Casella Waste Systems Inc (CWST) 2007 Q2 法說會逐字稿

Good day, everyone. Welcome to the Casella Waste Systems fiscal year 2007 second 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 are joined by John Casella, Chairman and Chief Executive Officer of Casella Waste Systems, Jim Bohlig, President and Chief Operating Officer, and Richard Norris, Senior Vice President, and Chief Financial Officer. Today we'll be discussing the preliminary second quarter fiscal year 2007 results that we shared with you yesterday evening. Along with a brief review of these preliminary results and an update on the Company's business and operating environment we'll take some time to answer 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 table section of our earnings release which was distributed yesterday evening and is available in the investor section of our website at www.casella.com/investor.

Now that I'm out of breath I'll turn it over to John Casella, who will begin the discussion.

Thanks, Joe. Good morning and welcome. The purpose today is to discuss the second quarter '07 results. We do want to give you as much insight as possible so that you can better understand our business, the economic and other external factors affecting it, and what we're doing to meet our full fiscal year targets. As usual, Richard will go through the detail behind the numbers and Jim will give an update on the development activities.

We'll start by giving an overview of the highlights of the quarter. Revenue growth for the quarter was strong at 8% versus the same quarter last year. Pricing was up in all four solid waste regions. Overall, solid waste pricing was up 3.6% with 1.1% coming from the surcharge. Operating income was up 5.8% over the same quarter last year. And EBITDA was up 10.4% from the same quarter last year, and it was an increase of $7.3 million from the first quarter.

A little touch on the economy. Rollout flows in Massachusetts rose sequentially from the first quarter, however, as an indication of the economic conditions in this market, the pulls are off several hundred on a year-over-year basis. Indication is that the New England economy is stabilizing. However, Massachusetts continues to be soft. One of the things that's really important to understand is the conversion that we have well underway at Southbridge to convert the facility from C & D to MSW will help to reduce the seasonal and economic variability of our assets in the southeast region. The quarter on a gross margin basis improved on a year-over-year, mainly driven by lower third-party disposal and direct benefits in fuel.

In addition, gross margins improved 300 basis points from the first quarter. This improvement was driven again by lower third-party disposal, third-party transportation, correct labor, and direct operational cost. SG&A is down 140 basis points from the first quarter, and as mentioned on the last call, about $600,000 of marketing and advertising expenses that were, in fact, front-loaded. But on an overall basis, SG&A is down 140 basis points from the first quarter. EBITDA margins are up 440 basis points sequentially and 50 basis points on a year-over-year basis. Margin improvement as a result of our focused sales effort, including customer by customer profitability review and the work of our people to drive down costs in the business.

We did, as I indicated on the last call, roll out the environmental fee on August 1st. In this quarter we generated approximately $600,000 through the second quarter, and we expect to generate another $1 million to $1.5 million through the next two quarters. The fee, though, in fact, was very well received and certainly was well -- as I said, well received by our customer base. Overall, landfill development efforts critically important to the company are on track. We're very excited about the developments in that area. Jim will go through some of the details of that later on in his comments.

We are well on our way to adding an incremental 3,000 tons per day, or approximately 900,000 tons of annual capacity at our existing facilities. And I think it's really critically important because when successful in adding that capacity, all of which, as I said, is under and in permitting currently, we will add an additional 24 million of EBITDA. Again, important because the majority of that investment has already been made at these facilities, and obvious that will drive considerable value as we execute -- continue to execute our landfill development plans.

On the recycling side, FCR, overall commodity prices were down slightly for the quarter. Plastics pricing remains soft, also down slightly from the first quarter. O & P, or newsprint pricing, continues to firm as China continues to put inventory in place for new capacity that's coming online in '07 and '08. This also may have a positive impact on fiber pricing as well. Interestingly enough, in spite of lower commodity prices, EBITDA margins for the recycling business were up 270 basis points year-over-year, which were a result of the passion and innovative work of our people to use technology to lower our costs to generate more meaningful returns from our recycling business.

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

Thank you, John. For the quarter ended October 31, 2006, revenue increased $11 million to $147.8 million, or 8%. Some 3.8% of that year-over-year increase, or $5.2 million, arose from the acquisition activity over the last year, including Colebrook, Chemung, and Blue Mountain Recycling. Internal growth for the quarter reflected higher pricing across all regions in the solid waste segment, both at the hauling/transfer level and the landfills. Volumes improved in the northeast region, but were down elsewhere, especially in the southeastern region which performed as expected but at a lower level. This decrease was partially offset by revenues from the true-up of the Brockton closure project. The solid waste pricing increase percentage includes 1.1% related to surcharges.

FCR, excluding Blue Mountain, which is accounted for as an acquisition, reflected higher volumes. Despite an average drop in gross commodity pricing of about 5%, FCR showed higher prices because certain glass volumes previously handled by third parties for zero revenue were internalized due to our [culcrum] technology. Therefore, the average price per third-party ton went up. All our price/volume calculations are based on third-party, or reported revenues, so you can see how eliminating zero revenue tons would swing this calculation.

Without this impact, FCR's year-over-year price change would have been 1.5% negative. The revenue for the quarter breaks down as follows: Solid waste, $116.9 million. FCR, $24.9 million. And other, for $6 million, for a total of $147.8 million.

As John mentioned, gross margins are up 60 basis points year-over-year, mainly due to lower third-party disposal costs. Fuel prices and transportation costs were largely unchanged from the prior year as a percentage of revenue. The lower disposal costs came mainly from higher internalization in the western region due to the addition of Chemung, plus the closure of Wellsboro. Internalization was also up in the northeast region. G&A was essentially flat year over year, as a percentage of revenue, although up in dollars. The trend noted in the first quarter was reversed. So that sequentially, G&A was down both as a percentage and in dollars.

However, going back to year-over-year, bad debt expense continued high. It was up about 30 basis points. Again, mainly due to two large slow paying accounts in southeast region. The expenses continued to be up about 16 basis points as we deal with tissues in Maine and other outstanding litigation items. The adoption of FAS 123R, the stock option accounting, added 10 basis points, and other compensation costs were also up 10 basis points. These increases were largely offset by lower expense in several other categories, including marketing, communications, travel, and office supplies.

EBITDA for the quarter at $33.9 million was up 10.5% from the prior year. The EBITDA margin was also up 50 basis points. EBITDA breaks down as follows: Solid waste, $28.9 million. FCR, $5.1 million. And other was a negative $100,000, for a total of $33.9 million. Solid waste EBITDA increased $2 million from the prior year, and margins were up by 30 basis points. The same factors mentioned earlier relating to cost of operations as well as G&A expenses accounted for the improvement.

FCR's results included a full quarter of Blue Mountain Recycling. The total volumes were up, but even if you exclude that acquisition, volumes increased. Commodity prices continued to decline, especially in plastics, which negatively impacted EBITDA, but as mentioned previously, the internalization of non revenue producing glass, due to the application of the culcrum technology, caused the average price per ton, third-party revenue to increase. Results were also enhanced by lower workman's comp and medical expenses. Depreciation and amortization, this expense was up $2.4 million year-over-year, or 70 basis points. Depreciation was up $900,000, and land for amortization increased $1.5 million mainly due to the acquisition of Colebrook and Chemung. The decrease in amortization of Worcester, arising from lower volumes, was largely offset by a true-up adjustment of Brockton.

Income taxes. The tax rate decreased to 59% versus 92% last quarter. This decrease is driven mainly by the higher level of book income this quarter versus a loss last quarter. As I explained on last quarter's conference call, at lower pretax income levels, when you add back the items that are nondeductible for tax purposes the rate increases substantially. We do expect there to be volatility in the tax rate throughout the remainder of the year. But based on this quarter's results and our guidance, we expect the tax rate to drop from the guidance I gave last quarter and to be in the 50 to 60% range for the rest of the year.

For the quarter, net income after preferred stock dividends amounted to income of $1.5 million, or $0.06 per common share. Now to miscellaneous data. The average interest rate for the quarter increased to 8.8%, including amortization of noncash items. Net of these expenses it was 8.5%. During the quarter, the remaining $1.1 million of tax-exempt revenue bonds was drawn down. And availability on the revolver at October 31st was $148.8 million after taking into account $55.1 million of our fees outstanding. Capital expenditures for the quarter amounted to $28 million, and the gross component of these expenditures, which was $9.7 million was largely made at the landfills, especially at Juniper Ridge and Southbridge. Three tuck-in holding acquisitions were closed during the quarter for a total purchase price of $430,000. The purchase price multiple paid was about 2.5 times EBITDA. Free cash flow was negative for the quarter as previously indicated. Again this was driven by capital expenditures which, in fact, were slightly behind our forecast.

With that, I'll hand the meeting over to Jim.

Thanks, Richard. Good morning. First, a few comments on the external environment. I think we saw a fairly substantial swing in the overall economy from Q1, where we were quite disappointed with the economy. As the proxy for that we use the Dodge Construction Index, and New England is in Q2 only off 11% from Q2 of '06. As you may recall, it was off nearly 25% Q1. So there's definitely a strengthening going on. However, Massachusetts remains roughly Q2 '07 over Q2 '06 about 27% off. So most of the improvement is not appearing yet in Massachusetts. And we have seen in the balance of the region in the franchise generally firming and improving economic conditions.

This was a good quarter for the Company in solid waste. We have good revenue growth and EBITDA growth, and EBITDA margin growth at the same time. Each of the four regions contributed to the improvement but the western and northeast were principally more robust as drivers than the southeast and central. Particularly benefiting from an improved pricing environment at the landfills, generally landfill pricing was up about 10%, and the transportation savings afforded through the reduced hydrocarbon pricing cost that has been realized over the last three or four months. At the landfills, volumes are essential flat for the quarter over the same quarter last year. As I indicated, prices are up, and in each of the regions, we have seen substantial and good robust price increases at the landfills, which we think is both in accordance with the seasonality that we're in as well as generally firming economy, as I mentioned.

From an internalization standpoint, our internalization this quarter is up from Q2 '06. Again, the northeast and the western regions were the principal drivers to the improved internalization for the overall company. The substantial improvement in the western market as we begin to wrap up and take advantage of the increased expansion and permit capacity that we have developed over the past three or four years. We add good quarter from capital expenditure and I think, well, Richard didn't really mention that. I think we did a particularly good job managing capital this quarter, and parsing it out over the course of the year and staging it relative to the overall year requirements, and it's shown up obviously in improved cash flow characteristics that Richard has already reported on.

John mentioned in his remarks that we expect from our landfill development projects by 2011, and we picked 2011 because that's the date that we kind of feel that these projects that we've worked on since about 2003 will be at maturity. What kind of incremental EBITDA would come from those facilities. John referenced about $24 million. And that equates to about a million tons of additional, on an annual basis of, capacity into those facilities. I thought I would try to give you some indicator of the progress we're making toward that goal. It's a fairly important goal for us, both obviously for the EBITDA that increases the free cash flow but more importantly, it's on existing footprints, so it represents minimum additional capital investment, and it is the opportunity for us to harvest our disposal strategy that we embarked on two-and-a-half years ago.

First, Southbridge as a matter of public knowledge, the council voted unanimously in October to proceed to detailed negotiations to convert the facility to MSW facility and increase capacity to 400,000 tons. We are in detailed negotiations and are hopeful to have those completed by the end of this calendar year. And would hope to be in front of the council early in 2007 for approval.

That is particularly important project for us both because it sits within the market which is relatively disposal-deficient, as well as allows us to completely reallocate and relook at our business model in the southeast as we bring the facility on-line. Chemung, which is our public/private partnership in Chemung County, New York, we're in the process of permitting to 280,000 tons, then ultimately to 417,000. A draft permit is in the works. We have recently received local approval from the County to proceed to 180,000 tons, which will be a 60,000 ton increase, and we expect that early in calendar year '07.

Highland, we have just received an expanded permit there of 48 acres, and about 11 million yards, and about 80,000 ton per year incremental increase, and we'll be starting to ramp up in January and taking advantage of that over the balance of this fiscal year. Hakes in October received a 35-acre expansion approval, and we are beginning to examine, given the long life that we have now acquired on Hakes, how we might match that long-life capacity with additional annual capacity particularly from further down toward New York. Juniper Ridge and Pine Tree as well this quarter produced very good results from a permitting standpoint. We received both Hampden and State of Maine approval to extend Pine Tree operation until December 2009. That will allow us to recover about two million yards of additional capacity at Pine Tree, and then the operations will be shut down and fully shifted to the Juniper Ridge facility for which we are in an application and put in a preliminary environmental report for an additional 25 million yards of that facility.

Each of these facilities, along with several others, I think are very much performing against the plan. As you know, permitting is a special science, and you shouldn't talk about it it until the permits are actually issued. But I think that we're making substantial progress, and we are generally very pleased with the track relative to the framework that John framed, which is in 2011 incremental $24 million of EBITDA and a million tons of additional annual disposal capacity. The mid-con project is well underway. We expect that to be completed early spring. We're actually seeing some additional quantities on that for the FCR recycling business. And so overall, I think that we're pretty pleased with the progress, and where we are on this general development Road map.

Moving on to recycling, and FCR, as Richard indicated, it was a good quarter for FCR. Overall revenue was up nearly 12%. EBITDA was up substantially higher than that. In spite of average commodity prices falling this quarter, volumes were up nearly 17%. And we've also, I think, take our hats off to the folks as John indicated because one of the other aspects of this business is variable costs, and we have lowered our variable costs this quarter over the same quarter last year by over 5%, which is a substantial quarter to quarter improvement. Generally speaking, we are cautiously watching commodities. While we've had some softening in the plastics, there is firming in the fiber. We are fully covered on the fibers. We are working to get hedged and drive activities in place with regards to plastic.

We have some really exciting things underway, particularly with the culcrum glass technology and our glass beneficiating facility in Ontario where we believe we are going to be able to substantially change the paradigm for glass processing in most of our facilities, and we believe that that will not only drive margins but produce year-over-year significant EBITDA contributions from a better job of processing glass. Auburn is converted to single stream, as is Burlington, Ontario, and we expect all three of those facilities early in calendar year '07 to be platforms to extend the recycle bank program on that we expect to roll out in -- and scale out in '07.

Generally, we're pleased with the volume increases. Part of that is organic growth. Part of that is actual volume increases in the marketplace. And we expect that generally to continue. Moving on to U.S. green fiber, U.S. green fiber is on track for this calendar year. They report on a calendar year basis, to do about $20 million of EBITDA which represents about a 24% year-over-year improvement over '05.

For the quarter, they had a growth at the contractor level of 37%. Retail level, 21%. Manufacturing homes was off 5% for a total overall improvement of about 24% over the same quarter '06. EBITDA was up 8%. Bag production was 14%. So you can see we're getting both volume and pricing growth in this business. Having said that, the housing adjustment and correction, which is underway, will swing through this business. This business is a lagging indicator to the housing industry. So we expect to see softening demand for insulation in this quarter, in the coming quarter, as the housing market corrects, and it is that that we have reduced our calendar year forecast down to $20 million, for which we expected the business would actually do quite a bit better but anticipating the housing correction, we're now signaling a softening in our calendar year '07 performance.

Overall this business is doing very nicely. We believe it's a housing correction actually in the profile that it took will actually produce improvements sooner than might have been expected, and we're already beginning to see, I think, some wisdom in the market that the housing market correction will not be as steep as maybe some folks had originally anticipated. With that, I will turn this back to John for his closing comments.

Actually, I think at this point we'll just open it up for questions. Operator?

Certainly. [OPERATOR INSTRUCTIONS]. Our first question will come from Scott Levine with JPMorgan.

I was hoping you might be able to talk a little bit about differences in landfill pricing to peak growth amongst your four markets. We can kind of cross-reference the changes in internalization with how strong the [tip fees] are in your given regions. If you could give a little detail, I'd appreciate it.

I would generally characterize the northeast landfill pricing as up about 8%. The central was essentially flat. It was up 1.4%, but not very much. That's our most mature market, and it's a market that we're in a sustainability mode as opposed to a growth mode. Western market was up 7.5%. Overall pricing to landfills was up 4.6%. Our closure landfill, which is basically Brockton, and now in transition to Worcester, and the Colebrook facility, you really to have lack at those two in separate pieces because the closure project in Massachusetts is fundamentally a dirt project so those tipping fees are actually depressed and off principally because of cottage street closure which is being filled and we expect to have that closed, waste management to have that closed by early in the calendar year.

But the Colebrook numbers are up on a year-over-year basis just because we didn't after Colebrook in the '06 numbers. So they are non soil market mb's so it's driving the closure numbers a little bit. But overall pricing is up in every region. I think it is, as I mentioned, driving in two levels. One, the pricing is going to the bottom line from an EBITDA standpoint, and the other phenomenon is that I think we've enjoyed material transportation savings tied to the cost of fuel.

Okay. And it sounds like, and you guys are pretty positive regarding pricing on the last quarter as well, sounds like that's not coming in any lower than you guys anticipated. If anything, maybe coming in a bit above.

Well, this is our second quarter, so we have obviously Q3 and Q4 in front of us. Each of those quarters are seasonally as a factor more challenging for us because waste flows fall down in the winter in the northeast so I don't know that I would automatically extend the robustness that's in this quarter to next quarter, but I think there's some positive momentum, and some cautious optimism that the pricing environment is very positive.

One additional, if I may. On the Berkshire convert, is there any update with regard to your thoughts and plans there.

Obviously we would much prefer shares to be converted, but as you know we increased our credit facility by 100 million, so we have given ourselves the flexibility to accommodate that should we need to redeem that next year.

Okay. Thank you.

We'll go next to Brian Butler with FBR.

Good morning.

Good morning, Brian.

question on the green fiber, to maybe sure I got the calendar year versus the fiscal year correct. On the green fibers calendar year for 2006, it's going to be 20 million in EBITDA and that also impact your fiscal year expectation that was at 28 million for green fiber for fiscal '07? Is that correct?

Well, we -- it will -- let's just separate these things out. Green fiber runs their business on a calendar year, so sometimes we give calendar year projections, sometimes we give Casella fiscal year projections. The calendar year projections for green fiber is currently $23 million. We're actually lowering that to 20, which is about a 24% growth over calendar year '06, just to be conservative relative to the housing market. If the housing market begins to stabilize, we would expect the calendar year '07 performance to obviously improve with that. And so generally speaking, it is off from our $28 million calendar year '06 forecast that we were previously on track to achieve.

Okay. So that was a calendar year, that $28 million for green fiber.

Yes.

okay. Great. And then on the landfill development, I know you've started breaking out the growth CapEx, but can you give me a sense just how much has been spent since you guys started in 2002, 2003 from a capex point of view on the landfill development?

You know, I think we've broken it out before, Brian. I think we've spent about $200 million in total.

Including the estimated expenditures for this fiscal year.

So including this fiscal year, and is there really any development beyond this fiscal year?

there may be a little bit, but the development activity is predominantly complete this fiscal year. There may be some that will go into next year, but the vast majority of it is completed this year.

With a swagger, probably say 85% of that investment profile is behind us.

Thank you very much.

You're welcome.

Going next to Bill Fisher with Raymond James.

Jim, just -- Maybe clarify on the landfill pricing. Maybe I misunderstood. Sounds like you said it was up 4.6% overall when you broke out the segments. I thought you had mentioned like 10% earlier, year-over-year figures.

I said the overall solid waste quarter over quarter is up 7.6% on EBITDA growth. Then people were asking about pricing, so we try to give some flavor on the landfill pricing. Overall landfill pricing non closure projects was up 4.6%.

And the 4.6, you obviously had a nice landfill revenue growth on a sequential basis. Did you get some nice pricing as you moved through, I guess, the first six months of this year?

Yes. I think overall we're very pleased, and it's a little bit hard to figure out whether it's, you know, it is certainly landfill pricing, but it's also a material contribution to transportation savings which shows up at the landfill's pricing. So because a number of our contracts are kind of T & D, so the transportation number goes down. Obviously shows up at a pricing at the landfill.

Okay. So if you had lower fuel, say moving waste to Maine, does that lower your operating cost as well?

Yes. The hydrocarbon pricing is a good positive driver currently to our operating cost reductions.

Okay. Then just a second question, you mentioned on Southbridge that you're working on the conversion to MSW and expansion. Are those two separate items, or do you think you can get them done in one step, or is that a two-step process?

Well, the actual negotiations with the town is a comprehensive new extended contract to the existing contract that would cover both and all contemplated steps, and that would, subject to local jurisdictional approvals, would have the town supporting these undertakings and outlining and detailing the benefits when they are accomplished.

There are two fundamental steps. One is take the existing facility of 180,000 tons and convert it to all MSW. As you know, it's currently only receiving C & D volumes and a small amount of MSW waste in the community. The next step is to convert site tonnage. We have a large processing facility there, to reduce the processing facility volumes and transfer those to the landfill while keeping the overall site at the same incoming rate, so that we're actually, if you will, converting the facility to a higher efficiency operations because landfill operations with MSW obviously work better than processing facilities. And that step will allow us to see the landfill in operation at 400,000 tons and the processing facility at about 190,000 tons. The combination of those two, which we expect will take about 14 months to get permitting authority, will have substantial drivers for the company in the southeast region.

The first step of that, though, Bill, will be the conversion from C & D to MSW on 180,000 tons. Second step will be to move from the 180,000 to 400.

Conversion to MSW you hope to have in the first calendar quarter?

I think that we would expect to be by the end of Q4 '07 for us, our fiscal year, so that would be by March, April.

perfect. Thank you.

[OPERATOR INSTRUCTIONS]. We'll go next to Corey Greendale with First Analysis.

Good morning.

Good morning, Corey.

Another question on the landfill pricing. Just looking for a little bit of color on the market dynamics there. Are other sites raising their price, and you're kind of raising in line with that? Are you being more of the dog than the tail? Are you raising in line with other people? Just kind of what's going on in those markets.

I think there are three drivers this quarter. One is that the whole region was very soft in Q1, and so you probably had an adverse pricing environment which quickly flipped and firmed up, and so people are basically trying to catch up a little bit from the adverse effects of Q 1, and I think that's a general comment to everyone in the marketplace. I think that as I mentioned, transportation is making moving of waste more effective, and therefore a long list will both allow us to capture volumes and to do some pricing. Then I think there is generally a firming in the overall economy, and, you know, given our pricing initiatives, responding to those pricing initiatives in a general sense.

I do think, too, Corey, there's no question that we have an environment from a market perspective that continues to be robust in terms of pricing, that pricing dynamics continue to be positive from a market condition standpoint, although a bit offset, as Jim mentioned, an economic standpoint, but the attitude and the general sense from a market perspective is positive from a pricing standpoint.

I mean, the only thing that retains us or restrains us from being more bullish is the other fact to which is the economy's not growing very strongly relative to the rest of the country. So that always remains, for the northeast, a drag, and, you know, if the economy was growing at 5 or 8% up here, then you'd have some really good outcomes. But we always to have keep in mind that the northeast performs at a different economic level than the rest of the country, and that puts us in a situation where we are a little bit more volatile with regards to this issue. We're seeing it firm now, but bad winters, a lot of snow, the economy going down, we could see that softening. So I don't think we want to oversell that, nor do we want to undersell it.

I think we've tried to place it properly. I think the other thing, too, you have to look at our price actual price increase related to the part of the country that we are operating in, and compare that to when you look at that in comparison to other companies in terms of the actual price that we're getting, obviously believe it fairly favorable in terms of the economic reality that we deal with, our pricing has to be put in that context when you look at it.

I think on a strategic level, the 65 million yards of additional disposal capacity that we've put in is put into a market that that basically represents the majority of additional capacity that's been put in, and that it's consuming it it is a a much faster rate, relatively speaking. So I think long term our prospects for pricing in the northeast are good, and I think that we've done the right thing from a strategic standpoint. I think our disposal strategy was the right move. We spent a lot of money the last three years to go after it but I think it's going to start to produce benefits and it's going to see continued improving environment from pricing because all of the existing capacity is being consumed, relatively speaking, without any new other third-party capacity other than that which we've added. So I think if you're a long-term investor in this region, and in this business, I think the steps that we've taken are positive from that horizon.

Thanks for all the detail. Part of the question is I'm just wondering, you talked about some of the factors affecting volume. I'm just wondering if part of it is that you could be losing some volume competitively with the price increases.

That we're doing what?

I think there's no question that we are. There's clearly, from a pricing standpoint, we have programs in place as we've indicated historically, core ree. We've got [Phil Hanley] who will has really revamped our entire sales program. We're looking at customer profitability customer by customer. And so clearly, and we're looking at that obviously through the eyes of return on invested capital as one metric of that analysis.

So we are looking at the lower quartiles. We are trying to do obviously a better job there, and that does cause us, both from a landfill pricing perspective, when we look at from the simply landfill pricing, of our customer base, but on an overall basis, we are pushing out lower quartile volume. That's essentially what those programs are really meant to do, is to obviously look at the quality of the revenue stream and push out the lower quality.

And internally, John, that process, the looking at returns and pricing, what inning would you say you're in with that whole thing?

That's a great question. I think it's -- I would say that we're probably -- we're probably in the fourth or fifth inning. I mean, I'd say the fourth inning, fifth inning. I think we have all of the programs in place. We have trained and retrained our 80-member sales force. Phil has spent a year and a half, two years putting those programs in place, redoing the pricing models, retraining the sales force, making sure we have the right people in place. That's essentially what he's done for a year and a half, two years now. We're now really beginning to implement that into the field level. So, you know, I think we're at the fourth or fifth inning.

Another piece of that overall program is, basically what we're -- what will be driven off of this strategic plan that we're developing now, which is our customer loyalty and customer experience program, and we are going to drive that throughout the Company in a very, very strong fashion, aggressive fashion, starting January of '07, and we expect that that customer loyalty and experience program, which is much different from a customer satisfaction or relationship program, for those of you familiar with it, is going to help drive and differentiate good profits from bad profits as well. So that's -- I think is also consistent with kind of being in the fourth inning. We think we've got a good part of the game to play with here yet and we're seeing results, and we're pleased by it.

Thank you very much.

[OPERATOR INSTRUCTIONS]. And, gentlemen, it appears there are no further questions.

Okay. Just to close it out, I'd like to really note that we obviously feel really strongly that we have the best people in the industry working for Casella. Really not referring to just simply management but really to every level, every job category in the company all the way down to our people at the front line. They work hard, they love what they do, they're dedicated to our customers and to our mission, and clearly all of our people have been embraced the challenges that we have given to them and have responded with great focus and energy. They deserve much of the credit that, in fact, we have talked about today, in terms of the improvement from our performance from the first quarter and clearly we're very pleased with that.

Just from a guidance perspective, guidance remains unchanged, 113 to 117. And as indicated on the call, fundamentals are improving. Thank you very much for your attention today. Talk to you in early March with our fiscal '07 third quarter numbers. Thank you very much. Have a great day.

That concludes today's teleconference. Thank you for joining us.