Casella Waste Systems Inc (CWST) 2004 Q3 法說會逐字稿

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

Thank you for joining us this morning and welcome. We're joined today by John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Jim Bohlig, our President and Chief Operating Officer; and Richard Norris, Senior Vice President and Chief Financial Officer.

Today, we'll be discussing our fiscal year 2004 third quarter results. Those results were released yesterday afternoon. Along with a review of our financial performance, we'll update you briefly on the Company's activities and our business environment and answer your questions as well.

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 today.

Take a deep breath. Also during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principals. A 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 and is available in the investor section of our website, www.casella.com/investor.

With that, I'll turn it over to John Casella who will begin today's discussion. John?

Thanks, Joe. Again, welcome, everyone to our third quarter fiscal '04 call. As you can see, the business continues to make steady progress. We continue to execute against a strategy that we had laid out with regard to adding disposal capacity and that strategy continues, as I said, to make very steady progress. I also look forward to giving you an update on all of the projects as we go through the conference call and also give you a sense of the state of the business as of this quarter.

Once again, characterize this quarter from a business perspective as stable and I think we're seeing stirrings of a recovery, a modest improvement in volumes and, again, I think that from our perspective, just modest improvement, but certainly stirrings of recovery. As you know, from the release, revenues for the quarter was $104.6 million. EBITDA was $22 million, operating income was $7.4 million and EPS was 3 cents.

As I said, volumes are beginning to pick up, but I think we are still cautious until we see more signs of the economy improving in a permanent way. I think the way that we will gauge this will be how we come out of this winter season and approach really the spring construction and seasonal tourism pickup that we normally see in the first and second quarters of our fiscal years.

Another issue that is very positive is that commodity prices are up. They continue to remain higher this quarter, but one of the things that we do need to point out is that, as you know from our previous discussions, we have hedged our commodity risk against our budget, so fundamentally, we've given away a portion of that upside to protect our downside and bring stability to our recycling component. I think that program has worked extremely well and served us very well, but certainly as commodity prices go up, we have really given away a portion of that upside to protect the downside.

Another issue that is also somewhat dampening in terms of this particular quarter was, across the entire northeast we had a very cold January and as an example to the impact of that across the northeast, skier visits across the northeast are down about 16-18%. So somewhat of a dampening factor within this existing quarter.

Richard will as usual, give you a more detailed picture of the numbers in just a minute, but before he does, I'd like to give you a little bit of an update on some of the development things that transpired during the quarter. As you know, we began operating the Ontario County facility in mid-December. When we took over the facility, it was operating at about 1,200 ton a day. Today we're at about 1,500 ton a day. The South Bridge, Massachusetts processing facility as well as the residual landfill started operation in February as well. And our permitting efforts to reposition the facility are also moving ahead very nicely.

We did close on the Old Town main landfill transaction and have seen the draft permit issued by the agency as well. Our negotiations in McKean County, Pennsylvania continue to move forward with the authority there. An issue that did come up through the course of the quarter, which has delayed the negotiations a bit, has been the effort and the discussion by the governor of Pennsylvania to add an additional $5 tax. So that has somewhat delayed the negotiations and that is a dynamic that both parties need to completely understand relative to the transaction, but nonetheless, those negotiations are ongoing and continue to move forward very nicely.

I will also give you an update on the Templeton and North Country decision, and Jim, as usual, will go through some of the operating metrics and highlights for the quarter as well.

With that, I'll turn it over to Richard who will take you through some details with regard to the numbers for the quarter.

Thank you, John. Good morning, everybody. For the quarter ended January 31st, revenue increased $8.8 million to $104.6 million from $95.8 million, or 9.1%. Prior-year revenues include $3.6 million related to the domestic brokerage business.

Internal growth for the quarter of 5.8% was comprised as follows: Solid waste business breakdown is price 0.9%, volume, 1.5%; core commodity 0.5% for a total of solid waste of 2.9%. FCR's price increases were 0.9% and volume was up 2% for total internal growth of 5.8%. Adding to this was the rollover effect of acquisitions, 7.5% and partially offset by the divestitures of 4.2% for a net change of 9.1%. Revenue for the quarter breaks down as follows: Solid waste, $81.5 million; FCR, $19 million, and other, $4.1 million for a total of $104.6.

Moving on to EBITDA, EBITDA increased $1.9 million to $22 million from $20.1 million, and it's broken down as follows: Solid waste, $18.7 million; FCR, $3.5 million; and other, a negative $211,000, for a total of $22.021 million. After backing out the effect of FAS 143, which amounted to $1.3 million in the quarter, solid waste EBITDA was up about $1.1 million year over year. This was due to the impact of tuck-in holding acquisitions, as well as earnings from the Hardwick in Ontario landfills.

But you should also be aware that our solid waste operations were adversely impacted by the severe weather in January that John mentioned. We had three weeks of very low temperatures. Our best estimate is that operating costs, mostly fuel and labor, were up year over year by approximately $400,000. FCR benefited from higher prices and volumes. Partially offset by expenditures and R&D amounting to $440,000. FCR's volumes were also adversely impacted by weather due to shipments not being made and turns not being received to approximately $100,000 impact on the EBITDA line. SG&A increased year over year by approximately 900,000. The key factors were legal expenses of $550,000, travel of $200,000, and bad debt of $150,000.

Moving on to depreciation and amortization, this expense was up $3 million year over year, while depreciation was up $600,000, most of the increase arose from landfill amortization, including the FAS 143 of $1.3 million mentioned previously, but also from the addition of the Hardwick and Ontario landfills and from higher volumes from our closure projects at Brockton.

In the quarter, U.S. GreenFiber reported operating income of $2.3 million and we recorded our 50% share. Cash flow from operations amounted to a negative $100,000 in the quarter and having back networking capping changes of some $1.4 million, U.S. GreenFiber reported EBITDA of $3.6 million for our third quarter.

Income taxes, the tax rate from the quarters came in at just below 44% consistent with the guidance provided last quarter. Net income after preferred stock dividends amounted to $672,000 or 3 cents per share. Our balance sheets and some other statistics, our total debt was $336.1 million, which is up $27.5 million from last quarter, mainly due to the landfill acquisitions. Our total equity was $200 million, giving a total capitalization, including preferred shares, of $536 million. Total debt to cap as of January 31st was therefore at 0.63, which is up slightly from last quarter when it was 0.61.

The average interest rate for the quarter moved down to 7.61% including amortization of financing costs. Net of these expenses, it was 7.08%. Total cash and cash equivalents on hand at January 31st amounted to $9.3 million and restricted cash was $12.4 million, so total debt that's unencumbered cash was $326.8 million up from last quarter, again, mainly due to the higher borrowings at the end of the quarter. Availability on the revolver was $117 million after taking into account $30 million of LCs [ph] outstanding.

Capital expenditures for the quarter amounted to $8.8 million. We closed three small holding [ph] acquisitions during the quarter, the total purchase price was $2.3 million for an EBITDA multiple of 3.1 times. I expect you'll also be aware that we completed a $45 million add-on to our high yield issue on February the 2nd. Gross proceeds were just over $51 million. And we used it to cover the cost of the transaction and pay down the revolver.

Yield to [inaudible] was 6.9%, but we should be accounting for the transaction using the effective interest rate method. Which will result in an effective interest rate of 7.65% on that charge of the high yield issue. The impact on Q4 will be to increase interest expense by approximately $500,000. At March 9th after doing the transaction, the availability increased to $130 million, after $45 million of L C's expanding.

With that, I'll pass it over to Jim.

Thank you. Thank God your voice stood the test. Thank you. Good morning. Just a little bit of color again on some of the points that Richard made. As he indicated, revenue was up to our budget and most of our cost items are actually, as a percentage of revenue, tracked that fairly well, although they tracked that as a percentage of revenue in a very improving fashion so that while revenues are up, some of the cost factors are up slightly less. So on the year over year basis, we did have a relatively flat net revenue profile, and I think this continues to support our experiences that we have had relative to pricing power in the marketplace and the effects of weather.

Touching on some of the weather issues, overtime was $480,000 over our budgeted items and we also had a maintenance item of about $500,000, so these are both items tied to winter conditions and adversely effected what was a very solid performance and could have been even better.

One other item we wanted to mention was that since we've bought the Maine Energy of, or did the merger of KTI, the Maine Energy facility has each year has given us challenges relative to tube leaks and this year was a continuation of that. And we, in the quarter, had to shut down for a short period of time to replace a heater bank and that added an additional $600,000 of impact to the quarter that we did not expect.

From an internalization standpoint, first, landfill volumes are up generally, modestly across the system consistent with John's comments with regards to the economy. As we look into the Western region, because of the Ontario County landfill introduction, which was 1,200 tons, mostly third-party tons, not much of our tons, our internalization rate there was at 30.8%, which is a slight reduction from last quarter, which was 32%. Central region remains very strong at 80% and the eastern has improved from 50.6% to 52.7%. So our overall internalization rate is reported this quarter at 52.6%.

The Western region, with the advent of the Ontario landfill, gave us an opportunity to really kind of go out and look for waste. We think that market is going to be very robust this spring. We think volumes in pricing, particularly long range haul waste coming out of New York City as a result of some of the points that John made with regards to Pennsylvania, pricing and some of the other issues will be robust, but currently available waste and pricing in the Western region is soft for the quarter.

Central region, principally was where most of our weather impacts occurred and weather-related ski impacts and then the Eastern region we're beginning to see the emergence of an economic recovery that John touched on. Our maintenance Capex was 8.8, which is slightly above what we had budgeted. We had reported last quarter that we intended to spend money for Capex in the third and fourth quarter comparable to the result of adding these landfills and so we would expect that Capex will be up in the fourth quarter as well within our budget.

A little bit on the litigation summary, three major topics to cover, Maine Energy, North Country and New Heights. First Maine Energy, as you may recall, we have had, since we did the merger with KTI, a long-running residual cancellation settlement, litigation, with the communities that had signed long-term contracts with Maine Energy. During the quarter, we were successful in entering a settlement agreement with 13 of the towns, and that settlement agreement is a substantially good agreement.

It's a win-win agreement for all parties. It allows the communities to enter long-term disposal contracts with us for as long as 20 years past the completion of the current contract, which is 2007. It gives them a portion of the residual cancellation payment early. There has been a separate press release on that, and these towns have taken the settlement to their annual meeting and in some cases have already approved them and we expect each of the 13 towns to approve it, which will be done by June. That leaves only Stockholm, Bideford [ph], which I have chosen to stay outside of those negotiations.

We are hopeful that we can continue to work with them and accomplish a similar type settlement reflecting what we appreciate to be the host community nature of both Stockholm and Bideford and we would and we would hope that, were the parties able to proceed on good faith, that we will have this entire issue settled by early summer consistent, certainly, with the reserves that have been created to cover this.

Moving on to North Country, as you know, in the early part of March, we received a final decision on the Supreme Court of New Hampshire with regard to the North Country environmental services facility of Bethlehem. The decision was actually on-- if you call short-term being four or five years, a really terrific decision. It finally settled that the town had no right to interfere with our development of landfill capacity within the existing 51 acres of the landfill. We own about 105 acres at the property and so the existing permit, which covers the 51 acres is from this point forward free to be fully developed as it has been proposed with the New Hampshire DEP.

This will provide us approximately three to five years of capacity from this date forward. As you may recall, we had been basically advising the markets that we probably had permit capacity until middle or end of '05. So this is a three-year extension off of that and it's good for the Company. Long-term, we had hoped that the litigation would also allow us to finally resolve expansion beyond the 51 acres.

Unfortunately, the Court has remanded that part of the decision back to a lower court and there are two major open issues that need to be addressed by that lower court having to do with zoning and a right of the community to contravene the general welfare of other communities. Those issues will be litigated in the lower court and no doubt will come back to Supreme Court for a determination. I wouldn't expect that determination within probably about 12 months.

Finally, New Heights, we did put out a press release. As part of our press release, that there was a decision rendered there on Tuesday. We had been a 50/50 joint venture. This is a project left over from the KTI days, and certainly are pre of our merger of KTI, that we are partners with another entity in a tire burning plant. The plant had received a retail rate and the retail rate had been challenged by the local utility and this decision disavows the ability to use that retail rate. So we're in a situation now where we have to kind of work through our partnership, figure out what is the right next steps and as we do that over the next month or two, we will give you a clear indication of the impact of that to our business.

Going to landfill, a little bit of status report, a little bit further from what John had said. Ontario landfill, we assumed operation on the 10th of December. We have driven the facility from 1,200 tons per day to 1,500 tons per day. We're about seven weeks into operation. As I indicated, it is mid winter and so we've not been able to drive it past 1,500 tons per day, but we do expect to be able to reach permitted capacity, which is 2,000 tons by early summer. We have a permit mod in that we expect to have coming in April, May, that would allow us to expand additionally and also raise the capacity and we feel very good about the relationship that we have begun to build with the community and we think we have done a terrific job relative to how the landfill was operated in the past and we have received very strong encouragement from the community with regards to that.

South Bridge, closed the transaction the end of November, fully completed a consent order with the State of Massachusetts and the DEP, settling all of the previous litigation issues and establishing a very rigid timetable for remediation associated both the recycling facility and the landfill. We have received authorization to operate the new cell in the landfill and we are actively landfilling a fluff layer in that fill today that began, as John indicated, early in February.

Late in January, we restarted the C&D processing facility and are running at about 500 tons per day. The current permit is for 750 tons and the permit will go to 1,000 tons come May, which is consistent with the spring economic activity on C&D and Boston marketplace. Finally, from a permitting standpoint, this facility has great opportunity for the Company, but it will require a significant change to the working relationship with the town on both how the facility is positioned relative to access, other issues like power lines and better utilization of both the processing facility and the landfill. We have begun discussions with the town with regards to repositioning this facility and we look forward to working with the town of south bridge to make this the facility which they had always wanted it to be.

Moving on to West Old Town, transaction was closed and funded in February. The draft permit was issued 15th of February. Some of you may have seen that Commissioner Gallagher is also on a press release this week announced that she will close the comment [ph] period on the 26th of March and issue the final permit on the 9th of April. There are legislative hearings going on with regards to the project, but we do expect a final permit in April.

I do expect that there may very well be appeal from the opposition group and so we will have to work through that with exactly when that appeal gets finalized, but this is now a state-owned landfill. It's now owned by the state planning office. This is an existing landfill that's been operating previously permitted for five or six years. It's clearly the best site in the state of Maine from an environmental standpoint, and so we are very positive that eventually we will work through the regulatory structure, finish the permitting, any appeal and be in a position to start operating this and constructing the new cells early summer of '04 and have it in full operation by the end of '04.

McKean, I think John did a great job summarizing quickly, so I won't go much into that. We continue to work with McKean and believe that there is a good partnership there, but it's certainly very slow developing one and I think it's reflective of the issues both market and political issues in Western Pennsylvania. Hardwick, we were successful in this quarter to get DEP permission to convert it to an MSW landfill. We are in the process of doing that and we are continuing to work with the town with regards to expansion of the footprint and other issues that are open issues with the town of Hardwick.

Finally, Templeton, we think is a very effective and binding contract. There is an underlying landfill there that requires remediation. We think with the benefits that have been created for the town negotiated with the Board of Health are very sound, but obviously we'll have to go back and work within the political structure to see if we can redevelop the momentum and confidence that you require in a landfill as you develop essentially a GreenField facility.

Moving out of solid waste, FCR had a significant performance over budget, $1.14 million is a bit over budget, the number was about $3.6 million. And this was really driven by three or four items. First, price commodities are up substantially $68 per ton versus 56 and that results in about a $500,000 increase. Buying was up 290,000 tons versus 276,000 tons and we have had a nice continued cost reduction on a dollar per ton basis, which produced another $200,000 in the quarter.

Hedging, which is the tool we've used to manage our budgets, we are now in the cycle to try and position those for the next downside, so we're grabbing and moving up in our positions on that as the market goes up so that as the market goes down, we protect our downside, and as John indicated, that whole strategy has us not taking the upside on the commodity pricing, but rather positions us for the downside.

Moving out of FCR, U.S. GreenFiber year over year sales are up 21%. EBITDA is up 50% over a year ago. We have had a surge in residential construction and robust retail selling and Home Depot and Lowe's. That has been counteracted again by a continued depression in manufactured housing industry. That industry is down now to about 130,000 units per year and just three and a half years ago it was producing 300,000 units, so significant depression in manufactured housing.

We are modestly encouraged by Berkshire Hathaway's purchase of Clayton and the impact that will have. Richard, I think gave you the revenues, 34.8, $3.6 million on a pretax of $2.4 million. And we have begun our Fusion technology rollout with test markets, particularly in the Southwest with five contractors and we expect to be in a position to commercialize this technology. Fusion technology will give us for the first time a cost effective way to move into the walls in addition to the attics and, as you know, that's where the major insulation market in North America is, is in the walls. So we expect, if successful on this, to both demonstrate its cost effectiveness and its applicability to fiberglass to be able to access significantly brighter and larger market.

Finally, paper prices, which are great in FCR, are adverse for U.S. GreenFiber, so we have had to experience continued runup in paper pricing of used GreenFiber, which is adverse. We have put in pricing increases, substantial pricing increases to deal with that. Fortunately, natural gas prices are up and fiberglass prices have been moving up nicely as well, so our pricing initiatives have been well accepted.

With that, I'll turn it back to John.

I guess at this point in time, we would like to open it up for questions.

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speaker phone, please make sure your mute button is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and will take as many questions as time permits. Once again, that's star one on your touch-tone telephone to ask a question or make a comment. Also, if you find your question has been answered, you may remove yourself from the queue by pressing the pound key. We'll pause for a moment to assemble our roster. Our first question will come from Brad Coltman with Deutsche Bank.

Yeah, good morning.

Good morning, Brad.

I was wondering if you could just provide the revenue and EBITDA contribution during the quarter from South Bridge and Ontario.

Currently, Brad, we don't have the contribution from those from the quarter. The South Bridge, really the operations there started up in February, so there really wasn't any real contribution from South Bridge at all during the quarter.

Yeah, okay.

And there would certainly be a contribution, although fairly insignificant from Ontario for the quarter as well.

Okay. How about just change gears, for SG&A expenses that were up in the quarter, you mentioned three reasons, legal, travel and bad debt. Should we view that as that will continue into the fourth quarter, or is that more kind of one time associated with some of these opportunities?

I think SG&A will probably continue relatively flat into the fourth quarter, although hopefully some of those legal expenses will decrease as we move forward, one of those disputes that we incurred legal expenses on has been settled subsequently.

I think it's likely, too, Brad, that travel should begin to -- I think that we had an awful lot of activity over the last quarter with regard to the development activities from a disposal perspective that should, I think move back down over time, over the next quarter.

Over the next quarter, okay.

Yeah.

And then just last question, Richard, I think you mentioned interest expense would be up roughly $500,000. Is that sequentially or year-over-year

Quarter-over-quarter.

Third quarter to fourth quarter?

Sequentially, yes.

Okay. Thank you.

You're welcome.

Moving on, our next question comes from Amanda with J.P. Morgan.

Good morning.

Good morning, Amanda.

How about a little bit of outlook on your Capex for the fourth quarter, what are you expecting at this point?

I think we gave an update last quarter where we indicated a range, we changed our guidance from 44 to 46 to more like 56 to 60.

Right.

I don't think at this point we see a change in that, although --

For the year, you mean?

For the year, yeah.

Okay.

It's not for the quarter.

Okay.

We would probably be within that range.

Okay. I guess, and that's before acquisitions, right?

That's just for Capex, correct, yeah.

Okay. So it just looks like maybe it's a little more back-ended in terms of the spending than we thought?

That's correct.

Is that just on equipment orders or weather related?

We had announced last quarter, Amanda that it was $12-14 million of additional Capex, most of which was related to the disposal facilities that we've executed on.

South Bridge and Ontario.

Right.

Right.

For example, we've start add large excavation project at Ontario to move a million yards of dirt, which is the necessary requirement to get the cell constructed this summer, and obviously those were things not contemplated in the original budget put together a year ago.

Right. Okay. And then related to that probably, depreciation and amortization looks like it's running a little higher than we had thought and I just wanted some clarity. Are the operating lease contracts that you signed for the landfills, are those running through EBITDA or are you capitalizing those leases? Because I see it showing up in a couple places. So is that what's pushing your depreciation and amortization up, or is that also just because Capex is up?

It's a function of two things. It's D&A is up, as I mentioned earlier, probably obviously from the FAS 143 effect, depreciation year over year is up $600,000, but also from the addition of Hardwick and the piece from Ontario, that was in our numbers for about seven weeks and also from higher values at Brockton. As far as the leases are concerned, as you know, they're being treated as basically prepaid rent and we're amortizing those payments over the life of the lease on a per ton basis. So we disclosed separately in the cash flow numbers the impact in the quarter of that amount, which was 332, I believe, and that amount goes through cost of operations and not through D&A.

Okay. But then also in your cash flow, you had payments under landfill operating lease contracts of a little over $4 million for the nine months.

Well, yes, but that was actually in the third quarter, but yes, you're correct.

Okay. So is that going to be a good quarterly run rate on a cash basis? [inaudible]

No, that will vary as we make the payments. There are still some outstanding up front payments to be made in Ontario and the lease payments all have different timing, so they will be kind of lumpy from quarter to quarter.

Okay. Okay. Thank you.

Bill Fisher with Raymond James has our next question.

Good morning. Just had a couple questions, following up on some of the numbers Richard gave. You mentioned 400 some thousand of costs R&D costs at FCR. Was that up year over year and was that a number that kind of should keep at that level

Yes, year over year, there was an increase. There was none last year and it will continue to run at approximately that rate for the next couple of quarters.

Couple quarters, okay. And then, maybe this is for Jim. The maintenance costs, that was half a million, was that up half a million dollars?

Yes. The unanticipated, unbudgeted maintenance expense for the quarter was about $500,000 over what we had budgeted.

Did that relate to Maine Energy or was that just cold weather and whatnot?

No, we think that's a non-Maine Energy number. That's a solid waste infrastructure, mostly hauling vehicles, transportation vehicles.

Gotcha. And then Maine Energy, that $600,000, that was more just a lost non-EBITDA from not having a facility?

Yes.

And one last thing. Maybe for John and Jim, the expansion of waste USA, could you touch on what's the time line from the regulation side of the thing?

We are actively, as we have all along, continued to expand waste USA and the next phase that's in permitting right now is Phase 4 and that's going through its regulatory hearings and Act 250 [ph] hearings. We would expect to have those completed by early summer and hopefully to have a permit determination sometime mid-summer.

Okay. Great. Thank you.

Leone Young with Smith Barney has the following question.

Yes, thank you. Good morning. I realize with the New Heights situation, you want to get it resolved before you really see anything more, but can you just give us an idea of what you're looking at? Is this cash you would hope to get that now you probably won't? Does it require charges, is there sort of maybe any color you can give us on that?

Probably the best color is it is a facility -- understand there was a lower court decision that awarded the retail rate which was roughly about a 10-cent contract, and the facility would have operated at about $10 or $11 million of EBITDA. If the rate had been sustained, we obviously would have monitized the facility and it would have been sold to a third party and there was a substantial opportunity for an upside. On the downside, it's mostly a non-cash issue for us, but we have to figure out with our partners what the next step is and we really would like the time to do that in a thoughtful manner before we report back to the markets, which we committed in our press release to do in the forward period of time.

That's helpful just with that. That's great. I apologize, Richard, but could you repeat the three pieces that effected SG&A? We didn't quite catch all the numbers.

Sure. As long as my voice keeps holding together. Increased year over year by $900,000. The factors were legal, $550,000; travel, $200,000; and bad debt, $150,000.

Thanks. One last thing, I know it's hard to do, John, or Jim, but you had talked about McKean. It has fatal flaws. It's moving forward, but a little snag here with the Pennsylvania. Are we talking weeks, months, any way to get a sense of time?

Well, we've had from the beginning to the end, we've probably had 20 items that we've been working unresolved. I think we're down to the last three or four. I would hope that we could get those resolved and move on and have this completed by early summer.

Year end. Yeah.

First part of the next fiscal year.

Terrific. Thanks a lot.

Dealing with public officials who move at their own pace appropriately, and they're volunteer, often they are volunteer folks that do this part-time, so you just have to let them work it at their pace. You really can't push them.

Thank you.

Moving on to Corey Greendale with First Analysis.

Good morning.

Good morning, Corey.

First of all, you talked about seeing the stirrings of improvements in the economy and, Jim, you talked a little bit about kind of the effects in different regions, but could you just add a little more about whether there's some differential from region to region or among lines of business between commercial and residential, et cetera?

Well, honestly, we'll give you some body language on that, but we don't precisely track that, so I don't want to make a suggestion here that we have these things clearly in focus. The Western region probably was, and through this economic downturn, had the most softness, lost the most manufacturing jobs. This is Western New York, and has been the most difficult to recover, but we're seeing some other macro effects that I was commenting on with regards particularly to waste coming out of New York City, because as you know, the Seneca Meadows facility was bought recently by IESI and we've taken over control of Ontario County and there are dramatically different dynamics underway in New York City for export of waste. Whether that's export to Pennsylvania or export to upstate New York, we think will change the market for disposal in Western New York. You take that and couple that with John's comment on the governor's recently announced Pennsylvania governor's recently announced that to try to increase their $4 a ton surcharge to another $5 will drive waste out of Pennsylvania.

We think the effect of all of that will be to drive waste to upstate New York and in a constrained market, that usually results in pricing going up, so that was the flavor of that comment. The Central region strictly for reference through the weather and the [inaudible] comments I want to add on to that. Eastern market, I think that it's got signs, probably more signs than the other two regions of economic activity, more robust than we've seen. So I think that's the best flavor I could put on that.

Okay. Thank you for that. Question specifically on Ontario, as you move up toward the 2,000 ton per day level, do you have a sense of how much of that that you might have an opportunity to get off of your own truck?

Well, we're going to put every bit of that on our own trucks, and we're going to look for opportunities to do acquisitions where we can achieve additional internalizations, that's the whole thing. Our first game, first objective is to get it to 2,000 tons, which is to allow it to operate at its full capacity. We think we're going to have a good market to accomplish that.

The second goal will be to look at it as a long-term anchor for the Company, and the way you do that, then, is to try to tie up either with long-term contracts or with acquisitions and increase your internalization by bringing your own waste in. So we are starting to do that now and we would expect in the first quarter, second quarter of next fiscal year to have made some more progress on that.

And did you say you're working on possibly expanding the daily capacity of Ontario?

The permit that has not yet been issued but was an obligation of the County to issue, will provide us some additional flexibility. That was what I was referring to.

Okay, I see. Then just one last one. On GreenFiber, sounds like some things are going well, some things are a little bit of a headwind. Is there any sort of guidance at all you can give on that line?

Well, we've got three markets we sell into. The retail and the residential construction markets are going very well and our product is well accepted and we think we are bringing technology and cost effectiveness to a level that will allow us to increase market share. Manufactured homes, which we manufacture homes, which we are the principal national supplier for all the homes, is still in a very deep dull drum, and so when that does pick up, it will have a significant positive impact for us.

Pricing on paper remains an issue. We are working on initiatives to enter into long-term supply paper contracts with Waste Management and other folks to try to stabilize that. But overall, I think the business, it's running at $120 million, grew 21%. We think it's got similar growth perspectives going forward, particularly if Fusion gains traction in the marketplace, so I would try to color it at a slightly positive view of where it's going.

Okay. So kind of conservatively at the very least, you would think it would kind of stay at the run rate of the January quarter level?

Yes. I think that's a fair characterization.

All right. Great. Thanks very much.

Moving on to Tom Ford with Lehman Brothers.

Thank you. Good morning.

Good morning, Tom.

Just a few questions. Was there any contribution, I know you guys had mentioned before that you had bought air space, I think it was at $18 a ton from McKean County.

Correct.

Could you just talk about, was there a contribution there in the quarter?

We certainly put waste in McKean under that contract, and there was probably some modest contribution in EBITDA, but I wouldn't be able to tell you what it was, probably a couple bucks a ton we saved over what the alternative was.

Okay. So if it was anything, it was pretty small then?

Yes.

Yes.

Okay. Great. Then just wanted to go back to, Jim, our comments on South Bridge. Because on the last call you had given guidance commentary and then it seemed like you're kind of following through with plans on developing South Bridge. I just wanted to make sure, the guidance comments that you gave last quarter are not really factoring in what you're trying to do in terms of further developing the South Bridge facility. Is that right?

I think what we said last quarter was that we thought South Bridge facility, just kind of on a 12-month rolling basis once we get it operating, would have revenues of about $11 million and EBITDA of about $3-4 million. So that would have been a reflection of kind of a status quo, in other words, we would not have reflected any improvements in either permitting or processing or our landfill capacity.

So I think the point that you're making, Tom, is that should we be successful in substantially changing the processing fasting [ph], thereby effectively changing the disposal capacity, because -- please remember, at this facility, there's two separate facilities, one owned by us, which is the C&D processing facility, one owned by the town of South Bridge, which accepts the residuals from that processing facility. So the two have to work in tandem and obviously that requires all the parties to be in concert with regards to how they operate, but were we successful in adjusting and addressing the access road issue, the power issue and some other issues and we think we would be able to create some substantially a better package for the town as well. Then we think that there certainly is the capacity at that site from a footprint to have it operate differently than it has historically and if we accomplish that, then we would be looking at different numbers than we gave last quarter.

Okay. Great. And then just moving on to GreenFiber, if I remember correctly, it usually operates right on a calendar year budget.

It is a calendar year business, correct.

Just wondering, are you guys in a position where you could give us thoughts on calendar year '04.

For the business?

Yeah, for GreenFiber.

If you call me -- I just don't have it here, but if you call me up, I'd be happy to give you the calendar year budget.

Okay. And then just one last quick question, I think you had said you guys are anticipating, likely an appeal, but you're thinking maybe April in terms of Old Town. When do you think you guys might be in a position to comment to us on potential contribution?

Really what we've laid out there, Tom, as soon as the permit is final, that's when we would layout the contribution for Ontario, which is really essentially exactly what we did with the other transactions with Ontario and South Bridge.

Okay.

So as soon as the permit is final, at that point in time, then we will give the metrics for the contribution from Old Town.

Okay. So I guess maybe assuming all goes well, that's something that maybe next quarter you might be in a position to comment on.

Clearly.

Okay, great. Thanks very much.

Yep.

Our next question will come from Justin Moore with Lord Abbott.

Good morning, guys.

Good morning, Justin.

Jim, I think you mentioned the eastern internalization had dropped down a couple points or not quite a couple points. This may be a ignorant question, but I'm trying to understand if Ontario is the accepted third party at this point, how does that effect internalization --

Actually eastern internalization went from 50.6% in the second quarter to 52.7%, so it was actually up.

Oh, it was up, okay.

There's a misunderstanding.

Okay. I thought you said it was down. Okay. That's all I had. Thanks.

That's all the time we have for questions today. I'd like to turn the call back over to you. Please go ahead.

Great. Thank you. Just in summary, I think clearly you have a clear indication that we continue to make progress in all of the areas from a business development perspective, and continue to make progress, I think equally importantly, with regard to our back-to-basics approach that we had laid out, again, a couple of years ago. We continue to make progress from a safety perspective, continue to make progress in terms of our efforts with regard to turnover.

This year we're looking at selection in terms of how we're bringing individuals into the organization, as well as a very significant training program for all of our managers. All of our profit center managers, division managers, a real effort to bring their understanding of the external environment that they operate in in terms of their customers, competitors, essentially really helping them get from a management perspective to a leadership perspective is clearly going to add significant value.

We continue to really tie continuous improvement to adding additional disposal capacity, as well as the densification of the franchise. We continue to make progress on that and we continue to feel comfortable that we're going to be able to achieve the goals that we set out for the next three to five years.

I would like to thank you for your attention this morning and we look forward to talking to you in June when we release our year-end '04 numbers and give guidance for '05. Thank you very much for your attention this morning and have a good day.

That concludes today's conference. Thank you for your participation. You may now disconnect your line.