Casella Waste Systems Inc (CWST) 2006 Q1 法說會逐字稿

Good day, everyone. Welcome to the Casella Waste Systems first quarter 2006 earnings results conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Joseph Fusco of Casella Waste Systems. Please go ahead, sir.

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

Today we'll be discussing our first quarter fiscal year 2006 results. Those results were released yesterday evening. 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 a little later.

But first, as you know, I must remind everyone that various remarks that we may make about the Company's future expectations, plans, and prospects constitute forward-looking statements for the purposes of the SEC's 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 prospectives and other SEC filings. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change, and therefore, you should not rely on those forward-looking statements as representing our views as of any date subsequent to today.

Also, during this call we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial tables section of our earnings release which was distributed yesterday afternoon and is available in the Investors section of our website, www.casella.com/investor.

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

Thanks, Joe, and welcome, everyone, to the first quarter '06 conference call. We've got a lot of ground to cover today, recapping the quarter. We'll try to be as concise as possible in order to leave enough time to answer as many of your questions as we can get to.

Brief overview with regard to the quarter, in spite of the head winds that we faced in the quarter, we continued to deliver solid operating performance and focus, and we are seeing emerging strengths of the disposal capacity additions to our franchise. The results for the quarter, revenue increased over $8 million; operating income was up $404,000, with a margin down slightly. A bit of decrease, $685,000 over the same quarter last year. And while fuel was not a factor because of our surcharge, our third-party transportation costs were up by almost $3 million, $2.9 million on a year-over-year basis.

Our internalization for the quarter improved 2.2%, and we believe that our performance in Q1 '06 is strong enough to meet the expectations that we set for '06 as well as continuing to meet our overall strategic plan from a 3 to 5-year standpoint of growing our EBITDA 8 to 10%.

I think it's also important for you to note that the-- one of the reasons why we feel that confidence is our budget for the first quarter was only up slightly on a year-over-year basis.

Some of the additional highlights of the business for the first quarter, our 2006 first quarter average company turnover rate improved by 18% over the same period last year. Our Workers Compensation incidents were down 20%, 20.7%. Our costs, however, were up 58% because of one large claim that we had. Our fleet incidents for first quarter '06 were up 1.6%, and our costs were down 16%. We also continue to focus on our leadership development, having 95 managers completed advanced achievement with an additional 16 to be completed by year end.

In addition, we have our in-house team, which is really lead by Joe Fusco, where we've actually had 60 mid-level managers through the Advanced Achievement Leadership program, which again, over time we believe is going to add significant value to our franchise and allow us to differentiate ourselves in the marketplace.

With the success from a management standpoint, we also kicked off May 1st our Driver and Mechanic Training Program. 110 drivers and 40 mechanics have been through that program. That program concentrates on giving our drivers a clear understanding of their importance from a customer service, safety, and a maintenance standpoint.

In addition, during the quarter we hired Bill Hanley, who is our new VP of Sales. Bill's going to make a concerted effort to improve our overall sales program. We're delighted to have him on board to help us drive our internal growth.

We've also created a new position to strengthen our Investor Relations communications effort, which will be led by Ned Coletta.

Again, as we indicated on our last call, you do have to keep in mind that our success on the landfill and disposal side of the business has naturally affected our short-term free cash flow generation as we make the necessary investments in developing this capacity. Once the up-front investments are made in the landfill, our historical performance has shown that the landfills generate significant EBITDA and free cash flow, and we certainly expect that that pattern will continue.

We continue to develop additional disposal capacity, both internally and externally. Internally, we continue to drive permanent expansions at all of our facilities, which Jim will give you some specifics on in terms of those efforts, and externally the recent vote in Chemung County speaks for itself in terms of the unanimous vote to enter into our contract.

Additionally, we are working on several more opportunities to develop additional disposal capacity. And again, the most impressive measure of our success in this area is from the end of '03 to the end of fiscal '05, we've added 52 million tons of disposal capacity, taking our total capacity from 29 million to 81 million tons. And keep in mind, the significance of that develop -- disposal capacity is also in a region of the country where our disposal costs average between $45 and $50 a ton.

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

Thank you, John. Good morning, everybody.

For the quarter ended July 31st, 2005, revenue increased $8.3 million to $132 million from $123.7 million or 6.7%. Some 1.5% of the year-over-year increase, or $1.8 million, arose from the acquisition activity over the last year.

Internal growth for the quarter in the solid waste business reflects higher landfill volume in the northeastern and western regions, where volume is up at FCR and commodity prices increased slightly year-over-year. Most of FCR's commodity price increase arose from our hedging program as OMP and OCC pricing declined in the quarter.

Revenue for the quarter breaks down as follows: Solid Waste was $107 million; FCR, $20.5 million; and Other, $4.5 million, for a total of $132 million.

Gross margins were down 150 basis points year-over-year. The key factors were high fuel prices, accounting for 70 basis points, and higher transportation costs arising from moving more volume from the landfills, which was 1.8%. We make little margin on those trucking costs. These negatives were partially offset by flat direct labor costs, which therefore decreased on a percentage basis.

G&A: G&A was up as a percentage of revenue year-over-year and also in dollars. The increase in G&A in the quarter was mainly due to higher SOx costs. We've added five SOx auditors, one at each region, to reduce the workload on the division controllers, and in addition, our SOx third party audit fees increased half a million dollars. While we expect to spend no more this year than last year on SOx audit fees, we accrued less in the first quarter this year than last year. I'm sorry, we accrued less in the first quarter last year than this year. I reversed myself.

Health insurance was also up $200,000 and communications and training expenses $300,000.

Moving on to EBITDA, EBITDA at $29.2 million decreased $700,000 from $29.9 million with EBITDA margin down 200 basis points. The EBITDA breakdown is as follows: Solid Waste, 25.1 million; FCR, 4.1 million; and Other was 39,000, for a total of $29.2 million.

Solid Waste margins decreased by 250 basis points from the previous year. These results reflect the same factors as mentioned previously relating to costs of operations plus the impact of higher SG&A's as a percentage of revenue.

There were also two one-time events in the quarter. We suffered from a fire at a transfer station in New York State, which disrupted its operations for several weeks and impacted earnings, both from the loss of volume into our landfills as well as higher disposal costs.

Secondly, although we successfully defended the permit at Wellsboro Transfer Station, EBITDA was negatively impacted because of the legal and professional costs as well as the costs of opening up a hauling division separate from the transfer station. That transfer station is now up and running.

The negative effect of these two events amounted to $825,000 in the quarter, which is equivalent to $0.02 per common share.

FCR's EBITDA margin increased this quarter by 80 basis points. Average selling prices were up slightly this quarter and turn shift were also up year-over-year.

Depreciation and amortization: this expense was down 1.1 million year-over-year. While depreciation was up 300,000, landfill amortization decreased 1.2 million, practically due to Brockton, as this site comes to the end of its life. Brockton's amortization was down about $1.6 million and was partially offset by Worcester, which increased $400,000.

Income taxes: the tax rate was the same in each period, and within the range given as guidance, which led us to a net income for the quarter after preferred stock dividends of $2.3 million or $0.09 per common share.

Now, a couple of miscellaneous statistics. The average interest rate for the quarter moved down to 7.87%, including amortization of financing costs. Net of these expenses it was 7.42%.

Availability on the revolver at July 31st was $129.1 million after taking into account $32 million of LCs outstanding.

Capital expenditures for the quarter amounted to 34.6 million and the growth component of these expenditures, which is $14.9 million, was largely made at the landfills, plus we acquired a building in Boston where our [inaudible] is located.

Three small tuck-in holding acquisitions were closed during the quarter. Our total purchase price was $800,000 and the purchase price multiple paid was three times EBITDA. We also spent a further $200,000 on Colebrook.

Free cash flow: as expected, free cash flow was negative for the quarter, driven by higher capital expenditures. The change in working capital was negative, as in the first quarter last year. The usual seasonal changes were evident. Accounts receivable was up from the higher revenue in the period while DSO maintained at the same level. Accounts payable increased consistent with the business seasonality while payroll accruals were down.

With that, I'll turn you over to Jim to take you through the operations.

Thank you, Richard. Good morning.

A little bit of color on the economy. I think generally, the Northeast remains sub-robust, but I think beginning to see in this current quarter some improvements generally in the various regions that we operate in.

We have had a good quarter, first quarter of '06, relative to gathering of tons. Tons particularly were up in the Northeast, as we segued and transitioned from Pine Tree to West Old Town, and we did a good job of gathering additional tons in that process.

Central region, as Richard mentioned, suffered from fire, and that did cut down on internalization for the central region as well as conjunction with additional [inaudible] costs and vehicle maintenance.

In the Northeast -- in the Southeast, we're pretty much on target with the price increases realized, nicely covering the costs.

Western region, again, as Richard mentioned, impacted by the Wellsboro and related activities associated with that recovery. And overall, though, I think all four regions were performing reasonably well from an economy standpoint.

With regards to each of the regions' performance, as we've noted, West Old Town and Pine Tree now are in full swing. We expect to have West Old Town at capacity later this year. We're exactly on schedule we expected relative to our transition as we move tons from Pine Tree and move onto a 40-year site at West Old Town. As part of that, we were very successful in reaching out across the state of Maine in some abutting jurisdictions to gathering an additional 40,000 tons of tons -- of waste to dispose in those landfills, but as we transition to that longer-life landfill, West Old Town, which is further distance from the market and therefore suffers from the transportation costs, will have a slight impact from a yield standpoint.

Southeastern region, we are about two months late on our start on Worcester. We had planned for the quarter for it to start early in the quarter. It started actually early in July. We're now running at 1800 tons a day. As you'll recall, Worcester is the replacement project for Brockton, and so we will be running at about 50,000 tons per month, which is close to very much the 500,000 tons budget that we expected for the facility. At that capacity, it will add significant additional value, which was not there in the first quarter, and we estimate that that was about a million dollars of EBITDA due to the late start.

Central region, we expect to start Colebrook, which is another closure project, in late September or October. We've received all the go-aheads and are now doing the site remediations associated with receiving permission from the State of New Hampshire to start waste disposal, which we hope we will receive in October or early November.

John mentioned in his opening remarks, the Western region, I think, is highlighted by the unanimous vote at Chemung County to take over their landfill and solid waste system. This is a follow-on public-private partnership to the Ontario Project, which we're very proud of, and fits nicely into the mode of what we believe is our differentiation strategy with regards to sustainable environmental economic development. We expect to have the contract effective by the end of September. It's fully negotiated and we are waiting for a few conditions preceding to be satisfied for the contract to be effective. We do expect to be able to wrap up this facility to about 100,000 tons this year, and then we will be in the process of applying for permits to take it to 250 and some later increases beyond that, subject to the county's approval, which we expect to be able to reasonably get.

As an overview, we gathered an additional 73,000 tons in the quarter, net across the region. Unfortunately, most of those tons were either in lower-margin regions like the Western region or the cost of getting them with regards to transportation, so they did not have quite the impact that you would normally see on first inspection.

We are seeing good volume numbers in August and early indicators are that we are on target. The Central region is seeing a recovery in their volumes and the effects of the fires have been resolved with regards to the transportation of waste from those transfer stations impacted by the fire.

And finally, I think that we have affected a pretty good transition between Brockton and Worcester. Brockton will continue to run until October and as I mentioned earlier, we expect Worcester to be fully at its budgeted number by the end of this month.

From an internalization rate, the Central region has fallen from its normal high of 80% to about 78.2%, whereas the Northeast region's internalization rate has increased to 60.5%. Southeast has increased as well, to 51.9, and the Western has increased to 41.2 for an overall system internalization rate of 56.9, which is on par with Q1 '05.

I think Richard did a nice job on the capital expenditures, so I'll move to the development projects. We are, as some of you might have noticed by following the news, both Saco and Biddeford have announced public referendums in November as part of a buyout negotiation which we have been going on here for many, many months. Subject to that public referendum, if they receive voters' approval, we would then operate the plant for an additional 10 years, at which point we would shut the plant down and convert the balance of the community's waste to a 15-year contract from that point.

A lot remains to be done on that negotiation, and we'll have to see how the referendum, but I think the parties are working toward a fairly common aligned set of goals. There is the state government involved, and they are offering to attempt to source funding as well for that buyout. Net-net, I think it's a win-win.

From a development standpoint, as we've mentioned earlier, we have in North Country for the 51 acres that we have current permitting authority for, remains with us with about five years of capacity. We have significantly increased our capacity at Waste USA and are now operating near the permit limit with -- in excess of 25 years of capacity there.

A little bit on Southbridge. It's a project under development, and we believe that we'll be able to replicate some similar approach as we've done to Hardwick, where we'll be able to realize what we think is a tremendous potential at Southbridge in both in terms of the quality of waste as well as the volume of waste that we believe we'll receive approval to bring in there.

Hardwick is a good example. As you know, in June we signed a long-term host community agreement, which allows us to develop 83 acres subject to a town zoning vote, which we'll have some time in the next year or so. This will allow us to develop in excess of 5 million yards at this site and to raise the capacity to 240,000 tons and we think it's a good indication of the tractionable effects of our sustainable environmental economic development programs and how we've differentiated ourself in our marketplace.

We've already covered on West Old Town. Residual landfill projects, Worcester/Colebrook, and then we did mention the new signing of Lewiston, which we hope to become effective this fall and begin to bring waste in there as well. That's another new public-private partnership, Lewiston, Maine.

So, if you take all of these facilities and look at them from a maturity standpoint, which is sometime post-2008, and you look at what we believe, based on existing facilities, what the incremental capacity that we believe that we'll be able to realize at these facilities, we are talking about realizing additional disposal capacity of about 1.7 million tons, and I think our gathering demonstration this quarter demonstrates that we'll be able to gather that tonnage up across our marketplace and utilize that capacity. And if we were able to accomplish that, again, using kind of a normal weighted average EBITDA yield across all of our landfills, it represents in excess of about $30 million of additional EBITDA at maturity. So we look at that as part of our organic growth in our landfills. These are all landfills that we control. These are landfills that we think sit, for the most part, in the middle of markets where there's no new landfill capacity being developed and for which real value propositions will exist as we move into maturity at each level of development.

Moving on out of Solid Waste and into FCR. I think we had another really good quarter. We had from a budgeting standpoint expected the commodity prices might fall off. In fact, I think the fibers fell off a little bit, but in fact plastics and tin have gone up back again. So we actually see prices slightly up from what we expected by about 1%.

Volume is also up, which is a good sign, because usually when prices are at this high level, the volume does suffer. Overall, the business is functioning at about a 20% EBITDA margin, and as I've noted before, I think relative to all of our peers across the country, we have the finest recycling business performing at the highest levels of any of our peers and we're very proud of that, both from it as an indication of our attention to detail and innovative ideas associated with hedging and things like that, but also because of the importance that we believe that recycling will play in the future with regards to sustainability.

The Ontario single stream and glass beneficiating facility would come on-line in December and March respectively, and we are cautiously optimistic that we will have both of those facilities fully utilized from a capacity standpoint by the summer of '06, which is well ahead of our expectations when we built that into our proposal for Ontario.

As I mentioned, Cape May was extended for an additional five years. In our budget going forward, we continue to be a little bit cautious with regards to pricing. And as I mentioned to you, I think pricing has shown some firmness and we're pleased with that.

Our operating costs is slightly higher than our budget, but we're comfortable with it relative to the price increases that we have, and we expect to see FCR to continue to perform at its current levels. During the quarter we did sign and execute a long-term contract with CRRA in Connecticut for the operation of their entire solid waste recycling system and we're very pleased to be a member and a partner with that fine organization in Connecticut.

Moving on to US GreenFiber, US GreenFiber had sales increases. As you know, they're a seasonal business with the summer being the least demand. Even having said that, their summer business was up the year-over-year, quarter-over-quarter to 11% from '04 to '05, and we expect -- principally, this is being driven by strong demand -- continued strong demand for new housing. We expect year-over-year sales for the overall unit to be up 14% and we are forecasting calendar year performance of about $147 million and $15 million of EBITDA. EBITDA margins are up and grew quarter-over-quarter 31%, and we expect that EBITDA margins for the year will have grown 49% year-over-year.

The channel growth, contractor sales were up 16%, manufactured homes were up 10%, retail was up 18%. Total sales about 15%. And I think a noteworthy thing is that a lot of this revenue growth and EBITDA growth is coming from pricing power as opposed from pure additional sales, which is also happening.

With that, I'll turn it back to John for his closing comments.

Actually, we'll go into questions, but before we take questions, I'd like to let you know that our goal, obviously, today, is, as with every call, is to get as many questions in as time will allow. Toward that end, we've asked you to ask one question with one follow-up so we can get as many people to participate as possible. Of course, if you have your question answered, you can go back and get in the queue again.

Operator?

Thank you, Mr. Casella. [OPERATOR INSTRUCTIONS] We'll take our first question from Lionel Jolivot with Goldman Sachs.

Good morning. First question, on the fuel cost. Since the end of the quarter, fuel cost went up pretty dramatically across the U.S., and particularly in the Northeast, and what have you seen in terms of direct fuel costs and your ability to pass this to your customers, sort of fuel surcharge-- surcharges, sorry.

And second thing, what have you seen in terms of third party transportation costs?

Well, we've been fortunate with regard to the sales -- with regard to the surcharge. We've been able to fundamentally offset a very large portion of the increase in fuel costs, but it does, obviously, still have a drag from a margin perspective. So our fuel surcharge program has been in place for several years now. It's been well received, and so we have been able to offset the majority of that cost, but I think that the place where we weren't able to offset those costs was really the third party transportation that I talked about in the opening remarks, where the third party transportation costs, which is something that we're focused on now and looking at and we'll look at how we can minimize those costs on a go-forward basis or adjust for them, was almost $3 million on a year-over-year basis.

Okay, and so it means that in the second quarter we should expect more third party transportation costs as fuel prices continue to go up?

Well, I think that there's no question that that issue is going to be with us, but as I said, one of the things that Charlie is working on right now is to really understand those third party costs and understand how we can minimize those costs or where we may very well need to increase pricing to offset on a third party basis.

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

Good morning. I just want to quickly follow up just on some things Jim talked about. The EBITDA was down a bit this quarter, and then to get to your mid point, obviously needs to be up around 7 million or so, the balance of the year. If you had to kind of look at the top three or four things that would get you there, it is out of the Worcester, Colebrook and Chemung, that type of thing? Or could you talk about those?

Well, I think that the plan for the year had included contributions from Colebrook, which I touched on, starting -- we had expected starting in September or October. We're essentially within 30 days of that schedule. It also had expected to have completed the negotiations with Chemung, which we have, to have received a positive vote, which we have, and to have an effective contract, which we expect to have by the end of September. And then to ramp that facility up to its current permitted capacity allowed for by the permits, which will be probably in the order of 120 to 140,000 tons initially.

Also contributing would be Worcester, which we got a late start on but we think will pick up in this quarter and continue on to the balance of the year, and also Lewiston, which we've announced, which we expect to complete our negotiations there with the various regulatory bodies, and that would be a contributor as well.

So those are some of the major drivers. We also have some other unannounced things that we will expect will give us some traction on the second, third, and fourth quarter. So we remain confident, both in terms, as John said, the performance against the budget for this quarter and the things that we believe are incubating, including those that I've mentioned, to be able to accomplish the forecast for the year.

Okay, and just a follow-up. I think Richard or John mentioned Workmans Comp was up 58%. Was that just a couple hundred thousand dollars year-over-year or what kind of magnitude?

It was a 58% increase, but it was not significant in terms of dollars, total dollars.

We'll move on to Amanda Tepper with JP Morgan.

Good morning.

Good morning, Amanda.

Just a follow-up on Bill's question. To get to your EBITDA for the year, then, are you saying that there's roughly in dollar terms and not tons, please, EBITDA dollars, 7 to $10 million going to come from all these new projects, none of which or maybe one of which is starting to take tonnage, but over the next nine months they'll all be taking tonnage and generating EBITDA to get you to get your number for the year?

I don't know where you got that number from, but I'm looking at our budget, and I'm looking at our forecast, and comparing where we are at the end of first quarter, and those projects that I mentioned will need to contribute significantly less than the number that you talked about in order to get to the range that we talked about.

Okay, but you won't put a number on it?

No, I don't think we're in that-- we're not in that-- we resist that kind of thing because these projects do have some timing sensitivity and we would rather report the results and overdeliver and underpromise than the other way around.

The other point to your question too, Amanda, is the fact that when we look at our budget on a year-over-year basis, for the first quarter, our budget was only up slightly over last year, so that's another factor in terms of where we -- how we saw the year from a budget perspective.

Right, you had budgeted a back-ended year. Okay. And then on the --

Some of that is also recognition that we had a great fourth quarter this year and year before. We had some rollover into the first quarter from the fourth quarter because of the weather-related issues that we didn't have this year--

In '05.

In '05.

Okay, and the spend for these new projects, all the new ones, including Chemung, that you're getting approved, is that all incorporated now in your current CapEx budget for the year, or is there more spending that we might hear about?

I think a very -- a fairly significant portion of it is in the CapEx budget, but I think as an example, the Lewiston project might not be. We'd have to go back and get that information for you, unless you have it--

Let me just try to help you with that. Chemung and Lewiston both are operating facilities, and so we're taking over operating facilities. The development of Chemung from 120,000 tons to 280,000 tons, which is the first permitting gate, will take probably about a year and a half. So there won't be a lot of CapEx associated with that permitting expansion outside of the permitting activity and some initial site stuff. And similar with Lewiston. So I would think that by the time we take over both Lewiston and Chemung, most of that CapEx will be really fiscal year '07 spendings as opposed to fiscal year '06.

And then Worcester's already in the program, as is Colebrook, so I think that those principal drivers are very much in line with John and Richard's answer to the CapEx.

Next we'll hear from Steve Cole with Matador Capital.

Good morning, guys.

Hey, Steve, how are you?

Doing fine, thank you. Just a couple of quick questions. One is, could you give us an update on -- I guess a couple years ago, maybe a year and a half ago, Massachusetts had talked about lifting the moratorium. From what I gather, even though they're talking about doing that, the reality is that it's very, very difficult to get projects through and that shouldn't be a concern. Can you just give us a sense on what's happened with that or what's the realities of trying to permit new things there in the state?

I think there are three realities: First reality is the state continues to be committed to recycling and they somehow think in the back of their heads that providing any additional landfill capacity is a disincentive to recycling, so you've got that kind of bias sitting over it, even though at the DEP regulatory level, they've been open to landfill expansions.

Second, you have a state in which it's not governed or constrained solely by the DEP, but very much constrained by the local communities through their elected health boards and the elected health boards retain absolute approval rights for the ability to either expand, significantly expand, or to cite a new facility.

So you have in many, many instances, almost without exceptions, a very high bias in local communities for the ability to either cite greenfields or even for that matter any type of landfills. Even communities with permitted facilities which the health board has blocked from moving forward.

So you're seeing a continuation of a kind of a bias in the state, which has been there for a long time, that has resulted in them being in a position where they're generally exporting about 2 million tons of waste, and they're still looking for some silver bullet on recycling.

And so I don't think those biases are going to change, and I think that you're going to have to work very, very hard and I think we've done well coming in and being the late entry in the state, so to speak. We are the only ones who have developed disposal capacity, including those who have been in that state for a long, long time. So I think that our program is being effective, but it's also -- has to be understood within a difficult climate, and we're not expecting any place in the Northeast for that matter for landfills to be easily -- landfill capacity to be easily acquired.

And one last quick follow-up. Just on -- what the changes at one of your other public brethren and also the changes in some of the greater Boston collection contracts. Are there opportunities that you see there at all or has there been opportunities to do some things or how do you see that environment?

I think you're referring to, as the industry may know, Covanta and American Ref-Fuels has merged and therefore have two waste energy plants that are directly in the greater Boston market, and as part of that, they elected to go after some of the city of Boston's waste, which they then took from Waste Management and BFI and then hired -- they in turn hired a subcontractor to pick up the waste. Waste and Allied in turn pulled their waste out of American Ref-Fuels and took it to their facilities. So we had a daisy chain, a bunch of kitchen chairs, they changed, but at the end of the day, when you walked back into the kitchen, not much has changed because the tonnage that American Ref-Fuel's picked up in Boston is about equal to the tonnage they lost in retaliation by Waste and Allied.

So I don't think that there's a lot of interest on our part to play in that particular shuffle. When we get Southbridge up and, fortunately, we're looking at the bedroom communities of Boston particularly, we're not looking to be downtown Boston, and that hasn't been our objective. So our strategy is to be out in the Worcester and Auburn markets and north of the city and harvesting, if you will, on what we think is a better marketplace than downtown Boston. And so what goes on down there has not had a lot of traction from our standpoint.

[OPERATOR INSTRUCTIONS] We'll move onto Corey Greendale with First Analysis.

Good morning.

Good morning.

I was hoping to dig into the internal growth just a little bit more. First of all, on the price side, can you in any way quantify the impact of the fuel surcharges, how much of the 4.4 points came from that?

Yes, the full surcharge was just over 1% of the total amount.

Okay. And then on the volume side, can you quantify the impact of the transfer station's fire? And also, I was just wondering whether any of the smaller players in your areas are also implementing fuel surcharges or whether they might be taking this as an opportunity to try to take some volumes, or are you seeing any push-back on volume?

Actually, I don't think that we're seeing any real impact there. I think that most of the time what you see from a small independent standpoint is a lack of sophistication in terms of being able to put the surcharge in place, so you see more pressure on those businesses from a financial standpoint. So it should, I think, bode well from a tuck-in perspective, Corey, as opposed to seeing pressure from it.

Again, I mean, that does speak to smaller companies. I think, obviously, the larger the company -- if you get to 5, 10, maybe $15 million of revenue, the sophistication level is obviously very different than that of a $500,000 or a $1 million business. So we're not seeing any impact from the independents in that regard.

You know, in some sense, the whole issue of fuel is a pretty level playing field. Everyone is having to deal with fuel price increases, so I think no one sees that as an opportunity at a time when fuel prices are rising to try to lower prices to take volume, and I think if anything, our experience is that we're actually doing slightly better in gathering volumes up. And maybe because our transportation system is more robust than some of the smaller ones and we can take the stuff further.

We'll move onto Alina Celura with Citigroup.

Great. Actually, I don't know if you answered Corey's question about the volume growth, because I was just curious as well what the impact was from the fire on a percentage basis?

I don't have the exact number, Alina, but I think it was like maybe 20 basis points. It was very small.

Oh, okay, okay. Also, just given the gross margin reported this quarter, should we look at this as sort of a new base and then model out from there? Or -- I guess I'm just curious what the trend is going to be going forward?

I think we're going to see, particularly given the volatility in fuel prices that we've seen over the last 30 days, we're going to see fuel prices continue to be a negative factor on the margins, and the transportation costs will continue to be there, so I think we will likely see a similar trend.

As we said before, though, Alina, one of the charges that Charlie has is to really take the transportation piece apart and understand where we have any opportunity to impact that so that we can get obviously back to a higher level of performance there. So we'll be taking it apart. I think Richard's reflection is an accurate one. However, we are going to from an operating standpoint take it apart, put it back together again, to see where we may have opportunities to improve that situation.

As a reminder, press Star 1 if you have a question. We'll now hear from Sammy Cohen with Lehman Brothers.

Good morning, gentlemen. I was wondering if you could comment on the reorganization of the Southeast operations has progressing, what we should expect out of it, some of the things you talked about previously?

I think really the only color that I would give you on that is that it's-- we've completely filled all the positions. I think we have replaced about 60% of the positions. Each of them -- of the new people have come, I think have met our expectations in terms of building bench strength and deepening the management of that particular region, and one year into this or some nine months into it, we feel that we've accomplished our goal and that we're accomplishing what we've set out to do for the year. I don't think I'd probably comment beyond that.

Okay, great. Thanks.

Also, quite frankly, you can look at the reported numbers that we have for the quarter and see the improvement on a year-over-year basis for the Southeast.

Okay, great.

Thank you.

And we do have a couple more minutes left in the Q & A session. We will pause for a moment to allow anyone else to signal. Again, that is Star 1 if you have a question. We have a follow-up question from Lionel Jolivot with Goldman Sachs.

Thank you. I got disconnected so I really apologize if you already answered this question, but regarding the convertible preferred stock, this preferred stock is coming to maturity in '07. I was just wondering how you are looking at it and if you had any sense at this point how you would refinance it?

You're talking about Berkshire?

Yes.

I mean, I think that one of the things that we did when we put the last facility in place was really to give ourselves the flexibility to be able to deal with that issue in 2007. We currently have the flexibility within the existing capital structure to pay off the Berkshire note. So I think that our sense, though, is that we would obviously like to see performance continue to improve and to be in a position where they simply convert. And so we're working hard to improve the performance of the business, to bring in the disposal assets, to increase our internalization and to continue to drive the business consistent with what we have laid out from a strategic standpoint.

Again, I think that it's our perspective that the exercise that Jim went through, talking about the additional disposal capacity at our facilities that we already control from a value creation standpoint in terms of additional EBITDA over time to the franchise is huge, and we're hopeful that we can see a real value creation there that would enable Berkshire simply to convert. But if not, we have the capability within our credit facility to take care of that in '07.

Okay, and no plans to accelerate the maturity or to take care of it in the very near term?

No, there is not.

Okay, thanks a lot.

You're welcome.

Our next question will come from Greg Hyde with Wachovia Securities.

Yes, good morning and thanks.

Good morning, Greg.

Just a couple of quick questions. Really, just clarifications, because you guys have covered most everything already. But on the $2.9 million increase in third-party fuel costs, those are, just to be clear, those are fuel surcharges that you're paying third parties more or less on the same volumes that you had last year? Or did you have some increased usage of third parties this year as compared to last?

It's a combination of both. It's not necessarily fuel surcharges as much as it's overall transportation costs. Some of that is related to the increased fuel costs, but some of it is also related to the increase in total tonnages that we were able to gather. As Jim said before, feeding the additional capacity that we've put in place.

Great. That's what I thought. And then second question is, really, if you look at your margin as compared to last year, your SG&A as a percent of your total of sales, and I know that last year it was sort of a low point for you, but you had about a 50 basis point swing in SG&A as a percent of total sales and that equates to about $650,000. I think you mentioned, and I just want to be clear on this, I think you mentioned that you had sort of a front-loaded expense with respect to Sarbanes-Oxley, to the tune of about $500,000 versus last year, and I just want to be sure I heard that right.

Yes, that is correct, Greg. You did hear that correctly. Last year we didn't understand the size -- the immense -- the external audit fees and the other third-party audit fees would be, so we didn't accrue as much in the first quarter as we did this year.

We have a follow-up question from Corey Greendale with First Analysis.

Hi, thanks for taking the follow-up. I just have two quick questions about the guidance. First of all, with the volume coming in a bit lower than guidance and the price higher, you think as some of these projects ramp up that the 3% internal volume growth is still reasonable or might it be that we hit the revenue number by having higher price and lower volume than we thought initially?

I think that it's likely that we will hit the target that we set out from a price and volume standpoint. I think that it's hard to say because I think in some cases, Corey, we're going to see potentially higher pricing from a disposal standpoint than what we would anticipate, and then in other cases we may see lower. So there isn't a consistent answer across all of the 11 disposal facilities, so in some cases, we're going to see higher disposal. In other cases, we're going to see lower.

Okay, and the another quick one was for Richard. I know you don't have a crystal ball on interest rates, but I think you said last quarter that about 33 million in interest expense was reasonable. Do you still think that's reasonable?

We may come in a little lower than that. The reason being that our CapEx this quarter was actually a little lower than we originally anticipated. So it's just a timing thing. So we may come in a little lower.

And our final follow-up question comes from Steve Cole with Matador Capital.

Hi, guys. One real quick one. Can you explain again -- I know you've done this in the past -- but on the fuel surcharge, just the mechanism. I know there's been a lot of talk about third party and some of the folks are trying to pass that along to the customers incrementally. How would -- I know Charlie's looking at this -- but how do you envision, is it possible to move the price to the customer and just say that's part of the, you know, it's within the supply chain and we're going to go ahead and mark it up that amount by some percentage as some of the other guys are doing? Or how do you envision --

I think that's exactly right. Charlie's taking that apart to look at where the opportunities are to raise pricing to cover some portion of that $3 million incremental increase in cost, Steve. That's exactly what we're doing. Perhaps I'll have some more specifics on it next quarter, but clearly what we're doing is going to take that apart and where we have the opportunity to do price increases, do just that.

Very good. Thank you guys.

Yes.

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

Thank you. Again, in spite of the head winds that we faced in the quarter, we do consider our results from an operating performance standpoint to be very good, very strong, and obviously, we are seeing the emerging strengths of the disposal capacity that we put in place.

With that, I thank you for your attention this morning, and we look forward to talking to you in December when we release our second quarter '06 numbers. Again, thank you very much, everyone, and have a great day.

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