Casella Waste Systems Inc (CWST) 2003 Q3 法說會逐字稿

This is premier conferencing. Please standby. Good a day, everyone. Welcome to the Casella Waste Systems third quarter 2003 results financial call. As a reminder, 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. Good morning, sir.

Welcome. We are joined today by John Casella, chairman and CEO. Jim Bohlig, our president and COO. Richard Norris, SVP and Chief Financial Officer and Charlie Leonard, our SVP for solid waste management.

Today, we'll be discussing our third quarter results for our 2003 fiscal year. These results were released yesterday afternoon. Along with a review of our financial performance we will update you briefly on the company's activities, and our business environment, and answer your questions as well.

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 FCC's Safe Harbor Provision. Actual results may differ materially from those forward-looking statements. Having said that, I will turn it over now John Casella, who will begin today's discussion. John?

Thanks, Joe. And good morning, everyone. We would like to take a few moments to give you a brief outline of our performance for the quarter and other highlights.

As usual, Richard will go through the financial performance for the quarter, and Jim will give an overview of operation.

In spite of challenges that we're all facing from the economic and geopolitical uncertainties, it is clear that we have delivered a solid quarter operationally.

If you adjust for the one-time expenses associated with our new capital structure, we are right in line at 6 cents.

Of course, the big news was the completion of our new capital structure, which gives us the flexibility, and most important, the capability to execute our strategy; our three to five-year plan.

Our plan continues to be driven by adding additional disposal capacity, continuous improvement of the assets we already own, and the densification of our franchise.

While we are pleased of the performance of the third quarter we do remain cautious about the fourth quarter. This is -- this is really a clear reflection of subdued regional economy and the obvious concerns about war.

We also had a lot of snow here this year, but more importantly, there have been numerous storms in the metropolitan areas and unusually cold temperatures during key vacation week, which unfortunately didn't always translate into increased tourism.

Snowstorms as we have said historically, snowstorms add to our labor costs and negatively impact our productivity. Volume did deteriorate over a quarter-over-quarter basis, and in February, we did see a slight reduction in landfill lines from last year.

I think most importantly, though with that information, you need to understand that the fourth quarter is truly driven by what happens in March and April.

Currently, approximately 58% of our fuel is under contract. There was, in this quarter, a small impact from the 42% that's not under contract. However, we will see the full impact in the fourth quarter, which will translate to $200,000 to $300,000 of additional costs.

While it's clearly difficult to predict the true affect the economy with the reality of war, currently, we remain comfortable with the guidance that we gave a year ago.

The other big news in the quarter was the acquisition of the Hardwick landfill in Massachusetts. We're very excited as we have a great opportunity to develop this facility into an important part of the Massachusetts disposal infrastructure. The purchase price for the facility was $12 m, that translates into six times cash flow based on the first 12 months of full operation.

Just as important, as we discussed on our last conference call, we have been able to deliver on our promise to add additional disposal capacity by the end of the current fiscal year.

With that I will turn it over to Richard, whole take you through the financials.

Thank you, John. Good morning, everybody. For the quarter ended January 31, 2003 revenue decreased by $5.4m to $95.7m from $101.2m or 5.4%. This decrease was largely due to the sale of export brokerage. Prior revenues include $8.3m related to that business and that decrease was offset by higher revenue of FCR. . Internal growth for the quarter matched 3.6% and comprised as follows. Growth of the core business was basically flat at 0.2% negative. FCR brokerage price growth, 1.7% and the FCR volume growth, 2.1% for a total of 3.6%.

The core business growth breakdown is as follows, price 1.6%, volume 1.8% negative, and poor commodity was basically flat, so that gives you 0.2% negative.

Offsetting the 3.6% internal growth were divestures of 9.4% negative partially offset of rollover affect of acquisitions of 0.4% which means a net of 9%. And 9% minus 3.6% gives you a net change of 5.4%.

Revenue for the quarter breaks down as follows. Core business $73.4m, FCR $18.8m, and other $3.5m, for a total of $95.7m.

EBITDA decreased $900,000 to $20.2m from $21.1m. While EBITDA margin improved to 21.1% in the current quarter versus 20.8% last year.

The increase was mainly due to improved performance in the recycling business. Partially offset by low margins in the core business mainly from insurance costs, low volumes and small factor of -- EBITDA is broken down as follows. Core business $16.3m, FCR $3m, and other $800,000 for a total of $20.2m.

In the income caption under other income expense which was an expense of $655,000 in the quarter, this caption includes the cost of unwinding interest rates swaps at the cost of $1.3m. You recall that we had originally six interest rate swaps in place. One matured early in January with a note [inaudible], of $45m leaving $5m in place. These were closed out as part of the refinances.

Had we left those swaps in place we would have had to mark them to market and two expired in January and two in March, and one in April, the cost of closing them out was much reduced from last July, but that cost did amount to 4 cents a share.

Income taxes -- effective rate moved to 42% on the year to date basis. A small decrease from 43.8% recorded last quarter. This decrease arose from the finalization of accounting for AART. That project is now completed and the last was reported for tax purposes so that tax benefit is reflected in the rate.

Since that change in rate all gets booked in the quarter, the Q3 rate was reduced to 31%.

Extraordinary item, as a result of our debt refinance, we wrote off the unamortized cost of the old credit facility. This amounted to $3.6m before tax, $2.2m after tax, or 9 cents per share.

The net loss for the quarter, amended to $1.6m after preferred dividends per loss per share of 7 cents. But included in this loss was the cost of unwinding the swaps of 4 cents a share and the extraordinary item of 9 cent a share.

Moving now to balance sheet statistics, our total debt at the end of the quarter was $310.8m. Our total equity was $186m, giving us a total capitalization including preferred shares of $496.8m.

Total debt to cap ratio as of January 31st was 57%. This ratio has improved from last quarter because of the elimination of the effect of the interest rate swaps from other comprehensive income in the equity section of the balance sheet.

The average interest rate moved down slightly from last quarter to 9.6% including amortization of financing costs.

Net these expenses, it was 8.9%. It is expected that our interest expense in Q4 will decrease from Q3.

This pro forma assumes we do not utilize any of the revolver as a result of acquisitions but on a pro forma base, all end costs will likely fall to close to 8% or 7.5% on a cash basis eliminating the affect of amortization of financing costing.

All be aware we have put in place two three-year interest rate swaps for a [inaudible] of $53m of 2.44%.

Total cash and cash equivalents on hand as of January 31st amounted to $18.9m.

This was unusually high as we received cash from the refinancing and we had nothing drawn on the revolver closed to pay down. Restricted cash was $10.6m so total debt less cash was $281.3m, which is up from the prior quarter to many of the refinancing transaction costs as well as paying off the interest outstanding at the refinancing closing date and high capital expenditures.

Availability at the end of quarter was $130m after taking into account $45m of LCs outstanding.

The amount of our credit line available for acquisitions and ignoring the benefit of the EBITDA from the acquisitions was $90m. Capital expenditures for the quarter amounted to $11.5m which is up from last year's $6.4m for a year to date total of $32m.

We are on track to be within the guidance of $38m to $40m and finally during the quarter we closed two small tuck-in acquisitions of hauling companies, purchase price of $1.1m which is 3.7 times of EBITDA multiple.

Moving onto cash flow, free cash flow, free cash flow in the quarter include higher capital expenditures as I just mentioned plus higher cash interest as a result of need in the refinancing to pay off all of outstanding interest.

Those two contributed to a negative free cash flow of $7m in the quarter. However, more important, on a year to date basis, we are positive to plan and we expect to meet the guidance that we gave you. With that, turn the meeting over to Jim.

Thanks Richard. Just comments on the general flavor of the economy, last quarter, we discussed that we were seeing softness in the western region.

That is continuing throughout this quarter as well. And we are beginning to also see some of that move across into the Central Eastern markets.

So generally speaking from an economy standpoint, we are seeing continued softness, and I'm sure part of that is aggravated by the war -- the Iraq war effect and other concerns related to that, and then of course, we do have the issues of fuel pricing.

Not withstanding that from a pricing standpoint, pricing has generally held up fairly well. Other than the normal kind of pockets of competitive pressures that we always see, the pricing environment has been fairly steady across the three regions. We have seen some very subdued deteriorations if you will and roll off volumes, particularly C and D, and related to the construction industry, as all of these are impacted generally seasonally anyway from winter conditions.

As John mentioned, these winter conditions this year are probably as severe as we've seen in terms of both snowfall and temperatures. So the deteriorations are not surprising, given those realities, particularly in the Central and the Eastern markets.

With regards to landfill operations on a buy-in basis as mentioned earlier, actually year over year down about 16,000 tons. That's about 3.4%.

A good portion of that is attributable to the residual landfills in Massachusetts, that principally had a fairly large stream of waste, particularly dirt, from the big dig project a year ago that we're not getting now. But we have seen some slight deterioration in volumes in the central region.

Again, we believe they are tied to the winter weather and the boxes being buried in the snow and general economic activity, which is expected for this quarter, and as a seasonality challenge we face every year.

Landfill pricing is up about 1.8%, which is consistent with the price metric that Richard gave you. Internalization, year to date Numbers, the Western region is doing 35.9%, Central region's 81.2%. Up a tad from the previous quarter. Eastern is 46%, and the overall is 52.3%. From a landfill permitting standpoint, very pleased this quarter to receive FERK (ph) approval for the expansion in Clinton County.

With that approval in hand now, we have secured all of the principle permits associated with effectively of 30 or 40-year expansion of the landfill with 5m to 6m yards of additional capacity. That facility will remain a key anchor for the company and for that portion of the waste shed and obviously very pleased to have that accomplished.

We are actively in permitting phase four, -- from the road show related to the finance, we concluded our trial with North Country, and we expected a decision there and sometime in the fourth quarter, and a permit from the DES with regard to North Country, as I said in the past we’ve had to overcome opposition from the town every time we have permitted. This is no different. We have been able to move forward, and we are hopeful that we will be able to repeat that. We are very confident that we will.

A little update on Maine Energy and the litigation there. I guess one of the more material issues is during the quarter, we submitted both our tax appeal and an expert witness testimony associated with actual fair market value of the facility.

That information greatly anchored our advocacy with regards to the fair market value as very consistent of what we've told you in the past with regards to how we’ve dealt with this from a balance sheet standpoint and I think we'll bring a lot of reality back to the negotiations with the towns. One of the phenomena, going out I guess, across the country, but particularly the Northeast, almost every state has got a very fairly serious budget crisis.

Maine is no different so everyone in the municipalities are dealing with trying to figure out how to deal with budgets and deal with forthcoming priorities.

I think that will auger well for the main situation in they will give us proper environment to settle settlements. We are very hopeful to have that resolved before the end of year. John mentioned Hardwick. We are obviously delighted to have that into the family. I know Charlie had been down in Florida earlier in the week and was handicapped because not able to talk about it, but now that we have announced it, it's a 300-day landfill. It’s the anchor for a disposal capacity for us in Massachusetts. It is a constructed facility. The permit was issued in the last week, and we expect to close on it within the quarter.

And we believe that had some additional upside in both in terms of capacity and broader use beyond just C&D, so look at that as particularly good asset for us long term in the marketplace.

John touched on the fuel. We have had a long-term philosophy around here like paper pricing and hedging. We've had a program to lock into long-term contracts for fuel. They have given us relatively good protection this last year. Our year over year fuel costs relatively flat, even though we've had this run-up because of these measures.

Most of these contracts are one-year contracts, and as such, when they unwind, depending on the length of war and the affects of oil prices, there may be some exposure there larger than what we've had historically.

We don't see too many ---we don't see being in that position before the first quarter or the second quarter of next year, but depending on how long oil prices stay up, there is a potential for some impact from that standpoint. But I think probably better situated than most of our sister businesses in this segment.

Moving on out of solid waste into FCR. FCR has had another good quarter. A lot of that continues to be driven by commodity pricing which remains hire of the budget assumptions that we have created for the business. As you know, we also acquire The Kate May (ph) business this year and that has created very good additional benefits for us as well.

Volume is up 6%. Pricing generally is up about 30% and we've had about a 1.4% cost improvement, which meets our target to have continuous improvement on cost reduction goals of 1% to 2% per year.

During the quarter, FCR resigned and renewed their operating contracts in Fort Myers for an additional five years and have been selected as the preferred vendor in Sarasota to continue operating that facility for an additional five years.

We look forward to FCR continuing to do well. Surprisingly, commodity prices are actually up over what I think many people thought what they would be. Principally, I think probably being driven by export markets, particularly China, and there is some fear in terms of transportation, there won’t be enough ships to move that stuff to the Asian markets when many of those ships may be tied up in the Middle East.

Some of that may be holding up pricing. With that, it's a good segway to move into U.S. Greenfiber, whereas commodity pricing is a good thing for FCR and we’re benefiting from it. US Greenfiber is on other side of the hedge effectively because a major portion of their cost structure is paper. They use a number 8 O&P paper to make insulation.

That business on a nine-month year-over-year basis, has had sales growth about 2%. The contracted channeled is 3%. Manufactured homes in a very dismal manufactured home market is 1% up, and retail's flat.

We've had a good -- a good year in the sense that our strategy was to continue to roll off this business. We've had an additional 430 new Stores, in 8 new MSAs on the contractor's side and taken significant market share on the manufacturing home channel from the home balance of those we were not supplying insulation to.

A good indicator for us is, when we entered into the Denver market, which was earlier in the year, since we've entered that market, we have essentially captured about 35% to 40% of the wall market from fiberglass.

That’s a reflection of both the quality of the product that we are producing and the benefits over fiberglass, and what we think to be the opportunity for us in the future.

During the nine months, however, on an EBITDA performance standpoint, the business has suffered from these higher paper costs. We have about on a nine-month basis, year-over-year, $1.392 less EBIT reported than the previous year, if you multiply that by two, because were a 50% joint-venture, it’s closer to $2.7m, year-over-year off and about a $1m of that is tied up in paper. Another $600,000 is tied up in chemicals. And then the balance is on the significant SG&A, $1.9m that we spent in the last nine months to advance this business across the country, and to penetrate both new and additional MSAs throughout the year as well as the addition of the new stores at retail level. So, from an overall standpoint, we think the business is rolling out nicely. We are suffering from paper prices. The business is cash flow positive by about $7m. It's got about $8m of cash on its balance sheet, and it is growing itself with it's own cash flow. And we remained very pleased with the two major technologies that we're in the process rolling out and the impacts they will have on the future markets. With that, I’ll turn it back to John.

I guess, at this point in time, 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 press the star key, followed by the digit one on your touch-tone telephone. If you are using a speakerphone, please make sure your mute function is turned off, to allow your signal to reach our equipment. Once again, that is star one, if you have a question. And we'll pause for just a few moments.

Our first question today will come from Bill Fischer of Raymond James.

Good morning.

Good morning, Bill.

First on the landfill side, I guess both in Massachusetts and maybe at your other sites, is there a process to go through where, with the states, where you can expand daily volumes, and on your other sites -- any of these expansions do they afford an opportunity to do that as well.

Well, that's -- the simple answer's yes. And that is incorporated in our basic approach to these facilities. Unfortunately, almost every facility is kind of one off in terms of particularities.

Some restraints may appear at the state level, some may appear at the local level, so it’s hard to give kind of a uniform answer. But I think what your question is, what are the opportunities as you acquire these disposal sites to bring them in line with, and make them more accretive to business.

I think Hardwick is a good example of that. That was a constructed C&D landfill actually constructed a year ago, but the permit had been stalled because various issues.

We have bought that. The permit has been issued. And we believe that there's an opportunity to take that landfill and expand it. It won't be expanded by double the size. But it will be done incrementally and sequentially year over year and done in conjunction with the local community. But it is a good example of what can be done I think in this marketplace.

Okay. And separate is on landfill side. You guys have touched on Woburn and the comp issues versus Brockton. I guess does that anniversary itself in the fourth quarter, or when do you get back to apples to apples there?

Yeah, I think you are right, Bill. We had a small impact in this quarter as a mentioned earlier, but next quarter, we should -- Brockton should overtake Woburn in terms of the year-over-year comparisons.

Great. Last question for Richard. On your -- I know there are moving parts. But your best guess in terms a go-forward tax rate to use?

Obviously, it's difficult to give a tax rate for '04 until we have got our budget finalized. We are in the process of doing that right now. But if you are asking me for the best guess ----.

That was the fourth quarter or '04, Bill?

I guess -- can you hear me?

Yeah.

Just going forward ----fourth quarter for that matter.

In the fourth quarter, it’ll probably be in the 40% to 42% range. The next year, that obviously is difficult for us to determine, but that will somewhat likely be higher, 42% to 44%.

Great, thank you.

Our next question today will come from Tom Ford Lehman Brothers.

Good morning, guys.

Hi, Tom, how are you doing?

good. Jim, I wanted to go back to you on the Greenfiber discussion. Just trying to get a sense for the contribution assumption. I understand what it means probably for this year, but if you could just kind of Rehash, what was the target for the calendar '02? And do you have any thoughts as to what the target would be for calendar '03, so that we can try and back up into something?

I gave you our fiscal year. We always have this problem because they’re on a calendar year and we’re on a fiscal year. I gave numbers based on our fiscal year and I didn't bring their calendar year numbers but let me kind of answer your question with the caveat that I don't have the numbers right in front of me.

Generally, we were -- and we believe -- this business can grow at 15% a year. We did not get the kind of growth that we thought we were going to get this year. Part of it -- we didn't start the SG&A rollout until March '02.

We expected to see significant growth in retail that we didn't get and primarily, it's tied to Home Depot. The problems that Home Depot is suffering, I think, generally we have to put up with as well. So the retail channel was off from what we thought we could do.

The contracted channel, we actually did quite well in. We entered each of the MSAs and had to give up some price, but we’re effectively taking market share from fiberglass from those markets and more importantly, the contractor installers prefer this product because, not only of its thermal capabilities which are equivalent and better than fiberglass, but also are great sound dampening and the mold issues.

So we think that the business is maturing as we had planned it to. On a forward-looking basis, we are putting demands on the management team to grow the business at 15% a year there. Their budget for the next year, which is generated by them, is supportive of that. They think they can do that. But we will get this variability in the actual performance based on paper pricing. If paper prices fall, then there will be a big improvement in the EBITDA if it stays where it is and then growing this business based on sales.

Okay. With respect to that, it's sort of one of the risk elements. You noted paper. What about the situation -- I guess you were saying the G&A build out in March of '02. I guess is it right to assume we can kind of anniversaried on that?

I am sorry, I was listening to a comment here that John was trying to share with me. Could you repeat that again, please?

Sure. In terms of highlighting the risks to the outlook, you had noted paper prices as being one of the question marks, and I was just curious about the other two things that you mentioned earlier, chemicals and G&A, and you mentioned G&A, the build-out occurred in March '02, so is it right to assume we are naturally anniversarying on that now.

That's correct. Not a significant increase in SG&A. A slight increase in this -- in the '04 budgets but not the same magnitude. You are correct on the SG&A. Chemicals are tied to basically -- somewhat tied -- to fuel pricing, boric acid is up a little bit. We have also added other additives to the product to enhance some of the features of it. One of the major things that we're very excited about, Tom, is we have patented two technologies, one for blowing the stuff into the walls, and second called CPM, which is to produce the fiber out of a lower grade fiber than number 8 O&P. We have done full scale testing on both of these. That represents an opportunity to reach down to $30 to $40 a ton in our cost to a lower-grade paper. So we are pretty excited about that. So those are the upsides. The downside is we do have chemicals, and we've had SG&A additions to this business and the paper pricing that we to manage. All in all, we think this is a business that is going to produce value creation over the next few years.

Okay. All right, great. One question for Richard. I know in your highlights you had noted some of the margin differences. If I had just apples to apples for last year, I have a gross margin of about 37.5% or so going to 35.2%, in this quarter, and I am just wondering number one, if you can just give me some idea as to what the different forces were in terms of impacting that? I know Jim had referenced like the Woburn-Brockton timing element what if have you. Something in that cost line that was unusual? And associated with that, I am wondering if you track the dollar number in terms of overtime costs?

The operating cost number, Tom, includes a lot of different things. And obviously, it's impacted year over year by the brokerage facility. So there's a lot of moving parts in there.

It's a very large number. And I think the key things we did mention already that impact that, the lower change in volumes, the with Woburn year-over-year change and even the insurance costs which is buried in that number.

But in terms of tracking overtime, overtime is tracked obviously is monitored very closely at all levels in the company, particularly at the division level where the guys -- the division managers are able to make a difference.

Uh-huh. Okay. Thanks very much.

Thank you.

And now we will hear from Mark Reider (ph) of Goldman Sachs.

Hi Mark.

On Hardwick, are you going to have to spend anything to get the landfill into shape or is it all baked into the $12m purchase price?

No, the first year purchase price is $10m, and two one-year $1m payments that's where it comes from.

The landfill is fully constructed. Inevitably, when you take over a facility, we would perceive perhaps a different approach in scale operation than maybe the former owners did, so probably some investments. But it's relatively minor relative to actually getting it up and operating it. But we do a plan to the previous question that was asked, we do plan -- we do have a build out of the facility and obviously will require capital as we move down the line.

What does this bring to it now?

Hardwick is not operating. It's fully constructed but unfilled operating landfill. We close on it in a week or two weeks or whenever we finish the conditions preceding. There won't be any waste going into it. Now, we have got the waste. The good news is we have all of the waste on our trucks. So as soon as we can get it up and running, we have -- we have the ability to fill that to the capacity. There is a fluff layer that we have to put in. So a start-up period here for those of you not familiar. The fluff layer is a requirement in the design in operating the landfill when you build your additional landfill cell, they like to have a non-injurious material on the floor of the landfill. As the weight builds on it, it lowers the risk of the pipe or something sharp that can be driven through the liner. Generally build a three to five-foot fluff layer. As such, you have to put it on there carefully and got to screen for the materials, so you can't fill at the same rate. Once we get past that which nominally takes four to five months to get done, we'll be at full operation, and we will be able to see an immediate benefit.

People have asked for metrics. It's often very problematic to give these numbers, because you understand it depends on the tipping feed, depends on the purchasing price, and therefore the amortization charges and the production costs and the closure and post-closure depends on the transportation costs to get the waste to the landfill, and a lot of related variables like that.

But generally speaking, a 1% improvement internalization, we think to give about $400,000 improvement in EBITDA. If people are searching for a metric. But we are clearly making that a big caveat that there's a lot of variables in that that people should -- shouldn't use that very reliably.

Okay. Thank you. And could you just give us your thoughts on some acquisitions that you might be looking at, opportunities that you have? I know you had mentioned in the past, municipal landfills and what-not and also hauling ops.

John Casella Sure, Mark. One of the things that we clearly articulated is that, within the current environment, clearly because of the economic realities that we're facing, it's really created an opportunity for us because many municipalities have got real difficulty with regard to their budgets.

So -- and the fact we have been in that process for two years now, in terms of developing additional disposal capacity and working with different municipalities, we find that to be really beneficial. We have got many opportunities that we're working on across all of the regions. Some of which are additional private facilities, but a good number of those, as we've discussed historically, are partnerships with public facilities.

Okay.

As an example, I think we were talking about six to eight opportunities to be more specific of actual opportunities that we've been working on. In addition to Hardwick and in addition to the Hardwick facility, still have the six to eight other opportunities that we have been working on for some time now.

Any thoughts on timing or size?

Well, I mean, we are pleased to have delivered as we said we would, Hardwick. And additional disposal capacity before the current fiscal year. I don't think we are ready to declare on the other facilities or the other opportunities that the point in time, other than to say that, again, there's half a dozen -- eight of those opportunities that we have been working on and clearly working on the vast majority of those opportunities for 12 months or longer.

So if that gives you a little bit better reflection, we are obviously delighted that we've been able to add disposal capacity to Eastern Massachusetts. It's a real win for us, and we're excited about the opportunity to work with all of the constituencies to really get as much value out of that facilities as we can for all of the stakeholders.

Okay, and do you have any thoughts yet of what fiscal '04's going to look like? I know in your quarter --

Actually, in the budgeting process right now, so we really don't. We'll be talking about that in the next conference call. Or perhaps actually prior to, but, yeah, next conference call the end of June. As I said, we are right now in the middle of the budgeting cycle, and so we really don't have a comment on it at this point.

Great, thanks.

All righty!

If your question has been answered today, you may remove yourself from the queue by pressing the pound key. We'll go next to the, Amanda Tucker from JP Morgan.

Hi, good morning. A couple of follow-ups. On the landfill volumes you said turning negative in February, and sounds like at least some of that is weather related. I'm wondering whether historically, what you see -- at least the weather-related part, created sort a backlog that you get later on or is it rather macroeconomic?

I think that's a very fair issue. I think first all, when you look at the fourth quarter Amanda, you really do need to look at March and April. And the reason for that is the weather-related issues. And also, if you look at February, February was one of a very, very cold February. If you look at it on a historic basis. Which means there, is the potential for there to be pent-up, but it's very difficult to have a clear vision about that in light of the economic reality and war and the other uncertainties that are out there.

But if we were to look at it historically, without the overhang that we currently have, I think it's a fair characterization, particularly in light of the fact the weather that we experienced in February. It does depend on whether or not we get a lot of snow in March and April, or whether or not it begins to warm up, and we begin to feel the effects of potentially the economic activity coming back.

Right, but if it's the economic activity doesn't come back, it seems all things else equal, you ought to end up maybe roughly flat, volumes and still in the 1% pricing range for the fiscal fourth quarter?

I mean, I think it's fair to say that flat to down. I think the characterization I'd indicated is down slightly.

Okay.

So flat down slightly I think is a fair characterization at least on the basis of the information that we have at this point.

Okay. And going back to the Hardwick new landfill. When you say you have the volume on the trucks, do you have -- I mean, primarily a C&D site, do you have a lot of C&D to bring there?

Yes, we have a substantial C&D operation in that marketplace.

Where are you taking it currently?

Well, it goes to Rochester. But a lot of material difficult management material that can't go through that processing facility. So we've had to take that material to third party sites. And so this will allow us to internalize that material.

Have you run, -- kind of a follow-up on the previous question. Have you run the numbers to see what that does to your internalization rate in that market?

We think it will improve it by about 4%.

Okay.

If you ask the next question, and then 4% of the metric I gave you of what we think the impact of Hardwick is.

Okay. Are you -- do you think over time you'll be able to work on the permitting process to be more of an MSW site?

Is taken now from -- [inaudible].

Yes, that's correct. But from the designed standpoint fully designed from a regulatory standpoint to accept MSW. I don't think any problem from a regulatory standpoint and we are hopeful that we can have constructive conversations with all of the constituents and make sure that's in the interest of the state of Massachusetts.

Okay. And what's the estimated life of Hardwick?

The site is -- is quite a good site from a long-term standpoint. The total property that the contract, the purchase agreement covers, is in excess of 200 acres, and quite a bit of long-term development there. But it will require the normal kind of things. I'd really not like to speculate on that. But, anyway, A, we think it's a long-term site. B, it's nicely situated in the waste shed and it's the first anchor point for us from internalization. And we think it's got a nice community, and we're looking forward to being a good neighbor in that community.

Okay, thank you very much.

From Leone Young (ph) of Salomon Smith Barney has our next question.

Yes, good morning. I just wanted a clarification from John Casella. Understanding very well the caveats with fuel and the economy. Yet, it sounded like you were still comfortable with your sort of general overreaching guidance that you'd given out previously. Did I understand that correctly?

Yeah, exactly what I said. I don't know about overreaching, but I think with the cause for the fourth quarter, we're still comfortable with the guidance that we had given nine months ago.

Great. And for Richard, there was anything unusual in the D&A levels this quarter? Would you expect that to determine about the same on a percentage basis?

G&A was lower this quarter due to legal expenses and that's the only thing that might disrupt that on a go-forward basis.

I meant D&A.

I beg your pardon, I thought you said G&A. The D&A ticks down from the second quarter. The lower volume in the landfill which comes from our own seasonality and expect that similar for the next quarter.

Great, thank you.

Next question today comes from Larry Taylor from CSFB.

Thanks, most my questions have been answered but maybe if I can clarify one comment from the prior question, or get to you to clarify it. When you had said the internalization rate would go up 4%, you meant within that region as opposed to overall.

That's correct.

Okay. I just wanted to make sure they translate that back properly. And then one other follow-up question on the --

No, Larry, I am sorry, that is overall. That's overall.

It'll -- internalization up 4% overall.

When we get the facility functioning at 100% capacity.

Okay, and that's without the expansion of being able to put municipal tonnage in there.

Again, internalization is the measure of the waste on your trucks into the landfill. Now, from all the waste that goes into the landfill is coming off our trucks, it would have that kind of impact in terms of internalization.

The other side of that is what we were trying to give you a feeling of what impact on the EBITDA level was, so that you could get a measure of that as well. So kind of two different questions.

Yep. Okay. Thanks for that clarification. And then if I heard right at beginning of the call, the pricing on this hard -- of this Hardwick is consistent of what we were just talking about is about six times, which seems quite attractive.

I wonder if you could kind of characterize where that sort of sits in the spectrum of what you think about overall in terms of potential opportunities and how they are likely to be priced as you go forward and take on some more capacity?

Well, I think -- I think that that sits right where we had expected. We had expected that we were going to pay slightly higher multiple than what we are seeing from a hauling perspective, as Richard said, the acquisitions that we did in the quarter were 3.7 is that right?

Yeah, that's right.

The acquisitions we did, Larry, for the hauling companies is 3.7 times EBITDA and so we fully expect to pay in the 5 to 6 times for disposal capacity.

But I think -- I think, you have to understand that our business model assumes that we're going to be able to improve the operations of that landfill or increase its capacity so we effectively look like we bought it for less than six times significantly less, maybe below five, because only way we are going to create value is to actually have that difference in the multiple expansion and take advantage of it as we grow this business again.

Okay, so --

That is day one. That doesn't include any of the anticipated improvement, and obviously we are going to move the facility forward, as we said in conjunction with the constituencies to create obviously more value with the facility.

Okay, that's helpful. And so that number is six times is relatively consistent when you think about the six or eight opportunities that you're also thinking about out there? That number is relatively consistent with those opportunities as well?

I think that's a fair characterization, but I do think Larry, that the number be lower, it could be a little higher, depending on the impact. Depending upon the opportunities with the disposal capacity.

From a practical perspective, on a go-forward basis, we are going to add disposable capacity to our franchise, and it's clear that we may see circumstances where it might be a little bit higher or might be a little bit lower.

Terrific.

I certainly don't think substantially higher. I do think, though, potential that it could be a little bit higher.

Okay. Thanks very much.

You are welcome.

We will take our next question from Mark Farano from First Analysis.

Good morning.

Hi, Mark.

Just a couple of quick clarifications. We talk about Hardwick as being a six times multiple of cash flow, but then, maybe I misunderstood, but I took it from a different comment that the site isn't really operating yet. Can I -- can I square those two ideas up?

Well, --

First 12 months of operation.

Whether we buy or a business or have one starting up, we always do a pro forma to do our IRR returns and based on operating the facility as we expect to operate it.

Okay, so it's your expectation for the first 12 months?

Correct.

Okay. Of the 200 acres, what part is actually -- what's the permitted footprint?

The constructed cell, I think is sitting on about six acres. Okay, then, when we think about cash flow for next year, I know you mentioned these, but the various projects, Clinton and Waste USA. Should we think about an increase in CAPEX in fiscal 2004, to support some of these projects?

No. I don't think there's any impact from that standpoint, other than the normal construction build on cycle. The significance of my comment more made and aimed at securing long-term capacity for this franchise.

We would like to have 30, 40 years of capacity because it's. Stability and strength of this franchise. I think those comments were aimed at that concept, not to suggest any change in the construction spending or capital spending associated with the landfills.

Okay. And then one last question. You gave some internalization numbers by region and overall. I took those to be year to date numbers? Could you just tell us what the internalization was for the quarter?

Yeah, those were year to date numbers. For the quarters 27.4 in Western, 81.9 in Central, and 41.8 in Eastern.

All right. And equates to overall?

48.5.

48.5.

That entirely consistent with our seasonality. A year ago, it was slightly lower than that, so we have improved our internalization.

Okay. Thank you.

Hear next from Brian Butler of Freedman Billings and Ramsey.

Good morning.

Good morning, Brian.

I have a question on the gross margins. Those actually, in my calculations, ticked up about 60 basis points. I’m trying to figure out what factors were behind that?

When you say gross margin, you mean --

Revenue of the operating costs?

Operating costs. As I tried to explain to Tom before, the problem with looking at our gross margins is on a gross basis the way they are presented in the P&L is that they include a lot of moving part, the impact of the brokerage, the volume change quarter over quarter. And so it's very difficult to get your arms around those moving parts and I think the impact in the quarter was largely due to the improvement in the price and volume at FCR, as I said in the beginning of the conversation.

Okay. And on the SG&A, up a little bit? What was behind that? Is that --

SG&A was down in the quarter of last year -- from last year and from the previous quarter, I think, Brian.

I had last year -- SG&A is a percentage itself?

Okay, I thought you were talking about dollar of numbers. When you look at as a percentage of revenue, that results from the elimination of the brokerage revenue this year from the revenue side.

Okay.

Excuse me. Take out that revenue, it causes those percentages to go up. But absolute dollars went down.

Okay. And then, you can break out the free cash flow, just the actual pieces like the cash taxes and the cash interests.

Sure, the cash taxes were actually $57,000 in the quarter, they were basically zero. And the cash interest was $8.9m. The cash interest was up substantially from last quarter. If you remember last quarter, cash interest was unusually low because we had a large -- accrual at end of the quarter. And in this quarter, we had to pay off all of our interests when we did the refinancing on January 24th.

Do you have the change in working capital?

The change in working capital was a negative $5.8m. That rose largely from the decrease in the accounts payable only partially offset by accounts receivable. A cash receivable DSO -- DSO ticked up a couple of days to 40 days this quarter, and really two reasons for that. First of all, the economy. Obviously a number of businesses are experiencing cash flow difficulties. And so that did tick up, but the -- that deficiency or that going backwards has been recognized and our collectors are now on the job and I do expect significant improvement in that area by year end.

The second issue was great Northern Paper which declared bankruptcy in the quarter. We were following our collection procedures in regards to that particular customer and they were pretty current, but of course we got hit by the bankruptcy. And even though the accounts receivables were not overdue -- FCR has been applying paper to great Northern paper for some time and the bankruptcy date owed significant money.

But we believe we are the preferred creditor, since we supplied over 40% of that material. So we do believe the company will not incur a loss of our payment receivable. It will be deferred. And just on that point, you should note an offer has been made to purchase the plant of $91m, and we think that offer well may precipitate other offers. And an auction has been set for March 21st. We are comfortable with where we are on that.

Okay, thank you. On – Was there any affect on FAS 143? Any affect on these numbers?

No, FAS 143 is not implemented until may the 1st, the new fiscal year.

Okay. And last one is on the Hardwick. Was there going to b $10m this year and $1m for the following two years?

That's correct.

Is that tied to any landfill -- or I mean permanent expansion, those million dollar payments.

No.

Okay, thank you very much up.

We will now hear from Steve Puehl (ph) with Matador Capital.

Good morning, guys.

Good Morning, Steve.

A couple of quick questions. I can't find anything with the questions they have found so far.

You have never disappointed us before.

Wouldn't want to start now. I want to talk a little bit, if you look at landfill volumes sequentially being down, I think you gave the number in aggregate of what they were down. If you exclude the effect of Woburn-Brockton, do you have any idea what they would have been down if you make that adjustments?

About 1200 tons, flat.

Okay, and if you -- if you look at the site in Hardwick, out of curiosity, since Massachusetts moratorium has been lifted, is this the first site that has been permitted in this state.

I don't know that I would want to go on the limb for that, just because I don't think I'm that knowledgeable. It certainly one of a few. I can't tell you that I can --

Don't know if they know the answer in terms of the overall. More likely it's one of several.

Okay. And turning to insurance, last year, if I remember, you guys have kept fairly high deductibles. I guess we’ve seen a trend across some of your brethren of increasing your deductibles and self insuring a greater portion. And curious entering the new fiscal year coming up, have you guys put some thought into that in terms of what your strategy is to bring insurance costs down or what measures you can take?

As you know, we are in the process of renegotiating our insurance at this point in time. Our policy's mature at end of the current fiscal year. It’s a little early to predict exactly where we will be. But I can assure you we are not looking to put 40% increase in premium into the hands of the insurance companies this year. So we may well consider high deductibles as a part of that approach. Our deductible's are currently not that high. I think some our peers have high deductibles. We have a $500,000 deductible for worker’s comp for example. So we still have some room to maneuver there.

Okay. If you have had to guess, of seeing today is 10% a reasonable number or any idea that the point?

I would rather not comment at this point in time. Still negotiating hard with the insurance companies.

Okay.

difficult to predict where we will end up.

I guess we will wait to see the news here another quarter. Last question on Greenfiber. Jim, you went through great detailed outline, again on the initiatives and the measures that you have taken. I guess what I am curious about, if we hold everything constant, what type of performance to expect on a steady basis for fiscal year '04? And what are you building into your assumptions of two of the newer initiatives and what sort of traction should we get and when?

Let's talk about traction first on the initiatives. It's our goal to begin commercialization of the IAT technology by the summer, by this summer. And we would expect to begin to roll that out in some of the major MSA markets.

We recently had couple of the key contractors in to view the technologies and they were positive. So we think it's going to be well-received. We don't think it would be -- get full traction across all of the MSA markets until six, nine months past that roll out date. That would take you roughly in the winter of 2004. On CPM, we will make a decision this month on deploying that technology and a new plant. Probably located in the Midwest. And if we make that decision at the board level, because it's a decision that's made in conjunction with Louisiana-Pacific, who is our partner and we have a great relationship with them, and obviously they get a say in this. Then it's probably a nine-month cycle to construct the plant and we won't be producing that product again until 2004.

Both of these technologies won't get traction in the numbers until the calendar year 2004. With regards to going forward however, we believe that these -- these technologies are a part of growing this business, and maybe an important part, but the balance of the initiatives are aimed at getting this product understood and positioned in the marketplace across the country. Historically, -- has been a small fractured industry, made up of a lot of small guys without the abilities to either do R&D research or to properly position themselves.

We're the only provider of this product in the country who, for example, can meet Home Depot's national needs. So that's why we are one of their principle suppliers of this product. Their only supplier of product. And that is true with regards to other large chains. So there's a big opportunity to match and get into new markets that haven't been served well. Also some acquisition opportunities. We expect to try to acquire a couple of entry points in new markets that we're not now in. So we expect this business should have the capacities to grow at 10 to 15% without IAT and CPM and with the introduction of that, we would believe substantially higher growth rates would be possible.

The IAT and CPM are particularly person to get into the wall market. We are not into the market today. We blow attic insulation but not into the wall. If you understand that the $4b fiberglass market is mostly the wall, you can see why we are excited if we can demonstrate the ability to go into the walls, provide a superior product, at a lower cost than fiberglass. We think we can get a fair market share of growth on that.

The last point. In terms of performance on a financial perspective, Jim, looking at '04, and the next year, the fiscal year, not having much of an impact of this new stuff, what you are guys thinking.

I think on the short term to be continue to be hammered by higher paper pricing by the higher SG&A. And we've got clearly one of our major channels manufactured home a lot of softness there, so we're going to be challenged by that and I think until the retail channel and Home Depot kind of gets their channels straightened out, those are all challenges for us. So I am kind of saying, it's a kind of a flat on the short term.

Very good, thank you, guys.

And that does conclude today's question and answer session. Gentlemen, I will turn the conference back to you for any additional or closing remarks.

Thank you. Once again, we're very pleased with a very solid operating quarter, which does indicate the ongoing strength the franchise. Our continuous improvement efforts in the area of safety, turnover production and productivity.

It's fair to say, we do approach the fourth quarter with caution. However, we have the ability to execute our plan with a new capital structure in place. We're excited about the additional disposal capacity that we've added to the Massachusetts market. And more importantly, these additional opportunities that we are pursuing throughout all of our regions.

While there is undoubtedly an economic cloud in the picture that cloud is creating real opportunities to work with municipalities facing budget issues and uncertainties and allows us to pursue additional disposal and other opportunities to diversify the franchise. With that I would like to wish everyone a great day, and look forward to all of your participation on our fourth quarter conference call, which will be in late June. Thank you.

And that does conclude today's conference call. Like to thank you all for your participation and have a great day.--- 0