Casella Waste Systems Inc (CWST) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Casella Waste Systems second 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 today by John Casella, Chairman and Chief Executive Officer; Jim Bohlig, our President and Chief Operating Officer; and Richard Norris, our Senior Vice President and Chief Financial Officer. Today we will be discussing our fiscal year 2005 second quarter results. These results were released early yesterday afternoon -- sorry, early yesterday evening. 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. 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 other 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 table section of our earnings release. which was distributed yesterday afternoon. and is available in the Investor section of our Web site, www.casella.com/investor. Now I will turn it over to John Casella who will begin today's discussion. John.

Thank, Joe. Welcome everyone to our second quarter fiscal '05 call. Throughout first half of the year our strategic focus has been on driving performance and, obviously with the results that we released last night, you can see that we're pleased with the performance and with the results that we have. Look forward to going through some of the detail of the quarter with you and discussing the state of the business. Overall, the quarter-- the second quarter was strong, it continued along the path of the first quarter and, as all of you know, our first and second quarter's are our strongest quarters of the year. I think, though, one of the most important measures of our success is how are we doing from a margin improvement standpoint. I think the results for the second quarter speak to that very nicely. We had 170 basis point improvement in our EBITDA margin. We had 100 basis point improvement in our operating margin. And a 2.1% improvement in our internalization rate quarter-over-quarter from 52.9% in fiscal '04 to 55% in '05.

Just a brief overview of the numbers for the quarter: 126.4 in revenue-- 126.4 million in revenue, 30.6 million in EBITDA, operating income was 12.8 million, and 10 cents on the EPS line. Also need to mention that the results are net of the effect of the divestiture of our data destruction unit and the write off of our McKean landfill efforts. As usual, Richard will go through a more detailed picture of the quarter and the numbers and Jim will cover the operational and business details a little later in the call. But first let me give you a little bit of the highlights of the quarter as I see it.

We made great strides in the quarter developing and harvesting the internal disposal capacity that we have been working on for the last year and a half to two years. At the Waste USA site, we received its permit to go from 240,000 to 370,000 tons in the quarter. While the near term financial impact will be minimal, as we will first move waste from other facilities to rationalize and reduce our overall transportation costs, over time we will add the additional waste to our franchise and that will be a tremendous contribution to the overall health of the company. During the quarter we also, at Ontario County, submitted the permit modifications for the facility expansion that was required in accordance with our proposal. And most importantly we've completed all of the cell expansion projects that were required for calendar '05's operations. I think, as we indicated last quarter, one of the things that has clearly come out of our success in Ontario County is real recognition and real visibility on our partnership model throughout our entire region. And consequently we continue to make progress on the four additional partnership opportunities that we talked about, pretty much minimally obviously, at this point in time as it's very premature in terms of the development of those partnerships. But, nonetheless, we're very pleased with the results and pleased with the progress that we're making in terms of adding additional disposal capacity to the franchise.

One of the other aspects of our strategic plan is that once adding that disposal capacity was really the reigniting of our tuck in acquisition program at the division level to densify the existing franchise. As you know strategically, it's our view that that utilization of capital and indensification of our existing franchise is really the way that we cannot only grow the business, but also improve our margins as we go forward. Critically important, to tie those two issues together, it's our view that we really need to drive our margin improvement as we grow the business. I think one of the other efforts that you hear me talk about quarter after quarter is the efforts that we're making on building a great business. Some of those efforts, through some of the programs that we've been working on from an improvement standpoint, our safety incidents are still down. They continue to go down on a year-over-year basis, even with the success that we've had over the last couple of years. That program now is three years in place and we continue to make progress in embedding safety into our culture.

Employee turnover rates also continue to go down. And, as you know over the last couple of quarters, last three quarters I think, we have reduced our overall turnover by about 45% and we continue to make progress in understanding what those issues are to continue to drive our turnover rates down. And, again, I mentioned that we're doing that because, basically, we're looking at our own performance, we're not looking at ourselves against our peers; but we're looking at our own performance and trying to get better and better at everything that we're doing.

And last, but not least, in terms of a 30,000-foot view one of the critical components, in our view, of much higher level of performance in this business is the investment that we're making in our people. Over 50 of our managers have attended leadership training, and in the third quarter we'll be unveiling a custom in-house advanced achievement leadership curriculum that will be aimed at reinforcing and supporting both the growth of our leaders and the investment that we're making in them as achievers. As you know, this is a local business. So it's our view that we're only as good as the operating managers that we have at the local level and I think our leadership training programs, the effort that we are making and the resources that we are investing in our people will pay back to the Company big, big dividends over time. I think that it's, again, when you look at the localness of the business and the fact that each one of those division managers really needs to understand all of the domains of his external environment in terms of his customers, competitors, et cetera. I can't think of a better place for us to be putting resources than to try to help bring the skill set of our entire management team to a much higher level. With that I'll turn it over to Richard who will take you through some of the details on the numbers.

Thank you, John. As usual, I'll start with revenue. For the quarter ended October 30, 2004, revenue increased $14.8 million to 126.4 from 111.5 million, or 13.3%. The prior year revenue numbers no longer include any amounts related to domestic brokerage, so the year-over-year comparison is clean this quarter. A large component of the year-over-year increase, 8.4 million, arose from the acquisition activity over the last year. Internal growth for the quarter of 5.7% reflects growth in the solid waste business in line with our expectations, while commodity prices continue to be up significantly year-over-year. Internal growth for the quarter was comprised as follows: firstly for the solid waste business, price was a small negative 0.2%, while volume was up 3.4% and core commodity price and volume was up 0.4%; for a total growth of the solid waste business of 3.6%. At FCR, price increases represented 2.6% while volume was down slightly at 0.5% negative, giving a total internal growth of 5.7%. Added to that is the rollover effect of acquisitions of 7.6% for a grand total change of 13.3%.

As last quarter, the negative price growth in solid waste was skewed by the lower average prices at Brockton and Hardwick , both because of a change in revenue mix. This year, Brockton, which is our closure project is taking more soils at lower prices. While Hardwick also took in more soils at lower rates in the quarter for intermediate cover. This is a better alternative than paying for dirt to use for cover. If we excluded those operations, price growth would have been 1.3% positive. Revenue for the quarter breaks down as follows: Solid waste, 102.3 million; FCR, 20.2 million; and other, 3.9 million; for a total of 126.4 million.

Moving on to EBITDA. EBITDA increased 5.5 million to 30.6 million from 25.1 million, for an EBITDA margin improvement of 170 basis points. These strong results are right in line with our guidance of 104 to 108 million for the fiscal year, and they are broken down as follows: solid waste, 26.4 million; FCR, 4.1 million; and other, 100,000; for a total of 30.6 million. As you can see, solid waste margins increased by 40 basis points from the previous year; which results reflect the addition of both Ontario and Southbridge to our portfolio. FCR reported over 20% margin in this quarter, benefiting from the continued higher commodity prices. Gross margins were up 140 basis points year-over-year, again, mainly due to the change in revenue mix. Essentially a higher quality revenue arising from the combination of the higher commodity prices at FCR, as well as the addition of landfill and tuck in revenue. I should also mention that gross margins were negatively impacted about 40 basis points by fuel price increases this quarter, even though on a dollar basis most of that increase was recovered through our surcharge program.

Moving on to depreciation and amortization. This expense was up 2.6 million year-over-year. This arises from mainly from landfill amortization, an increase of 2.1 million, again mainly due to the addition of our new landfills of Ontario and Southbridge, as well as higher volumes from our closure project at Brockton. Deferred costs. This caption, which amounted to 295,000, represents the costs associated with our efforts to acquire McKean County. Since the county is now negotiating with another party as a result of the re-bid, we have written off these costs. US Green Fiber, that company reported net income in the quarter of $2 million and we recorded our 50% share. Cash flow from operations amounted to 3.3 million in the quarter and, adding back networking capital changes of some 100,000, US Green Fiber reported EBITDA of 3.4 million for our second quarter.

In the other income expense caption of 220,000, included in that caption this quarter is the final payment related to the cost of winding down New Heights, the power plant operations of 370,000. This is partially offset by our normal gains on sale of equipment. We expect no further cash outlays on the New Heights project. Income taxes. The tax rate continued as a more normal rate this quarter, in the 44% range, which is expected to continue for the rest of the year. This contrasts sharply with the prior year, when the tax rate for the quarter was a credit. If we were to restate the prior year numbers using this quarter's effective tax rate, then last year's second quarter results would have been 9 cents as a comparison to the 10 cents reported this quarter. Net income from continuing operations, after preferred stock dividends, amounted to 2.6 million, or 11 cents per common share. This is after deducting the right off of McKean County and the last payment of New Heights which, together, amounted to some 670,000, or 395,000 after tax, which is equivalent to 1.6 cents per share.

Discontinued operations. In the quarter we sold the assets of data destruction for cash sale provides of $3 million. This was small shredding operation in New Hampshire which was not a part of the core business, so it made sense to monetize it. The sale created a book gain of $.05 million, but since the goodwill associated with the operation was not deductible for tax purposes the tax gain was higher, thus turning the book gain into a small loss. The gain and its tax effect were deemed to be material enough in the quarter to warrant discontinued operations accounting treatment, which requires restatement of all prior period income accounts. Just to give you an idea of the order of magnitude, data destruction which was previously was reported under FCR, it's revenue in fiscal year 2004 was about a million seven and EBITDA was 200,000.

Moving on to the balance sheet. Total debt was 379 million at the end of the quarter, which was up 10.9 million from last quarter, mainly due to the higher capital expenditure and outlays on landfill lease payments and acquisitions. Total equity, including preferred shares, was 203.8 million, giving a total capitalization of 582.9 million; for a total debt to cap ratio of 0.65. The average interest rate for the quarter was 7.92% including amortization of financing costs. Net of those expenses it was 7.51%, so there's little change from the previous quarter. Total cash and cash equivalents on hand at October 30 amounted to 4.8 million. So cash balances were up slightly from last quarter. Restricted cash was at $12.5 million. Total debt, that's unencumbered cash at 374.3 million, was up from last quarter end due to the hiring borrowings at the end of the quarter. Availability on the revolver was 121 million after taking into account 31 million of LCs outstanding. Capital expenditures for the quarter amounted to 19.5 million. We are still on track to meet the guidance that we gave earlier in the year of 68 to 72 million. So capital expenditures will likely be higher in Q3 and Q4 than has been typical historically. We've been preserving cash and we've been able to defer some of the capital expenditures to the latter half of the year.

Payments under operating leases, landfill operating leases for the quarter amounted to 7.9 million. This represented mainly the balance of the up front payment for Ontario, which was 7.5 million. Two small tuck in holding acquisitions were closed during the quarter for a total purchase price of 1.9 million. And the average purchase price multiple paid was 3.1 times EBITDA. Free cash flow. As we expected free cash flow was negative for the quarter driven by the higher capital expenditures and interest payments, which are always higher in this quarter as the high yield payments are due in August. Accounts receivable increased from the higher revenue while DSO maintained at 36 days. Accruals were up, as was the current portion of the capping closure post-closure provision. We remain on track to meet the 8 to $12 million guidance for this year's free cash flow. Shelf registration statement. As you will have seen, yesterday we filed a shelf registration statement. This filing was made as part of our normal financial planning simply to provide flexibility in the future. With that I will hand you over to Jim.

Thank you, Richard. First a bit of color on the economy by region. The western region continues to see modest growth from an economic activity standpoint. I will note that they have recently announced a significant closing, Toshiba announcing that they were closing a major operation in the southern part of New York, which will affect some of our businesses. On a positive note, Corning has seen a real resurgence of their business and that's helping to offset that loss. Rind has remained relatively strong. We're seeing good pressure coming out of the region, primarily from New York City up into the region, and with good pricing support with those volumes. Central region, as we had reported in the first quarter, remains steady. The economy is not robust but certainly very foundationally acceptable and we've had a relatively strong quarter this quarter. And we're hopeful, subject to the weather, that that will continue in the central region as well.

The eastern economy, as you now know, we split that into the northeast and southeast; but those two regions continue to see, actually, slightly higher economic growth. While pricing is flat, we have seen volumes up in both those markets and I think that augers well to go into the third quarter. Overall landfill volumes as indicated are up 3 to 4%. We do have a portfolio of facilities with some up more than others but, exclusive of Ontario and Southbridge, the overall landfill volumes are up 3 to 4%. Pleased with, as John indicated, with the margin improvements. All margins, both solid waste and recycling, have improved for the quarter. Net revenue has also been up two quarters in a row, in line with, and ahead of our budget forecast. And we continued to see that-- and believe that a focus on margin improvement is a very important piece to be coupled with the overall growth of the business. As I mentioned, Hardwick, Maine Energy, CERF, Waste USA, Highland, all saw volume increases.

Brockton, which is our soils project, is running down toward the end of its life. The current permitted life allows the facility to operate through the end of December. We have been given verbal approval from the agency that that permit will be extended until August of next year. So that is an extension of about 5 or 6 months over what we had been expecting. It's a good upside opportunity, but only very short term and we will finish that project in late calendar year '05. We have seen a good overall volume increase, as I've mentioned, and when you add with both the additional volumes at Southbridge and Ontario, our quarter-over-quarter in '04 volumes are up considerably as a result of that effect.

From an internalization standpoint in comparing Q2 '05 to Q2 '04, the central region remains essentially flat at 80%. The northeast region is up at 58.9% from 56.7%. The southeast is up 49.1 from 45.8 and the western is up 36.6 from 32.7, with an overall internalization improvement Q2 '05 to Q2 '04 of 55% versus 52.6%. We have done a good job both in the first and second quarter in pushing out capital expenditures, so we are somewhat below what we thought we would be, but we expect to spend all of that in the balance of the year consistent with the capital and free cash flow projections that Richard gave you.

Maine Energy litigation front, we exchanged final draft position papers with the town. We have taken a temporary hiatus, basically reflecting on the statewide referendum in the state of Maine on property tax reform which naturally took, this year particularly, a great deal of attention. That coupled with the Thanksgiving holidays we expect to get back with them, and we hope very quickly in the first part of January of '05, to come to a landing on our settlement issues, hopefully, with the towns toward a long-term settlement.

On the development front, we have successfully added some additional capacity within the 51 acres at North Country that will assure us of an excess of 30 months of forward capacity of that facility. And we are working on a couple other design modifications that we believe will add capacity hopefully beyond that point as well. As John mentioned, we are very pleased to finally have the final Waste USA permits issued. This was for phase IV and it covered not only the expansion from a total volume standpoint, but also allowed us to increase our annual acceptance rate up to in excess of 300,000 tons; and we'll be working hard to take advantage of using that capacity over the course of the year. We also received during the quarter at Ontario, an important permit flexibility release which is going to allow us to accept or reduce--or eliminate, rather, quarterly limits on how much can be accepted quarterly. So allows us to do a better job to make up for any seasonally challenged quarters, for example in January and February, by taking advantage of the strong markets during the summer.

Southbridge facility continues to run at capacity. We've done a good job in filling the wedge. As I mentioned last quarter, we've developed about 4.5 to 5 million yards of capacity there and the facility is running at capacity and has through the fall, although I was there this week and, as you might expect C & D is very much weather dependent and as the weather deteriorates we do expect the C & D volumes to fall off in the southeastern Boston market. Hardwick conversion continues I think successfully. We're in the final stages of negotiating a host community agreement. We expect to have that done in January and then we will be required to go to a town wide vote in the spring of '05 to affirm both that and other zoning changes that are necessary.

Also during the quarter we got great news on West Old Town. We have been reaffirmed by the Bureau of Environmental Protection. This is the appeal board to the DEP for the state of Maine regarding the West Old Town permit that was issued. That reaffirmation was issued in October. It reaffirms, without exception all of the initial permit conditions and permit structures that had been issued earlier and while we do expect and have received a challenge and have further appealed that to the Superior Court, we do expect that the hurdle rate is getting very, very hard for the oppositions with regard to this project. We do expect to construct the first cell beginning in March and to be in operation in August. And we have got preliminary approval on the sludge mixing program. As you know the landfill has been a sludge landfill for Georgia Pacific for well over five year and so there's about a million tons of sludge that we want to mix and restabilize with MSW or C&D related material in order to better expand and build on that landfill.

Also during the quarter the Highland vote was affirmed. This was a public referendum approving a 40-acre expansion at the Highland facility. For those of you who may not be familiar, Highland facility was a greenfield facility we bought it in '97, I believe. At the time while it was greenfield, it had a substantial local opposition. We entered into a host community agreement on the theory that, in time, we could demonstrate to this community that this facility was a real asset to them and therefore we agreed not to expand the landfill subject to referendum as a condition of the host community agreement. We're very pleased to report that that public vote was taken in November and it affirmed and approved the expansion which will add considerable volume to the landfill. We are in the process of expansions and at some point in the fiscal year '06 I would expect that we're going to be able to increase the daily intake at this facility from its current rate to something close to 1,000 to 1,100 tons a day. John mentioned additional opportunities, as you know, Chemung has announced through an RFP, which will be due in April. So we will be closely working and following that as we are several other fronts. Finally, one final item that I touched on earlier, which was the Brockton extension. We will be able to operate Brockton through the summer of '05.

Moving out of solid waste into recycling, FCR continues to perform very nicely. Their revenues are up, their EBITDA remains very strong, as Richard reported. And while we did suffer some volume loss, primarily due to the hurricane in Florida, as we have four or five facilities that are either directly impacted by the hurricanes that came through Florida or tangentially impacted impact. And with lines down about 2%, our overall EBITDA held up very, very nicely. Margin improvement moved up to 20.7% for the quarter which is very good for the recycling business. We've seen nice commodity pricing support during the quarter. Commodity pricing was up 18% over what we had forecasted it would be from a budget standpoint and, as I reported last quarter, we did that purposely to be cautious. We are also seeing a continued improvement in our turnover rate. The City of Ann Arbor has approved funding to upgrade the plant in Ann Arbor.

We are in the process of introducing optical sort technology at our Camden and Boston facility for PET. And while we think pricing will continue higher than forecast, and I know that there is some interest on the Street to try to suggest that we've been overly conservative; we remain cautious given the strength of the dollar -- or the weakness of the dollar relative to foreign currency and the impact that the export markets will have and we think we're nicely positioned, though, for the rest of the year. We did have a slightly higher variable cost principally driven by bale wire and the lower volumes and, as we all know, that it's not just revenue and commodity pricing in this business, you also have to be the low cost provider of service. So we continue to be intensively focused on our dollar per ton operating cost and technology which we can introduce to change that and differentiate ourselves. EBITDA margins were close to 20% and we think that this business would perform according to our forecast plans that we've announced for the balance of the year.

Moving out of recycling, US Green Fiber, sales for the quarter were 35.6 million, EBITDA was 3.3 million. We have continued to see a considerable growth in this business. This is a 28% growth in sales this quarter over the previous quarter and the same quarter in '03. Each of the segments have sustained considerable growth. Contractor sales were up over 40%. Manufactured homes even managed to develop a 5% increase and retail sales were up 26%, with an overall sales increase of 28% for the quarter. We believe we're on pace for, as you know, US Green Fiber is on a calendar year. So calendar year '04 they're on pace to make $12 million of EBITDA. They will repatriate this month a dividend back to each of the parents, so they are free cash flow positive and we expect on calendar year '05 for them to be in the range of about $15 million. With that I'll turn it back to John.

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

Lionel Jolivot, Goldman Sachs.

First question on the pricing, basically you were saying pricing was negative 0.2% and if you exclude the impact of mix and special waste, it's basically up 1.3%. What's the impact on volume because volume reported is 3.4%. If you exclude the impact of the special waste where does it go?

We didn't do that calculation, Richard could probably do that for you and get back to you with it, but we don't have it as part of the presentation.

Okay. That's fine. Then going back to --

I don't think that it would be all that significant because we're really talking about the -- we would just need to do the calculation for you, just don't have the information off the top of our head.

Okay, but it should not be that significant, volume was still up pretty nicely this quarter?

Correct.

Then in terms of pricing, can you just tell us a little bit more about the landfill pricing versus collection pricing during the quarter?

Yes. If I went to each of the landfills, generally speaking, with the exception of Brockton where the pricing year-over-year was down and that was principally because of the soil market and big dig market. Each of the landfills had a very modest pricing increase or were flat to the previous quarter. So we are seeing, I think, a given--given the circumstances a good connectivity, if you will, to the economy and the general strength coming out of the economy to be able to push pricing at the landfill.

Okay. And you know given the improvement in volume, I mean, I know that the second half of your fiscal year is clearly slower. But given the overall improvement in volumes and in the economy, do you expect to raise landfill prices to be a little bit more proactive with the pricing?

Well, I think that there is -- I think there's a very healthy perspective in the industry which landfills are very important drivers and the most capital intensive piece of assets that we have, and that they may not be generating the returns on capital that they ought to be. So we totally agree with that perspective and landfills are our engines for pricing growth. And we take every opportunity consistent with being consistent with the marketplace and being a low cost provider of service, is to test the elasticity of the marketplace. Because I think the industry generally appreciates they're not getting the kind of returns that they really ought to get on their invested capital. And we have a very similar view and we are-- we try to be good stewards of that point of view.

Okay. And then in terms of your full year EBITDA guidance, your original guidance was 104 million to 108 million. It seems to me that your LTM EBITDA is already 104.6 million and you should continue to see the benefits of Southbridge and Ontario County in the second half of this year. So is it fair to say that you're likely to come at the high-end of your guidance if not slightly on top of your guidance?

I think it's our perspective that we're comfortable with the guidance that we gave initially and we're, you know, from a practical standpoint, we're looking to put ourselves in a position where we exceed the expectations that we lay out. So at this point in time, I think we're just comfortable with the guidance that we gave. To the extent that we get to the end of the third quarter, we'll obviously look at that again and be talking about what we see after our third quarter.

And from a bigger picture perspective, last week ISI was acquired by BFI Canada and we have also seen some asset swaps in the past couple of weeks. What are you seeing in the industry in terms of M&A activity, first, and secondly, what is your own out look in terms of M&A activity? I know that historically you said that you would be focused more on tuck ins or small acquisitions of disposal capacity, is it still the same? And last thing, what could be the impact of this $250 million shelf, because it will clearly give you a little bit more flexibility if you needed to raise some additional financing?

Well, I think that we have laid out a strategy that we've been executing against for a couple of years now and, first and foremost, we needed to develop additional disposal capacity. With that in place we've a really begun to reinvigorate our tuck in acquisition program and we'll look at other acquisitions that would be larger acquisitions. But, again, within the geographic region that we are operating in currently. So we have a terrific opportunity. I'm not sure whether you're familiar with our discussions historically on the opportunity we do have. You know, 4 or 500 million of opportunity that overlays out existing franchise in the northeast from a growth standpoint.

So we're very fortunate in that we have significant opportunity to grow within the existing footprint. Our perspective, though, is that that growth needs to come with margin improvement, so our utilization of capital on a go forward basis is to improve the performance of the existing assets and continue to drive our strategic plan. We're not seeing any real significant, M&A activity other than the transaction that you just mentioned. There's not a lot of activity in our markets. There's not a lot of activity that we're seeing for the opportunities that we're earmarking and so, I think on an overall basis there is some opportunity for swaps and divested assets from other public companies that would certainly make sense that could be larger transactions.

But I think with regard to the shelf I think one of the things as a management team that we're very conscious of is capital structure. We need to stay ahead of our strategic plan with our capital structure and we need to provide flexibility to do that. I think if you go back to what Richard was-- Richard did when we did the high yield, we did that well in anticipation of the need that we currently have for the development of our disposal capacity from a landfill standpoint. So there is nothing imminent. There is no intended uses at this point in time in terms of the shelf. It was simply put in place for us to be proactive. Richard essentially is doing his job to be proactive and be out in front of what our needs are from a financial standpoint. Those are some of the lessons learned from history and I think we're clearly very sensitive to making sure that we have a capital structure that will give us the kind of flexibility to execute on any opportunity that may be in front of us.

[Caller Instructions] Tom Ford, Lehman Brothers.

Jim, wanted to ask a couple of questions to make sure I heard you right. Could you back over what the Highland tonnage increase would be?

We are currently running at about 750 tons a day which I think, I forget what the annual numbers are where that equates to. But we expect to be able to run and increase the Highland tonnage to around 1,100 tons a day. But that will be subject to a seasonal permit which is in process today and we expect to have completed by first quarter of '06. So that would be June, July of '06. But we will, as a result of both the referendum and that permit, because of the additional acreage that we've now been approved, we will be able to ramp the facility up and still retain our goal to have 4 years of disposal capacity at that facility and that's really what's driving it.

So when that comes on, though, it's likely maybe a part of '06 and into fiscal '07 type event in terms of incremental contribution.

Yes. I don't think it would be a cautious position to think that any of '05 will be impacted by it, but we will try to take advantage of that in our '06 forecast.

Great. Then the other thing, you guys had mentioned, John or Jim, Chemung. I know that the RFPs have happened. Just wondering two things, number one to the degree that you can or want to feel comfortable about it, if you want to talk about the potential timing as you understand it on Chemung. That's the first question. The second question is, you mentioned four or five opportunities are out there, is anything as visible in addition to Chemung?

I think it's fair to say, Tom, that we really don't have any comment on Chemung. You, obviously, you saw the article in the paper where the RFP is coming out. We've indicated on the last couple of calls that we're working on other opportunities but, clearly, the RFP just barely came out. So we really don't have any comment and can't really comment on the timing relative to Chemung. It just wouldn't be appropriate for to us really make any comments on that. Other than to say, as we have, we have other opportunities. We believe we're going to add additional disposal capacity to the franchise. We're committed to do that and we have four or five opportunities that we're working on that are in various stages of development. But going back to what happened with regard to McKean, we've got to be sensitive to make sure that people don't start building expectations before we've even had the opportunity respond to a proposal.

Just from a pure administration standpoint the RFP is done under 120 W. It was issued this week. It requires a draft comment period of 90 days. It will run until the end of February and then there'll be a 30 day period to collect comments, then they'll issue the RFP in the 1st of March and then they will ask for bids to be submitted on the 15th of April. So it's a fairly standard 120 W process in the state of New York. And we'll all be busy between now and April 15 and probably not want to talk very much about it until after that.

That's really helpful. Last question is with respect to, I think, Jim, did you mention that Green Fiber you're looking for somewhere around 15 million of cash flow?

I said that we are on target to finish calendar year '04 with about a $12 million of EBITDA. And our current forecast, based on the current strength of the market, and while I think the housing industry remains positive about where that industry is going to grow, there's a lot of variables in there, particularly interest rates, which could change that. But the current growth that we're seeing and the strength of that industry, we believe with the current pricing in place that we've made that we will be able to be talking about a forecast of $15 million for calendar year '05, for that business.

Bill Fisher, Raymond James.

Jim, you touched on opportunities for margin improvement and I assume landfills and internalization are a big part of that and maybe densifying routes. Is there anything else that jumps out in terms of opportunities you guys are looking at to improve margins?

Well, really-- if you really get into the details you have to get into details and look at this business region by region and each region has a different set of opportunities, so there's not one answer that fits all. But we've got real opportunities in the central region to continue to roll-out our KPI program and to drive and be the low cost provider service and continue to-- continue to be the model region of the three. We've got real growth opportunities in the western region as evidenced by what we did last year with Ontario and then what we can do with tuck ins and other acquisitions that will help us to densify in and around Ontario and, obviously, picking up and focusing on opportunities like Chemung.

In the eastern region, as you know, we've split that to the northeast and southeast and a great deal of effort is now underway in the northeast on the implementation of the West Old Town project and driving margins there now as a result of that. We will suffer in the northeast because we will, temporarily, effectively be running two landfills, both Pine Tree and West Old Town, as we transition from one to the other. So there will be some margin deterioration slightly in the northeast reflective of that transition but once we get past that, we actually believe that we'll grow margins.

We're actually being impacted by that now so there's no --

Right. And in the southeast we're, frankly, really driving margins there through densification, sales efforts. We've shut down the Admington facility. We are looking at both focused sales growth that allows us to densify routes as well as key independents that we can bring into our system. And, as you know, we've done a good job of trying to position both Hardwick and Southbridge to increase volumes. And we've done a good job, I might add to you, of taking waste out of that market and getting it up to Maine Energy to help in terms of the overall mix of material there.

So the answer to your question is, you know, if we have any real silver bullets we're not going to tell anyone about it because we're going to go and implement it and then when we get it done we'll crow. But each of the regions are in different growth stages of their life of maturity and they each deserve and have different specific strategies. We just completed a year long strategic review in the last month on all of the regions and so we're-- we think the right place to be is focused on margins as well as growth and we are going to continue to do that.

I think one of the other issues that sits over the top, Bill, in terms of margin improvement is what we're doing-- the programs that we've had in place in terms of improving the capabilities of our people. As Jim said, we've been through very a significant strategic planning process over the last three years and really what we hope will come out of this strategic planning process and the development of our people is our ability to improve our operations in the most difficult operating environment that we have during the course of the year which is our third and fourth quarter.

To the extent that we can improve the overall skill set and performance of our people, strategically we should be able to do a better job of predicting where the business is going to be in the third and fourth quarter. It's a real goal from a management standpoint and clearly over time it's not quarter-over-quarter. This is really an investment in the three to five-year process that will in fact really bring value, in our view, in our ability to get every one of those division managers better connected to that external environment that he's operating in and we've had real good results there. We've had real good results in terms of bringing the right people into the organization, making sure that we're doing the things that we need to do to make sure that everyone coming into the organization has a clear understanding of what the mission, vision and values of the organization is so that we can create that long-term value by margin improvements.

I mean the real effort in terms of investing in our people is to drive exactly that, is to really drive margin improvement over time. We've demonstrated the capability to really grow the business. We need to now really demonstrate the capability as we grow the business to improve the margins.

Just real quick for Richard, maybe, or Jim. I think you guys had targeted 28 million of growth CapEx on these landfills and the collection facilities this year. Sounds like Maine spills into both this year and next, but I guess for '06, ex any new sites, does that number fall off pretty sharply?

I think --

We think it does, sure.

I think if should fall off for '06.

Nothing else, other than what you have on your plate, other than Maine a little bit that would be about it?

I think that, I think that the it's likely that it's going to fall off in '06, Bill. We're still going to have additional development, it really depends on where we end up and how much we get done this year. It's very likely that it's going to drop off some next year but it could very well be, depending on how successful we are adding additional disposal capacity, that we-- that we could have demands for any opportunities that we execute on between now and then.

Michael Hoffman, Friedman Billings Ramsey.

I want to follow back up on the question about BFI Canada and ISI because I'm not sure I got what I was looking for. That acquisition happening, are you seeing BFI Canada coming across the border in New York? If not, do you expect them to now with having done this or do you, what do you see as their sort of M. O. Now that they've done this?

I mean, I don't know that we would suggest -- we would strongly suggest you talk to them because we don't speak for them, but we can give you a competitive analysis point of view. First of all ISI, with the exception of the purchase of Seneca Metals did not participate in our marketplace. As you know, ISI is principally based in New York City and then a large operation in Texas. BFI Canada was not in our marketplace. They're in Montreal. They're a little bit in Toronto. They're in Alberta and they're in British Columbia.

From our perspective you've got two disparate businesses, one kind of stretched cross Canada, the other one kind of stretched in two markets but not much overlap in North America. Both with their own set of, kind of, special characteristics relative to wanting to public or part of equity funds and so forth; and they found a partnership that seemed to serve their purposes, whatever those were. I don't think them achieving their merger necessarily changes the competitive analysis that existed before the merger. And I think that they--I think ISI was challenged by a high debt load. I think the combined entity will be challenged by a high debt load and I think I would expect that BFI Canada management, which seems to be the surviving management, which has no real recent experience in managing North American--or managing USA assets, will spend some time getting used to very complex operations in New York and in Texas, frankly. And so I don't know that, short-term, we see them as a competitive force in the northeast where we operate.

So at this juncture you haven't seen any sense of deal prices when you're talking to some of these tuck ins, anybody that's backing off going, hey, I'm going to hang out and wait and see if BFI Canada shows up and starts buying?

No. We haven't really seen any real activity like that at all, Michael. It's not to say that we couldn't see that. I think that we're not sitting here with a mindset that that certainly couldn't happen. I think that the perspective that we have, though, is to solidify and continue to drive our business forward and execute our strategy and nothing in that transaction, at this point in time, changes our strategy.

Corey Greendale, First Analysis.

John, in one of your earlier comments you eluded to capital structure. I was just wondering if you could review for us a little more detail, your current thinking about capital structure? I know in the past you said you like to keep leverage under four times EBITDA, is that still the case? And if a larger acquisition opportunity did arise, is there some stock price below which you don't feel comfortable issuing equity?

I think that it's fair to say that historically we have said that we want to keep debt to EBITDA below four times. If we had an opportunity and took us over 4.2, 4.3, then certainly that's plausible. But our goal would be to keep our debt to EBITDA below four times. And I think we've also said historically that we're not really interested in issuing equity until we get in the 20s. I mean I think we're asked point blank that question a number of times and I think our collective opinion is that we're not interested in issuing equity at current prices. But obviously at some point in time,and historically we've said in the low to-- in the low 20s that certainly could be a possibility.

Okay. Then I wanted to ask, historically, looking sequentially July to October quarter, revenue has declined by a couple of million. This quarter was up a couple million. There's a couple of moving pieces with the divestiture of the brokerage business and adding a couple new landfills. Could you just give some color on whether you think the seasonality pattern has changed with those mix changes or is the sequential improvement really a result of economic environment and commodity pricing?

I think it's a combination of three things. I don't think that there's any change in the seasonality of the business at all. I think we do benefit from the commodity prices. We obviously have the benefit of the disposal acquisitions and the partnerships that we put in place driving the revenue for the quarter and I think that -- I think it's those factors as opposed to any-- any seasonal change. One could argue that when you look at where we are now, the question is what kind of a winter are we going to have. We've had somewhat of a mild November, which is a slight positive for us. But on an overall basis Corey, it's really-- what we're doing strategically to execute our plan which is driving that as opposed to any seasonal change.

Then one last quick one for Richard, I think. It looks like spending on closure, post-closure in the free cash flow reconciliation, that jumped up by a couple million sequentially. Is that because of Brockton already or why is that? And what would you expect for the next couple of quarters in terms of outlays for closure, post-closure.

Most of that expenditure is actually at Southbridge and it'll likely continue at that rate for the next couple quarters. We have a closure project that's ongoing there that Jim referred earlier, the wedge fill.

Ross Berner, Weintraub Capital.

Just in terms of being on the proactive planning for both the balance sheet and future acquisitions, you've definitely proved out US Green Fiber, at least from our perspective, it's growing rapidly. You know, it's $150 million run rate business, maybe 15 million of EBITDA for next year. You've long identified it as a noncore asset but now that, I don't know what kind of multiple you could get for it but your stake might be worth 45, 50 million or close to $2 per share. Could you talk about your plans and how you view this asset? Because the best time to sell something like this is when it's growing rapidly and continues to show strength?

I think that it's a fair question, Ross. I think that we have the same perspective in terms of the performance of Green Fiber and we're-- we look at it on a-- each quarter, evaluate our position at that point and I think that we're also of the same mindset with regard to, you know, you need to make sure that you look at it and you don't wait to the point in time where you've really waited too long to monetize your position. I think that the fact of the matter is that we're still driving the technology, the reasons for the holding of the business in the first place was to really understand what kind of opportunity was from a technology standpoint and we're not through that envelope at this point in time, at least from our standpoint. But it is something that we go through an evaluation on a quarterly basis. We look at where our position is and evaluate where we are. And we're doing that on, as I said, on a quarterly basis.

Right. How sustainable, John, do you view the growth rate on Green Fiber? How good do you think the opportunity really is and how much do you feel like you need to capture that in order to maximize the value?

It's a good question. I think that we obviously feel like the technology could have a very significant impact on the business and its ability to penetrate the insulation market. If we didn't believe that, Ross, we wouldn't obviously keep the business. So I think that both Jim and I feel very strongly that the technology could have a very substantial impact on the business's ability to impact the insulation market.

Kind of going to the core question there, I think, or the underlying variable that your question is implicitly aiming at is how credible, how strong, stable, is the housing market? And based on, there's a lot of people in that business in the housing sector, a lot of reports and generally the current wisdom is that that's kind of a stainable market for the next ten years being driven by a very strong immigration growth in housing demand --

Jim, I'm not going to disagree with that but do you feel like, as a solid waste company, it should be your view to make a bet on or even have a view on the housing market and the sustainability? I mean it's--

No, we were just trying to answer--

--Relative to the risk.

We were just trying to answer your question relative to risk. And so it's an issue, I think, that is also coupled with what's the opportunity to harvest that and where do you deploy the capital. And if you just deploy the capital to pay down debt and you could get-- at some point there's a return on capital. So you have to look at paying down debt versus redeploying it into the solid waste market or letting it continue to grow while those opportunities mature. So it's a balancing act between all those issues.

I guess your cost of debt is in the 7, 8% range, so I don't know what kind of returns-- return on invested capital you're getting on Green Fiber.

Far in excess of 7 or 8%.

Okay. Just -- I guess the, it's all sort of pertinent to the, even though you stated publicly that you don't want to sell stock below 20 and this is an easily quantifiable asset that frees up flexibility.

I think we've also said too, Ross, to the extent that things began to develop where we could see that we really needed that capital, that we're not uncomfortable thinking that we can monetize our position and maybe we do that with a bridge. There's many different financial instruments and ways that we can do that. So I think that we're of a mindset, and I recognize that the timing is everything, and-- but I think that we've also said clearly that if we had an opportunity where we needed equity, that would be one of the first things that we go to.

Leone Young, Smith Barney.

Most of my questions have been answered, obviously, but I was wondering if you could talk a little bit more about the competitive landscape, what you're seeing from competitors in terms of pricing and, in particular, I believe it was the east coast that pricing was still sort of flattish and sluggish, and maybe your thoughts on why that is given the strength in the volume?

I think as Jim said before, Leone, I think it varies from region to region. I think that part of the-- part of that process in terms of overall pricing is a function of the leaders in the marketplace and the real question in our mind is, in the areas where we have the opportunity we will continue to test elasticity and try to move pricing forward. But we need to do that in a manner that is-- that is reflective of what kind of elasticity is in the marketplace and what we're feeling back from the customer base in the given market that we're trying to move pricing to more acceptable levels.

That is all the time we have for questions today. Mr. Casella, I'd like to turn the call back to you for any additional or closing remarks.

Thanks. I'd just like to emphasize a few important topics. As you can see from the results from the quarter, the business is performing well. Strategically we're executing our plan. We're beginning to see some benefits from the health of the overall regional economy. We continue to focus on, not only internal -- not only external but internal disposal capacity in terms of adding additional capacity to the annual tonnage of the facilities that we already have in our portfolio, as well as continuing to develop additional partnership opportunities. As I said, also we're very much committed to densifying the existing franchise, moving forward with the strategic plan, reinvigorating the tuck in program. We have done that. We're out doing that now for about a quarter. We've reinvigorated that with our division management team and we'll begin -- you'll begin to see us do more acquisitions, more tuck in acquisitions as we densify the franchise.

And most of all we'll continue to invest in our most important asset which is our people. We will be well rewarded over a three to five-year period of time as we continue to invest in our people, we continue to help them do a better job of managing their local markets. With that, I'd like to thank you for joining us this morning on the call and we look forward to talking to you in March when we release our third quarter '05 numbers. Thank you very much and have a very good day. Thank you.

Thank you all for joining us today. That does conclude today's presentation.