Casella Waste Systems Inc (CWST) 2005 Q4 法說會逐字稿

Good day, everyone, welcome to the Casella Waste Systems fourth-quarter fiscal 2005 year end 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. Joe 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 will be discussing our fourth-quarter and fiscal year 2005 results. These results were released yesterday afternoon. Along with a brief review of our financial performance and an update on the Company's activities and business environment, we'll be answering your questions as well.

But first, as you know, I must remind everyone that various remarks that we may make about the Company's future expectations, plans, and prospects constitute forward-looking statements for the purposes of the SEC Safe Harbor provision. Actual results may differ materially from those indicated by those forward-looking statements, as a result of various important factors including those discussed in our prospectus and other SEC filings. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. And therefore, you should not rely on those forward-looking statements as representing our views as of any date subsequent 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 measure is available in the financial tables section of our earnings release, which was distributed yesterday afternoon and is available on 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.

Welcome, everyone. We've got a lot of ground to cover today, including a recap of the quarter, the fiscal year, as well as our guidance for 2006. We will try to be as concise as possible in order to leave enough time for as many questions at the end of the prepared remarks. First, as far as the quarter is concerned, really a terrific, solid quarter. We continue to deliver solid operating performance and focus. And we're beginning to see emerging strengths from a disposal capacity standpoint.

First, results for the quarter, revenue was up 7 million, a bit increased, 1.2 million, a 6% increase over the same quarter last year, EBITDA margin for the solid waste group was up 90 basis points. Internalization in the quarter improved 3.7%, from 56.1 to 59.8 from '04 to '05. Again, terrific quarter, terrific end of the year. Some highlights for the business for fiscal '05. And, again, many of you have heard us talk about our three- to five-year goals of growing our EBITDA 8 to 10%, improving our margin, and improving our internalization, and I can assure you that the results that we have for -- have delivered for 2005 are clearly on the mark in terms of us delivering and executing on that plan. Our EBITDA growth for the year was slightly over 14%, operating margin improvement was 80 basis points, and our internalization rate improved 360 basis points. So, again, we're really, obviously, very pleased and proud of the effort of all of our folks who have done a terrific job in '05 in helping us make sure that we execute our plan in terms of creating real, long-term value.

Our success on the landfill and disposal side has, naturally, affected our short-term free cash flow generation, as we make the necessary investments in developing that capacity. But as we have seen historically, once we make the front-end investments in the landfills, our historical performance has shown that the landfills generate significant EBITDA and free cash flow and we obviously can -- obviously expect that pattern to continue into the future. We do continue to develop additional disposal capacity internally. We continue to drive permit expansions at all of our facilities. Externally, recently we were chosen as the preferred vendor to negotiate for the operation of Chemung County. And additionally, we have additional opportunities that we're working on from a disposal standpoint.

I think one of the most significant measures of our success in this area is from the end of fiscal 2003 to the end of fiscal 2005, we've added over 52 million tons of disposal capacity, from 29.6 million tons to 81.7 million tons of disposal capacity. I think the most significant aspect of that, which I think is missed by -- by most people, is that the -- we've done that in the region of the Company with -- in the region of the country with the highest disposal costs. As an example, our average rate is 45 to $50 a ton. So we're, obviously, very pleased with that performance. It is, indeed, what we set out to do a couple of years ago. And, again, the execution in that regard really does speak for itself. So all in all, a really solid quarter, and from our perspective, a terrific year.

With that, I'll turn it over to Richard, who will go through the details on the numbers.

For the quarter ended April the 30th 2005 revenue increased $7 million, to 115.8 from 108.8 million, or 6.4%, with some 3% of that year-over-year increase, or $3.3 million, arising from the acquisition activity over the last year. Revenue for the quarter breaks down as follows -- solid waste, 90.8 million; FCR, 20.9 million; and other, 4.1 million, for a total of 115.8. Gross margins were up 70 basis points year-over-year. The key factors were lower disposal costs, offset by higher fuel and transportation costs. Insurance costs were also down. General and administration was up as a percentage of revenue year-over-year, and also in dollars, but on a year-to-date basis, we met our guidance of approximately 13%. This caption for the year includes some 2 million of out-of-pocket costs associated with Sarbanes-Oxley, when our budget and guidance included 4 to 500,000. And that amount does exclude the internal cost that we also incurred.

Moving on to EBITDA. EBITDA increased 1.2 million, to 23.0 million from 21.8 million, with EBIT margin remaining basically flat. On a year-to-date basis, EBITDA was up 13.4 million, or 14.3%, to 107.4 million, well ahead of our targeted 8 to 10% year-over-year growth target. Year-to-date EBITDA margins were also up 80 basis points. EBITDA breaks down for the quarter as follows -- solid waste, 19.3 million; FCR, 3.9 million; and other, negative 200,000.

Solid waste margins increased by 90 basis points from the previous year. These results reflect the same factors mentioned previously relating to costs of operations, partially offset by higher SG&A as a percentage of revenue. FCR's EBITDA margin decreased this quarter. Average selling prices were down slightly and volume is up. The margin was mainly impacted by higher operating expenses as a percentage of revenue, due to the higher cost of health insurance.

Depreciation and amortization. This expense was down 700,000 year-over-year, which arises mainly from landfill amortization, principally due to lower volumes at Brockton as this site comes to the end of its life. The last, on extinguishment of debt, included in this caption is the write-off of the unamortized deferred financing costs associated with the Term B portion of the previous credit facility. The balance will be carried forward and written off with the cost of the new facility. The combined amount will have -- will amount to approximately a charge of 500,000 per quarter.

Income taxes, the tax rate for the year moved down slightly to 44.3%. That's small change on a year-to-date basis, moved the rate in the quarter upwards because it was a benefit. And the impact was compounded because pre-tax income was a loss. Net income for the quarter after preferred stock dividends amounted to a loss of 1.3 million, or $0.05 per common share. This amount includes the pre-tax charge of 1.7 million related to the deferred financing costs that I previously described. Without this charge, EPS would have amounted to a loss of $0.01. We're looking at the year-to-date EPS comparison. If we eliminate the one-time charges from both years, and apply the current year's tax rate to both years, then on an apples-to-apples basis, year-to-date EPS for the prior year would have been $0.15 versus the $0.09 reported, while our current year would have been reported as $0.20, for a 33% year-over-year increase.

Moving on to some miscellaneous statistics. The average interest rate for the quarter moved up to 8.5%, including amortization of financing costs. Net of these expenses, it was 8%. Availability on the revolver at April 30th was 140.4 million, after taking into account 32 million of LCs outstanding. And as you are aware, we restructured our senior credit facility and that -- and we were able to move to a more flexible revolver loan. This was at a 75 basis points reduction in spread for the former loan. In other words, currently, at the present level on the grid we're at LIBOR plus 2%. We're also very cognizant of our leverage in interest rate exposure. So after closing that deal, we put 75 million in interest rates in swaps in place, commencing in May 2006 at 4.4% for two years.

Capital expenditures for the quarter amounted to 24 million, bringing us to a total for the year of 80.1 million. The maintenance portion of these expenditures for the full year amounted to 55.4 million, including expenditures on the facilities of 6.4 million. Maintenance capital increased over original guidance, as we spent more on replacement vehicles than budgeted, plus we replaced equipment subsequent to some tuck-in acquisitions. The growth component, 24.7 million, is comprised of 17 million on the landfills, versus the 20 million we gave originally in guidance, mainly due to timing on the work at Southbridge, plus 4 million on the FCR building, which we referred to in last quarter's conference call, plus expansion expenditures at other landfills, especially Pine Tree and Waste USA.

Payments under operating leases for the quarter amounted to 500,000. This represented mainly payments at Southbridge. One tuck-in holding acquisition was closed during the quarter, for a total purchase price of 650,000. The purchase price multiple paid was three times EBITDA. We also closed on two new closure projects, the Worcester landfill and the Colebrook landfill.

Free cash flow was negative for the quarter, driven by the higher capital expenditures as well as higher interest payments as the high-yield payments are due February the 1st, plus the closing of the new financing required all accrued interest on the old facility to be paid. Working capital was positive, as in the fourth quarter last year. Accounts receivable was up from the higher revenue in April, while DSO remained at the same level. Accounts payable increased, consistent with the business seasonality, and higher CapEx in the quarter, while payroll accruals were also up.

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

Thanks, Richard. And then I'll give it back to you for some reflections on the '06 budget. First, a little bit of economy and economic activity. As you know, the fourth quarter is generally one of our most challenging quarters from a seasonality standpoint, and so we were pleased to see that, I think, that the economic activity in the fourth quarter was actually on-line or slightly ahead of our expectations. And, certainly, going into the first month of this quarter, we seem to feel that there is a good robustness to the economy throughout all of the regions.

Looking at solid waste, as I said, the fourth quarter's generally our most challenging, and we're very pleased to see that the solid waste business has grown 11.7% quarter-over-quarter, that would be Q4 '05 versus Q4 '04, on a revenue gain of 7.4%, with the indicated margin improvements that John indicated. Overall for the year, solid waste has grown nearly 12% on year-over-year basis. Of course, the overall business has grown 14% on a year-over-year business at the EBITDA level. Landfill volumes are up about 15% for the quarter. This is on a same-store basis. And we continue to see some volume increases, although I will tell you that that's counteracted by some price pressure in some of the areas, particularly in the -- some of the markets associated with the soils projects.

From an internalization standpoint, the Central region has maintained steady at about 80%. The North Eastern region is 57.2%, which is a gain from Q3. The South Eastern region is -- internalization has risen to 62% from -- and that is also a gain from Q3 '05. And the Western region has essentially remained flat, at about 44%. But the overall internalization rising from 59.8% to -- as compared to 56.6%. We will talk a little bit more about capital expenditures, so I'll pass over that because I will do that through the lens of talking about these landfill expansions and development projects.

But, quickly, a little development summary. We remain, actually, surprisingly on track, I think, to solve or to move forward on settling the Maine Energy litigation. Some of you may have read recently that the Governor Baldacci has gotten involved and offered his good services. So I think there's a reasonable chance that we may very well end up with a settlement through the fall sometime, and we'll communicate more of that as it gets clearer to us as well.

From a development standpoint, the quarter was a very successful quarter from us. First, just an update at North Country. Those of you following our continuous work battle there, during the quarter the Superior Court ruled that the ordinances were invalid, that the town was attempting to use to work against our existing permit. We have no doubt that that will mean we'll be back at the Supreme Court, but it is a significant ruling and we remain with about 550,000 tons of existing capacity on the 51 acres with a very, very favorable Superior Court ruling that we believe will stand at the Supreme Court level as well. Waste USA, as we reported, has received all their permits. We've -- this, like many of our facilities, we've been able to position as a 30-year asset. And we're running in excess of 350,000 tons per year at that facility -- facility.

Ontario, we are running above our pro forma targets, we're running at 600 -- in excess of 630,000 tons per year. I would say this project is now mature, although we continue to make investment as part of the initial acquisition. And I'll talk a little bit about that in a second. I do want to indicate that I think Ontario is a typical development project for us, much like Chemung, where when we get it to maturity, it meets the -- the following kind of profile, if you will. It's going to exceed our pro forma expectations by about 113%. It's running in excess of 49% of the EBITDA margin. When we look at it on a long-term basis, it appears that we bought it for less -- somewhere between five and six times cash flow. And I think if you -- the more important metric is if you look at it all in, including the various investments that we make over time rather than up front on these projects, the IRR is north of 12%. And so we're very pleased that Ontario is meeting our expectations and is a good role model for, I think, some of these other projects to help you understand where we are in this process.

Southbridge, as you know, is one of these projects in development. We are making very good progress on it. We are kind of in year one of a three-year development program there. We expect to be able to bring this project to about 500,000 tons. We are actively negotiating at this time with the community on an amended and revised host community agreement, and we hope to have more to report on that in the next quarter.

Hardwick, as we have talked about in the last quarter, we actually signed the new host community agreement. This agreement will allow us to take this facility from 80,000 tons to 234,000 tons. The actual signature of this, which took place on June 1st, was a combination of approximately 10 months of weekly meetings with a very large, in the public, negotiating committee, in which we dealt with a number of issues and very, very pleased with this outcome. We think it serves as, again, another role model for our development projects. And over the next two to three years we will bring this facility to 234,000 tons. We do have a zoning vote that we'll have to do, another town-wide vote, this summer or this fall. So it's not quite done yet, but I think it's -- signing of the host community agreement is a very good indicator of the progress that we've made.

West Old Town, we have started our mixing program there. And we expect to have all of our cell construction done by the fall of '05 and to be in full operation there beginning in October, November. As you can appreciate, that when we get done with West Old Town, kind of the net improvement between West Old Town and Pine Tree is that we will add about 200,000 tons in capacity, and that we will have added a 30-year asset to our disposal -- disposal inventory.

With regards to Worcester, which Richard mentioned, we closed on that in May. This is an initial phase of 500,000 tons. We expect that the overall project will have on the order of about 1.5 to 2 million tons. This is a replacement project for Brockton, which we expect to phase Brockton out, and are currently phasing it out beginning with the phase-out to be, kind of, realized in October.

We've also announced that we have assigned and received permits for Colebrook. This is Colebrook, New Hampshire. We expect to be able to dispose of about 180,000 tons per year at this facility. It probably has on the order of 5 to 600,000 tons of capacity so it's a four to five year project. It gives us very significant life extension in the North Country, which, of course, helps us a great deal relative to North NCES and other strategies related up there. And this will be a nice addition for the Company over the next four years.

We have also announced or have been in the paper that we've signed a 30-year -- a 25-year contract with the City of Lewiston. This is to operate their landfill. This is a new landfill for the Company. We expect to actually sign on this agreement in -- in August, but it's fully negotiated and waiting final discussions with the various parties. And as I said, somewhere between 125 to 150,000 tons per year. We expect it to be in operation in fiscal year '06, and it will be in full operation, certainly, in fiscal year '07.

We are also very pleased with the addition of Chemung. That is a 120 done -- 120-w project, which we competitively bid against five or six or seven other bidders. We were, again, selected. And I think we were selected because I think we've done a better job of understanding what the customer really wants. This is a facility that's currently operating at 85,000 tons, permitted 120,000 tons, and our agreement on the bid will allow us to take this facility, when we receive the permits, up to 420,000 tons with the county's support. We expect that we will have this facility operating at this level probably within the next couple years.

We have also, as we previously reported, received the permissive referendum on Highland and will be expanding the annual capacity there by about 100,000 tons. And we've added an additional 11 million yards of expansion capacity at that project.

So overall, from -- from the solid waste standpoint, and from the disposal capacity standpoint, there has been some efforts to try to understand this, but I thought I would try to give that. If we take a look at just, what I would call are the dynamic facilities, which are the changing facilities in various development processes, Pine Tree, Ontario, West Old Town, Highland, Southbridge, Hardwick, Chemung, and Lewiston, I look at fiscal year '05, disposal capacity on an annualized basis and then I look at those facilities in -- at a maturity state. And generally we would say that that occurs in fiscal year '07 or beyond, but just call it a maturity state. The incremental capacity for those facilities is 1.6 million tons. And if we used our average tip fee, kind of, weighted average tip fee for those facilities, it's in the order of about $40 per ton. And so the yield from the EBITDA standpoint is about 20.

So we are looking at incremental addition to our franchise in excess of $31 billion -- $31 million of EBITDA from this incremental capacity. And so as you look over ourself, we look at each of these projects, and what we do is look at them from a total IRR calculation, invested capital, which would include purchase price and the development costs that we add into these projects. The model that we've developed that has been very successful in Ontario, in Chemung, and that is underway in Southbridge and West Old Town, is that rather than make up-front payments, as you would normally would on a purchase price, we are developing sustainable environmental economic development activities, which show up as capital -- CapEx. But when you look at them as an overall invested project, all of these projects will very much meet or exceed the Ontario frame of reference I gave you, which is, it would appear that we bought these projects for somewhere between 5 and 6, we will get a return north of 12%, and we'll have projects that will add 1.6 million tons of incremental capacity. So we're very comfortable where we are. I know there's been some issues about looking narrowly at this as CapEx, but you really got to look at what these projects are adding from an overall franchise standpoint.

Finally, also during the quarter we were awarded the mid-Con, Connecticut Resource Recovery Authority recycling contract. It's a 10-year contract with a five-year extension. It was competitively bid and FCR, again, did and outstanding job in being responsive to the customer needs, and has been selected as the preferred vendor by the CRA Authority. Looking a little bit at FCR on a year-over-year basis, their overall EBITDA growth is up 29%, based on the revenue growth of about 8%, and we've seen the margin increase from about 17% to almost 20%.

From a pricing standpoint, as you can appreciate, our pricing remains robust. And we continue to see that, although, I would tell you that in the last few months, we don't think that the pricing is -- is going to be moving up any further, and we've actually built a budget that reflects some conservatism in that. Quantities or volumes are down slightly, as is normally the case when prices is -- pricing is high. And variable cost is up slightly, particularly due because of bill wires.

Trailing 12-month margins, as I said, were about 19.9%. We've completed a number of planned upgrades in Camden and Boston. We've got a very nice optical sort technical improvement that we've put in there, and they've already realized 7 in Camden and 16 sorters in Boston, reduction from a labor standpoint. And finally, we expect FCR to continue to perform at this current level.

US GreenFiber. US GreenFiber had another good quarter. They're at $32 million for this quarter, in revenue, which is up 12% on a quarter-over-quarter basis. On a year-over-year basis, sales are up 18%, and continue to be driven by strong demand for housing. I think you've seen some other indicators in housing markets which indicates this business -- beside the business continues to be fairly strong. And outlook for the balance of the year is, in housing, we expect it to continue at the current rate. Margins are up on a year-over-year basis, and gross EBITDA grew by 38% on a quarter-over-quarter basis and 19% on a year-over-year basis.

We have put in place significant price increases to reposition the product line. Historically, it always been seen as a low-cost alternative to fiberglass. We think some of the product attributes even justifies us to reposition that, and those price increases have held very nicely. We will -- we achieved, for the fiscal year, $136 million in sales and $11.6 million in EBITDA. And we expect, for fiscal year '06, to exceed $15 million of EBITDA. The channels are up nicely in the contractor. Manufacturer home is the only channel that is really kind of flat, at a -- at an up 6%. Retail's up 17%. Total sales, as I mentioned, is up 17%.

And with that, I'll turn it back to Richard for fiscal year '06 budgeting information.

Thanks, Jim. As Jim said, I'll just make some comments on our 2006 outlook. The budget is predicated on a modest improvement in the economy. Core business volumes are expected to show 3% growth, but our net price increases are budgeted at 2.1%. I should say that that price increase excludes the impact of the change in the fuel surcharge, which we implemented effective May the 1st. FCR commodity pricing is budgeted to be flat year-over-year, with a 2.5% increase in volume. And if commodity prices were to take a negative move, a 10% downturn across the board would result in approximately $2.4 million decrease in EBITDA. However, we've got hedges in place which would offset that by just under $1 million. So we feel that FCR's earnings have been stabilized. As usual, only minor events are included for tuck-ins. This equates to 750,000 of operating income, plus depreciation of 250,000, resulting in $1 million of EBITDA.

As Jim said, we've had two very positive developments. We have two new closure projects coming on stream this year, Worcester and Colebrook. The last will allow us the opportunities to divert volume from North Country to save that air space as we move forward with [indiscernible]. And we also expect to divert tonnage from Pine Tree by the end of the summer into West Old Town when the remediation is completed and the first cell constructed. This will have an initial net negative impact. This is obviously more expensive to operate two sites than one. This will change over time as we add more volume into the system. The Brockton project, as Jim said, will be completed during the summer. So that will provide a headwind of some $2.6 million. So because we have to replace Brockton on a net basis, the aforementioned landfills are not budgeted to add significantly to earnings in the next fiscal year.

On the expense side, insurance costs continue to be difficult, especially as far as health care is concerned. In fiscal 2005, we experienced a 21% increase in health costs. Workers' Comp and auto is also showing a year-over-year jump. So insurance budgeted shows a net increase of 15%, from nearly 23 million to 26.5 million. For the next year, G&A's budgeted to be consistent as a percentage of revenue, in the low-13% range, showing the usual seasonal fluctuation. Depreciation and amortization, which historically has run at 14% of revenue, would drop slightly as a percentage of revenue for the year, consistent with the current year, 2005. Depreciation will be up, but amortization will show a net decrease, as Brockton comes to the end of its life.

Not included in the above EBITDA is the 13 million of EBITDA forecast in our fiscal year for US GreenFiber. Their operating income is forecast at 7.6 million for our fiscal year, plus depreciation of 5.1 million, which gives you EBITDA of 12.7 million. Therefore, our 50% equity interest in operating income would contribute approximately 3.8 million. Interest expense has been budgeted at 33 million, which is an increase of 3.6 million. That increase comes mainly from the higher balances outstanding, but also an increase in the expected LIBOR rate, partially offset by the 75 basis point savings in the new financing. The income tax rate is budgeted at 44.5%.

Free cash flow, as you will have seen from the press release, is expected to be negative this year because of the large outlay on capital expenditures. This year maintenance capital is expected to total 57 to 61 million, with growth capital accounting for the balance. The main factor in the growth capital is the development of our landfills, which accounts for approximately 32 million. As we just said, landfills are long-lived assets, requiring substantial up-front expenditures. The payoff is not immediate, but over the long term as we grow the volumes into these sites. The landfills concerned in this year's capital expenditures are West Old Town, with about 8 million; Southbridge, 6.5 million; Ontario, 4 million; and the MRF at Ontario, which would be about 6 million, plus glass beneficiating at that operation for 4 million; and then the balance will be on other existing sites.

For the balance of the growth capital 6 million will be spent on rebuilding facilities. Maintenance capital includes 24 million on the landfill -- in the landfill development category, which comprises 17 million for cell construction, 4 million for gas collection systems, and 4 million for common site costs. The major cell construction is at Waste U.S.A., Pine Tree and Ontario. We also plan to spend some 14 million on vehicles, as well as 10 million on machinery and equipment, 5 million of which relates to MERC.

The amounts invested in landfills have had a positive result from the perspective of the annual increase in volume. In fiscal 2002, we consumed 1.2 million tons of air space. That increased in 2003 to nearly 1.4 million tons, 2004 to 1.8 million tons, and 2005 our landfills accepted 2.5 million tons. These amounts exclude MERC and the closure projects. We've also looked out into the future to understand the magnitude of our capital expenditures as we go forward. And based on the landfills we have today and ignoring any acquisitions, we estimate that our maintenance capital expenditures for the next three years, commencing in 2007, will average in the 60 to $65 million range.

Now as our EBITDA grows, this will mean a significant increase in free cash flow and give us the ability to manage down our debt, while still allowing us to grow. Operating lease payments are expected to amount to some 5 million next year, the main components being Ontario and Southbridge.

And just a comment on the first quarter of 2006, as far as that is concerned, we are currently tracking to a similar result as the first quarter last year. To date, we've seen that a normal seasonal upturn, but no major volume swings.

And with that, I hand it back to you, John.

Great. Before -- before we take questions, our goal, obviously, is to answer as many as we can. So towards that end, I'd just like to ask everyone to limit the total number of questions. If you'd like to get back into the queue, certainly, you can do that, but I'd like to try to, obviously, get through as many people as we can. With that, could we open it up for questions, please?

Thank you. [OPERATORS INSTRUCTIONS] . We will take our first question from Lionel Jolivot with Goldman Sachs.

Good morning, and congratulations on the results. First, on the Chemung facility, I was just wondering, do you expect, or in your growth CapEx guidance for '06, did you include anything from Chemung?

Well, we -- no, we did not. But Chemung, we expect to probably take over the project, probably in August. And there will be -- the facility's currently permitted at 120,000 tons. So the expansion there will take some time to get those permits. So there is not any -- any allocation to the Chemung -- from Chemung into the budget from fiscal year '06.

Okay. And you mentioned that you wanted to expand the capacity. What's the timing? Basically, do you expect to -- in fiscal year '06, would you operate that -- the facility at 85,000, 100,00 tons?

No. I actually think from an incremental standpoint, given that we're not taking -- it's not in our disposal inventory now, we will probably be operating that facility at an annualized rate of probably of about 120,000 tons. But since we won't start until August, it will probably only add incremental for the year, probably about 100,000 tons of disposal capacity.

Okay. And in terms of EBITDA contribution, did you give a number for Chemung?

I think that you could assume that it's -- this is a market where tip fees are the order of 40 bucks a ton. And typically, the facilities when they get up and running and get normalized, they're running at something north of 45%. So you can kind of -- you can kind of make your own estimate of what you think the EBITDA margins will be, and what they will be for the year. But we've not given that as a specific guidance.

Okay. And then just a second question on the pricing side. Prices were up in the solid waste business by, I think, 1.9% in the fourth quarter, and your guidance is for pricing growth of 2.1%, which is -- which is actually pretty good. And what is your -- your assumptions in terms of volumes? And why are you able to raise prices so much in fiscal year '06?

Well, I don't know that -- that you really -- I don't know that we come up with simple answers for why the market responds. You have a lot of very different markets. Some markets are more competitive and less -- and other markets are less competitive. And we try to be responsive and responsible to our customers as our markets, while at the same time trying to recognize our cost increases and things that we have to cover. So our goal is to -- is to continue to have that sustainable organic growth. Some markets we achieve it, some markets we exceed, and some markets we don't measure up to our own personal targets. I don't know that we could characterize why -- why we're able to do it. I think, it's the general robustness of the economy and general market position that we enjoy in the various markets.

Okay. Thank you very much.

We'll now hear from Bill Fisher with Raymond James.

Good morning.

Good morning, Bill.

Just a quick one on -- for Jim on the Lewiston, what -- can you touch on that side a little bit? I don't know -- or does it go by another name? Or, I'm not as familiar with that.

This is the City of Lewiston, Maine. It is an existing -- about 250-acre site owned by the City of Lewiston. The opportunity actually came about because they're in the process of working with -- I think it's Home Depot or one of the major retailers -- and building a distribution center for Maine. And the property that we lease from them where the biofuels facility's located on, they needed for -- to support that overall retail development. And one thing led to another, and we eventually got to a place where we were willing to release the lease and take over their landfill. And effectively, responded to a bid opportunity, and -- with them, and converted it into a long-term, if you will, public-private partnership, where we're taking over this landfill and operating it for 25 years.

We think it has substantial capacity for the State of Maine. We think we'll operate it in excess of 150,000 tons, when it gets to maturity, per year. And we're very, very pleased to add another long-term disposal asset. This facility probably has 40 -- in excess of 40 years at those rates, 40 years of disposal capacity. So we're pleased to add another long-term disposal asset to our inventory.

And you said it starts in August of next year or this year, or how does that -- ?

It's actually going to -- we're going to sign the contract and start this year. And we -- both Lewiston and Chemung should add incremental to our forecast for '06. But as the normal for start-up contracts, they're hard to give you an exact month when they will come into place.

Okay. And just separately, real quick. The -- Richard mentioned the new surcharge. I think it's a decent bit higher than where you were, say, in Q4 on that. Have you had any indication how that was received in May?

It was received very well, Bill. We did reevaluate the surcharge at the end of the year for the beginning of the new fiscal year, and we put the surcharge across the higher percentage of our total business, and Charlie worked very hard with all of the region management teams to see where there were exceptions so that we could get much higher penetration, in terms of the surcharge. And it's -- that effort was well received, and we've had good success in May with it.

Okay. And just last, real quick. I was trying to write real fast, but, Richard, you mentioned '07, I think the CapEx is 60, 65. Was that just maintenance, or did you have a feeling on the growth side there?

That was just maintenance, Bill.

And with the growth side. If you exclude -- I mean, Chemung is a wild card -- but just on what you have today, would that number fall off a fair bit on the growth side?

Yes, that would -- yes, that's correct.

Okay. All right. Thank you.

Next, we'll hear from Tom Ford with Lehman Brothers.

Thanks. Good morning.

Good morning, Tom.

Hey, Jim, I was trying to write, and I don't think I caught everything, but I wanted to go back to sort of your -- your long-term view comments at the end of the disposal. Your -- all of your disposal commentary, which is really appreciated. I love the detail. But when you were saying -- you said, if you just look at the dynamic ones and the incremental difference between fiscal '07 and fiscal '05, and you were saying, what, incremental capacity, I didn't catch, and then just assume -- ?

Yes, I think what I was trying to explain was that if you look at what I'll call the maturity level, so whether that occurs in '07 or maybe '08, but when a landfill gets to its maturity level, what we view is that its operating, kind of, at the space or at the zone that it should be either for its relationship with its community or for its market positioning. And if I compare that mature level to fiscal year '05, we can tell you what we think the incremental tonnage will be between those two states. The number I gave you was 1.6 million tons. So between '05 in the mature state its 1.6 million tons, and I said that if we did a weighted average on all those landfills, generally speaking, it's about $40 per ton tip fee. And if they perform like we've experienced Ontario, which is kind of at a 49% EBITDA margin, then that would generate a yield about a $20 per ton EBITDA. 20 times 1.6 million is about $31 million -- 31, $32 million of additional EBITDA, incremental EBITDA, between '05 results and when those facilities, which we have in control, but when they arrive to what I'll call a mature state.

So if you want to look at that as organic growth, embedded organic growth, it's a way to better understand the value of the disposal assets brought into the franchise, and the money that we are deploying in a much more efficient fashion through CapEx expenses rather than buying these facilities up front. There's, kind of, two ways you can have a landfill. And if you buy it at six times cash flow, I think everyone would say, gee, if it's an asset in your franchise, it's a 30-year asset, it gives you good disposal capacity. No one will have a problem if you bought an asset at six times cash flow and then -- and then made it run and produced at those numbers. The other way to do it is not to put the money up front. So as you will see when the Chemung number gets released, there is not a huge up front number payment. Not a big purchase price. But you put the money in these development projects, landfill gas energy, and other things that the town finds is a whole change in dynamics, so it's not just trash for cash, but it's actually giving back the community something. But you're doing it over a later period of time.

But you're effectively buying these facilities very much in line with what we think is the accretive -- and actually quite a -- we're quite proud of -- be able to add this -- the capacity to our franchise at -- in the range of five times six -- five to six times cash flow. 49% EBITDA margins, and high IRR returns over the life of the project, very handsome. So we -- we think people are having a hard time understanding that we have already embedded into our system 1.6 million tons of incremental capacity over our '05 results that are going to show up as we finish the development of these projects. And the little number that I went through is to try to explain what the impact, that will result in about $32 million of additional EBITDA that's in the system that will be realized over the next two to three years.

Okay. So that's a -- ?

Very powerful -- it's very powerful, simple story. And we're hopeful that people will focus on that rather than focus on the fact that we're spending CapEx as opposed to purchase price for a facility.

Right. Now, that's -- I think it's very helpful in communicating that. And I guess, just broadly, what you're saying is is that there's a two- to three-year time frame before the dollar spent today really bears fruit.

Yes. And you can -- you can -- I mean, I think there are a ton -- two kind of assets out there. There are assets which are fully running at their full capacity, and you're going to pay more than six times cash flow, as evidenced by what IESI paid for Seneca Meadows. Or you can do what we're doing, which is developing these assets, and, in fact, buying them for much less than what you would pay for a fully-polished asset. But we're getting, at the end, a much better asset because we're doing it for a much lower multiple, higher IRR return, and the community's much happier because we're doing it in conjunction with them, where there's a sustainable environmental economic development approach to it.

I think another important aspect to that, Tom, is that when we look at the performance of our existing facilities, is that historical performance bears out the circumstance that we've just laid out in terms of the future value of the facilities. We look at existing facilities' performance, free cash flow going out is consistent with the model that Jim just laid out.

Okay. Just for -- just one quick question there on that. Do you guys have your total tonnage number for fiscal '05?

To -- ?

Or ballpark?

I think Richard gave that. It was two point --

2.5 million tons, excluding MERC and the closure projects.

And what I was giving was incremental tons, not absolute tons.

Okay. And then just one -- one quick follow-up on MERC there, because you guys raised it. When you talk about a settlement, I've seen some articles out there talking about the State of Maine trying to actually buy MERC from you. When you guys talk about clarity there, are you talking about that, or just the settlement with the local -- with the localities in terms of the issue going back to -- to the acquisition of KTI?

No. It's a comprehensive settlement. We're actually negotiating with the City of Bitterford and Saco. And we've reached an understanding with those two with regards to how we might proceed in the future, including a comprehensive settlement. And the State of Maine is contemplating assisting the cities in entering in that settlement and -- and solving some of the funding issues. So as that comes clear, we'll certainly communicate it. But it's a -- a comprehensive settlement, and we're pleased to see the Governor Baldacci's taking an interest in -- and actually committing his -- the resources of his offices to -- to assist in that outcome.

But would that mean the asset actually going away, as an operating asset?

No. We expect to be operating it for the next ten years.

Okay. All right. Great. Thanks, very much.

Our next question comes from Leone Young with Smith Barney.

Hi. It's actually Alina Celura for Leone. I just wanted to ask about pricing. You mentioned that you were seeing some pricing pressure on the special waste or soils projects. I don't know if you can comment on that. And also, is -- are there any particular regions or areas that you're seeing pricing pressure?

No. I think what I was -- I think that we, generally, with volume increases, we do see some pressure -- pricing pressure from that. And so with quarter-over-quarter 14% or 15% same-store volume increase, some of that was acquired at -- or with some pricing pressures. The soils -- and I think I misspoke. The soils market is actually firmed and is now running at about 16 or $17 a ton, as opposed to last -- late last fall, when it was actually about 9 or 10 or 11. So the soils market, which I think I misspoke when I did give my thing, is actually strengthened considerably. And we think and believe that the soil markets will remain robust in the Boston market because they're just few disposal sites that are licensed to take the material.

And, also, just a follow-up. Have you seen any movement on Waste Management's pricing initiatives in any of your regions?

I think we're really -- we're really seeing -- I haven't really seen a significant amount of activity. The only pricing that they've announced was their Maine facility and, certainly, any activity by Waste within our region is a positive. But we haven't seen any activity at the turn-key facility. And consequently, that is the largest landfill disposal facility that Waste has in the region, and, obviously, would be beneficial to see that. But we haven't seen any real activity around that particular facility. I think also Waste Management's disposal capacity in the region is also dramatically effected by the total capacity that Whellabrator has, too. So not only would it be a positive to see a turn-key, it would be, obviously, positive to see what is happening with the spot capacity at the Whellabrator facilities also. The only thing that we've seen so far is a bit of activity with -- with regard to the Maine facility.

Okay. Thank you.

Corey Greendale with First Analysis has our next question.

Hi, good morning.

Good morning, Corrie.

First, I just had a couple of clarifiers. John, I think you said that the fuel surcharge program now covers a greater percentage of the customer base. Could you quantify that at all?

Yes. We're -- we're up now to about 70%, Corey, 70% of the -- of the revenue base.

Okay. And --

Up approximately 10%. We were at a little over 60% before, we're up about 10%.

Okay. And what's factored into the guidance on -- ?

It's really -- it's also, too, Corey, is fuel and oil, too. It's not just fuel, but it's fuel and -- and all lubricants and oil as well.

Okay. Understood. And is the -- does the guidance that's in that fuel costs kind of stay flat with where they're at right now?

I'm sorry, your question again?

Just what's your assumption on fuel factored into the guidance?

Yes, it stays flat. That's correct.

Okay. Second question. Jim, I may have missed this, and if so, I apologize, but with all the focus on, kind of, the long-term, I didn't hear the -- the same kind of color on -- on the regional performance as you might have given in past quarters. I was just wondering if you could comment on that at all?

Well, the only reason I try to truncate that was management of time, because we're trying to provide as much time for questions and answers as possible. So I -- hopefully, my failure to spend time in that area was not an indicator of anything.

Okay.

The -- the -- I think that it's always a little bit hard, because we're here now in June and I got to think back about the quarter versus where we're at right now. Let me do the short-term thing real quick. We're seeing a robust seasonal month. And we're pleased with that, although, as you know our first quarter is always strong, and we see strong economic activities across all four regions. And we see steady pricing at the FCR area, relative to commodities with some continued volume pressure, because as prices go up, people chase recyclables.

Looking back on the quarter, which was your question. I believe that the Central region was relatively steady economic performance. The Western region, I think in the fourth quarter, was actually weak from an economic activity standpoint. And the North East and South East actually was strong. So I -- if you wanted a characterization of the individual regions, that's how I would do it.

Yes, I know you'll probably file your -- file your K relatively soon, but can you comment on the extent of -- or whether the South East region is still at a loss position or whether that narrowed at all?

Corey, I don't have those numbers in front of me. Can I call you back on that?

Yes, of course. Not a problem.

I think the -- the [indiscernible] score we're very happy where we're at in terms of -- of enhancing that business. And we think it's positioned for appropriate growth and improvement in '06, which is the more important thing. We finished about 8 or 12 management position changeouts over the course of the last nine months. As you know, we have new regional vice president. We substantially have added additional staff there. This is -- these are additions from outside of the Company. With the work that we've accomplished in Hardwick and expect to be able to accomplish in Southbridge and other development areas that we have underway, we think that the South East region, as a segment within our business, will undergo substantial improvement in the next 12 months.

Okay. And just one last quick one, and I'll turn it over. With all the focus on the landfill side, could you just comment on the -- on your fleet age, how that's trended, and whether you're kind of comfortable with where that's at.

Yes, sure, Corey. The fleet age is below seven years, 6.5, 6.8 years across the -- the entire fleet. So we're pleased with where we are from a fleet perspective. We're -- we -- we keep track of it. We try to make sure that we put good equipment in the hands of our people so that we can, obviously, provide the kind of service that is consistent with what we've done historically. And, obviously, we are -- part of what we're also doing is we continue to make progress, in our view, from a training standpoint. We continue our training programs, both from a management standpoint and we're also -- this year, May 1st -- have kicked off a training program from a driver perspective as well.

So really trying to bring up the level of awareness from a driver standpoint of their importance from a safety and maintenance and from a customer service standpoint. So with all of the training that we've done historically from a management standpoint, particularly over the last two years, we're now beginning to get to the really important people in the organization in terms of our drivers, who are touching our customer base every day. So -- and one of the aspects of that, obviously, is to put good equipment in the hands of our people so that they can do the job the way it needs to be done.

Great. And the CapEx spend that you're anticipating, that would keep the fleet age kind of where it's at.

That's correct.

Great. All right. Thanks, very much.

Yes.

Glenn Primack with Broadview Advisors has our next question.

Hi, good morning.

Good morning, Glenn.

A couple questions. One, why -- why wouldn't you monetize GreenFiber, given all the other good things kind of happening on the -- in the landfill projects?

Well, I mean, I think that -- I think, certainly, GreenFiber is an opportunity from a monetization standpoint. I I think, Glenn, as we've said historically, to the extent that we had a major opportunity, we certainly believe that we could do that. I think that GreenFiber's not a distraction. We're -- the management team there is driving that business very nicely, and it continues to grow. And our perspective is that, instead of simply monetizing it from a convenience standpoint without a significant opportunity, I think that it's our belief that we're very likely to have a much larger debt reduction when we do monetize it in that the business -- business, obviously, continues to move forward. So our sense is that we could pay down significantly more debt with the -- the business performing the way it is.

Okay. And the hot melt technology, that's -- that's already been, kind of, implemented and used?

What has come out of the technology is that the -- they're still working from a commercial -- commercialization standpoint with regard to the hot melt. But what has come out of that is a technology to do firewalls inside of building projects, and that has been implemented, and that product is out into the marketplace currently, which came as a direct result of the work that they were doing from a hot melt standpoint. They have got the hot melt technology working. There are some temperature issues in terms of different areas of the country that they're still working on. And -- but on an overall basis, what has come out of the -- the work that was done from an R&D standpoint on the hot melt has been the firewall product that is in the marketplace right now.

But it's just -- we can look at the technology, but the base business is growing very smartly. The EBITDA is growing year-over-year very smartly. We're sustaining very robust price increases in the market. And the value of this business is increasing every day.

Okay. Because the way I figure, it's like -- a little bit more than a buck a share.

Yes.

Depends what you sell for.

Yes. Depends what you sell for. But there's also some cyclicality to it, I take it.

Well, I mean I think that the --

Well, given it's not in our numbers at all, really, right now from an EBITDA standpoint, so --

No, but I just say, you get the -- the franchise and you just talk about the franchise that has an even bigger discount if this thing is --

Well, if you're a long-term investor and you know we're sitting there with that in our quiver, I guess it ought to make you feel that there's --

Yes, I have been a long-term investor.

-- there's some real, hidden value. If you're a short-term investor and just want to flip the stock, then it's probably -- we have a different set of values.

Been in here for a while.

Okay. Well that's -- we think this -- we think this is a great business, and it will position us when we need it to monetize it. It's growing smartly. And it's not reflected in our EBITDA.

Okay. And then on the last 8-K that was filed in terms of the bonus plan, is the target EBITDA -- is that the same EBITDA that was given today on the call?

From the bonus plan perspective?

Yes.

No.

Okay. Any idea how much higher it is?

No. I mean it's not -- that's not -- you asked if the bonus plan was the same, the answer to that is no.

Okay.

Obviously, the expectations that the Board has and management has is to drive the business consistent with what we've said, Glenn, which is 8 to 10% EBITDA growth on a year-over-year basis. And as evidenced by our performance in 2005, we did 14%. So that's -- that's, fundamentally, the answer to the question.

And can you give me a range, and just on the target of return on that asset? I know that that's only 20% of the -- of the plan.

Yes.

But it seems like there's a lot of room for improvement there, and part of that would be EBITDA and, part of it would be just --

Sure. I mean, it's a --

Productivity.

That's a good question. I mean, I think that that --

Because -- I haven't had a sense for the IRR on these projects until, kind of, today.

Yes. I think that the -- the goal that we have is to bring ourselves over a three- to five-year period of time, okay -- and, again, keep in mind this is a metric that we've just instituted. The goal is to bring our return on that asset to the 10 to 12% range, which will put us at the high end in terms of our peers. And we think that we can do that over a three- to five-year period of time.

Yes. That's a huge delta from where you're at today. I mean --

That's very true. That's very true. We understand that, but that -- you asked what the target was --

Yes.

-- we're shooting for, and that's the target. And that's what we're shooting for.

But you know --

In addition to continue to, obviously, move and improve our EBITDA margin as we -- as we grow the -- grow the business.

But, Glenn, if -- if you look at the incremental tons that I gave you --

Right.

-- and you think through that a different lens, which is a RONA lens, you'll see that I've given you numbers that will allow you to see what the IRR returns are going to be, and therefore, implicitly what the RONA -- long-term RONA returns are going to be, and it's not such a big jump. And the important thing to consider for those on the phone call is that these are assets that we already control, not assets we have to go find -- or go find and then add to. So I think that -- that we have worked hard the last two years doing precisely what John has said over and over and over again, which is in the business that we're in, disposal capacity is very, very important. And in the long-term, disposal capacity it only gets more valuable. And in the North East that disposal capacity, because of the higher tip fees and the environmental restraints, is even more valuable than it might be in Nevada or Arizona where there's less of those constraints.

So I think this is a franchise that's converted every one of its disposal sites, without exception, to 30-year-plus sites. And I don't think you can look around the North East and find another company that has that inventory of sites, that has got a track record of 12 years of doing that, and that has -- has done that, and has got three or four in the queue that we think we're going to be able to do a good job on a go-forward basis, and that should auger well for our long-term [indiscernible].

And has the RONA concept been pushed down into the field as well?

Yes, it has. It -- the RONA concept has been communicated to the division manager level, Glenn, and it's -- it's, clearly, been driven down into the organization. Keep in mind, this is the first year of that process. We -- but we, in fact, have incentivized division managers and the region teams as well, but it's the first year of that process. So --

Yes, that kind of came about the same time as -- as Zillmer was on the Board.

Actually, I think probably more attributable to Joe Doody from Staples.

Okay.

So it's really, I think, a reflection on how Joe has been driving Staples and that team. And I think that that reflection really came more -- but, clearly, John, obviously, was very much involved in that as well, no question about it. I think -- I think that it is a big improvement. We recognize that. And you asked -- that is our target. We think that it's an achievable target. We wouldn't have taken a target that we don't think is achievable, but it's -- it is a big improvement. It's a big effort. And we're at the beginning stages of really getting it embedded into our culture.

But having said that, you've got to understand that RONA is a single-year metric. And when you've got long-term, 30-year projects, you got to look at the long-term RONA, or the long-term IRR, because that's much more meaningful than a year -- year -- on a yearly basis. Because you may very well invest money that would have you having a reduced RONA this year because it gives you 1.4 million of additional disposal capacity, but you won't see the benefit of that for two years. So RONA, you got to be careful about it, because it's usually only looked at on a single-year basis.

No, I hear you. I -- what would help is if --

The better -- and the better metric is really Internal Rate of Return over the -- when the project gets mature. And we have demonstrated and we -- Ontario's a great example -- and all of these projects we've talked about have the capabilities to be in very acceptable IRR returns, from a deployment and utilization of our capital.

Yes. I mean, what would be really helpful is if you just had a slide on Ontario, what the numbers that gets you to your 12%-plus, and then we can just potentially roll up the projects behind it.

Well, we probably won't do -- we'll give you a typical project that you will -- assure you is reflective and tied to projects, but we try not to get into individual projects, just because there's a lot of people listening on these calls who might not have the same interest as you do.

Okay. Thank you.

Great. Thank you.

And that concludes our question-and-answer session. I'll turn the conference over to John Casella for any additional closing remarks.

Thank you. Just to close it out. Obviously, the quarter was extremely strong and, clearly, 2004 -- 2005 was a great year in terms of executing of, what we have laid out as our three- to five-year plan -- 14% EBITDA growth, a 80 basis point improvement in our margins, and 360 basis point improvement from an internalization standpoint. Again, a great, terrific year. A big thanks to all of our people who have done a terrific job over the -- over the last year. We're, obviously, very pleased with that performance. I would thank you all for your participation this morning, and look forward to talking to all of you in September when we release our second -- or excuse me, our first quarter '06 numbers. Thank you, very much.

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