Casella Waste Systems Inc (CWST) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the Casella Waste Systems second-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 Solid Waste Operations. Today we will be discussing our second-quarter fiscal year 2006 results. These 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 will be answering your questions as well.

First as you know, I must remind everyone that various remarks that we may make about the Company's future expectations, plans, and prospects constitute forward-looking statements for the purposes of the SEC'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 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 (technical difficulty) 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 evening and is available in the investor section of our website, www.casella.com/investor.

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

Thanks, Joe. Welcome everyone. As usual, we have a lot of ground to cover today recapping the quarter. We will be as concise as possible in our comments to try to leave as much time to answer as many of your questions as we possibly can.

In spite of the headwinds we face this quarter relative to energy costs, we continue to deliver solid operating performance and focus. We are seeing emerging strengths from our disposal capacity additions.

Results for the quarter. Our revenue increased 10.4 million or 8.2%. Operating income was up 950,000 or 7.4%. EBITDA was flat over the same quarter year-over-year. Our internalization in the quarter was up 2.7% from 55% in fiscal '05 to 57.7% in fiscal '06. While fuel on an overall basis was not a factor because of our surcharge, our third-party transportation costs however were up $2.2 million year-over-year.

Some of the highlights from the business in the second quarter. Through the first six months of fiscal '06, our average companywide turnover rate improved 13.4% compared with the same period last year. Annualized, our workers compensation incidents were down 4.8% our fleet incidents were up slightly at 3.9%.

We continue our focus from a leadership development standpoint. We have over 111 managers who have now been through our advanced achievement program, which was instituted with Bell leadership and one that we have now brought in house with Joe Fosco leading the in-house program from a leadership development standpoint as well as augmenting the existing program and investment that we are making in leadership development for our people.

In addition, we have another 60 managers who are scheduled to take the program this coming year and which will give us approximately 180 or our entire management team through the advanced achievement program. With the success of this program from a management standpoint, we have also begun May 1 kick off our driver mechanic training program. We have had over 200 drivers and about 50 mechanics who have been through that program and it really gives a real opportunity to concentrate giving our drivers a clear understanding of their importance from a customer service, safety and maintenance standpoint.

Again from an overall standpoint, that program now is beginning -- we are beginning to feel a very positive momentum and positive effort from the efforts that we have made to invest in our people and help them get to a higher level of performance. Keep in mind we are a local business and we are really as good as the operating management teams that we have in place at each one of our operating regions.

Again, from an overall standpoint you really have to keep in mind that the success on our landfill and disposal side in terms of our development activity naturally has affected our short-term free cash flow generation as we make the necessary investments in developing this thirty-year disposal capacity. Once these upfront investments are made in the landfill, our historical performance has shown that the landfills will generate significant EBITDA and free cash flow and we certainly expect that pattern to continue into the future.

Also I would encourage you to make sure that you look at the disclosure for capital that we put into the press release. What we have really tried to do is to make a very clear distinction between the development capital as well as the maintenance capital, and that is a new disclosure in the press release this quarter.

We continue to develop on an overall basis our disposal capacity both internally and externally. We will continue to drive as you know converting some of our facilities from C&D to MSW and also increasing our annual capacity at each one of our facilities. Internally that activity goes on as we speak. Externally, we began operating the Chemung County landfill during the quarter. The superb facility is the heart of our western New York market. Additionally we received our operating permit for our Colebrook, New Hampshire facility and we commenced operations this week.

The most impressive measure of that success over the last year or so is that we have added over 52 million tons of disposal capacity from 29.6 to 81.7. In addition, equally important is that we have increased our annual capacity from 1.4 million tons to 2.6 million tons. Keep in mind this is a region -- we have developed this capacity in a region in the company with the highest average disposal tipping fees at 45 to $50 per ton.

With that, I'll turn it over to Richard, who will give you the detailed specifics relative to the numbers.

Thank you, John. For the quarter ended October 31, 2005, revenue increased 10.4 million to 136.8 million from 126.4 million or 8.2%. Some 3.1% of the year-over-year increase or $4 million arose from the acquisition activity over the last year.

Internal growth for the quarter in the Solid Waste business reflects higher pricing across the Company except at Hardwick. Excluding Worcester and Chemung, which are treated as acquisitions, volumes were down across the Company except in the Northeast. Brockton's lower volumes for that site is now closed, reduced the volume growth percentage for the Solid Waste segment by 80 basis points.

Revenue for the quarter breaks down as follows -- Solid Waste segment, 110.1 million; FCR, 22.1 million; and other 4.6 million for a total of 136.8 million. Gross margins for the quarter were down 160 basis points year-over-year. The key factors were high fuel prices accounting for 90 basis points and higher transportation costs mainly in the Northeast, arising from moving volume to the landfills. Those trucking costs also include fuel price increases. These negatives were partially offset by lower operating costs.

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 compensation costs; legal costs were up 525,000 because of ongoing litigation at MRF and North Country as well as there were higher consulting costs -- 450,000 which was mainly for software upgrades. Travel was up 100,000 and training and communication costs were up 125,000.

Moving on to EBITDA, EBITDA's 30.6 million was largely unchanged from the prior year, although the EBITDA margin was down 180 basis points. The EBITDA break down is as follows -- for the Solid Waste segment, 26.7 million; for FCR, 4.0 million; and other -100,000; for a total of 30.6.

The Solid Waste margins decreased by 150 basis points from the previous year. As mentioned previously relating to a cost of Ops, fuel and transportation costs were up as well as vehicle maintenance but these factors were partially offset by lower third-party disposal costs, lower direct labor costs, and lower auto insurance costs.

FCR's EBITDA margin decreased this quarter by 1.7%. Average selling prices were up this quarter as returns shift; however, operating expenses included higher health insurance and workers compensation costs driving down the margin. On that subject, I should note that effective October 1 we moved FCR's health insurance to the Solid Waste health plan, which we believe will be more cost-effective in the future and bring FCR's health costs back in line over the next several months.

Depreciation and amortization expense, this was down 700,000 year-over-year. While depreciation was up 600,000, landfill amortization decreased 1.2 million, principally due to Brockton.

Income taxes. The tax rate rose slightly in the quarter but was close to the range given as guidance. So that gave us net income for the quarter after preferred stock dividends of 3.3 million or $0.13 per common share.

As for miscellaneous statistics, the average interest rate for the quarter moved up to 7.99% including amortization of financing costs. Net of these expenses, it was 07.6%. Availability on the revolver at October 31 was 92.9 million after taking into account 32 million of our fees outstanding. Capital expenditures for the quarter, I mentioned at 30.3 million, and you can see that the growth component of these expenditures, 10.9 million, was largely made at the landfills including the new MRF at Ontario.

Four small tuck-in holding acquisitions were closed during the quarter. The total purchase price was 687,000 and the purchase price multiple paid was three times EBITDA. We also spent in cash 13.4 on Blue Mountain recycling and the further $350,000 on Colebrook. Included in operating lease payments this quarter it is 4.9 million for Chemung.

Free cash flow. As expected free cash flow was negative for the quarter, driven again by higher capital expenditures. The change in working capital was negative mainly due to lower cash payable balances as capital expenditure standings (ph) were down. Accounts receivable were up from the higher revenue in this period, while DSO maintained at the same level, 38 days.

Just a brief word on the outlook. Looking ahead to the remainder of the year, it is likely that EBITDA will come in at the bottom of the range we gave in guidance. And at the end of quarter, our year-to-date capital expenditures were somewhat below plan, which is good from a cash flow perspective and we will give you update on the outlook for our capital expenditures at next quarter end once we have more visibility as to where we are likely to end the year. So as you know all our growth capital was at the landfills and the weather over the winter may constrain these outlays.

With that, I will hand it over to you, Jim.

Thank you, Richard. Good morning. A little bit of color on the economy in each of the regions. The Northeast I think generally has been steady but there continues to be major employees such as MBNA (ph) who are announcing the withdrawal from the main market so you get a continuing effect as that market tries to readjust to those allocation and reallocation businesses.

The central region generally steady, but similarly had seen some I think softness as in the Northeast. Southeast I think is very much tied to the perspective on the economy. It's tied to really one's perspective on the housing market and to the degree that one is worrisome about the housing peaks and people are worried about the Southeast economy, but generally it seems to be in a slow growth mode continuing to follow at the national level.

Finally the Western region continues to see some erosion of its manufacturing base; an increase in New York State government costs to serve Medicaid and Medicare. Generally speaking, FCR's markets, which are up and down the Eastern Seaboard and several other states east of the Mississippi is slightly stronger than the balance of New England, which as we have generally characterized New England generally lags the rest of the country.

From a landfill volume standpoint, our overall volumes are up 11%. This is good news because it reflects the ability to increase market share throughout our Solid Waste Operation, but the downside of that is of course a good deal of that increase is tied to increased transportation costs as we have to move that waste out of the Southeast market up to other landfills. And that results in significantly higher transportation costs which are not necessarily covered or are not covered by the fuel surcharge program which are at the curve and are working fairly well.

Our system is expanding and that increased market share has seen a very, very slight tipping fee decrease of about $0.20 quarter-over-quarter. As you know, Worcester and Colebrook, which are key projects for the year in terms of additional capacity; one as a replacement for Brockton; the second as a new MSW capacity are a couple months late to the plan that we had anticipated. Colebrook, as John mentioned, actually accepted its first MSW tonnage yesterday and will go into full operation next week. Although as the go into the winter months, Colebrook probably won't be the anchor that we expected it to be until the spring as the waste flows increase.

Worcester continues to be I think a very bright opportunity for us. It is late to our plan. It is reflective of today a solely soil market which is generally speaking fairly soft and until we get the residual permits which we don't expect this year, it will not have the power that the Brockton facility had and will adversely challenge us relative to year-over-year performance. But it is a very big project. We are very pleased to be in it. We are working closely to advance it and we will report to you in each quarter on the status of that.

From an internalization standpoint, Q2 '06, our reps sense a slight internalization improvement over Q2 '05 from 57.7% -- from 54.7 to 57.7. Much of that internalization is a reflection of two major issues, one I touched on before which is the increased market gathering capabilities in the Northeast region out of the Southeast and into the Northeast landfills. And second importantly is the Chemung facility, which came on line and so we're seeing in the central region a steady internalization rate of about 79 to 80%. The Northeast is 54.5; Southeast has increased to 53.9; and the Western is at 42%, which is a significant increase reflecting the Chemung opportunity.

A little bit on capital. We are significantly underspent to date on capital but much of that remains to be assessed as we go through the balance of the year and construction on the landfills and with regards to whether that capital gets into this year or into next year. And as Richard has represented we will report in very more detailed fashion next quarter.

Moving on development and litigation, from a development standpoint during the month -- or during the quarter, we have completed signing our contract on Chemung. We're in full operation there. We're not up to the permit capacity limit yet but we expect to be in that position by next quarter and we are working with both the host community and Chemung County to develop the project in accordance with host community agreement which anticipates a significant facility expansion after going through the various seeker and permit requirements required by the State of New York.

I think I covered West Old Town before but we have a steady and moving forward program there and we are ahead of our plan relative to that project. Colebrook will start full operation next week, as I mentioned, and we're making good progress on developing Lewiston, which is a key project for the next fiscal year in Maine.

Finally I'd just touch quickly. We expect the MidCon project which is the recycling contract we were awarded for the State of Connecticut. The permit we expect to be issued in the spring, probably February/March and then we will have a five-month construction period. We expect that operating facility to be full in operation by the summer of '06.

We also have as you know completed our Blue Mountain recycling acquisition and more importantly, the association with Recycle Bank and we are beginning to see significant Recycle Bank traction throughout the markets and we believe that is a good forecaster of areas where we think that we're going to be able to harvest and align that with our franchise both in the solid waste as well as FCR.

Finally with regard to Maine Energy, as you know we agreed to participate in a referendum to allow the town to buy out the main energy facility. That referendum was defeated which is actually quite good news for us because it now finally sets the issue and frames it properly relative to the interests of the town to realize the income from the host community agreement and the various taxes that the facility contributes as well as generating an advantageous disposal cost for the community. We expect to complete our host community agreement and the litigation resolutions with Biddeford in early January and we hope that SACO (ph) will follow in host community fashion that Biddeford has but we do not have any forecast with regards to SACO.

Moving on into FCR, revenues are up about 9%. EBITDA is down about $200,000, which is really reflective of an allocation issue in the sense that paper pricing is down, as you know, overall but container pricing is up. So when you weigh those two together, the overall pricing, the average commodity pricing is up slightly. But a number of our facilities in the Northeast are more heavily dominated by paper, so we had some impact. The other material issue in FCR was that we had some health insurance and worker comp unexpected expenses this month and both the combination of those two factors pulled the margin back down to 17% (ph). We expect to be back on track in the next quarter.

The Ontario Single Stream will go in operation this month and the glass beneficiating facility in mid-March of '06. We believe that both those facilities in combination with Recycle Bank and other activities will be fully utilized by the summer of '06 and the capacity fully utilized.

We believe that the overall average commodity pricing in the country for all the commodities will continue to be fairly flat with some downward pressure in fibers and continued upward pressure on plastics, HDPE, PET as they mimic the energy markets.

Then finally as I said the Blue Mountain Recycling assets were acquired during the quarter. We are very pleased with them since we acquired them Recycle Bank has also been awarded a contract in Wilmington. And so we expect to see within the Philadelphia market a significant increase in transition and additional homes that will begin to utilize the Recycle Bank technology in what we think is a very, very novel approach to not only increasingly recycling rates but to giving the opportunities for customers in their home to not only take advantage of the Single Stream technology but more importantly to be incentivized and receive up to $30 a month from spendable coupons in the major metropolitan markets.

Moving on to US GreenFiber, US GreenFiber is experiencing a significant surge in their business both a reflection of I think increased market share and pricing power. Revenues are up 20% in the Q2 '06 versus Q2 '05 on bag sale increase of 11%. This is on a fairly -- while the housing market has cooled from its historical peak, it is a fairly steady number and we think it is very sustainable.

EBITDA has surged 40% quarter-over-quarter primarily driven by the ability to drive pricing in the face of fiberglass which is experiencing significant energy, natural gas, and allocation problems across the industry. This business is nicely positioned to take advantage of what we expect to be a long-term run not only in pricing but more importantly, in innovative projects and products which they are beginning to bring to the marketplace as well as having a very clear, green, environmentally friendly and sustainable I think image as opposed to others.

With regards to these sections which are -- make up that contractors were up 21%; manufactured home was up 2%; retail was up 33%; total sales as I repeated, 20% up quarter-over-quarter. They have created a new productline called Fire and Sound productline which we expect to be a major addition to next year. We expect to complete -- as you know they are on a calendar year basis -- we expect to see about $16.6 million of EBITDA which represents a significant year-over-year increase of in excess of about 25%. And we expect a significant growth in this business in calendar year '06 as well.

And with that, I will turn it back to John.

Thanks, Jim. Before we take questions, we would like to make sure that each participant would maybe ask one question and a follow-up so that we can get to as many folks as we possibly could. Once your question is asked and answered, you certainly can get back into the queue but again, we would like you to limit your questions to one with a follow-up so that we can get to as many people as possible. Thank you.

(OPERATOR INSTRUCTIONS) Corey Greendale, First Analysis.

The first question, I just want to clarify a little bit on the change in the volume. I think, Richard, you said that Brocton was about 80 basis points. But could you just talk a little bit more -- it sounded like the landfill volumes I think you said, Jim, were up 11% just live volumes -- as you pull out Brocton, it was -- the volume trend was still kind of going south from where was it was in Q1?

Perhaps we weren't precise enough. Overall volumes including the residual projects were up 11%. The residual projects are relatively speaking flat relative to Brocton going away and Worcester coming on. The nonresidual projects which we would characterize as our Solid Waste projects are up about 98,000 tons, which represents about slightly more than 11% increase. But a good portion of that is additional waste that we gathered in the Southeast region but had to truck 160, 170 miles up to the Northeast landfills which were considerable transportation costs. And the balance of that was really tied to the addition of the Chemung project and the increased internalization resulting from that project.

So (indiscernible) -- the fact that volumes was -0.4% -- the internal volume was -0.4, that may have been a distance issue but that's more of a margin thing. So can you just give me a little bit more on why the internal volume growth was --?

I think, Corey, you have to understand when we prepare the revenue analysis we treat Worcester and Chemung as acquisitions and so that analysis does not represent solely landfill. It covers holding companies, transportations and the landfills. And as I said, we back out Chemung and Worcester. Jim was giving you the absolute tonnage change, which is a different statistic if you like than the way the revenue is analyzed.

So in other words the hauling and transfer volumes were down?

I think if you looked at Richard's numbers you would kind of look them on same-store basis and so on a same-store basis the volumes are relatively flat. But when you look at -- because we don't add in that statistic, as Richard said, Chemung and Worcester because that's an acquisition, when you look at it on an absolute sense, the numbers are up. So it is a product of the definitional use of the terms used in defining and doing the metrics associated with organic growth versus absolute volume.

I understand. Thank you for all that. The other question I has is just about the internalization in the Northeast region which looks like it was down year-over-year and sequentially. Just what are the dynamics behind that and where is that volume going?

Well, what happens is that when we do the internalization the increase in internalization is reflective of where the waste initially comes from. So if the waste is sourced in the Southeast even though it’s disposed in the Northeast it shows up as an increase in the Southeast. But during the quarter also we repositioned waste out of the Northeast that was there previously and made it available to go into Colebrook. So we are seeing some internalization lost from that effect. It is overall internalization rate has gone up but it is a little bit of the shifting back and forth the waste between the regions.

I understand. Thank you for the clarification.

Tom Ford, Lehman Brothers.

Just had a question for you, Jim, just trying to understand or Richard if you guys had it -- if I took Brocton out of last year, what would the EBITDA be last year? In the second quarter?

I don't know if I've got that off the top of my head. We'd be glad to get that and (multiple speakers) that off-line rather than sit here and sputter and stutter trying to look for it.

That's fine. The other question I had for you, Jim, is a follow-up is looking at those green fiber numbers and trying to look a little bit down much further down the road especially now with your comment -- you also introduced the issue of new products coming. And I just wondering what -- I don't know how you want to put it, whether you want to talk about it from a revenue or an earnings perspective or what have you or both -- that would be great -- but just thinking about it two to three years from now, where could that be?

Let's start this square first. The US GreenFiber business, which is as you know our 50-50 joint venture with LP and because of the nature of that doesn't appear in our EBITDA numbers at all. It only appears in our EPS. We believe that our share price does not reflect the value of that business that is ultimately there and at some point people will begin to understand that a business which is growing 20% a year on a revenue base and probably sustainably higher than that on an EBITDA base has got some value to it that at some point and somehow should be reflected in our share price.

Obviously the simple way to do that is to monetize it and that has got constant balance for where is the business relative to its maturity? And other needs that we have from a balance sheet standpoint that we have relative to that business.

I think down the road we are very pleased where that business is positioned within its market. As I mentioned, we expect it to do north of $25 million of EBITDA next year and that represents a substantially higher growth rate than even what they got this year. This is on -- and comforting from our standpoint is that that forecast is based on basically same-stores and price increases that had been put in effect in the last three months and then just forwarding those plus three or four acquisitions that will be done by the end of December. And the new productline. So we see that US GreenFiber has an opportunity to be a very strong growing business in a stable industry, but ultimately obviously this business probably best belongs within the housing industry. So we are carefully looking at this business, nurturing and mentoring it and making sure that we optimize it for our share price at the right time.

One quick question there is just as outside observers, is there anything that we can focus on that gives us an idea as to when you guys would look more strongly at monetizing? I mean is there any kind of milestones that we can think about or something that you are focused on?

I think we will think about that but I wouldn't offer anything off the top of our head right now and I think John --.

I would concur with Jim, Tom. I think that it would be inappropriate for us to comment on that.

Just to answer your Brocton question, year-over-year Brocton had a negative impact of $0.5 million in the quarter. Operator, may we move to the next question please?

(OPERATOR INSTRUCTIONS) Bill Fisher, Raymond James.

Jim, you gave a good status on the Chemung, Colebrook, and Worcester. I was just -- if those things are running at the permanent levels you had kind of planned, do you have a rough idea of what the annual EBIT would be from those three? And I assume it's pretty negligible obviously in the current quarter.

I probably could give you a better feel of the EBITDA level or the NEBIT, but what the question I believe is is that given that this year is a transition period for both Worcester, Holbrook, and Chemung, what is the full-year effect on an incremental basis year-over-year and fiscal year '07 versus '06? We believe that would be in the neighborhood of 2 to $2.5 million of additional EBITDA.

For those three?

Yes.

For Richard, just the working capital was the use of 9 million in the first half. On a seasonal basis, should that kind of reversal out in the second half?

Typically our working capital trends positive in the latter half of the years, Bill. So I would expect that same trend to be experienced.

Okay, great. Thank you.

Amanda Tepper, JPMorgan.

Hi, it's (indiscernible) in for Amanda. In terms of the price increase, 5.3%, do you know how much of that was from your fuel charge versus just organic price growth?

It was just over 2% as a percentage of segment revenue.

2% was the fuel surcharge?

Yes.

Got you. Then in terms of -- I know you're offsetting most of your fuel costs through the fuel charge. Do you know what percent of that it is?

I'm sorry, I'm not sure what the question is.

I guess is the fuel surcharge -- is that covering 100% of your fuel costs or are you covering the increased fuel cost through other fees or just from general price increases?

It's both. We're basically covering the fuel costs through the surcharge.

I'd like to make a distinction here because when we talk about the fuel surcharge, we're talking about at our curb as opposed to surcharging our ability which we're having to absorb the third-party transportation costs which we're not able to yet pass on that fuel surcharge. And that is really the impact that we're trying to explain that our fuel surcharge for the customers that we directly work with is working and tracking fairly well and covering what I will call our customer-related -- but when we get into moving waste across the states and (multiple speakers) and we're trying to gather additional waste and therefore we're having to be competitive, the consequences of having to be competitive is that we have to absorb a higher transportation cost associated with moving that waste primarily driven by third-party fuel costs on that transportation.

Okay, thanks.

Leone Young, Citigroup.

First of all, maybe I could approach this volume question a little differently. If we take out the impacts of what is an acquisition and what is not, just looking from more of a 30,000 foot view in that is it your sense that the economies that you're in are kind of sluggish such that they are indicating to you overall sort of flattish volumes? Modestly up volumes? What is your sense of what the economy should be producing in terms of volume?

I think that it is fair to say that the economy is flat to up maybe slightly I think -- which is what we have seen for the first quarter. I think it is certainly our perspective that we would have liked to have seen a more robust second quarter. It is normally the seasonal time of the year where we can see the increases where we'd normally see them. And I think that it is really flat to up slightly as opposed to where we would have liked to have seen it for the quarter.

And on an absolute basis what we are trying to signal is we have done a better job increasing marketshare but the overall size of the market is flat, which is I think your question.

Talk a little bit about some of your opportunities that maybe you don't want to specifically mention, but are there still privatization opportunities out there you're working on? And perhaps any commentary on the expected waste management and allied divestitures in terms of opportunities?

I think we've clearly indicated that we are working on several additional disposal assets that will certainly from a strategic standpoint add value. I think that it is also fair to say that we are looking at harvesting the success that we have had with the assets that we brought in in the last year. We do have several additional opportunities that we are working on and we will continue to strategically put additional disposal capacity within the portfolio. And it is clearly our understanding that we are really Allied or waste management and Allied are -- they are certainly looking at what they are likely to do over the next month or so. And we are likely to hear particularly from Allied as to what decisions if any they are going to make in terms of divestitures on a nationwide basis. I think that they are in the process currently of doing that analytical work and we expect that any decisions that are made will be the first quarter of next year.

Just from a development standpoint, why I think historically we have distinguished ourselves in acquiring additional disposal capacity from all of our competitors in New England. Development and additional disposal capacity remains very challenging in New England and we don't want to over represent or overdrive (ph) our headlights that we're going to always be able to be in a very different quartile than the rest of the competitors. It is a tough business to develop landfills in New England and we are very reflective and responsive to that framework.

Great.

I think the real expectation is that we have had tremendous success in the last few years of adding four or five facilities. We don't anticipate that on a go-forward basis; however, we do have a number of opportunities that we are working on and strategically we will add additional disposal capacity to the portfolio, but simply not at the level that we did in the last year or so.

Great. Just one clarification. Did you say the GreenFiber income at these current levels was sustainable?

Absolutely. We're very pleased from a sustainability aspect with US GreenFiber. It is taking market share from fiberglass. It has got better product attributes. It's got better pricing characteristics from our standpoint. We think it is very sustainable. Having said that, it does track with housing markets so if we see changes in the housing market, everyone will have to deal with that. But I think it's a very --.

Certainly the other overriding issue to is energy costs as well because it is really driving the remodeling and folks trying to reinsulate and minimize the energy costs that everyone is facing.

Fiberglass has a very high-energy component to its cost.

Okay.

Glenn Primack, Broadview Advisers.

I was wondering if the Cocoon Insulation, is that offered nationwide?

Yes, we are the only national footprint cellulose manufacturer in North America and the next largest, which is not a national footprint, is probably much, much, much smaller, 1/10 our size. So we have that advantage as well in that business because we're really the only ones that can serve Home Depot and Lowe's in those national footprints. And I think part of our pleasant response to the sustainability question is that we are seeing very high demands in the retail channel from Home Depot, Menards, and Lowe's and we believe that that is going to be a sustainable issue that as energy prices rise, people continue to want to look at their existing homes and see if they can make them more draft free and more efficient from an energy consumption standpoint.

Do you think that the tax credit should drive some of the volume next year?

It can't hurt but I don't think I would want to offer an opinion because I don't think I am very learned on that. So I'd kind of leave that to people who are better trained, that have a better understanding of that.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Nicholas (indiscernible), Shenkman Capital Management.

Good morning guys. Nick Sarcasi (ph). A couple of questions. Firstly on the CapEx guidance, I know you guys mentioned that you'd look to update it next quarter but is it safe to say that any update would likely be on a timing front as opposed to the total amount with respect to the actions you were looking to take?

I think that is a fair characterization, Nick, yes.

Second question would be did you state or could you give us about how much you spent year to date on third-party transportation costs? And kind of as you look at the landscape going forward, is there anything you can do to maybe limit the exposure you guys have to that and maybe a little bit more color on how those contract dynamics work? Is it real-time price changes as their fuel costs go up? Or do you have somewhat of a lag?

It's a great question. The actual year-over-year increase was $2.2 million over -- (multiple speakers).

The total for the quarter was 12.8 million.

Yes. $12.8 million in total and a $2.2 million increase over the same quarter last year. And as Jim said, some of that has been driven by the increased volume and movement of waste to the incremental disposal capacity that we put in place. Charlie Leonard is working on a number of programs to really reevaluate. I think one of the things that we consistently are doing now is reevaluating the transportation lanes, looking at those lanes from a back haul perspective and making sure that any place where we can from a pricing standpoint that we can go in and impact that to try to recapture that and Charlie is developing a program right now to be able to look at those transportation costs, understand where we may be able to increase price or where we may have other opportunities in terms of rerouting or possibly putting in lanes ourselves where we've got back hauls and how we may very well be able to maximize that.

Keep in mind the third-party transportation costs, the reason that it is in place in the first place is that historically that could be done cheaper with third party than we could do it by utilizing our own capital and our own folks to transport that waste. So it is something though because of the impact that we're looking at and analyzing on a quarterly basis to see where we may be able to impact it.

Okay and the balance as far as timeframe, how long do you think before any of the measures you are looking at might be able to be put in place?

I'd like to think that we should begin to have a real understanding of what kind of impact we could have or what changes we could make for next quarter.

Great. Thanks, guys.

A follow-up from Glenn Primack, Broadview Advisers.

Just could you remind me what the RONA targets are for the company as part of the SACO plant?

It is part of the -- from an incentive comp perspective, we have incorporated RONA into the incentive comp program and I think that we have stated that we want to move the RONA target over the next three to five years to 10 to 12% versus the 7% that we currently -- or 7.25 that we're currently running at. So over a three- to five-year period of time we're going to move -- our goal is to move the RONA to 10 to 12%

Great, thanks.

That does conclude our question-and-answer session today. Mr. Casella, I'll turn the conference back to you for additional or closing remarks.

Terrific. Thank you. Again I'd like to make sure that people do keep in mind that we are investing in disposal capacity that we put in place. It has the impact on our short-term free cash flow generation. Clearly made an attempt this quarter to break that out, to give people more visibility on it, again suggest that you go to the press release to make sure you take a look at that.

I think clearly we believe as demonstrated from historical performance that the landfills will generate significant EBITDA and free cash flow and we certainly expect the historical patterns to continue after we have made the upfront investment in those thirty-year assets.

Again, one of the other things too that I'd like to emphasize as well is that if you take the average tip fee and EBITDA yield for the facilities that we have brought in place that are in various stages of development, which is Ontario, West Old Town, Highland, Southridge, Hardwick, Tramani (ph), Lewiston, that when we get those facilities to maturity, we anticipate in excess of $30 million worth of additional EBITDA.

Again we're very pleased with the performance for the quarter. Certainly like any company that have felt the headwinds in terms of the energy costs, but the development activity that we have had has really enabled us to be able to offset a good portion of that.

I'd like to thank all of you for joining us this morning and we look forward to talking to all of you in March when we release our third-quarter '06 numbers. Thank you very much and have a great day.

That does conclude our conference call today. Thank you all for your participation.