Casella Waste Systems Inc (CWST) 2005 Q1 法說會逐字稿

Good day everyone. Welcome to the Casella Waste Systems first quarter fiscal 2005 earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Joseph Fusco of Casella Waste Systems. Please go ahead, sir.

Thank you for joining us this morning and welcome. We're joined 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 we'll be discussing our fiscal year 2005 first quarter results. These 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 provisions. 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 non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial tables section of our earnings release, which was distributed yesterday afternoon; and is available in the Investor section of our website, www.Casella.com/investor. Now I'll turn it over to John Casella, who will begin today's discussion. John.

Thanks, Joe. Good morning, everyone and welcome to our fiscal first quarter conference call. We are off to a terrific start for fiscal '05. And we look forward to reviewing the quarter with you and discussing the state of the business as we see it today. The quarter -- let me begin by prefacing the quarter as one of modest improvement. Clearly, I would characterize the health of the regional economy as modestly improving. Our volumes are up on a year-over-year basis 1.7%. Also, I think more significantly from our perspective at a time when other companies are reporting pressures on their margins, we continue to see improvement in three key areas: EBITDA margin, operating margin and our internalization rate improvement. Numbers for the quarter: revenue was 124.2; EBITDA, 30.1; operating income was 12.8 million; and EPS was 8 cents.

I'd also like to just briefly recap our fiscal 2005 guidance for you that we gave last quarter. Revenues between 450 and 465 million, EBITDA between 104 and 108 million, our non-growth maintenance CapEx was between 40 and 44 million, facility CapEx of 8 million, and landfill development CapEx of 20 million; for a total of expected CapEx between 68 and 72 million. After 28 million of development CapEx, our free cash flow is expected to be between 8 and $12 million. Our performance this quarter is-- clearly places us on track to deliver against the guidance and the expectations that we've set. As usual, Richard will go through a more detailed picture of the numbers for the quarter, and Jim will cover some of the operational and business development details a little later in the call.

But first, let me -- before we do go through those detailed presentations, I'd like to highlight a few points for you. The success that we've had in doubling our disposal capacity has certainly not been evident in the way that our stock has traded over the last few months. We have made, and are making, a very focused effort to add additional disposal capacity both internally as well as externally. I think, importantly, the budget and operational issues faced by municipalities, which are the drivers for our partnerships are still in place; and we look forward to pushing forward with additional partnerships as we go through the balance of this fiscal year. Another reality overshadowed has been that our effort to pursue and add external disposal capacity fueled by our success in Clinton County and now Ontario County and Old Town Maine has presented four additional disposal capacity opportunities using our public/private partnership model. We're also, as you know, pursuing internal disposal capacity additions at our existing sites as well.

Permanent expansion efforts in various stages at three sites would add over 1,000 tons per day of additional MSW capacity. And in addition to that, we have 750 tons a day of additional construction and demolition disposal capacity that's also in various stages of permitting. I think another important fact is to keep in mind that the value of that disposal capacity is in a region where the tip fees are amongst the highest in the nation. While we continue to make progress, also, on our longer term big picture investments that you've heard me talk about on each quarter. It's really what we refer to as our core blocking and tackling: safety, turnover, selection, leadership training which we all believe clearly is the path to building a great franchise. These are not typically quarter-to-quarter issues, but are really important to understand from the perspective of our three to five-year strategic plan. With that I'll turn it over to Richard who will go through the details on the numbers.

Thank you, John. Morning, everybody. I'm sure you'll all be relieved to hear that my comments this morning will be much briefer than they were on the last call. For the quarter ended July 31, 2004, revenue increased $10.3 million to 124.2 million from 113.9 million, or 9%. The prior year revenue numbers include 3.3 million related to domestic brokerage. A large component of the year-over-year increase, 7.6 million, arose from the development activity over the last year. Internal growth for the quarter of 5.2% reflects only modest growth in the solid waste business, as we expected, while commodity prices were up significantly year-over-year.

So internal growth for the quarter was comprised as follows: In the solid waste business, pricing was essentially flat, it was a small negative 0.3%; while volume was up 1.7% and core commodity price and volumes increased 0.7% for a total of 2.1% for the solid waste business. In FCR, price increases were 2.7% while volume was up 0.4%. The sum of those is a total internal growth of 5.2%. Added to this is the rollover effect of the development activity of 6.7%, partially offset by the divestitures of 2.9% giving you a net change in our revenue for the quarter of 9.0%. Revenue for the quarter breaks down as follows: Solid waste, 100 million; FCR, 20.1 million; and other, 4.1 million; for a total of 124.2 million.

Moving on to EBITDA. EBITDA increased 5 million to 30.1 million from 25.1 million for an EBITDA margin improvement of 210 basis points. This is, as John said, in line with our guidance of 104 to 108 million for the full fiscal year, and it breaks down as follows: Solid waste, 25.9 million; FCR, 3.9 million; and other, 200,000. As you can see, solid waste margins increased by 70 basis points from the previous year. This strong result reflects the addition of Southbridge and Ontario to our portfolio. FCR again reported close to a 20% margin this quarter benefiting from higher prices and volumes. Gross margins were up 200 basis points year-over-year mainly due to the change in revenue mix. So essentially we had a higher quality revenue arriving from the divestiture of the low-margin brokerage business and the addition of landfill and tuck-in revenue plus higher commodity prices at FCR.

Moving onto depreciation and amortization. This expense was up $2.5 million year-over-year. This arises mainly from landfill amortization which increased $1.7 million due to the addition of our new landfills, Hardwick, Southbridge and Ontario; as well as higher volumes from our closure project at Brockton. U.S. Green Fiber reported an operating loss in the quarter of 136,000, and we recorded our 50% share. Cash flow from operations, I mentioned, were 3 million in the quarter, and adding back net working capital changes of some negative 1.8 million, U.S. Green Fiber reported EBITDA of 1.2 million for our first quarter.

Moving on to other income and expense items, the major item included in that caption this quarter, which I mentioned are 530,000, is the cost of the bankruptcy funding of New Heights and also some balance sheet cleanup; we wrote off some miscellaneous assets. The balance of the New Heights costs are expected to be recorded in the second quarter.

Income taxes. The tax rate assumed a much more normal rate this quarter in the 44% range, which is expected to continue for the rest of the year. Net income after preferred stock dividends amounted to 2 million, or 8 cents per common share.

Moving on to the balance sheet and some other statistics, our total debt was 368.2 million, which is up 11.5 million from last quarter mainly due to the higher capital expenditures and outlays on landfill lease payments and acquisitions. The total equity was 200.4 million giving a total capitalization, including preferred shares, of 568.5 million. So our total debt to cap at the end of the quarter was 0.65.

The average interest rate for the quarter moved up to 7.99%, including amortization of financing costs. Net of these expenses, it was 7.56%. The small rate increase from the fourth quarter of last year is mainly due to the uptick in LIBOR rates. Total cash and cash equivalents on hand at July 31st amounted to 3.4 million. Cash balances were down from last quarter as we were able to pay down the revolver. Restricted cash was 12.3 million, so total debt less unencumbered cash was 364.8 million, up from last quarter end mainly due to the higher borrowings at the end of this current quarter. Availability on the revolver was 128 million, after taking into account approximately 36 million of LCs outstanding.

Capital expenditures for the first quarter amounted to 22.9 million, (indiscernible) slightly lower than expected, mainly due to the timing of landfill expenditures. But we are still on track to meet the guidance of 68 to 72 million and the pace of capital expenditures will likely pick up in the second quarter. Payments on the landfill operating leases for the quarter amounted to 9.4 million. These represented half the upfront payment for Ontario, which is $7.5 million; the balance of the West Old Town payment, 1.4 million; and some lesser amounts on Southbridge.

Four tuck-in hauling acquisitions were closed during the quarter. The trash from the two New York acquisitions will be internalized into Ontario. The total purchase price was 3.6 million and the average purchase price multiple paid was 3.4 times EBITDA.

Free cash flow. As expected, free cash flow was negative for the quarter driven by the high capital expenditures and the negative change in working capital. The main factors in the change in working capital were the increase in receivables and prepaids and the decrease in accruals, which is the normal pattern in this quarter. Accounts receivable increased from the higher revenue while DSO improved to 36 days. And we're still on track to meet the 8 to $12 million guidance for this year’s free cash flow, as John mentioned earlier. With that, I'll pass you over to Jim.

Thank you, Richard. Good morning. Just picking up on what John had said on the economy in a little bit more detail by region, the western region is continuing to show steady growth from an economic standpoint; and we're seeing good volume increases there and some modest pricing. So that's a sign that the western region -- as is our essentially western New York state economy which is growing nicely. Central region remains very steady. As everyone knows, our first quarter is one of our strongest quarters. So it's always hard to sort through the indicators to come up with a conclusion, but I think that the central region is performing slightly higher than expectations as well. And the eastern region is also performing nicely. Volumes are up and, while pricing is flat particularly biased for Brockton, we see reasonable economic growth in the eastern region as well.

Our solid waste operations, as Richard and John said, did nicely this quarter. Revenue was up 11% and EBITDA growth of 14%. Our basic strategic approach, as you know, has been to grow EBITDA while at the same time growing margins and we did that nicely this quarter. And I think it's positioned us well for the next quarter as well. Net revenues also increased by over 14%. That's another indicator, exclusive of disposal pricing, that the balance of the operation is moving forward. Landfill volumes are increasing. Generally we're seeing a 3 to 4% increase. We have seen a nice increase year-over-year in August as well, so we expect to see some continued positive news in this quarter. Landfill pricing, generally, is flat with the exception of the Brockton landfill where we are finishing up that contract and pricing is lower there because of the big dig project. And, as I mentioned, August volumes appear to be consistent with this growth.

From an internalization standpoint, we did report a nice internalization increase year-over-year from 51.8% to 54%. The central region steady at 80.6%, eastern region is up to 55.2%, western is 35% for an overall 54.7. I might add that when we reported fourth quarter '04 results, at 56%, we did indicate that we expected because of the strong first quarter the internalization rate quarter-over-quarter would be slightly lower; but on a year-over-year basis we've seen a nice growth. And actually if you look back through all the quarters, you're seeing a nice steady internalization growth year-over-year, quarter-over-quarter.

Capital expenditures we have not spent some that we planned in this first quarter, primarily tied up with landfill construction; but we do expect to spend all that, so the positive free cash flow and the deferred on the capital expenditures will be spent this year, consistent with the guidance given by Richard.

Moving on to Maine Energy. There has been some newspaper articles on the Maine Energy settlement, thought we'd quickly touch on that. Of course being in the middle of settlement talks generally precludes us from giving you much information. I can tell you that the communications between the parties is very good. I think the forthcoming proposition for tax overhaul in Maine is causing a great deal of potential problems for the communities in Maine and probably will figure into these settlement talks. We continue to try to be responsive to the request of the communities. And some of the published articles were in efforts on our part to be responsive, but let us assure all of you that a final settlement will be a win-win for all the parties. And we are very hopeful that we will continue to be able to complete that before the year end.

From a development standpoint, during the quarter North Country received within the 51 acres permit authority to construct the MSC burbs. This will provide capacity well beyond 300,000 tons, which puts us well past the resolution of that final dispute with the town. We also received during the quarter, phase four permit capacity at Waste USA. And I might add that during the quarter we were able to handle the Pfish concert. Our landfill up at Waste USA’s was right adjacent to where the Pfish concert was handled and it was quite a show for those of us who-- those of our operators who are up there that were working through that. And the Waste USA facility, from a permitting standpoint, is right on track at this point.

Ontario, we're operating at permit capacity. We're meeting all of our commitments with the communities, have been well received, as I mentioned before, pricing is generally up in that market. So we're at capacity and above the pricing that we expected. And the balance of the development projects are proceeding nicely on the Ontario.

Southbridge, we're operating under the ACO. We're at capacity at that landfill. We've done a very nice job in the wedge fill there, and we have confirmed that we have about 4 to 5 million yards of capacity at that landfill with some additional expansion beyond that. And we are working with the town of Southbridge to explore some of the historical issues including the access roads and seeing if we can't reconfigure that landfill to be a better market participant from our standpoint while, at the same time, being a better user to the community. Hardwick, as you know, we've converted to MSW and we are working on increasing its capacity to 750 tons per day. That's going nicely. And West Old Town is proceeding as well. The final hearing on the appeal will be October 21st. We will not operate the landfill until the next fiscal year and we'll construct the first cell in late May of '05 and be ready to operate in August of '05. So we'll be in our fiscal year '06. We've done some good work on recycling in the state of Maine and I think you've probably seen some of those articles if you've been following them as well.

McKeon will be rebid. The bid date is currently September 20th and we'll really have no comment on that until after the results of the bid. And, as John mentioned, I think that the good progress that we've made in Ontario and the awareness that that has brought to the market, has done a lot to flush out what we believe to be three or four additional opportunities in western New York; that will give us opportunities to go after and apply our approach to public/private partnerships.

Moving now to FCR, FCR had a very good quarter. Sales were up, EBITDA was up. Pricing on commodity pricing is up from a year-over-year basis. Our performance continues to improve. During the quarter, hedging was a continued drag, but that would be expected with high commodity pricing. But fortunately these commodity pricing has allowed us to continue to lock in good forward contract stability. So we're very comfortable, but-- that even in a very adverse commodity market that we're nicely protected on a go forward basis.

During the quarter, Saginaw, Michigan facility was a renewed ten-year contract. And we believe that there remains other opportunities out there for us to apply our recycling technology and capabilities, too. We are still cautious on the pricing. Pricing is above where we thought it would be. It is higher than what we had expected. But it's possible that this could continue for the balance of the year, which would be a very good indicator for FCR and, obviously, a good contributor for the company. I might close on FCR by just saying EBITDA margins are close 20%. For recycling that's a very good EBITDA margin and an indication of the stability and some of the techniques that we've used to build this business since we acquired it from KTI.

Going on to U.S. Green Fiber, year-over-year sales have increased 22%. As you may recall, May, June, July is the low three months of the year for U.S. Green Fiber, because just the winter weather is a major driver to people's awareness to buying insulation. But notwithstanding that, sales are up, as I said 22%. We did $28 million in revenue and about $1.2 million in EBITDA.

Outlook for the balance of the year is for housing demand to continue at its current rate. And, while the EBITDA for this quarter was flat because of increased paper prices, we have been very successful in placing pricing increases for the balance of the year. So we expect for the -- for their calendar year about $130 million in sales and 10 to $11 million of EBITDA, which is slightly up from some of the previous guidance. On the channel basis, contracts are up 27%, manufacturer's home are up 13% and retail is up 20%. So we're seeing good volume growth and some pricing capabilities in some of those channels as well. Fusion field trials are in place and we believe we'll have that technology commercialized by the end of the year. Free cash flow remains positive. And this is a business that has not for the last-- since we acquired it, really required any cash infusion. It's actually been a generator of cash for the company. Businesses continue to perform and reach new markets in growth, but remains a monetization asset when needed. I'll turn it back to John.

At this point, I guess we will open it up for questions.

Thank you, Mr. Casella. Today's question-and-answer session will be conducted electronically. [Caller Instructions] We'll pause for just a moment. We'll take our first question today from Corey Greendale with First Analysis.

Hi, good morning, guys.

Good morning, Corey.

Couple of questions. First of all, on the pricing, can you talk a bit about collections pricing?

Well, I think on an overall basis, I think that what we're seeing is, you know, modest improvement in economic perspective as evidenced by the volume, Corey. But I think from an overall standpoint on pricing, whether it's, you know, landfill, collection, it's really very flat at this point in time.

And if you look at sequentially at the price comparison, the decline in the year-over-year internal growth, how much of that would you say is just due to mix in Brockton versus other factors?

I think if you are comparing Q4 internal growth, Corey, with Q1, you're kind of comparing apples and oranges. Because, as we explained on the Q4 call, that was a comparison with a very poor fourth quarter of the prior year, because we had snow events that really damaged the results in the preceding period.

Okay. And then Richard, I know ordinarily you wouldn't get into this kind of granularity but, given the items that are running through the other expense, I was just wondering if you would be willing to give any sort of guidance for the October quarter for the other expense line?

I think we had given-- on the fourth quarter call we indicated that New Heights was going to be approximately 5 to 600,000 and there was about half of that was booked in the first quarter. And in the second quarter, it will be probably a similar or maybe a somewhat slightly larger amount.

Okay. And then finally, John, I was hoping you'd just talk a bit about acquisitions, kind of what the -- I know you don't want to get into giving specific guidance, but what the more active pipeline looks like in just a little bit more detail on your activities there; and how they might be ramping up on the tuck-in front.

I think as we indicated last quarter, from an operational perspective, Jim and Charlie have really pushed back to the field to really have all of the business development activity from an acquisition standpoint really updated and really begin to have the individual division management team's focus, particularly on the tuck-in acquisitions that are available in each of those waste sheds, to really begin to look at and execute against the disposal capacity that we put in place. I mean, obviously, you know, we've had some success in terms of moving up the internalization rate. What we have indicated is that over that three to five-year period we think we can bring the internalization rate into the low- to mid-60s.

And, you know, the way that we will do that is to begin to drive the -- to really begin to drive the tuck-in acquisitions and get that process going. But also, as we said, that's a process over a three to five year period of time. We’ve begun to do that because of the execution of the disposal strategy, in terms of adding that disposal capacity, obviously didn't make sense to do that prior to adding the disposal capacity. Operationally, we've always felt that the opportunities were there and in place. We don't feel any differently about that at this point. We've identified a significant amount of opportunity from a tuck-in standpoint. Now we need to go out and begin to execute from a -- particularly from a tuck-in standpoint where we can impact our internalization rate.

All right. Thanks. I'll turn it over.

We'll take our next question from Lionel Jolivot with Goldman Sachs.

Hi, guys.

Hi, Lionel.

Two quick questions, first of all on the working capital, working capital was a use of cash of 7 million this quarter, which was a touch higher than what I had expected. Why was it so high? And second thing, what should we expect for the remainder of this year?

We're typically in this quarter-- working capital is negative, Lionel, because of the increase in revenue which generates an increase in receivables. Typically accounts payable are, you know, less of a positive in this quarter. And our accruals typically decrease. So it is a pattern which is consistent. I think in the next quarter working capital will be closer to flat. But I think the pattern will be consistent with our previous years.

Okay. And for the full year, do you expect working capital to be flat?

Pretty much, yes.

Okay.

And usually what happens is, in the last two quarters, we turn into positive space.

Okay. And just regarding the payments on landfill operating leases, so you paid 9 million this quarter. How much do you expect to pay in the remainder of this year? Because I think you still have to pay a little bit on Ontario county.

The estimate, it runs around $11 million. An additional $11 million, so it will be about 20 for the year.

Okay. And out of the 11 million, how much is for Ontario county?

As I said, the 7.5 in this quarter was half of the upfront payment. We would expect to make the second half of that payment in Q2.

Okay. That's it for the moment. Thank you very much.

Thank you.

Bill Fisher with Raymond James has our next question.

Good morning.

Good morning, Bill.

Couple of things. First for John on the new sites here you're having talks with or whatever, could you just characterize are they all existing sites? I mean (indiscernible)?

They're all existing sites or existing infrastructure that's already in place and operational. Yeah, that's correct, Bill.

They're municipally owned sites?

Yes they are.

And, maybe for Jim on--you mentioned I think you got the Waste USA phase four expansion. Does that include a daily limit expansion or is that a separate thing?

Well, the phase four permit has been issued for comment by the agency and there'll be a final comment period. So the actual permit won't be issued. But at this stage when the permit has been issued draft and is issued for comment, usually the permit is issued within about 30 days. So that is -- will allow us to operate and provide volumes at a considerable capacity, at considerable larger volumes than we currently are at.

Okay, great. And then just on MERC, I think you have your seasonal shutdown in that first quarter. I know you had issues there in the, whatever it was, third or fourth quarter. Is that running kind of as you want it right now?

Yeah. I think we're pretty happy with Maine Energy. The decisions we took I think were the right decisions relative to taking some short-term pain to assure ourself on a go forward basis that tube links were less of a problems than they have been historically. As you know, we added thicker wall tubes in the generator banks and we did that based on a belief that that will reduce the number of tube outages and, therefore, increase availability and have a positive effect above where we thought we'd be based on our budget projections.

Okay. Great. Thank you.

Leone Young with Smith Barney has our next question.

Yes, thanks. Good morning.

Hi, Leone.

A little (indiscernible), I just wanted to pursue the pricing thing a little bit more. Generally you have some modest pricing, so I'm kind of curious whether the flattish pricing is more due to mix issues or are you seeing increased competitive pressures out there?

I think it's more mix. I don't think we're seeing increased competitive pressures, Leone. I think that it's really more a mix and I think it's reflective of where we have been from an economic standpoint. I think there are pockets where, you know, we're seeing positive signs. But on an overall basis, it's just fundamentally flat.

Okay. Well, that's good to hear. And also, Richard, just to clarify, are you reconfirming the Green Fiber numbers for equity income that I believe were given out on the fiscal fourth quarter, the 2.3?

Yes, we are. That's correct.

Great. Thank you.

Thank you.

Our next question comes from Michael Hoffman with FBR.

Hi. I need to come back and revisit the below the operating line expenses, to make sure we got that clear. What do you think actually is going to be that number in the second quarter, Richard? There's stuff blended in in the first one to get at your 5 to 600,000 number in total.

Yeah, and as I said, the New Heights piece of that is 300. So in Q2, there will be, you know, between 3 to 5, I would expect; somewhere in that range.

And then on the revenue guidance that you'd given previously, if you track your normal seasonal patterns in the second quarter it's going to be the same or a little bit better than the first quarter, that means the second half of the year is essentially flat year-over-year to be in the 450 to 465 range.

Yeah, I think that from an expectation standpoint in terms of the guidance that we've given, I think that it's fair to say that that guidance was fairly conservative relative to the second half of the year.

What are your thoughts about the second half pattern?

Well, I mean, it's really hard to say, Michael. We don't really have a sense in terms of, you know, where the economy is going to go for the third and the fourth quarter. Certainly if the economy improves steadily, then there's -- you know, there's a potential of exceeding that. But we're not -- we didn't project that, and we didn't try to characterize real significant improvement from an economic standpoint. Obviously if it happens, it'll have an impact on that-- on our overall revenue.

Okay. Thank you.

Yeah.

[Caller Instructions] We'll move on to Amanda Tepper with J.P. Morgan.

This is Scott Levine for Amanda. I was hoping to ask, actually, getting back to what Corey said about the deal pipeline. You mentioned target multiple or a multiple of 3.4 times EBITDA during the quarter. I was wondering if you could comment with regard to whether there's competition for deals or whether the price paid is going up or down directionally. And I was also hoping you might be able to comment regarding diesel surcharging during the quarter, what are you seeing as the impact of fuel prices on your margins? Thanks.

With regard to the marketplace, we're not seeing significant competition. Keep in mind, the majority of the waste sheds that we serve, we are the largest provider of services. So there's not a lot of activity in a good portion of the markets. Certainly in some of those markets, there is activity but, clearly, we're not seeing a significant amount of activity from a competitive standpoint. We would expect the multiple paid to be consistent with where we have been historically over the last two or three quarters. Obviously as we look at disposal capacity, that multiple will be higher than 3 to 4 times. But, clearly, consistent with what we have done historically; but, nonetheless, disposal capacity would certainly be higher than that multiple. But on a tuck-in basis, the smaller acquisitions, we would expect to see, you know, consistent pricing and really don't see a significant amount of competition in the marketplace.

Okay. Thanks.

As far as the fuel question is concerned, we implemented a fuel surcharge May the 1st last year and that fuel surcharge has been very effective for us. It's linked to a government index and as prices go up and down, so does our fuel surcharge. And we've been successful in recovering our incremental fuel costs quarter over-- each quarter.

Thank you very much.

You're welcome.

Raymond Cheng with Lehman Brothers has our next question.

Good morning. My first question is just to get a little bit more clarity on the other expenses line. You talk about half of it related to New Heights. Was the other half related to the Lawson sale of fixed assets.

Yes, it was the write-off of some miscellaneous assets, correct.

Okay. Okay. And do you expect more to come for the remainder of the year?

Well, typically we have a couple of hundred thousand going through that line each quarter relating-- as we retire trucks, containers and so on we have gains or losses through that caption. And they are relatively difficult to predict.

Okay. Okay. And my next question is just try to get an update on the progress of some of the recent realignment activity you mentioned, effective in June, where you separated the eastern region and also you're realizing the permitting engineering activity. Did that have any impact on your overhead? And also any allocation between SG&A and gross margin lines?

Well, just to give the benefit to everyone who is on the call, we are still operating within the eastern region. And while we've got two subregions in that, the northeast and southeast, we really aren't -- that isn't a dramatic change. We did end up adding a new regional vice president, and we did staff with an additional permitting compliance. But I wouldn't even close to characterize it the way I think the framework you questioned or you posed the question. And I don't think it's had any material impact, really, on SG&A.

Okay. Okay. And can you talk about what incremental actions that would need to be implemented to get to the 1.3% pricing guidance for the year? And are you still comfortable with that number?

I think that on a division by division basis, the pricing model will be executed waste shed by waste shed. And I think at this point in time, we're still comfortable that we'll get to the pricing expectation that we set for the year towards the balance -- towards the -- for the last three quarters, I think it's likely that we will get to that 1.3%.

You know, we look at organic growth through both a pricing and volume model. But you really, when you look at it, you've got to look at it as a net organic growth. We're seeing good volume growth, and that's somewhat in the marketplace, sometimes a trade to pricing growth. So I think the important question is do we expect to see the kind of total organic growth we talked about, and I think we're going to be in line with that. The actual split between pricing and volume we think is less of a material marker to the market, and a better focus is the total organic growth.

Okay. Okay.

I think it's also fair to say that we do expect that, for the last three quarters, that we will be implementing our strategy relative to the expectation that we set for the 1.3% on the price side. I mean, we are going to push that forward for the last three quarters.

And we think the market will support that. We're not trying to signal anything, any weakness in the market, we're just trying to be cautious and project fairly what we think is going on.

Be consistent with a modest improvement that we're seeing from a regional perspective. And then, you know, execute the plan that we had laid out.

Okay. Fair enough. My last question, can you just provide some more color in terms of how much of your energy cost is hedged by a forward contract and how much of that is offset by your surcharge program put in place a year ago?

I don't know off the top of my head. We'd be glad to give you that offline. I don't know that we have that on the top of our head right now in terms of percentages.

Well, I think the majority of it is relative to surcharge as opposed to hedges at this point in time. Although we could have some hedges in place, we can certainly get that information. The majority of the offset, though, is coming clearly from the surcharge.

Okay. Great. Thank you very much.

You're welcome.

[Caller Instructions] And there are no questions at this time. I'll turn the conference over to Mr. John Casella for any additional closing remarks.

Thank you. I'd like to thank everyone for participating this morning. In closing, I just want to emphasize a few things. The business is stable. We are encouraged by the regional economy. As we've indicated, we are beginning to see modest improvement, and that is obviously a positive. And hopefully we'll continue to see that as we go through the rest of the year. We continue, as I indicated, we continue to focus on internal and external disposal capacity additions as a key driver to our strategic plan, and we will begin to really push forward from an acquisition standpoint on those tuck-in acquisitions that are going to enhance the value of the disposal capacity that we've put in place.

We also see the first quarter results as clearly a great start to meeting the expectations that we've set for fiscal '05. And I think equally importantly, we also continue to improve the quality of the existing assets that we already have in the portfolio as we, you know, use capital to add disposal capacity and grow the business. We're excited about where we are, we're excited about the first quarter, and even more excited about the balance of the year. Again, I thank you all for participating in this morning's call and we look forward to talking with all of you in December when we release our second quarter '05 numbers. Thank you very much.

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