Casella Waste Systems Inc (CWST) 2007 Q1 法說會逐字稿

Good day, everyone. Welcome to the Casella Waste Systems fiscal year 2007 first quarter 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, President and Chief Operating Officer; Richard Norris, our 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 2007 results. These results were released yesterday afternoon. After a very brief review of these results 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'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, you should not rely on those forward-looking statements as representing our views as of any date subsequent to today.

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

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

Thanks, Joe. Good morning, and welcome, again, everyone. Again, our purpose is to discuss the quarter -- the business from a financial operations and Jim, as usual, will go through details in terms of the development activities for the quarter. And, again, we'll also take the time to answer your questions as well. I don't -- I don't want to burden you with the same information that we covered with the August pre-release. However, I would like to update you as of today on some of the issues that we identified during the August 16th release.

Starting off with the landfills; the Hakes landfill, as we had indicated, was significantly off target for the disruption from a weather perspective, as well as some of the economic issues that we had pointed out. The landfill is really back on track for August. However, volumes are off slightly, approximately 1000 tons on a year-over-year basis. But that facility was off 22,000 tons for the first quarter. So significant improvement in the Hakes facility. And as I said, pretty much flat on a year-over-year basis, down slightly, which is a significant improvement from the first quarter.

As we also indicated on the preliminary call, with regard to the Hardwick facility, the issue is a zoning issue that -- we don't expect to have a vote on that until the fall. So we don't expect any real favorable impact until the fourth quarter on the Hardwick situation. And also, as we discussed in August, we don't expect a favorable impact from Worcester until the competitor's landfill is closed towards the end of the fiscal year.

And one of the other issues that we had indicated and given significant detail on was the roll-off pulls in our southeast region. And while the roll-off pulls in the Southeast region are still down year-over-year for August, the number of polls, more importantly, are tracking to the updated guidance that we gave. In addition, the [Dodge] index for Q1 '07 in New England and Mass was actually down 21 and 38%, which is a slight improvement over May and June's numbers that we had given in our press release of 26 and 46%. So you can see that -- actually in July, we did have a slight improvement from an economic perspective. And obviously ,most importantly, August is tracking in the southeast region consistent with our updated guidance. On an overall basis, roll-off pulls in August were up 14% over July.

Another issue that we had identified on the call was the plastics commodity issue. And from a plastics perspective, pricing is actually up slightly, about $20 a ton, and more importantly, is the trending slightly above -- or at or slightly above the guidance that we updated last -- in August. So, again, trying to really layout -- just an update on some of the issues that impacted our first quarter results.

And lastly, the environmental fee didn't back-roll out on August 1. It was indeed well accepted. And we did roll that out on 70% of our solid waste hauling revenues. So good success in terms of the implementation of the environmental fee and very much accepted from a market perspective. Those are some of the -- actually some updates in terms of some of the issues, as I said, that impacted us in the first quarter. And some of the -- just an update as well in terms of the environmental fee and how that -- how it actually laid out in the marketplace for August and what we're likely to see on a go-forward basis --- very positive.

With that, I'll turn it over to Richard, who will go through the detail in terms of the numbers.

Thank you, John. For the quarter ended July 31, 2006, revenue increased $11.5 million to $143.5 million, or 8.7%. Some 5.6 of that year-over-year increase, or $7.4 million, arose from the acquisition activity over the last year, including Colebrook, Chemung and Blue Mountain Recycling.

Internal growth for the quarter reflects higher pricing across all regions in the solid waste segment at the hauling and transfer level. This solid waste price increase -- this solid waste price increase was weakened by having more BUD material at the landfills this year than last. BUD material is typically received at prices in the $8 to $10 range. Without this factor, solid waste prices would have been reported as being some 40 basis points higher, making the total price increase 3.4%.

Volumes were down in the southeastern region, mainly due to a decline in hauling and [CND] volumes, driven by the record rainfall in the quarter and a lower construction activity. Volumes elsewhere in the solid waste regions were flat to up slightly. Due to deep price discounting by a competitor, which site will likely close by the end of the calendar year, Worcester did not offset the loss of volume from Brockton. Consequently, that combination reduced the volume growth percentage for the solid waste segment by over 100 basis points.

The solid waste price increase percentage includes 1.2% relating to fuel surcharges. FCR, excluding Blue Mountain, which is accounted for as an acquisition, reflected lower prices, mainly from plastics on higher volume. The revenue for the quarter breaks down as follows; solid waste, $114.3 million; FCR, $23.3 million; and other, $5.9 million; for a total of $143.5 million.

Gross margins were down 180 basis points year-over-year. Fuel continued to be a significant factor at 70 basis points. The other main factor was landfill operating costs, which were up 60 basis points, mainly due to leachate costs and landfill grounds maintenance being higher, and as well as that, landfill operating lease amortization increased due to the acquisition of Chemung and higher volumes at Ontario and Juniper Ridge. Maintenance was also up 30 basis points, one third in FCR and the balance in solid waste.

Moving on to general and administration expenses; this category increased as a percentage of revenue year-over-year 170 basis points. Bad debt expense is up 30 basis points, mainly due to two large slow-paying accounts in the southeast region. Legal expenses continue to be high, 30 basis points, as we continue to deal with the political issues in Maine and other outstanding litigation matters. We also had a difficult year-over-year comp as we recorded a credit of $155,000 last year from insurance company reimbursement.

External communications in marketing were up 40 basis points, but these costs were front-end loaded. Consulting costs were up 20 basis points, as we work on long-term growth initiatives, but these will be reprioritized on a go-forward basis based on those projects which have a benefit in this current fiscal year. Compensation costs were up 20 basis points arising from the combination of acquisitions and the addition of regional sales managers and direct optimization and safety personnel. To complete the picture, travel was up 20 basis points and advertising, 10 basis points.

As we have announced previously, we're focused on maintaining these costs within or below budget for the remainder of the year. Currently, the overall percentage of G&A is running at 30 to 50 basis points ahead of our original guidance of 13.5% as a percentage of revenue.

Moving on to EBITDA; EBITDA at $26.6 million was down from the prior year. The EBIT margin was down 350 basis points. EBITDA breaks down as follows; solid waste, $22.8 million, FCR, $4.0 million, and other was a negative $200,000, for a total of $26.6 million. Solid waste EBITDA was down $2.1 million from the prior year. And margins decreased by 330 basis points. The same factors mentioned earlier relating to cost of operations, as well as G&A expenses, accounted for the decrease.

To summarize these results from an event perspective, leachate and grounds maintenance from the record rainfall impacted EBITDA negatively by $400,000. Landfills in total were a negative $2.45 million, as to say the combination of Worcester, as well as weaker volume into Hakes and Hardwick. The southeast region hauling and transfer stations experienced lower volumes, which impacted EBITDA by $900,000. These negative factors were offset by better performance from the remainder of the operations.

FCR's results include a full quarter of Blue Mountain Recycling, so total volumes were up. But even excluding that acquisition, volumes increased. The major negative factor was the 25% downturn in plastics prices, which adversely impacted results by some $500,000 year-over-year.

Depreciation and amortization; this expense was up $1.8 million year-over-year or 30 basis points. Depreciation was up $1 million and landfill amortization increased $800,000, mainly due to the addition of Colebrook and Chemung. However, amortization was lower than expected, due to lower volumes at some sites, as previously mentioned, plus a [cap-in] correction at Southbridge. D&A, depreciation and amortization, is expected to increase over the balance of the year back up to guidance levels, which is the high 13% range.

Income taxes; the tax rate increased to 92% versus 44% last year. This large increase is driven mainly by the low level of book income. At this level, when you add back the items that are nondeductible for tax purposes, the rate increases significantly. If our book income increases above the present levels, then the effective tax rate will decrease accordingly. The guideline, though, I would use 75 to 80% as the rate for now.

For the quarter, net income after preferred stock dividends amounted to a loss of $934,000 or $0.04 per common share.

As to miscellaneous statistics; the average interest rate for the quarter increased to 8.66%, including amortization of financing costs. Net of these expenses, it was 8.2%. At the end of the quarter, we still had $1.1 million of tax-exempt revenue bonds remaining in escrow. This amount will be drawn down to finance our main capital project over the next few months. That escrow amount is included in restricted cash in the balance sheet.

On July 25, the Company increased its borrowing capacity by $100 million, by adding $90 million of term loan B and increasing the revolver by $10 million. This amendment was made to provide the flexibility to redeem the preferred shares, which became due in one year effective August 11. And in the second quarter of this year, will be included in current liabilities in the balance sheet. As a result of the additional financing, availability on the revolver as of July 31 was $155.6 million, after taking into account $58.4 million of our fees outstanding.

Capital expenditures for the quarter amounted to $32.3 million, which you would have seen the growth component of these expenditures, $8.5 million, was largely made at the land fills, especially at Colebrook and Southbridge.

Five small tuck-in holding acquisitions were closed during the quarter. Total purchase price was $700,000 and the purchase price [inaudible] paid was 3.5 times EBITDA.

The Company adopted FAS 123-R May 1, 2006. This resulted in a charge to earnings amounting to $134,000. The charge for the balance of the year will amount to approximately $500,000.

Free cash flow; free cash flow was negative for the quarter as previously indicated, driven by capital expenditures, which somewhat lagged the forecast due to timing. Cash interest expense was up year-over-year due to the prior year amount being low. In the fourth quarter of 2005, we restructured our senior credit facility, at which time we paid all the interest outstanding, which therefore decreased cash interest in Q1 2006, the comparative period.

And finally, a brief comment on our 2007 outlook. In the light of the first quarter results, we've updated our guidance, as you have seen in the press release, and we've lowered our capital expenditures so that free cash flow will be essentially unchanged on a net basis. We've reduced our capital expenditures roughly 50-50 between maintenance and growth. And we looked at those projects which had the lowest payback or the lowest return on invested capital. So in maintenance, for example, we reduced the expenditures by approximately $2 million on buildings and facility improvements, which obviously have no impact on operations. On the growth side, we deferred certain [inaudible] upgrades.

Currently G&A is running at the 14% revenue range. And depreciation and amortization, while lowering the first quarter's revenue, will be back up to guidance levels by the end of the year -- that is closer to 14%, taking into account normal seasonality. The tax rate will be volatile, but use 75 to 80% until further guidance.

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

Thank you, Richard. Good morning. Just a few comments on the color of the economy. As you noted, the Federal Reserve is reporting basically steady national economy. But in New England, I think there are two factors driving the economy. One is it's very sensitive to the housing market and, as you know, the housing market has fallen off, particularly new starts in New England. Secondly, and more importantly, I think hydrocarbon pricing has stolen available revenue or spendable revenue from the middle class. So I think it's two pieces of data that supports what we've actually seen in the overall economy in the first quarter.

Generally, while New England is steady as well, there is some softening, as evidenced by the Dodge index that we gave in our pre-release. And for the quarter, that index for New England is down 21% and for Massachusetts, down 38.4%. I might note that given the numbers we gave in the prerelease, the number in August and July actually has increased. And so it's indicating, as John has suggested and as we're seeing in roll-off pulls, a slight improvement, both toward the end of the quarter as well as beginning of August.

The northeast region has done a reasonably good job of gathering excess tonnages. As Richard noted from a landfill volume standpoint, our landfill volumes are actually up by about 14,000 tons. But when you separate the landfill from the closure landfills -- our solid waste landfills, including Maine Energy are up about 80,000 tons on a quarter. But offset that by the lower -- or the higher transportation costs and the net effect of a lower average dollar per ton going into the landfill, and therefore, we were not as efficient in harvesting EBITDA out of those facilities. Overall, the landfills are performing to the forecast and we see some slight improvements in August as well.

From an internalization standpoint; we have published those internalization numbers in the actual press release, so I won't read those. But as indicated, internalization for Q1 '07 over Q1 '06 is up slightly, reflecting the additional driving power, primarily of the Chemung landfill and waste we've been able to internalize in the western region. The central region is relatively flat quarter-over-quarter. And the southeast region is reflecting softness that we previously reported. We remain very hopeful about Worcester, but Worcester will not be used as a market compressor. And therefore, we will wait for that closure project that we expect to close down in October, to close in order to restart and harvest the opportunities at Worcester.

Colebrook is performing nicely as the closure project. Our closure tons are actually up there significantly because of that, as well as our dollar per ton. But because of the nature of the closure project, we don't get to harvest as much -- certainly EBIT or EBITDA there because of the short-term nature of the project.

Moving on to the development projects; Waste USA has recently, during the quarter, completed negotiations with the FAA with regards to requirements required in the future, with regards to the small airport near the landfill. Results of those negotiations will significantly reduce future construction costs and we believe that we that will be able to incorporate that into our FAS-B calculations over the next few quarters.

Ontario's performing right on the money for our expectations. We expect to have our glass beneficiating facility in operation by the late portion of Q2 '07. And that will add some additional EBITDA out of that overall facility, including the single stream landfill.

Southbridge, as those of you who may have been following it, is an important project for us. In June, the town voted 2 to 1 to support a referendum to develop this -- a new access road into the site and to develop the industrial development park. Both of these features are important for the economic development of Southbridge. Two of the three opposition candidates were defeated in those same elections. The roads since those elections have now been approved by both the planning board and the council. And there is a public presentation for our proposal in late September scheduled. We are hopeful that we'll have positive discussions and negotiations in the fall with the town, leading up to some announcements there.

Hardwick, as John mentioned, is scheduled for a special town meeting late October or early November. We have filed the petition for the zoning change with the select board and they in turn -- in due course, will -- are required to refer to the planning board and then the planning board has a statutory number of days in which to call a special election.

In West Old Town, in combination with Pine Tree, is performing quite nicely. Last night -- or the night before rather, I should say, the town of Hampden voted unanimously to allow the operation of the Pine Tree facility until December of 2009. This is a very important confirmation of the overall plan, which was to essentially develop West Old Town and then transit from Pine Tree to West Old Town in an orderly fashion, allowing us to reposition ourself in West Old Town and leave the Hampden market. And so I think that both Hampden and ourself are pleased with that vote and the negotiations have taken place. And we expect now to be able to precisely define operations between now and December of 2009, as we complete the closure for Pine Tree.

Chemung is also operating at capacity and we expect -- and are in the process of applying for permit for 280,000 tons per year. That is the [aceecra] permit that will require [aceecra] and -- as well as county and DEC permit approval. We're also in the process of soliciting comments for a [inaudible] to the permit that would allow us to increase -- not to the 280, but above the 120. We're hopeful that we'll be able to get that accomplished in the next two months. Should we get that accomplished, Chemung looks to be able to be a good increase driver in Q3 and Q4, and we are hopeful that that will occur. If it does, it's in addition to the forecast that we are currently giving to the market.

Finally, the Midtown project has started, which is the project FCR was awarded in Connecticut. We expect that to be online early in calendar year '07.

From an FCR standpoint, as Richard mentioned, volumes were up. Overall, operations are going very nicely. We did get a commodities price, particularly in PET and HDP, pigment and non-pigment. The results of that was actually a reduction in our revenue -- commodity revenue price from $86.45 in Q1 '06 to $83.66, which was a 3% reduction. Volumes were up 6%.

Our cost is nicely in control, with the same-store cost increase of only 1.5%. And in looking at the commodities markets, we have used a flat line based on where we were at the end of Q1 for forecast for 113. But as John had indicated, for PET and HDPE, the markets are currently up to that forecast. And I would note also that the markets are also up [inaudible] from that forecast. So we think this is a good indicator that the markets are recovering. Certainly, the drop that we saw does not reflect and is out of whack with the long-term rise in plastic pricing, driven principally by the rise in hydrocarbon pricing from $30 to $77 a ton. Some of you may note that the pricing has come down a little bit, but we think it's well above, as a driver, to where we are for plastics. And we expect those prices to recover over the next few quarters.

As I mentioned, Ontario Trilogy project will start. We'll accept over 40,000 tons of glass starting late fall. And we'll be able to deploy our Green Mountain technology that we have there. We're excited about getting both the experience and the additional revenue, and EBITDA will flow from that. We think the paper pricing, which represents paper -- which represents about 78% of our commodities, are relatively stable. As you know, all of those are hedged and protected with only plastic pricing, the ones that we have been unable to hedge.

Finally, a little update on Recycle Bank; we received excellent traction in the Philadelphia market. Philadelphia has announced 125,000 homes conversion to single stream and with an additional 80,000 homes to be converted in late this year or early next year. Auburn conversion to single stream is running above our forecast and we see good market interest in that. And as some of you who have been following Recycle Bank know, that we now have rolled it out in Wilmington and they have had a very, very good reception there. And I think it's beginning to suggest that we are positioned to do this in a broader roll-out in larger markets, including many of our key MSA's within our franchise; including Burlington, Ontario and Auburn, Mass, Boston -- a pilot in Boston, Greensboro and Charlotte.

With regard to the U.S. GreenFiber, they continue to perform extremely well. For the quarter, their revenue is up 77%. Bid is up about 28-- sorry, about -- bid is up 67%. And bag sales are up 28%. For the year to date, calendar year '06 versus calendar year '05, overall sales are up 32%. Bid is up 75%. Bag produced and sold are up 28.9%. And I would tell you that we continue to believe that for the calendar year, U.S. GreenFiber will have probably revenues of about -- will have a bid of about $28 million. And this compares nicely to the calendar year '06 bid of about $16. Housing starts have fallen from historical highs, and we do expect some reductions in the contractor channel. But we believe that both the retail in both the Easy Pour and the Fire and Sound product lines, which will come on next year, will allow us to meet our '06 EBITDA and exceed it in '07.

And with that, I'll turn it back to John.

Thanks. At this point in time, we would like to open it up for questions. We would like participants to limit their questions to one and follow-up, so we can answer as many questions as we can. If you would like to ask another one, just reenter the queue. Operator?

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Corey Greendale with First Analysis.

Hi, good morning, guys.

Hey, good morning, Corey. How are you?

Good. How are you?

Good.

Good. My first question -- or only, other than the follow-up I guess, my question is about the pricing environment. If adding back the 40 basis points that you suggested, Richard, from the BUD impact, it still looks like the trend is -- it's solid still, but the trend is still downward. If you could just talk a bit about kind of on a same line of business basis; is pricing holding? And the fact that you made a positive comment in the press release about pricing, is this kind of a reasonable expectation for what we should expect going forward?

Well, this is John, Corey. I think that, clearly from a practical perspective, when you look at our marketplace, when you look at the northeast, I think the pricing environment that we find ourselves is indeed positive in light of the fact that we have the challenges, from an economic perspective, in the northeast. So notwithstanding that, we think that the environment is positive. And we think that, at least from what we have seen to date in August, that it looks as though it's going to be at those levels for the rest of the year.

Okay. So in other words, it's good under the circumstances, but it's probably a little bit weaker than it was a couple quarters ago?

Yes, I think it may very well be a little bit weaker, that's correct. I think we were at, probably 3%. So I think you're right. It is slightly weaker than what it was.

I think relative to the regional economics, it's actually, I think, quite robust relative to that.

I think the other indication, too, is the increase in pulls from July to August -- I think is a real positive as well. So I think tha -- that's what gives us some comfort in terms of where we are from a pricing perspective.

Okay, and follow-up question, maybe for Richard; on the guidance, on the free cash flow, I'm just looking at the details here. Looks like you didn't change the cash flow from operations guidance and you lowered the CapEx guidance by $8 million. So what else is playing into the free cash flow guidance, that that's not going up by $8 million?

Well, as part of the reforecasting process, we reforecast the balance sheet. And some of the balance sheet working capital items changed as a result of the higher revenue forecast, for example, cash receivables go up, so that impacts the free cash flow. That's the main reason.

But I'm just a little confused. Wouldn't that affect the cash flow from operations guidance also, then?

Yes, but it didn't materially -- it didn't impact it in the same way. Maybe I can explain that to you off line, Corey.

I'll have to get it off line. That's fine. Thanks.

We'll hear next from Scott Levine with J.P. Morgan.

Good morning.

Good morning, Scott.

Regarding the internalization rate up 2.6% year-over-year, I was kind of wondering if you guys had some rough thoughts about where we can expect that number to go to over, say, the next two to four quarters given your current landfill development plans. And what your expectations in terms of margin leveraged increased internalization might be, from a broad perspective?

I think the way to answer that, perhaps, is to kind of go through each of the major landfills in terms of opportunities. As you know, many of our landfills are at capacity, so there is limited opportunity to drive internalization by additional, unless we get permit changes. But just to give you some highlight on that; Chemung, we expect to be able to take in the next six months from 120,000 tons to 220,000 tons. And when we accomplish that, a good portion of that will be eligible for internalized tons and so that will drive internalization, certainly from an overall company standpoint.

West Old Town, as we continue to transition from Pine Tree to West Old Town, we're able to drive some additional volumes into West Old Town and internalizations there will improve as well. I think that Waste USA is pretty well stable at the number in fact, as is Clinton county, by existing permit limits.

We expect to be able to actually see some improvement at North Country, as we complete the construction of the cell that we just constructed. And we'll be able to bring that facility back in conjunction with Colebrook, bring that facility back to 120,000 tons. When we do that, most of that will show up as internalized tons.

Southbridge is probably the biggest anchor in this question, were we to be able to get the negotiations completed with the town of Southbridge, convert to MSW and then ultimately, to its higher capacity that we are proposing. That would offer significant opportunity to reach into the Massachusetts market, acquire tons and then internalize them.

And then did I miss any? Hyland is at capacity. We are awaiting for a permit approval that is scheduled there for December or January that would allow us to increase tons and there will be a slight internalization.

So overall, I think over the next year to two years, contemplating Southbridge and the other assets, Chemung included, I think that there is the opportunity to see a continued robust increased internalization rates for the Company.

Clearly from our perspective, Scott, we believe that we'll be on target in terms of what we have laid out a year ago, in terms of getting to the mid-60s -- low to mid-60s in a couple years.

Great. One quick follow-up, if I may, as well. Jim, you talked about the macro environment. I didn't know if there were any noteworthy differences in the environment across any of your regions? Or seeing pretty much the same thing everywhere, excluding Massachusetts?

Surprisingly, I think that Vermont, which is essentially the central region, is probably least affected by those issues, I think. And it I think the area that's most affected is Massachusetts. And so if we had a paradigm, we have a continued soft economy in the western region, which is upstate New York, primarily being driven by continued pricing -- not pricing -- continued driven by cost associated with servicing social services and higher government costs there. Massachusetts is the most sensitive right now.

The northeast region, which is principally Maine, is in kind of the same situation it's been, but it continues to be working very hard. And one of the major election issues for the Governor Baldacci this fall will be the ability for Maine to create new jobs. And I think that's probably best reflective of that they're finally figuring out they really need to be focused on that because they have had a very, very soft economy and a lot of basic economic transit away from Maine.

So overall, Mass is the most sensitive market; Vermont, the most unaffected. Next being affected, I would say would be Maine, and then west New York continues to be driven primarily by excess Social Security spending and related --

Vermont is really Vermont and New Hampshire, as well.

Vermont and New Hampshire, right. That would give you granular color on New England economy.

Great. Thanks, guys.

[OPERATOR INSTRUCTIONS] We'll hear next from Melinda Newman with Post Advisory Group.

Hi.

Hi.

I have a couple questions. Let me start with this and then I'll get back in the queue. Just on the internalization issue, so it sounds like you've had internalization ticking up mostly from the western region, but margin depression. And can you comment, maybe, on the impact of -- if Southbridge would be someplace where -- is there density enough if Southbridge works out, so that higher internalization will move margins higher? And can you comment on, in the western region, whether you just don't have the root density and the effective fuel costs, just -- have made that harder to convert?

Yes. I would be pleased to do that. First of all, I would just note for everyone that I think internalization, although it's a proxy that is often used and talked about and is generally accepted as a proxy, it is in itself, a hard thing to take much guidance from because there are many other factors other than tons. A good example of that is the [tipping fee] difference between Massachusetts and New York, less than 300 miles away, is over $30 a ton. So obviously an internalized ton in Chemung doesn't have the robustness effect from an EBITDA standpoint that the same ton from an internalization would have in Southbridge.

Second role, the point of question about Southbridge, we -- Southbridge sits less than 60 or 70 miles from downtown Boston. It's in a market, which is net exporter of MSW to the tune of about two million tons. You have Chicopee and other major landfills in the market coming to the end of their life. And so there is more than adequate solid waste in that market that can be internalized at numbers around $60 a ton, which are very good numbers from the landfill standpoint, and will result in very robust EBITDA and EBITDA margin numbers coming off the Southbridge when we get it converted.

So I would say that a ton at Southbridge internalized, it's much more valuable to us than a ton at Chemung. But having said that, we are hopeful that -- the next factor on landfills is that you've got to operate them as to kind of the right scale. And Chemung was always, when we developed it or took it on, it was a project that we expect to take to 417,000 tons. It's what our host community and operating services agreement with the Chemung county anticipates. We're currently at 120. So as landfills get up to scale, they also perform better. And so at 120,000 tons, even though it's an internalized ton, the extra tons that we then go from 120 to 220 have a much higher EBITDA per ton carrying capacity than the first, which are carrying general site costs.

So, again, internalization as a proxy by itself, does not give you a clearer insight into how you will drive EBITDA without looking at some of these other factors.

Okay. The follow-up, can you -- you commented on Southbridge and timing. Can you clarify -- you said the town approved, they voted yes on the referendum or there is a referendum on the ballot? And then can you tell us exactly what is in your current forecast with regards to Southbridge volumes versus what the upside might be if things go well?

Well, first of all, the, the elections that I referred to took place in June.

Okay.

And prior to that time, there was a political debate in town over what became -- which may be -- could be characterized as a proxy for the landfill, but it was never really done that way. And that was a town that was in a very economically troubled circumstances, were they going to -- they have the largest industrial park already zoned in the State of Massachusetts less than six miles from the Mass Pike and were they going to develop it or were they just going to sit on it. And there was two or three opposition folks who were wanting to, for reasons hard for many people to understand, to oppose that. And that came up as the referendum item in the June annual town meeting. The vote was two to one and it resulted in both the defeat of two of those three opposition candidates and absolutely affirmed what the town is now calling a mandate to develop that industrial park and to site and develop the road.

The road for us is pivotal because it provides direct access to the landfill, allows us to avoid Pleasant Street, which we've always wanted to get off of, and it allows us to more fully develop the opportunity that the landfill represents. So following that vote, the town council and the town manager have moved appropriately, but moved and have gotten the road approved by the planning commission. Town council has approved it and the actual road now will be accepted and approved as a town or as a city road.

That is a precursor to a broader more deeper discussion, which have been under way for about a year, with regards to the development of the landfill. And we expect to be making a presentation at the town's request in September. And were that to be favorably received, we would expect to have fairly intense negotiations and a contract discussion in October, November and could believe that we might have a path to this conversion on track by the end of calendar year '06. None of our forecasts includes that, so were that to occur, it could have some impact in Q4, but it's likely to be an '08 -- Q1 '08 impact as we convert the existing permitted tons to first MSW and then seek both local and state permit approval for an increase to the larger volumes.

Thank you.

And our next question comes from Nigel Coe with Deutsche Bank.

Thanks, good morning. You talked about some important landfill initiatives over the balance of the year. You talked about better pricing on volumes at Worcester. I think high capacity coming through at Chemung, and also the glass beneficiating facility at Ontario. How material are those initiatives to -- for your EBITDA guidance?

Could you -- ?

What was the -- ?

What was the last part? You trailed off and we missed --

Yes, sorry. How material are those initiatives to full year EBITDA guidance? I mean, how much is baked into your EBITDA guidance on those initiatives?

None.

None of that.

None? Okay.

No.

Great. And what are your assumptions on plastics pricing and also fuel, for the balance of the year?

Well, I would say that what we have done is we've created a forecast that assumed the plastic prices were flat lined. And we are not --

Flat lined based on the first quarter results.

First quarter's results.

Right.

And we are not mind readers, so we are not -- not forecasting where they are going. But we did report that they are up and when you look at them from an historical over the last three to four years, they are back at the current level there -- back where it was in 200. And as you know, 2001 we had a much different hydrocarbon pricing. So my instincts are that this is a short-term correction either caused by something on the export market or something that we don't quite understand, but that we expect those prices to come back. Whether they will come back to where they were in May, I don't know that we would want to wager a bet on that. But we do think that they will come back.

Okay. And fuel?

I think again, importantly, the way we forecasted it was off of the first quarter, Nigel.

Okay, great. You talked about the CapEx reduction. And would it be fair to assume that -- I mean it seems that some of the growth CapEx is lower because of the landfill delays. Would it be fair to assume that that will phase into 2008?

Yes.

Yes, okay.

Of course.

And finally, Richard, could you just reiterate your tax guidance full year?

Yes, presently we believe it will be in the 75 to 80% range.

Okay, and that's purely because income from operations is lower, so next year you would expect that to get back to where it's been historically?

Exactly.

Yes, great. Thanks.

Our next question comes from Steve Kohl with Matador Capital.

Good morning, guys.

Hey, Steve, how are you?

I'm doing fine.

Good.

I missed the very early part of the prepared remarks. My apologies if you have covered this. Just shut me down and we'll circle back. On Southbridge --

We wouldn't do that to you, Steve.

You never do that to me?

No, we wouldn't do that to you.

On Southbridge, I guess I was a little confused one thing. You talked about you want to move -- if the development of the park moves forward that would be a positive because then you have a different way in and you can get off Pleasant Street. How -- is it conditioned then, do you think, that to get the bump-up in volumes that you'll need, that development of the industrial park? Or are those things mutually exclusive?

No. The interesting thing about the circumstances in Southbridge is that in addition to a fully zoned industrial park, this in addition to a fully zoned industrial park, this park back in '97 went through an entire environmental impact and MEPA process. And in that process, it awarded and approved over 6000 trucks per day -- vehicle trips per day into the landfill. So from an overall transportation, which is usually the gating issue, this piece of property, which includes the landfill, has already received probably one of the most difficult piece of permitting. And so we're only -- we're only a very small portion of that overall traffic today. And we-- part of our contemplation is to use our existing permitted capacity for the site, which, of course, includes the CV processing, and reallocate that to MSW into the landfill and be more selective and efficient with regards to the amount of CND that we take.

As you know, CND product testing is fairly processing intensive. It costs a lot of money every time you touch waste to try to sort it. And so the more selective you can be, the higher pricing you can have, the lower processing costs you can have, and the better yields on either wood or metals that you take out. And then the balance of the capacity gets shifted into the landfill for MSW waste to be accepted. And so all of that will have the effect of making the WR processing facility more effective and more profitable. And then the landfill, considerably more profitable.

And the last question, you may have addressed this one, but on the [Berkshire] note, in looking at the leverage, where do you guys feel comfortable with that leverage going forward as we look into -- kind of into I guess, even '08 and '09? But where would you like that number to be? And, again, you may have addressed this, but what actions have you thought about that you might be able to do to reduce that leverage?

Yes, I mean I think it's clear from our perspective that that -- that's an issue that we need to address. We have said that all along, Steve, that we need to look at the balance sheet, recognize where we are from that perspective and look at mechanisms from a delevering perspective. The Berkshire notes now are in the current portion of the balance sheet. So clearly that changed the dynamics in terms of what we're -- what we're looking at in terms of overall mechanisms to change the balance sheet and bring our debt to EBITDA back down. I mean, I think we clearly indicated that for some period of time. So we're looking at that issue, currently, and we'll continue to look at that to really bring our balance sheet back. As we have said, we're comfortable in the four times and obviously, we're going to be above that. So that really causes us to be really proactive in terms of looking at the capital structure.

And the mechanism, John, is it largely asset -- I presume there is a lot of different mechanisms, but when you rank them, is asset sales one of the predominant ones? Or how do you rank the top three?

I think that we're constantly looking at swaps, at activities that will help us. Certainly, sale of assets that, from our perspective, are better off in the hands of other companies. I mean I think that we're looking at that clearly. And we also look at -- we'll look at our, as we have said historically, we will also look at our investment in Greenfiber.

Okay. Very good. Thank you.

And -- the investment in Greenfiber is actually, relative to this performance in growth is a place that may very likely be a great story and a good place to expect to be able to harvest an opportunity there.

Very good. Thank you very much, guys.

You're welcome.

We'll hear next from Leone Young with Citigroup.

Hi.

Good morning, Leone.

This is actually [Alina].

Hi, Alina. How are you?

Good.

Good.

I was just wondering, was there any way that you could differentiate between the weather and the economy's affect on volumes? Is there any way you can determine that?

It's really -- it's really difficult to do that, Alina. I mean, I think that it's really a tough order. We have not done that. Maybe Richard could take a look at that. It's not something that we've done. It's not easy to do, quite frankly. It's very hard to assess how much the increased roll-off pulls from July to August is attributable to an increase in the economic activity versus the impact from the weather.

Okay.

It is truly difficult to do. I -- it may very well be something that Richard could take a look at, but I don't -- I really don't think--

Maybe to help you, they are both material factors. In other words, the weather compliments people's or takes away people's robustness to view the economy. So when you have all-time gloomy weather May, June and all-time rain; people generally stay indoors and are not as active and that further heightens and intensifies a softening economy. So that's why it's so hard to separate it.

To be somewhat specific, we obviously gave the impact from a leachate perspective, from a landfill cost perspective, it's like $400,000 or $500,000 in the quarter was directly related to the leachate costs, et cetera, et cetera. But to determine the additional impacts of how many pulls, what the loss of pulls were and loss of business is really difficult.

Weather.

From weather versus economy.

We could tell you what the number reduction is but assigning a categorization to it is difficult.

Yes, I don't think you can do it.

Okay. All right, great. Thanks.

You're welcome.

Next, we have a follow-up question from Corey Greendale at First Analysis.

Hi. Thanks. Just wanted to, first of all, follow-up on Steve Kohl's last question on ways to delever. I know you've said in the past that you would not look to sell equity at these levels. Is that still the case?

That's the case.

Okay. And then following up on -- I guess Nigel was asking about the tax rate. I know you don't give EPS guidance, but just to set expectations, running through the numbers, it looks like if the tax rate does come in at that level, that EPS for the full year could well end up being a bit negative. Does that sound right, Richard?

Yes, that could be right.

Okay. Then on the environmental fee, given the experience -- the acceptance so far, I think, John, on the last call you had said that you thought maybe $1.5 to $2 million EBITDA contribution from that this year. Does that still sound reasonable?

Absolutely.

Okay.

No change there. In fact, clearly from the reaction that we got from the marketplace, I think, clearly, very much consistent with the guidance we already gave, in terms of the $1.5 to $2 million.

Okay, and last quick question, given that the focus is on delevering now, is it fair to assume that we shouldn't be expecting any larger acquisitions at this point?

I think that's very fair. Clearly we're going to look at, obviously the tuck-in opportunities, the opportunities that are going to create significant value on a near-term basis. But clearly, we're not going to be looking at large acquisitions at this point.

And that is all the time we have for questions today. I would like to turn the call back over to our speakers for any additional or closing remarks.

Terrific. Thank you. Again, I would just like to point out that there is a strong focus. There's significant energy and passion from the management team, both from a -- from a senior management standpoint, as well as regional and divisional. I think the entire organization is focused on really rising to the challenge to meet the issues that we were faced with from the first quarter perspective. And really bring in the last three quarters of the year to the expectations that we have put in place.

Again, I would like to remind you that the EBITDA guidance for '07 is $113 to $117. I think from anyone's perspective with regard to August, the fundamentals are improving a bit.

I would like to thank you for your attention and we'll talk to you in early December with our fiscal '07 second quarter numbers. Thank you, everyone. Have a great day.

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