Casella Waste Systems Inc (CWST) 2004 Q1 法說會逐字稿

Good day everyone. Welcome to the Casella Waste Systems' first quarter earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to Mr. Joe Fusco of Casella Waste Systems. Please go ahead, sir.

Thanks for joining us this morning, and welcome. We're joined here by John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Jim Bohlig, our President and Chief Operating Officer; Richard Norris, Senior Vice President and Chief Financial Officer; and Charlie Leonard, our Senior Vice President for Solid Waste Operations.

Today, as you know, we will be discussing our fiscal year 2004 first quarter results. Those results were released yesterday afternoon. While with a review of our financial performance we will update you briefly on the Company's activities and our business environment, and answer questions as well a little later.

But first, as you know, I must remind everyone that various remarks that we may make about the Company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the SEC Safe Harbor provision. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our prospectus and other SEC filings.

In addition, any forward-looking statements represent our views only as of today, and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. And therefore, you should not rely on those forward-looking statements as representing our views as of any date subsequent to today.

Also, during this call we will be referring to financial measures that are non-generally accepted accounting principles. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. The reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the Financial Table section of our earnings release, which was distributed yesterday afternoon. That is available in the Investor's section of our website.

Now if you're still awake, I will turn it over to John Casella, who will begin today's discussion. John?

Thanks, Joe. And thank you for being with us, particularly today to our first quarter fiscal '04 conference call. As you know we've had quite a few developments (inaudible) and we're very excited to discuss those developments and the state of our business with you today.

First, what I would like to do is give you some color on the quarter. I would characterize this quarter from a business perspective as stable. We maintained or increased our volumes, but pricing is as strong overall as we would like. And we're still seeing quite a bit of weakness in the regional economy. And like our peers, we're still waiting for an economic turnaround.

As usual, Richard will go through the numbers for the quarter and Jim will go into operations in just a minute. However, before they do, I would like to give you an update on the continued progress that we are making in executing our strategic plans. As you know, our strategic plan is driven by three objectives, continuous improvement of the assets that we own, adding additional disposal capacity, and intensification of our franchise. We continue to make progress on our continuous improvement program. Last year, as you know, we reduced our turnover by 25 percent. Through the first quarter of this year we're on track to reduce it by an additional 19 percent.

As you know, we have announced a fair bit of activity surrounding the addition of disposal capacity in our core markets. Beginning with Templeton, Mass. and on through the news coming from McKean County, Pennsylvania and Ontario County, New York, we have been very busy executing our strategic plans for adding disposal capacity. To give you some perspective, these three projects alone account for nearly 4,000 tons of additional capacity, and represent a 70 percent increase in over the Company's existing daily disposal capacity.

It has been a few good months, and we are eager to give you some color on the significance of these successes; however, I must ask for your patience with regard to the details of McKean, Ontario, as well as our Old Towne Maine project. While we have been selected for those projects, they are in various stages of completion. As they are completed, we will discuss the details surrounding those successes. With that I will turn it over to Richard, who will take you through the numbers.

Thank you, John. For the quarter ended July 31st, 2003, although we had internal growth of 6.3 percent, revenues decreased $2.1 million to 13.9 million from 116 million, or 1.9 percent. This was largely due to the sale of export brokerage. Prior year revenues included 10.8 million related to that business, as well as the sale of Passaic and domestic brokerage on June 30th, where revenues decreased to 3.3 million for two months this year from 7.3 million last year. Those decreases were partially offset by higher revenues at both Solid Waste and FCR.

Internal growth for the quarter was comprised as follows, growth of the solid waste business, 5.1 percent; FCR brokerage price decrease, 0.1 percent, while volume was up 1.3 percent, for a total of 6.3. The core business growth breaks down as follows. Price was an 1 percent increase, while volume was a 4 percent improvement; 2 percent of which was the result of the change in business mix. Core commodities growth in price and volume was 0.1 percent for a total of 5.1 percent.

Offsetting these 6.3 percent internal growth were divestitures which had a negative impact of 11.8 percent, partially offset by the rollover effect of acquisitions, 3.6 percent, for a net of 8.2 percent. And if you deduct 6.3 from 8.2, you get the net change of 1.9.

Moving on, revenue for the quarter breaks down as follows, solid waste business, $90.2 million; FCR, 19.59; and other, 4.1, for a total of 113.9.

Moving to EBITDA. EBITDA increased 1.6 million to 25.1 million from 23.5 million. This improvement reflects the effect of FAS 143 in the amount of 1.2 million, as well as the acquisition of Hardwick, while FCR suffered from lower commodity prices. EBITDA is broken down as follows, solid waste of 22.8 million; FCR Brokerage, 2.5 million; and other, a negative 190,000, for a total of 25.1 million.

Income taxes. The effective rate decreased to 20 percent as previously indicated, due to reversal of valuation allowances. FAS 143 accounted for active retirement obligations. As previously announced, we adopted FAS 143 effective May 1. As a result, in the first quarter EBITDA increased by 1.2 million, but operating income decreased by 90,000. The cumulative effect of this change in accounting principle amounted to a $4.6 million gain before tax, and $2.7 million after-tax due to the conservative approach we have previously followed.

Net income, after preferred stock dividends, amounted to 5.4 million, or 22 cents per share, included in the cumulative effect of the change in accounting principle relating to our adoption of FAS 143, which amounted to 11 cents.

Next, balance sheet statistics. Oour total debt was 309.3 million, down slightly from year-end. Total equity, including preferred shares, was 189.4 million, giving us a total capitalization of 498.7 million, and a total debt to cap ratio of 0.62, which is largely unchanged from last quarter. The average interest rate for the quarter remained largely the same at 8.15 percent, including amortization of financing costs. While net of those expenses, it was 7.6 percent.

Subsequent to quarter end, we were able to reprice our Term B loan. At the present place on the pricing grid, we saved 50 basis points, and 25 basis points as we leave (indiscernible) with 3.75 times debt to EBITDA ratio. The market did start to harden after we had announced the repricing, so we also added a prepayment premium premium of 1 percent in your one and half a percent in year two. The other terms and conditions of the loan remain unchanged.

Total cash and cash equivalents on hand at July 31st, amounted to 5.7 million. Cash balances were down due to higher capital expenses in the quarter, as well as for working capital needs. Restricted cash was 11.6 million. So total debt less unencumbered cash was 303.6 million, up from year-end due mainly to the lower cash balance at the end of the quarter. Availability on the revolver was 142 million, after taking into account 33 million of our fees outstanding.

Capital expenditures for the quarter ended July 31st, amounted to 17.7 million. And during the last three months we closed three tuck-in acquisitions, All-Waste Services, Statewide, and B&B (ph), for a total purchase price of $6.2 million.

The average EBITDA multiple paid was 3.7 times. Free cash flow in the quarter, although it was negative, came in higher than we expected, mainly due to lower capital expenditures than we budgeted in the first quarter, which is just due to timing. Working capital was a use of funds as expected in our first quarter. Accounts receivable increased, as is normal, because of higher revenues, but DSO remain unchanged at 38 days. Net increases only partially offset by higher payables, while accrued payroll decreased.

And with that, I will turned it over to Jim.

Thanks Richard. Good morning. First, just a little bit of color on the economy. As is our normal seasonal swing, we do expect the first quarter to have a fairly robust characteristic do it. This year, frankly, I don't think that we saw that kind of seasonal robust activity that we usually expect in the first quarter. Having said that, I think we did a very good job of capturing, particularly on a volume sides, organic growth throughout our region.

On a pricing side, pricing power remains weak to historical performance. A good example of that is rolloff, where our rolloff lifts -- number of rolloff lifts to our budget was greater than our budget during the quarter. But from a net revenue per lift standpoint, they actually were off about 10 percent. So as you can, see volume is -- we had been able to attract higher volumes. And there are good volumes available in the marketplace, but the pricing attached to that volume remains weak. Although we expect, as economic activity across the nation apparently takes hold and roots, that it will begin to flow into the Northeast as well.

As you are aware, I think we have done actually this quarter a very good job, particularly positioning our haul and waste assets, and positioning that volume for the work that we're done to position them to internalize the waste through the new planned for development projects, which have recently been announced.

Quarter over quarter, the Western region is up 18 percent in revenue growth. Eastern region up 9.1 percent revenue growth. Central is up 6 percent. Although we have had good strong revenue growth, when you are not in a position to internalize that, as we have not been in the Western region prior to the developments in Ontario and McKean County, that revenue growth does not necessarily translate into EBITDA margin improvements over the previous quarter. And in fact, actually causes, on a margin analysis, to make the margins decrease, as you have to send that to third parties. However, we believe that as we bring these facilities online that not only will our internalization, but our margins will significantly improved as a result.

From an internalization standpoint for the quarter, Q1 '03 versus Q1 '04, again, we have seen some reduction in the overall internalization from about 54 percent to 52 percent. This was mostly driven by the effects which I just discussed, which is the revenue growth. Central region, we did buy AllCycle (ph) in the last year. And while we grew revenues in Central region by 6 percent, because of the volume reductions that we've instituted at North Country, we've actually seen an internalization rate in Central region reduced slightly.

The Western region internalization rate also went down. Again, this is driven by a tremendous revenue growth of 18 percent, but not the ability to internalize it until we complete these development projects. And similarly, we have seen nice nearly 10 percent revenue growth in Eastern market. That positions us very well. And as we bring Hardwick, Templeton, and some of the other facilities that will impact that market online, we believe that that we will be able to drive significantly internalization in that market.

Just one clarification, we are actually quite pleased with our cash flow performance this quarter. We were actually forecasted to be about negative $6 million cash flow. For those of you who follow our business model, you know that we do most of our Capex, a good percentage of it, early in the revenue years, so that we can get the benefit of that capital in terms of new trucks and reduced maintenance costs. And we accordingly budget in that profile.

This quarter we did a very good job of managing our free cash flow. We actually were $4 million positive to our budget plan. So while our free cash flow in the announcement indicated overall negative free cash flow, it actually was $4 million positive to plan, and as an indication of the strength of franchise, and the efforts to watch carefully the expenditures and outflow of cash.

Some of those of you who are interested in fuel surcharge programs, as we indicated in last quarter, we felt that we have done a good job of implementing a systemwide fuel surcharge program effective early in May. The effects of that have been that we have produced cost number for fuel and oil below our budget. And we think the program is going to be very successful as we now are much closer linked to the effects of international activity on fuel and oil pricing.

Landfill permitting and development, obviously a key effort, as John indicated,. As you know, strategic goal has been to develop in everyone of our region, to mimic the Central region in terms of internalization rates. And more importantly, with that capacity in each of the regions, to have it in excess of 20 years. I think that the McKean and Ontario and Old Towne assets, that we will talk a little bit about, go a very long ways towards anchoring all of our markets now to having disposable capacity with an excess of 20 years of permitable capacity. And allowing us to reach what we think it is the optimum configuration of near 80 percent internalization rates.

First, as you know, the Vermont wasteshed facility in Clinton County facility, as well as the Hyland facility, we believe has permitable capacity in excess of 20 years. We recently discussed Hardwick, and we believe that that, along with Templeton, also meets that criteria. So we're now beginning to see a system that not only has good capabilities to internalize, but that it is sustainable for the long-term.

First, with regards to Templeton, it is a twenty-year service agreement, located in Templeton, Mass. We expect it to be constructed and in operation in late this summer of '04. We are in permitting as we speak. And we will construct early spring next year, with a construction completion early summer of '04 of initial operation. It is a facility that will initially operate at 500 tons a day, but it will be permitted to 750 tons a day. And we expect to be able to bring it up to that level fairly quickly.

McKean County, which is located in the northwest corner of Pennsylvania, some might consider that a new market for us. In reality, we have actually been delivering waste to McKean County for many (indiscernible) operation and, I think, given us some ability to be perhaps more responsive, and perhaps contributed to our ability to winning that. McKean County is a twenty-year service agreement. It mirrors very closely the Clinton County successful model. It will operate and is permitted at 1,000 tons per day. Currently it is only operating about 250 tons. The Authority would like to complete the negotiations and transfer operational responsibility to us within the next 60 to 90 days. And we fully expect to be able to meet that timeline as we move forward and document the case -- document the agreement, and get the various things that have to be done to satisfy the condition proceeding.

This, as I said, is a classic Clinton County model. We see here at this landfill over 6 million yards of permitted or permitable capacity. We believe that its location, which is fairly rural, will allow us to expand it beyond the 6 million yards. And which may not be -- one of the real attributes that we believe in will be able to leverage is that it is located immediately adjacent to a rail siting, and will allow us in our system, where appropriate, to bring in rail volumes from long distances, as we bring that facility to its full capacity.

Ontario County, as you know, is located in Talladega (ph) and Geneva, New York. It is a great county. We're very pleased to have been selected there. It is the market, as you know, in the Western region where we have well over 500,000 tons of waste from our trucks. We are the logical player to be able to bring value to these landfills. And it is a market where we're currently only internalizing 35 percent. It currently operates today at 1,200 ton. It is permitted for a 2,300 per day operation. It sits on 300 acres. We believe it has in excess of 20 million yards of permitable capacity.

And again, it is a good mirror image of the Clinton County model that we have successfully demonstrated our capabilities to understand how to do a public-private partnership with the public sector side. This facility, in conjunction with McKean, will dramatically change our internalization capability in the Western market. It will allow us to access some additional acquisitions from a hauling standpoint.

We believe that the Western region is positioned for robust growth over the next few years. We caution those of you, however, that like all of these projects, until they are actually completed and signed and we have taken over operational control, we do not want to raise expectations. We have got a lot of work to do. Clearly, some competitive forces will attempt to interfere or disrupt this award, and so we need to get this done. And as soon as we do, as John said, we will come back to the market and discus it in terms of its precise impact, and give you some parameters to build into your models.

The Old Towne Maine landfill is a very important asset as well. It sits in Old Towne Maine. It was, and is, currently owned by Georgia-Pacific. It is what is called a generator owned landfill in Maine. There has been the statutory changes that were done in June by the Legislature to allow a change in that designation to a commercial landfill. As you may now, Maine currently has a prohibition on any additional commercial landfills. So this will be the first new commercial landfill in the state of Maine for well over twelve years.

It has in excess of 20 million yards of permitable capacity. The state will purchase the landfill, effectively with funds from Casella, and will be the owner of the landfill. And it will be limited, however, to receiving only waste originating within the state of Maine. We'll have an operating service contract and pay a yearly operating service fee. And that, in conjunction with other obligations that we're taking on behalf of a biomass (ph) facility, which will be built at the Georgia-Pacific Mill, will round out our operations.

We expect to contract the parties that are working very hard to have it effective by December 1. And to have permits issued contemporaneously with that date in order to allow us to take over operations from the commercial standpoint. This is an operating and constructive landfill. We do have over 500,000 tons of waste that we're currently bringing into the Pine Tree facility, which is not very far from this. So we will be able to shift some of that waste, particularly the main origin waste, into the Old Towne facility, while at same time same time, properly preserving and making the Pine Tree facility a much longer term facility from a permitable capacity standpoint than we have currently positioned.

We expect to have the new cells constructed in Old Towne by June of '04. And in that time frame for the impact of it to begin to roll through our financial statements. Again, this will give us an opportunity to significantly change our internalization opportunities. And more currently, there is a considerable amount of waste in Maine that we have not been able to really go after, because we're running Pine Tree at the 500,000 ton level, we were mindful of the capacity that we have at that facility, and we did not want to overdrive that facility. The ability to provide long-term services to Maine through this facility will allow us to service new markets within Maine. And we're very excited about what we will be able to offer to them as part of that overall program.

Moving on to solid waste in FCR recycling. Q1 versus Q1, we have seen, and as Richard indicated, we have had a margin improvement from about 10.5 percent to 13.1 percent. Over that was principally driven by the elimination of the brokerage revenue, and a fairly significant change from last year to this year in terms of commodity pricing. Commodity pricing last year was very strong. We anticipated a reduced market this year and budgeted accordingly. FCR actually performed on budget for the quarter, and did a very nice job within that frame of reference.

From a volume standpoint, tons were up, 281,000 tons versus 275,000 tons. So we got volume growth from the recycling standpoint. And was indicated, pricing per ton was actually down because of the commodities swings from about 62 or $63 a ton to $55 a ton. But our variable costs, we continue to make good progress there. Our overall costs last year were $34.96 per ton to process all of our commodities. We have reduced in the first quarter to $33.71, which is greater than a $1 a ton reduction.

And we continue to, I think, build a very good performance in our hedging activities. For the quarter we have had a net contribution from hedging of over $300,000. Just as a combination of the hedging contracts that we paid out versus the increased revenues that we are receiving, over where those contracts were placed. We believe the current hedging positions has essentially covered all of our downside risks on a go forward basis.

And we are in recycling essentially positioned for a pleasant surprise should the commodity market firm up and increase over where we are predicting it from our budget standpoint. We have seen some early indications of that. And so we may very well see a continuing firming on commodity prices as we go towards the end of the calendar year.

We have completed the integration of Goodman, Maine. And we're now positioned to offer various broad and increased penetration recycling services in Maine. And we intend to dramatically go after that opportunity, particularly in light of the commitments we have made on behalf of Old Towne to the state of Maine.

During the quarter we're renewed and extended five-year contracts in Sarasota, and also Canada and New Jersey. And we continue to believe that there will be new opportunities in the next twelve months on contracts, which we currently do not control, but which we will be able to bid. We have been successful, as you know last year we acquired the Cape May facility from a competitor. We believe that there is an additional opportunity there. The FCR business unit is contributing and working very well, and have demonstrated a real skill set within this recycling business.

With that, I will turn it over to John for his remarks.

Thanks, Jim. I am sure you can tell how excited we are about being able to talk about the execution of our strategy, particularly with regard to disposal capacity. It is, as you know, the culmination of a number of years worth of effort. And we're obviously very excited about that. I can also say that we're equally excited about all of the hard work that all of our people are doing to drive our continuous improvement program for the existing assets that we already own, particularly important, as we really strive to drive to be the best solid waste service provider.

While the disposal impact seems dramatic, it is also important to note that it will not all come at once. That it will, in fact, come over a number of quarters, as Jim said, as we're successful in negotiating those final agreements. And in some instances, such as Templeton, we will not be operational until next summer, which Jim said, which is the beginning of fiscal 2005.

Clearly, however, we are exceptionally well positioned from a disposal capacity standpoint over the long term to deliver and execute on the third objective of our strategic plan, which is identification of our franchise. While we're still waiting for a turnaround from an economic standpoint as everyone is, we're using this opportunity to drive improvement and efficiency throughout our operations, and position ourselves with additional volumes to complement the additional disposal capacity that we will add to our disposal franchise.

With that, I would like to thank you. I would like to thank you for your attention this morning, and turn it over for questions.

Thank you, Mr. Casella. (OPERATOR INSTRUCTIONS). We'll take a first question today from Mark Reider with Goldman Sachs.

Yes, hi, good morning. It looks like you're doing a very good job of accomplishing your goal of strengthening the disposal capacity. And you gave very good color on the new facilities. But I was wondering if you could talk about how you're handling the cost of these acquisitions, and how these acquisitions will affect the balance sheet? I don't how these service agreements will work, whether you're going to present value them and put them on as a capital lease. And just curious what I'm going to see as an increase in your net debt?

I think that it is really difficult for us to get into the specifics. As I indicated earlier, we will do that as those facilities are completed. But I think from a general perspective what we have say is that the predominant model that we're using is the Clinton County model. So as we're doing partnerships, we're looking at doing the partnership model on a lease basis on a go forward. And depending upon the specifics in terms of the details of those contracts, it will obviously impact how those facilities will be positioned on the balance sheet. So it is a bit premature, but we can say that clearly we're using the Clinton County model, which is the lease model for the partnerships.

And I would add a couple of other pieces of color. You know while we're not going to give you yet the information to put in your model, because John said the actual negotiations were not completed, we're very comfortable on two facts. And that is that we have bought these facilities, or acquired these operating services contracts, within a 6 to 7 times cash flow purchase price, which we think is stolid and a good indicator of business discipline.

And second of all, on each of these facilities they were, particularly in the McKean in Ontario, they were deeply competitive, and the offerings by all the vendors were very closely boxed, if you will. So we think that we've done a good job. And we bought these, and when we have them finalized, we will provide you the information to look at and make some of those model determinations that you talked about.

And where do these recent acquisitions put you on track with the 80 percent internalization target that you were talking about? And maybe you could also talk about plans for acquiring additional disposal capacity, and how much more landfill capacity you might be looking for in tons per day?

Well, I think those are two separate questions. We believe that these facilities will allow us to drive toward our Central region model, which is 80 percent. We have a lot of waste on our trucks in some of these regions, and we think that we're going to be able to take advantage of the permanent capacity that they are permitted for versus what they are operating at today. And where they don't, and where we don't have that capacity on our trucks, and we are beginning to focus on acquisitions that will allow us to do that. So the good news is we going to continue to harness the vertical integration power of these landfills over the next twelve to eighteen months.

With regard to other landfills, we're actively working, as we have been saying, that it is and remains our strategic focus. We have a portfolio of opportunities, which we're clearly not going to discuss, but there are a number of opportunities. And we believe that we are going to continue to be able to materialize and bring into the franchise, where appropriate, facilities which will continue to strengthen and intensify our operations.

I think that it is also fair to say too that historically what we have set is that the model that we will drive ourselves towards is the Central region model. But I think that it is likely that we will not be able to drive the other two regions to the level of maturity that we find ourselves in in the Central region. So while the model is the 80 percent internalization we have in the Central region, it is not likely that we will get it to that high a level of internalization.

The capital spending, just a quick question. I know you said you were below budget, but it was up 56.5 percent from a year ago. So I am just wondering how that affects your full year '04 target as far as some of these acquisitions and the build out you don't have to do there, do you expect to up lift targets for Capex this year?

No, we don't. We're still within the guidelines. As Jim mentioned earlier, by acquiring some of these vehicles earlier you get the benefits of productivity and lower maintenance early in the fiscal year. And that is basically what we have done. It is essentially just a timing difference.

Okay. Thank you very much.

We'll take our next question from Bill Fisher with Raymond James.

Good morning. You answered most of the landfill questions I had. Just had a couple of minor things on the quarter. On the domestic brokerage business I think, Richard, you mentioned 3.3 million in revenue. Did it have any EBITDA contribution in the quarter?

The EBITDA (indiscernible) to about 145,000. We had some accruals there which we reversed, which led to that being profitable for the quarter.

Okay. And then just on GreenFiber, could you update us on any of the outlook in terms of the net income there for the year, or what are the positives and negatives facing you there?

Sure. Well, first of all, US GreenFiber remains cash flow positive and was, I think, at $1.2 million dollars cash flow positive in the quarter. It, as I have said in the past, has three principal channels it sells in to, manufactured homes, contractors and retail. Both retail and contractor channels were up. Retail was up 7 percent. Contractor was up 4 percent. However, manufactured homes, for those of you following that industry, has been in a fairly long three-year, very low economic activity, or decrease in economic activity.

We were personally very pleased to see the Berkshire completed, the Clayton acquisition. Clayton is one of the premier manufactured homes and housing businesses in North America. And we believe that Warren Buffett must see very good opportunities in manufactured homes. We believe that market will continue to have an opportunity to do better, but we cannot predict at this time when it will turn around. As a result, we have taken a decision to -- and we did this well over a year and a half ago -- to position US GreenFiber to do, and to grow its business much more dramatically in the construction and retail business.

As I mentioned last quarter, we just conducted an agreement with Rose (ph) under a hitch and haul program that we developed with them that we will roll out this fall. We're actually seeing a growth in our retail business, of both the Home Depot and Lowe's. And more importantly, this summer we completed in July, fully completed, the ability to blow into the walls, which we have not been able to do at cost below fiberglass. This is the patent technology that we have developed. We are rolling it out this fall in December. And we're hopeful that it will give us the ability to significantly impact the wall market that we haven't been into in the past.

Okay. Did you incur some -- is there some SG&A or costs for that that hit you this year or last that (inaudible) ease up?

We have been funding both of these patented technologies, both the CPM and the fusion program, well over the last year and a half. It has added significantly to the SG&A cost, and we're expensing that obviously. But we have had great success from a technology standpoint. We are very pleased with the developments. They will begin to have a market impact early in calendar year '04.

Okay, thanks.

We'll move on to Brad Coleman with Deutsche Bank.

Hi, it's actually R.J. Hodivy (ph) standing in for Brad here. Good morning. First question, just a little bit of housekeeping. Could you update me on the revenue mix for the quarter?

I gave that earlier, but I will repeat it, sure. Core business was 90.2 million; FCR, 19.5; and other, 4.1.

Thanks. Next question, is there any update in terms of Hardwick in terms of your plan to expand the daily capacity there? I know you talked about trying to get it up to about 750, is there any update on that?

Well, we are actively in the permitting process both with the town and with the state to increase the capacity to 750 tons, and to convert its MSW. We expect to have that accomplished within this fiscal year.

Okay. Most of my landfill disposal capacity questions have been answered, but is there any update on NCES on the appeal process there?

Yes, there is, I guess. The Supreme Court accepted our appeal, and our initial brief was filed in August. They accepted it about 45 days after we made the appeal, which is a fairly rapid action on their part. And they established a schedule, which is certainly very accelerated, so that all the parties will have their briefs filed, and oral arguments will be completed by October. We expect, therefore, that the Supreme Court will move and resolve this within the next four or five months after October.

The other, I think, material issue, although there is certainly no guarantees, is that in July the Supreme Court did issue a COBRA case which dealt with preemption. We think it is a case that mirrors very, very closely the principles which we have been advocating, and certainly gave us comfort that we were rolling in the right direction relative to the wisdom of the Supreme Court. But as always, the Supreme Court will do what it thinks is right, and at that time we'll see the results. But we don't expect those to be available and February, I would think.

We are working to develop additional permitable capacity on the 51 acres within the framework of the original Judge Brewings' (ph) decision, which has been appealed. And we think we are going to be allowed about 150,000 tons of capacity, which is about a year. So we will have well in excess of, when we expect the decision from the Supreme Court, of capacity continue to operate. We have stepped it down somewhat from its normal acceptance rate of about 140,000 tons to about 115, being mindful of that capacity.

And that has, as I mentioned in the internalization discussion, continues to year-over-year cause the Central region to be a little bit off from their internalization goals that they had established the year before, and precluded us from internalizing the All-Waste acquisition waste. The good news is, in the long term All-Waste is actually from a physical location very close to Templeton. And so regardless of what happens, we are going to be able to shortly to internalize that waste.

Thank you. That's it for me.

We'll take our next question from Corey Greendale with First Analysis.

Good morning. I wanted to ask you for a little bit more color on the very nice volume results in the quarter, especially the comments you made about the mix hange, a little more detail there. Whether there was any effect of weather there, and whether you think this kind of level is sustainable?

Well, I don't think any of us here -- we did get up every morning and try to do the best we can. We don't get too far out about bragging. I think that this quarter we did a nice job of acquiring additional revenue. Some of that was in anticipation of opportunities that we could match with the disposal capacity that we were expecting to bring on. Some of that was, frankly, a change in business mix, quarter over quarter, Q1 '03 over Q1 '04.

We do think that we will continue to see strong volume growth. As we land these landfills, we will be able to obviously attract and go after additional opportunities. But you know we're not here just to forecast what that is over the next 12 months.

Okay. And would you say there was any instance of weather on volume?

Weather certainly has not been a factor in Q1, from our judgment. But the normal seasonal robustness of the quarter that we historically see kind of the May, June, July, I think it was -- the general comment was somewhat tempered over the strengths that many of the May, June, July period has coming out of the winter. So they are probably more tied to the economy than anything, but you know clearly --

There might have been somewhat of an impact, although it would have been fairly slight in terms of the weather, because it was a fairly wet May, June and July from a weather perspective. Maybe a slight impact, but not particularly significant. I think as Jim said, more economically driven as opposed to weather. Some impact there though.

I wondered if you could provide a little more detail on the fuel surcharge program? Just sort of what percentage of customers that that is going to? What kind of customers it is going to?

I don't think we would probably give you our inner workings of our fuel surcharge program, because that is competitive information, But the whole aim of the program is to link the market and the risk of fuel surcharges charges, or fuel pricing increases, so that the customers are only carrying the actual impact that happened in the marketplace. We have done that in conjunction with hedging. You know the revenue from the fuel surcharge was about $200,000 for the quarter. And annualized, that is about about probably $800,000, but is only 1 percent of the total annual bid (ph) estimate that we have for the year.

So the fuel surcharge is another one of those tools. Add all these tools together and you have a healthy business. But you build these tools, hedging, fuel surcharges, performance deliverables, and performance management techniques in order to continue to drive the overall business mix. Try to be a low-cost provider service, but for factors which you cannot control, make sure that those are not causing an adverse impact to you with the customers and competitors.

Great. Thank you very much.

Michael Hoffman with Friedman Billings Ramsey has our next question.

Hi. Good morning, gentlemen. Can I follow up on the tax rate, expected to be the 20 percent for the remainder of this year. That's accurate, right?

That's correct.

And then what are your thoughts about subsequent follow on years?

This year is an aberration due to the accounting for the evaluation allowances. And in future years our present expectation is that the rate will revert to a normal 42, 45 percent range.

Okay. And that is both on a book as well as cash basis? So the cash taxes will rise again as well?

No, that is on a book basis. I was talking about the accounting. The cash taxes are likely to be minimal for the next three years or so. We'll have to utilize the benefit of our losses.

Okay. And then on the interest expense as we look forward to the second, third and fourth quarters, what are your thoughts about what your interest expense will be?

Well obviously, that depends on the assumptions you wish to make around acquisitions. But essentially, barring the acquisition program, it will just tick down to 50 basis points, as I indicated early on in the call.

So it is about 7.9 percent. It wasn't clear the percentage rate that you said when you said it.

For the quarter it is 8.15 percent for the quarter, which includes the amortization of our financing charges, which is approximately half a percent. So that will be 7.6 percent net of those charges. They are non-cash charges, which is why I differentiate those.

Right. And so we're looking at the 7 6 for the second, third and fourth quarter then?

That's correct.

And then with regards to working capital, do you think you are net user again in the second quarter? And then that reverses, and you should be flat on the year, or will you be a net user regardless?

I would hope that by the year-end it would revert as it did last year. That has been our seasonality in terms of the working capital swings.

Okay. So you expect to be sort of flat, not a user, overall for the whole year?

That's correct.

Thanks. And then on the landfill side, Jim, thank you for all of your update. If I got my notes right, you gave us the date in Old Towne as sort of December 1st. Effectively the date in McKean is sort of December 1st, January 1st, depending on the 60, 90 day. Can you give us a sense of when the first permits have to come at Templeton in order to meet your summer '04 goals?

We would want to have the permits for the first cell issued by March of '04 or April, and then be in a position to start construction of the subservice liner. We expect to be able to actually do some excavation this winter under a land mining permit that will be issued by the towns. So we will be able to actually kind of get the site organized and the profiles developed, some sand and gravel material that will be either stockpiled or sold to the market. And then when the actual permit is issued, we will go immediately to construction of that cell.

And isn't the permit is a multistage issue, right? You don't have to get a design permit from the DET, and then they give you a construction permit, and then you get an operating permit?

Effectively, that is generally the process that it we're in, yes.

So when do you think you get the design permit?

We would expect to get the design permit in March.

So it would be all of these sort of coincident then?

And then we would construct, and we would believe we would have construction done by say July or August. And then we would get an operating permit immediately thereafter and be in operations, as I said, late summer of '04.

Alright. So we shouldn't expect any sort of news out of the state before March then?

Well, we're working feverishly to have that happen earlier, but states move on their own appropriate timescale. And it would be inappropriate to try to forecast what has been the kind of historical timelines that they generally operate against.

Right. And then Hardwick, you talked about it having permit modification in the fiscal year, did you mean that your fiscal year or by December '03?

I said that we believe that we would have it within our fiscal year, so that would be April of '04.

I just wanted to clarify when you used the word "fiscal" year. And when do you think the Ontario County transfer occurs, so that you are in a position for something to happen there?

Well, the RFP specified that the county would transfer it upon receipt of permit that they expected to get in December. So one of the conditions preceding is the issuance of that permit, which is expected in December or January. So I guess that would be the initial timeline. There are an opportunity, we have offered to do an early start, a private issue of that permit. But these are all subject to -- I urge you to consider the they are all subject to first Ontario County completing the bid award to us, and negotiation of the terms of that bid award, and then us actually making the contract effective. And so we're just really trying to be careful in terms of raising expectations both in terms of timing and the effectiveness of that contract.

If all of those things happened in the context of what RFP, when is the first day that you could what your tonnage into that site?

We would probably expect that we would be able to begin to internalize our waste into that in January.

Okay. And then if we had a winter like we did last winter, how does that throw off any of these construction opportunities you have just described?

Living up here, we anticipate winters like we had last winter. So both as a matter of practicality and as a matter of being realistic, we don't schedule landfill construction during the winter. We try to accomplish things that we think we can do. One of them is to do site excavation work, which you all know in the wintertime actually, contractors can move dig fairly efficiently, because their business model is at the seasonally low market point. But just moving raw dirt, even though it is frozen, they can do that pretty easily and pretty cost effectively. So we try to schedule those activities in the December to March timeframe, where there is a lot about work to be done. And then the more weather sensitive line of work in subsoil has to wait for good weather, and generally that does roll in by April and May. So our construction activities scheduled for Ontario is to be in a position to start the subsoil and liner activity late April or early May, which generally speaking, takes it out of the weather sensitivity issue, unless you get an awful lot of rain.

And so, Richard, on the Capex side it is 43 to 46 million, I think is the target. And just based on what Jim has talked about is timing of things, that is why we shouldn't be expecting an increased level of capital spending this year, because it's going to straddle the two fiscal year's?

That's correct.

Thank you very much.

A fair characterization.

That is all the time we have for questions today. I will turn the conference over to Mr. John Casella for any additional or closing remarks.

Thank you. I think you can tell the excitement that we have in terms of being able to really talk about the execution of our three to five year plan, particularly as it relates to the disposal capacity. And again, equally important, is the effort of all of our people to drive the continuous improvement of the assets that we already own. It is the combination of that strategic plan in terms of the three objectives that we set out to do, that really will create the value over the long term.

And while we're still waiting, as we have said before, for a turnaround from an economic standpoint, we're certainly using that opportunity, the opportunity that we have right now, to really drive improvements and efficiency throughout our operations, as we're positioning ourselves with additional volumes to complement the additional disposal capacity that we will add to the franchise.

Again, I would like to thank you all for your attention, particularly this morning. And we certainly look forward to talking with all of you in early December when we release our second quarter '04 numbers. Thank you again.

And that concludes today's conference call. We thank you for your participation. And have a nice day.