us over the last three years. It's a residual landfill closure project. We were able to successfully manage that project in a way that has been very beneficial to the company. And as a replacement the Brockton project was brought on line in summer. Because of the general market tightening conditions, particularly because of Fall River we are contemplating bringing additional residual closure capacity on to the market in the early part of calendar year 2003, and we expect that Brockton will continue to benefit both in terms of volume and price from this tightening market. Surf has done very well in the quarter. It is exceeding its plan in terms of tonnage. One other comment, shifting on now to Maine Energy -- Maine Energy, as you know, normally has a scheduled shutdown in November. We accelerated that shutdown into this quarter. So, I think, the fact that we actually for Maine Energy exceeded our plan for the quarter, including the shutdown incorporated into this. It's a quite a good compliment to the guys at Maine Energy and their efforts on both productivity, processing [fast in] tonnage. One of the positive benefits will be that in the next quarter, we'll not have a shutdown; so we should have some positive benefits from the full operation of Maine Energy in November.

And finally, on a litigation note, we continued to move forward with the towns. I think there are beginnings of discussions with the towns towards some type of a better understanding on the issues associated with their various complaints. And I am hopeful that we'll continue to find progressive and positive communication channels to continue to resolve that, as we move forward.

Moving on to solid waste, into FCR. I think that FCR recycling business had a very strong performance, principally driven by commodity prices and for the quarter they were about 1.3m above plan from an EBITDA standpoint 60% of that is probably attributable to the commodity pricing, but the balance of that is both variable cost improvement and volume improvements. So, I would tell you that not all of the FCR improvements is tied fully to commodity pricing with them -- with them having demonstrated some very good processing line capacity increases at their facility. The [Cape May] facility came on line during the quarter, and is exceeding our expectations from a pro forma basis, and we are very excited about the outcome there. Also during the quarter, John and I went down to Greensborough to attend the open house there, their new single-stream operation for the city of Greensborough. I think that is going to be a very successful operation. And from a solid waste standpoint, it is a very exciting opportunity because it really provides an opportunity for municipalities to significantly reduce their collection cost from a recycling standpoint, and thereby find a more effective way to continue to increase the penetration of recycling. The single-stream technology seems to be very promising. I think some of our competitors have also built and have one or two operating; and I think we are all feeling that this is probably a somewhat of a new direction for recycling that will produce -- both on hauling side and on the recycling side -- improved benefits for both their customers and the company.

Finally, a few comments on single stream fiber. For, as we have discussed before, that single stream fiber actually has three channels -- retail, contractor, and manufacturer. For the year on a year-over-year comparison, total bags sold were up 7% for the quarter and 11% year-over-year. Within the contractor channel, on a revenue basis, we are up 7.13%. Manufacturing, despite a very poor manufacturing home environment -- it is up 8%, which is primarily reflective of taking market share from other parties in that segment. And then retail is down 6%, which is a reflection, I think, both partly of the weather, warm fall weather, and the environment as of large boxes. Home Depot rose relative to insulation channel. Having noted that fiberglass is off 10% in that particular segment during this quarter, we find performance to be, while disappointing, to be above this segment performance of fiberglass.

Overall, the business is up 4% a year-over-year; and as one indicator since retails are closely tied to the weather, we have looked very much for when the weather really changes. In November, our retail sales were up 13.2%. It is an expectation that we had, as you know, we invested about $3.1-3.2m more SG&A this year over last year, primarily to drive into the retail channel. And our expectations are that we'll produce higher sales. We are beginning to see that in November and of course retail channel, carries on until February-March. So, we will see how that works out, but it is initially promising. Finally, I guess, that's really my final comment on [US Fiber]. So let me turn back to John.

I guess, at this point of time, we'd like to open it up for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the "star" key, followed by the digit "1" on your touchtone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us, and we will take as many questions as time permits. Once again, please press "star" "1" on your touchtone telephone to ask a question, and we'll pause for just a moment. And our first question comes from Alan Pavese of CS First Boston.

Hi, guys. Just a couple of questions. First John, if you could elaborate on the disposal opportunities, I think you said there is now eight. Are those all or most, I would imagine, municipally owned sites or how many are not, if any?

There are several of those sites that are not municipal sites. But that -- the majority of the sites are municipal sites.

Okay. And, you know, what's your level of confidence in, you know, being able to get those done, you know, lot of these has been notoriously hard to predict in terms of when you can complete them? How long we've been working on, you know, the various sites, you know, what’s your level of confidence that you can get one of them done? I think you said you should be able to do something by the end of the fiscal year?

That’s correct.

High level of confidence or is that --?

Well, I think, Alan, it’s fair to say that the program itself -- we’ve been working on some of these opportunities for over two years now. I think that, you know, as we’ve discussed in numerous conference calls in the past, what really has to happen is you have to build a relationship with the community, you've got to build that on the basis of trust, it’s not something that you can push along -- it’s got to go on the basis of the, you know, the political environment and moved at as quickly as you can. So it’s a long process. But again, fortunately for us we’ve been in that process for two years, and as I said, we'll be disappointed if we didn’t add disposal capacity to our franchise before the end of this fiscal year. So I don’t think that it serves us well to say any more than that, but clearly we expect that we'll add disposal capacity before the end of the fiscal year.

And do you think that's going to be more likely on the municipal side, I mean, that’s kind of the basis of my question, I mean, its been in the process for a couple of years and it is hard to predict? Just wondering, what, if anything, gives you confidence that it will indeed fall in the next six months?

Well, I mean -- I think that it's a function of having an understanding of where we are in a number of those projects, and having the confidence that that we've been working on them for a couple of years. And, I think, the other aspect of it is having the experience of actually having gotten done a very significant privatization with Clinton County. And, I think, the other aspect of it Alan, is that, you know, after 6 years, 5-6 years of relationship with Clinton County, I think, that the relationship is as strong today as it was on the first day of the relationship which is a really positive for us in the environment of trying to get additional opportunities brought into the company.

I know and that's, you know, obviously been a great example for the last few years and some of these projects, you know, obviously as you said have been in works for a while and just wondering if budget problems or something have really pushed some of these municipalities over the brink such that they are actively -- much more actively, you know, moving forward than have--?

Well I think, as Jim said, I don't think that there is any question but that the environment -- the economic environment that we're in today is boding well for the process that we've had in place for a long time. There is absolutely no question that the changed economic environment, the budget constraints that municipalities are finding there, they've got lots of places where they need to invest in terms of the infrastructure, and they don't have the kind of capabilities from an economic perspective, that they've had in terms of resources, so, I think that, that is the real factor that is a positive in terms of our efforts, particularly if as it relates to the municipal side.

Thanks. And just a last question on that topic. Do you think you will be able to get some collection tuck-ins done as well this year or is that probably -- may be going to slip into next year?

Well, I think what we have said is with the number of opportunities we have from the disposal capacity standpoint, we know where we can create the most value. We need to execute [drain] disposal capacity into the company, add disposal capacity to our franchise. Our facilities are running at their annual capacities currently, so, the real path to value creation is to add disposal capacity to the company. As I said earlier in my remarks, we have closed three -- at the end of this quarter, we have closed three small tuck-in acquisitions that are going to densify our hauling operations, and we will continue to look at those operations that are going to add -- hauling operations that are going to add density to this existing assets that we already own. So, I don't think that we feel constrained, but I think, it's very clear that from a capacity standpoint and from a real management focus perspective, our focus is, as a senior management team, on developing additional disposal capacity first.

I understand that, but the one that come to your mind of the eight that are mostly likely to get down in the next six months, also have attractive tuck-in opportunities right around them that you could pretty quickly peruse?

I think that one of the thing that we are also, you know, we have also said in past too that there are plenty of -- we have identified very significant opportunities from a growth perspective with regard to our core franchise. We have very substantial opportunities to add assets from our hauling company standpoint to the existing franchise. There is absolutely no question about that, some of which are -- would be directly related to adding the disposal capacity, some of which are going to add value to the assets that we already own.

Is there any reason you are not pursuing those already?

I think that clearly the perspective is that we are better served by focusing our attention on adding disposal capacity to the franchises.

No, I understand, but there is none even in the last 2 quarters. You haven't had any of that. I am just wondering if there is a reason you aren't, in the mean time until [audio gap] we really breakthrough pursuing some of these other opportunities?

I think that, as I said, we did three transactions this past quarter, and I think that -- I don't think that there is any question, but that if we had a terrific opportunity to densify an existing hauling opportunity, we would do so. And, I think that we also -- I think that's its clear that we have sent the message to all of the Regional Management Teams that we are really looking to densify the existing hauling operations. We are looking for them to strategically look at those hauling companies that will add the most density, therefore add the most value to our franchise. And, you know, Charlie and Jim and the Regional Management Team have already begun executing on that. We have got additional transactions from a hauling company's standpoint that are already in work for next quarter. So, I don't think that from a practical standpoint, we feel constrained in that manner.

Okay. And, just a last one, what was the size of the acquisitions done in this quarter?

The total revenue for the three acquisitions closed in the quarter is $1.3m for a purchase price of 1.6, which is EBITDA multiplied by 3.2 times.

That’s great. Thank you very much.

We also have --

We have two other acquisitions that are -- one that is already closed in November, small one with about 600,000 revenue, and we have another larger acquisition with $3m in revenue that is scheduled to close on December 31st.

Once again, please press"1" if you would like to ask a question. Additionally, if you find your question has been answered, you may remove yourself from the queue by pressing the "pound" key. And, next we will go to Mark Farano from First Analysis.

Good morning.

Good morning, Mark.

You know, on the landfill development project, you mentioned two, in particular North Country Highland and kind of the progress there, and just a clarification in the sense you had mentioned the additional years that would be added if those projects went through. With those if successful, will there be an increase in daily volume limits of those sites as well, or would that not be a part of the picture?

I think, at North Country generally, we would expect that facility will stay generally within the range that is operating in New Hampshire. The processing -- the permitting process involves the public benefit, and public benefit has to do with kind of the 20 year examination of available capacity versus needs of the state. So, I would expect North Country to continue to operate on the same kind of annual tonnage range that we’ve operated there in the past, which is kind of 115,000-140,000 tons per year. Highland is likely to be a different story, I would expect that as part of the expansion, there we will work to increase in annual capacity there, and we'll have no problems filling that. So, that’s a different story and from our [inaudible] standpoint, a positive story.

Okay, and then could you make any comment, I know it's early in the current quarter, but just in terms of volume trends in the quarter, especially the more seasonal volumes, as well as, what you're seeing from the industrial, the rollout perspective?

Yeah. I would tell you that I don’t know that we see any change in November, if I looked at November over -- kind of October on that month-to-month. I will tell you that on a quarter-over -- Q2-over-Q2 of last year that there is a slight volume increase but nothing that I would tell you is worthy of being materially reported.

Okay, thank you.

If anything, we're expecting volumes to be flat. We're not expecting anything, any further deterioration from the second quarter to the third quarter, but we are -- what we do move to our seasonally low volume -- seasonally, most significant reduction in volume that we normally see, because of the seasonality of the business. But we're not anticipating any further deterioration from a volume standpoint.

Okay. And then lastly, just a clarification, [were] -- you are expecting in the 43.8% tax-rate for the balance for the coming quarters of the current fiscal year as well?

That's correct, you know, unless something unusual happens. It will be that rate for the rest of the year.

Okay. And then your cash taxes actually were negative this quarter modestly. They were modestly positive last quarter. I mean is that just within the normal noise or will there be a little bit of catch up next quarter on a cash-tax basis?

I think they were negative last quarter as well. We end up having to pay some small state-taxes and so forth in some jurisdictions, and I have looked for the rest of the years, you know, be [colored] by the million dollars by the end of the year.

Okay. Thanks a lot.

Moving on, we'll take our next question from Bill Fisher of Raymond James.

Hi, Good morning.

Good morning Bill.

Good morning Bill.

Just following up on the -- January quarter on the Maine Energy. Can you give a rough estimate of what the loss EBITDA is on -- the turnaround from last year and that you won't have this time?

Not sure I understand the question.

You were down -- you know, did maintenance last year during the January quarter and this year you --?

Right, generally, when we do a shut down in regards when it occurs, we lose about $400,000-600,000 of EBITDA.

Okay.

So, we would have had it in our forecast for November, I'm missing of that, if look, we had a November shutdown. In fact, they were actually able to accelerate that, have minimum impact in the quarter results, it's going to gives us a positive benefit probably of that magnitude $400,000-600,000 during November that we otherwise would not have realized, because we would have been in shutdown mode.

Okay, great. And then also on, Richard on -- were there any unusual legal fee in the quarter for settlements or anything?

There were higher legal expenses again this quarter. We were -- Maine Energy is an ongoing situation that you are all aware of and we were very successful in fighting off three unionization attempts, but that did cost us some money and we also recorded the settlement of the proposed settlement of the class action suit, so we took those hits in this quarter.

And roughly how much were those latter two?

The union's was about a 100,000 and the class action suit was a 150,000.

Okay, and then last. [Just as] --, you mentioned a lot of the Workmen's Comp, lower expense there, has that, benefited this year on terms of cost? Is that more of helps your premiums next year?

I think that because we are self-insured Bill, there will be a benefit to us this year, but it should also show up in a benefit in terms of the annual renewals as well. Obviously, with better performance on the insurance program, both from the Worker's Comp as well as from the fleet standpoint, that better performance -- put us in a better position in terms of negotiating those costs. Although I do have to say unfortunately, performance is not necessarily reflective of what you're going to find in the marketplace today.

Okay. Okay, great, thank you.

It's the right place for us to be regardless.

That's right.

And Tom Ford from Lehman Brothers has our next question.

Good morning.

Good morning Tom.

Jim, just a question for you on your comment on Fall River. It was my impression that Allied had already taken up the TIP fees, and I was just under the understanding that their alternatives to increasing the amount of rail haul out of state was, that it was pretty limited. I was just curious as because you said that they were working through -- not that I want you to answer a question for Allied, but what were you thinking there when you said that, you thought there might be some alternatives for them?

First of all I would never want to answer for Allied, I think they are more than capable to answer for themselves. I was only commenting on Fall River, because I thought, it had an overall macro economic impact.

Okay.

It was worthy of mentioning the fact that Fall River is returned to its normal operating state, we'll then allow that market from a disposal standpoint to be un-impacted by it. It is currently being impacted by it, I thought that was significant to mention. They are down from their normal 1500 tons a day to about 500 tons. It appears that they will be in that state for about six months. So that market will be tighter, but because it's the wintertime it probably will have a relatively minor impact. If that is resolved by the time spring rolls around, then it will probably not have so much of an impact. I think, that they are -- I am certain that they are working very hard to resolve that with the town, and I wish them luck. These things are always difficult. And it's a big asset for them and it's important for marketplace. And we all have to deal with their success or failure.

Right, okay. The other question is -- sequentially the volume performance improved. And just based on your comment of just saying that conditions appeared to be largely stable in the regions, I am just wondering -- I mean the sequential improvement -- am I right in thinking that it is combination of sort of a negative lessening impact from Woburn/Brockton? And then is there share gain that's going on here as well?

I think it is probably little bit of both. As I said, I think one of the things that we're very pleased about is the transitioning from Woburn to Brockton. Woburn was a huge producer for us and the fact the we've have been able to, kind of transition through this, I think in and at more, kind of, really predictable and positive fashion is good news. I think, it is also been generally some market share taken from other people. So that's more of a comment on market share taking rather than overall economic activity growth. But, I think it's a slightly positive story and we just remain cautious relative to the economy.

Okay. Great. And lastly, Richard, you had mentioned that borrowing cost could come down as the swaps come off?

That's correct.

Could you just give me, a sort of a sense, you know -- if you take us from the, you know, average borrowing cost in the second quarter, where might we be by the end of the fiscal year?

We probably won't see much change in Q3 because the swaps start to come off in January. You know right at the end of our third quarter, but we will benefit from lower interest rates on about $115m of debt in Q4, and then by the end of the quarter all the swaps are gone. So that $115m will move to, you know, current [liability] spreads, which should save us approximately, you know, 4%. So for the quarter that'll be about a $1m in Q4.

Right. Okay great. Thanks very much.

And our next question comes from Kerry Callahan of Goldman Sachs.

Hi good morning guys. Couple of questions, if I could. On pricing, were the price increases which you saw, pretty uniform across the different regions and if not, could you give us a flavor for where they were higher or lower?

I think that we would probably tell you that, you know, we put together a fairly comprehensive price program at beginning year and we have generally had uniform acceptance of it across all the segments. So I think it would be misleading to try and give you some flavor one over the other. It was pretty uniformly accepted. Customer retention was good in almost all the regions, and I think that we are thrilled by that frankly, and I won't think to trying to slice that beyond that would be helpful to you because its not tied to the facts.

May, I think the only thing that you would say or you could say in a general basis Kerry is clearly--each of those markets you look at differently and the overall general pricing environment was really matched to the specifics in each one of the markets as apposed to just a flat across the board perspective from a pricing standpoint. It, really you look at that market-by-market in each of the operating divisions into the regions, attack that on a market-by-market basis.

I mean, is it right to say that it goes hand in hand with economic strengthen to the extent the West was a little weaker?

Yes

[East] was probably not as good?

Yeah, and that's why I kind of gave the economic flavor on my initial answer was to, kind of, give you or the listeners a little indication of where the receptivity might be weaker or stronger. Clearly, it was a little weaker in the western regions and stronger as you go east in terms of reception.

Yes.

It's also a factor too, frankly, market share in competitive pressures and other things like that. So it's a mixed bag of things.

Jim, on the Green Fiber growth for the quarter, you had said up 7%. You gave us a composition by channel and I think you concluded saying that it was up 4; what's the difference between those two?

I said that the contractor was up 7%, the manufacture home was up 8%, and retail was down 6.9%. So for an overall, 4% increase for the business.

Okay. Fine.

And primarily, we believe the retail is down only because it’s fairly seasonally triggered off by weather, and where as people don’t go buy stuff in Home Depot for insulation purposes until they begin to get outside. And we had a warmer fall than we had last year. And that was true, if that metric was true then we would expect to see sales increases in November when the weather did change, and in fact we did had a 13.9% year-over-year increase from November of last year to November of this year. So we are expecting that the retails starting -- but starting 30-45 days late. But that’s obviously impacting our numbers through October.

Okay, and then lastly on the Greensborough single stream technology. Can you -- for those who are aren’t familiar, can you just comment a little more fully on what it means? And secondly, will it make a difference for your business?

From a definitional standpoint, historically recycling has always been challenged by trying to figure out the most effective way to collect the recyclables. As you imagine, with all the different types recyclables--fibers, plastic containers, glass, steel, tin and the like. It’s a real difficult process in terms of how does the home owner segregate that from the balance of his waste, and then how does that segregation helps the curb. And then from the curb to the recycling facility where it gets segregated and bailed and sent off to a vendor who purchases the materials. There has been thousand different approaches in terms how to collect that. Sometimes its been done in the rural areas, in terms of having people bring the recyclables to the transfer stations, some larger urban areas have gone to dedicated recycling pick up routes where they actually have a route once a week or once a month where they pick up recyclables and then it gets as detailed as will homeowners put it out on the curb. If you put it out in one container, or you put it out in three or four containers and how much time do you spend at the curb trying to just sort it out or mixing it all together. And all that then gets tight to how it is delivered back to the material recovery facilities in which it gets done finally segregated bailed and sent to vendors.

The single stream approach is an approach to basically allow all of the materials to be -- if it will -- brought together at one point of the curb so that from a collection standpoint, where there is a lot of cost and that's spending a lot of money collecting source separated recyclables at the curb rather there are all effectively put in one container and loaded into one truck, if you will, and then brought to the recovery facility. That has only been recently possible, based on technology developments, that have allowed efforts to sort that material, once they all put together and sort of back out in an effective and cost effective way. The single stream approach is that approach -- it's a new technology or application of the existing technology in a different way that has allowed successfully the initial emergence of single stream collection and then segregation of material recovery facility. It's quite impressive. Greensborough facility is very interesting and I am sure there’s several of them in the country -- so waste management has several -- but and if it takes hold, I think it will offer significant savings to municipalities, in terms of collection costs, and that will make penetration of recycling higher more likely. The downside to the single stream system is the risk of contamination of the recyclables, cross contamination i.e., particularly by glass. When glass gets broken, it gets into the fiber and when it gets into the fiber, the paper mills don't like it. So, there are some downsides to be managed through it. But early indications are that it could be a successful technology improvement.

Professor Bohlig, thank you. Just...

Well, I got to enjoy myself so much, Kerry that I couldn't stop. I apologize.

No, no, no. That was great. The -- I mean the technology -- you are talking about -- you know -- air classifiers and shredders, I mean, what kind of, you know, a number of companies over the years have gone down a number of paths. What are the -- is this some innovative technology?

I think it's innovative, but not innovative in what is the classical sense of the word. I think that it's just better application of the existing technology in a more powerful way in terms of the actual stream. You know, we are using streams to separate--star streams to separate out and you are rather just using one of those. There is a series of four or five of those being used, and you are taking off different fractions. I have to tell you that it seems to me having, you know, been in this business now for 10 or 12 years and seeing recycling that some of the stuff could have been done maybe more effectively a few years earlier, but we are where we are at and it is a product of opportunities. People won't invest the money and the vendors responding to those opportunities and we are just, you know, improving the performance of our recycling operations as everyone is driving to try to provide better service and lower cost and get a better bang for the buck.

Okay. Great. Thank you.

And our next question comes from Steve Cole of Matador.

Yeah. Good morning, guys.

Good morning, Steve.

I wanted to touch on a few things. One, could you explain a little bit more on the Brockton and Woburn tradeoff. I know you had laid out some targets a couple of quarters ago on how that ramp would look. Have you exceeded what you thought you were going to do there? And when we talked about -- is that neutral, coming in the next quarter and when does it actually -- does it -- because, I presume, you still have a negative amount that you're going to have finally left out for the back half of the year.

Well, let me take that from the forecast standpoint we understood that Woburn was going to close as Brockton was going to start up. So our forecast reflects what we thought were the reasonable expectations for these two facilities. So, I don’t think that the fact that Brockton, which will not be accepting as much material as Woburn, has any material impact to our forecast, but it does, in absolute sense, perform not as well as Woburn did. Woburn accepted a lot more material on an annual basis and Brockton does not accept that number of tons. So, there is going to be a year-over-year, if you will, impact from that standpoint, but that was properly reflected in our forecast [inaudible].

Okay. I guess what I was getting at is Brockton is actually performing better than what you thought?

Brockton is performing significantly better than we thought, we are seeing both -- everyday we are at our maximum volume there, and we are actually seeing a positive price environment, relative to the residuals, and as I said relative to Fall River, to the extent that remains a troubled facility and is ramped down, that will help the overall environment to the extent that, that is resolved and goes back to its normal operations and maybe the market will become more neutral to what it has been in the past; but, yes, Brockton is running along nicely relative to its pro forma, when we had bought it.

[inaudible] this time GreenFiber, could you, may be speak to what the current thinking is on an EBITDA target. If I recall correctly, it was 13m for the year but then, secondarily, can you give us an update on what percentages of the few stock is hedged and number three, an update on the delivery technology. If I remember, that was one of the things you guys were working on pretty diligently, and some pilots, how is that play down?

Its three questions there. First of all, US [Green] Fiber is on the calendar year. We are on a fiscal year, which ends in April. So, we always have to kind to make sure we know which one of those we are talking about. We think that the facility is still on target to deal about $13m EBITDA in our fiscal year. For their calendar year, they would do about $12m EBITDA as of current forecast. And, it is pretty much on plan to what we had thought that they would do. One of the things that has been negatively impacting that, in addition to the $3.1m of additional of SG&A year-over-year that we invested as I mentioned earlier, has been a negative effect of paper pricing which is up $17 for the first six months of this of our fiscal year and $28 per ton for the first -- for the last quarter, and that translates into about a $1.5m of loss due just to paper pricing. Some of that has been offset by the hedging, which has been successful but not all of that. And so, if you take that plus the SG&A, and then we are still kind of on $12m EBITDA with good strength growth in contractor and manufacturer, that's kind of a good characterization of the business. From a technology standpoint, we believe that we've got a couple of disruptive technologies. We hope to roll those up during the next 12 months. It's too early to tell how soon they will have an impact, and I think will leave the comments there.

Okay. And why you're clubbed to another initiative? I know you guys are working out just cutting maintenance cost, some of that you have been tinkering around with some of -- couple of programs on that front. Can you give us an update on where that is and what types of savings you hope to realize and when?

Sure, I think that really we -- I talked about the employee turnover program earlier season. That was because that program has really got the emphasis for this year. A year-and-a-half ago, two years ago, with the safety program. This past year when we set out the targets for the fiscal year, it was a 25% reduction in employee turnover and that program is doing very well, as I said, second quarter analysis, annualized, gives us about a 22% reduction in turnover. The maintenance program is even more in an infancy stage there. We have selected the software. The software has been installed. We are in the process of beginning to train all of our people from the maintenance in an operating standpoint, but that project will take a longer time for us to begin to see the results from it, because it’s -- there is a number of issues there from a training standpoint, not only do we need to bring people up to the speed in terms of the software itself, but there is a lot of activity from a training standpoint in terms of bringing our maintenance staff up to a much higher level of skills set from a computer perspective. And so, while we are confident that we can probably take 4 or 5% out of our total maintenance budget, which is about $40m. It's also very, very likely that that will be something that will happen over a longer period of time.

Okay. And last question just on insurance. Can you give some sense on where your insurance costs are this year versus last year and going forward? And further split that down into the fixed portion versus the variable portion?

In the first quarter, our year-over-year insurance costs were up $2.1m, and as we had described, when we gave our outlook for the year, we anticipated at $6m year-over-year increase for the year, and fairly evenly split by a quarter. In the first quarter, the tail that we experienced on changing our medical benefits ended up being half a million higher than that and that's why we had a higher cost in the first quarter. In the second quarter, the cost came in pretty much as predicted, at a million-and-a-half. And, as we sit here today, we expect that to be at about same kind of level in the next two quarters.

Ok. Very good, thank you guys.

Thank you.

And next, we will go to Leone Young of Salomon Smith Barney.

Yes Sir. Good morning. Just as a point of clarification. With the sale of the export business and revenues being down, $6m into the next quarter, has that been incorporated into your forecast as well for revenues?

That was not included in the guidance that we gave back in June. So that's why I mentioned that number. The revenue will drop in the next two quarter equally by that. But, as I also indicated, there is very little EBITDA associated with that. And, that cost of operations is very high.

Can you give us a sense then of where you see third quarter revenues?

We are comfortable with the guidance that we gave in June, that is -- we gave guidance in terms of EBITDA of 87-91. And we feel that we will attain that, we will be in that range by the end of the year.

And you are still okay with the revenues even with this 6m?

Yeah, I think so.

The revenues are probably -- the revenues are probably off by the 10-12m as a result of that sale. Revenue guidance was 415-435.

Right.

That's a pretty broad range anyway.

Yes.

And also on depreciation and amortization, do you expect the current percentage of revenues? Should we use that going forward or was there anything unusual there?

I think the last two quarters, the percentage of revenue, depreciation as a percentage core revenue has been around 13%, and I would expect that to continue and total for the company, it is around 11%. So, I don’t anticipate any changes.

Okay great. Thank you.

That concludes the question and answer session today. At this time, Mr. Casella, I'll turn the conference back over to you for any additional or closing remarks.

Thank you. Again, in summary, I would just like to reemphasis that we're obviously continuing to do the right things with regard to the core business. We're focused on adding additional disposal capacity to the franchise as we begin to resume our acquisition program to densify the existing hauling operations as well. It was a good quarter. We are pleased with the results and pleased with where we are positioned for the second half of the year. Our third quarter earnings release will be in early March. I look forward to all of your participation at that point in time. With that, I would like to thank you all for your time and attention this morning.

Wish you a happy holiday.

Happy holidays.

That concludes today’s conference. We thank you for your participation.