Casella Waste Systems Inc (CWST) 2007 Q3 法說會逐字稿

Good day, everyone. Welcome to the Casella Waste Systems fiscal year 2007 third 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, our President and Chief Operating Officer; Richard Norris, Senior Vice President and Chief Financial Officer; and Charlie Leonard, our Senior Vice President for Solid Waste Operations.

Today we will be discussing our third quarter fiscal year 2007 results. These results were released yesterday afternoon. Along with a brief review of these results and an update on the Company's activities and business environment, we will 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 Provision. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our prospectus and other SEC filings.

In addition, any forward-looking statement represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change and therefore you should not rely on those forward-looking statements as representing our views as of any date subsequent to today.

Also, during this call we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the Financial Tables section of our earnings release, which was distributed yesterday afternoon, and is available in the Investors Section of our website at casella.com/investor.

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

Thanks, Joe. Good morning and welcome, everyone. The purpose for the call obviously is give you some insight into the third-quarter fiscal 2007 results. We do want to give you as much insight as possible so that you can understand the business from an economic and other external factors affecting the business and what we are actually doing to drive increase returns.

As usual, Richard will go through the detail behind the numbers and Jim will give an update on the development activity. I will start by giving a brief overview of the quarter and then we will obviously spend some time answering your questions.

Overall, from an operational perspective, we were able to grow the business wisely and [deflect] operational costs down out of the business as volumes did contract across our solid waste platform. Operating income was up 23.9%, almost 24%, over the same quarter last year after the deferred costs are excluded. EBITDA was up 10.2% over the same quarter last year. EPS was negative $0.07. Most of that negative share deviation from an EPS standpoint was driven by a year over year reduction of $2 million of equity income from Greenfiber and the resulting increased tax rate.

Revenue growth for the quarter was up 2.2% versus the same quarter last year. Pricing was up in all four solid waste regions. Overall, solid waste pricing was up 3.3%, with 0.5% of that coming from the surcharges. Our environmental fee added $390,000 during the quarter and a total of $1.3 million since its rollout on August 1. Solid waste volumes were down 4.8% versus the same quarter last year. The main drivers were the hauling and transfer volumes were down 3%, mainly in the Southeast region. Landfill volumes were down 1.8%.

Our indication from an economic perspective -- indication is that the Northeast economy is flat to slightly positive. Economic activity index in the region was flattened out over the last nine months, indicating that GDP growth slowed, but is still slightly positive. Although the construction economy continues to show weakness across the Northeast footprint, nonresidential construction is beginning to show some year over year improvement. Rollout [quotes] for the same quarter excluding the Southeast region are basically flat year over year.

The Massachusetts construction market continues to show considerable weakness with the number of rollout [close] down -- just up slightly over 10% on a year over year basis. The conversion of Southbridge to MSW, which is well underway, will help to reduce the seasonal and economic variability of our assets in the Southeast region.

For the second consecutive quarter, gross margins and solid waste EBITDA margins improved versus the same quarter last year. Gross margins improved 90 basis points versus the same quarter last year, mainly driven by third party disposal, maintenance costs, direct operating and transportation costs.

SG&A is down 55 basis points versus the same quarter last year and down 160 basis points versus the first quarter. As I mentioned on the last call, SG&A was front loaded for the year and has normalized back to our projected level for the year.

Solid waste EBITDA margins were up 220 basis points versus the same quarter last year, with the cost of operations and NGA factors contributing to the gains. Margin improvement is a result of our focused sales efforts, including customer-by-customer profitability review and the work of our people to drive down costs in the business.

A little bit of vision in terms of our pricing programs -- the collection pricing programs rolled out at the beginning of the fiscal year are making an impact on the business. We are seeing the benefit in our western region where the program is fully implemented. We continue to evaluate collection pricing opportunities on a customer-by-customer basis. We are still executing on opportunities to raise pricing on lower-quartile customers to appropriate levels of profitability. During this consideration, we take into account the internalization of waste and the commodity value. As part of the process, we are also voluntarily turning over some customers that do not meet the profitability standards, making a slight contribution to the volume reduction.

A little bit more color on the pricing programs -- this quarter, we did reach an important pricing inflection point. The average revenue for a new account is now higher than the average revenue for a lost account. Our sales team is targeting the right customers at the right price and churning the lower even negative margin customers. During the last nine months, we have increased the average revenue per new account by 30% and reduced the average revenue per lost account by 35%. The impact of this will be fully realized when we roll over the revenues of these customers over the next year.

On the landfill development front, overall our landfill development efforts are tracking well. As discussed last quarter, we are well on our way to add an incremental 3,000 tons per day or approximately 900,000 tons of annual capacity at our existing facilities. During the quarter, we did receive our New York CECRA permit for the Hyland facility to expand the daily limit by 250 tons per day and to add 11 million tons of total capacity. On Tuesday night this week, we presented a fully negotiated amended host community agreement to the Southbridge Town Council for approval. Jim will roll through some of the details of this agreement. However, I wanted to say that I'm pleased with the progress and confident that this facility will add considerable value to all of our stakeholders. Hard work by our people and the great relationships that we've built with these communities where we operate are driving progress on the expansion opportunities.

Also, from a market strategy perspective, we are in the process of consolidating select divisions into market areas. As we have grown from acquisitions over the past 20 years, we have kept separate balance sheets for each division, adding cost and complexity. The market area restructuring will do three things. First, it will reduce the total number of balance sheets. It will simplify the SOX and 404 testing, and enable our managers to better manage waste flows and service our customers. We've already begun this process and we'll begin to see the results of the consolidation efforts in the first quarter of next year.

Market area strategy also, with the completion of the negotiations with the Southbridge for the conversion of the facility from C&D to MSW, we are migrating away from the lower margin C&D business to higher margin MSW business in the Massachusetts market. We have also identified underperforming assets with $22 million of annual revenues that will be swapped or divested within the next fiscal year.

On the recycling front, FCR and overall commodities were flat over the same quarter last year. Plastic pricing remains soft, about the same levels as the second quarter and down from last year. Fiber prices were strong in the quarter, driven by global demand from China. EBITDA margins were down slightly on a same quarter last year. Our people continued to innovate and use technology to lower our costs to generate more meaningful returns from the recycling business. A great example of that is the rollout of the glass beneficiating technology that is collocated at our Ontario County MRF on February 1. The pilot program is turning a traditional cost into a positive revenue stream.

With that, I will turn it over to Richard to go through some of the details on the numbers.

Thank you, John. For the quarter ended January 31, 2007, revenue increased $2.9 million to $133.5 million or 2.2%. Some 1.2% of that year over year increase or $1.6 million arose from the acquisition activity over the last year, including Colebrook. Internal growth for the quarter reflects higher pricing across all regions in the solid waste segment, but the hauling and third party landfill volumes were down. The solid waste price increase percentage includes 50 basis points relating to surcharges.

FCR's results reflected significantly higher volume, while gross commodity prices were flat. Revenue for the quarter breaks down as follows -- solid waste, $101.5 million; FCR, $25.9 million; and other, $6.1 million, for a total of $133.5 million.

Gross margins improved 90 basis points year over year due to lower third party disposal costs as well as lower maintenance and direct operating costs. As a percentage of revenue, fuel costs were flat while transportation costs were also down from the prior year.

G&A was down 55 basis points as a percentage of revenue and in dollars. The trend noted in the first and second quarters was reversed. So sequentially, G&A was also down, both as a percentage and in dollars. But going back to the year over year numbers, most expense categories showed decreases, starting with compensation and including audit fees, consulting and travel. On a year over year basis, we also covered the incremental cost of the FAS 123R equity expense, which was $200,000.

Moving on to EBITDA, [at] $26 million EBITDA was up 10.2% from the prior year. The EBITDA margin was also up 140 basis points. EBITDA breaks down as follows -- solid waste, $20.7 million; FCR, $5.4 million; and other, $100,000 negative, for a total of $26 million. Solid waste EBITDA increased $2.3 million from the prior year and margins were up by 220 basis points. The same factors mentioned earlier relating to cost of operations as well as G&A expenses accounted for the improvement. Sequentially, FCR's margins were up slightly from the 20.5% margins reported in Q2, but FCR's margins were down slightly year over year, which was driven by the higher fiber costs experienced in the quarter.

Depreciation and amortization expense was up $700,000 year over year or 20 basis points. Half of that increase was from depreciation and the balance from landfill amortization, mainly due to Colebrook. Sequentially, depreciation and amortization was down $2.1 million, mainly due to the lower landfill amortization, resulting from lower volumes at a number of sites, as well as the non-reoccurrence of the Brockton true up.

At the operating income level, EBIT margin showed a nice improvement, after taking into account the deferred costs write-off last year, increasing to 6.6% from 5.4%. U.S. Greenfiber had a poor quarter due to a drastic slowdown in house construction, higher fiber pricing and unseasonably warm weather. If U.S. Greenfiber had performed as last year, such that our share of their earnings was an incremental $2 million, and using a more normalized tax rate of 55%, EPS would have improved in this quarter by $0.036. Had we reported that higher income, that would also have driven the tax rate down in the quarter and for the year. That more normalized tax rate of, say, 55% would have increased EPS by $0.031. In other words, the lower equity income from U.S. Greenfiber negatively impacted earnings by nearly $0.07.

Moving on to income taxes, the pre-tax loss this quarter accounted for the swing in the tax rate both for the year and the quarter. The year-to-date rate jumped to nearly 71%, and that change was driven through the quarter numbers, creating an unusual charge in the quarter. At this time, taking into account our new guidance, we estimate the rate for the year continuing in the 70% range.

Net income for the quarter after preferred stock dividends amounted to a loss of $1.7 million or $0.07 per common share. A few miscellaneous statistics -- the average interest rate for the quarter remained unchanged from last quarter at 8.8%, including amortization of non-cash items. Net of these expenses, it was 8.5%. Availability on the revolver at January 31 was $139.2 million after taking into account $55.6 million in LC's outstanding. Capital expenditures for the quarter amounted to $18.1 million, and the solid waste growth component of these expenditures was made at the landfills, especially at Southbridge and Chemung.

The MRF expenditures were mainly in Ontario for the glass beneficiating plant and at [Midcon] for the upgrades. Three tuck-in [horning] acquisitions were closed during the quarter for a total purchase price of $1.2 million. The purchase price multiple pay was three times EBITDA.

Free cash flow was $2 million negative this quarter, driven by higher capital expenditures and cash interest, as well as the use of funds for working capital. Cash receivable, while a positive source of funds in the quarter, showed an increase in DSO by two days, due to timing of some large cash receipts and slower payment patterns by a number of larger accounts. While our cash payable fell significantly from last quarter, mainly due to the timing of payments associated with construction projects, the balance last quarter was unusually high and we're now back at a more normal level.

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

Thanks, Richard. As usual, I will try to provide a little bit more detail on some of the good comments that Richard and John provided. Despite a really great performance, Q3 2007 over 2006, had we had a little bit more cooperation from the economy, I think that we actually felt that our performance had been considerably constrained, and I will give you some insights into that.

Using the Dodge Index, New England continues to be off considerably from the 2005 indexes. In this quarter period New England is off 11%, Massachusetts is off 5.1%. Although both of these represent for the quarter a slight improvement over the previous quarter, so we're seeing actually what we believe to be a correction from the downturn and a slight positive growth. Overall, residential activity, while that's down 38% and non-residential construction activity is actually up, could have been positively impacted by the weather. And if you then look at some of the landfill volumes, you get a better picture of that.

Overall, while our landfill volumes were essentially flat, the pricing environment that reflects a proactive action on part of the Company was actually up. We saw dollars per ton increase by about 7%. Not surprisingly, when you look at it at the MSW level, however, the volumes are off about 10%. So we remain in a fairly elastic economy where pricing initiatives that we have taken will have some direct impact on volume reductions, and that will continue until the economy refloats and becomes more robust.

Looking at the overall individual regions, the Northeast was down in volume 14%, but pricing was up greater than 10%. Central region, again, down in volume, but pricing was up -- third party pricing was up by 7.8%. The overall MSW volumes throughout the four regions were essentially flat, but pricing was up 4.6%.

This also had a float-over affect into the intercompany hauling side of the business, where we saw volumes down there as well. So overall, we believe that when this economy rebounds that we should see this removal of this constraint and should see improved performance beyond that which we have demonstrated in this quarter over the 2006 performance.

From an internalization standpoint, we are relatively flat on an overall basis. We had substantial internalization improvement in the Western region, reflecting the volume and the landfill expansion capacity demonstrations over the last quarter. We had some internalization reductions in the other three, reflecting the lower volumes.

As John mentioned, we initiated in 2003 a landfill disposal development initiative. This was aimed at creating approximately 600,000 tons a year of annual additional capacity that we could process and accept into our landfill with a target of EBITDA improvement of over $20 million per year. We have spent, as you are well aware, a good deal of capital on that program, and therefore we have been intensely focused on that program from a capital expenditure standpoint to ensure that this CapEx investment lines up and is aligned nicely with the actual delivering of results.

To that point, we are just now, I think, rounding the corner at Southbridge and, as John reported, had a very good public hearing there this week. We expect the Town Council to put the actual fully negotiated contract up for vote on the 26th of March. That will allow us to really enter our first major shift in our strategic focus from entering the Southeast region, which was to move out of the low margin C&D processing business and move in into the higher margin MSW disposal business.

When we do that, in addition to the simplification and balance sheet actions that John outlined, all of our efforts will be reorganized around this product line shift and around the Southbridge facility, which we believe will be able to operate substantially above the level that we are today, but accepting MSW in lieu of C&D, and that in conjunction with a refocused prioritization in terms of recycling will represent a dramatic market shift in our strategy in the Southeast region and we expect significantly improved results there.

Moving on to the development projects. As I mentioned, beyond Southbridge had good progress in the balance of the landfill expansion programs [through] the year. We believe that we are well on target for calendar year 2008 to achieve 80% of the annual capacity that I outlined there and to increase our long-time capacity to continue to support our 25 to 30 year franchise goals throughout the region. So we would expect that in calendar year 2009 you would begin to see a material deliverance of that $20 million of additional free cash flow for which we've been working at over the last 36 months.

Moving on to recycling. As John indicated, FCR again had another good month. Revenues were up about 5%. EBITDA was up 3%. The pricing environment, while down, and reflecting on a year over year basis the plastics, which are now beginning to firm, volume was up materially by about 10% to 299,000 tons, and variable costs was further reduced over 2006 numbers by about 7%.

The Ontario single stream facility is fully functional and will be running at about 45,000 tons this year. We also placed in operation our glass beneficiating facility in Ontario, which will be running beyond pilot as actually full scale facility, running at about 30,000 tons this year. We fully believe it will be fully booked for all of the cullet before the end of the year. This is a significant part of our strategy along with our hedging program. As you know, glass and cullet has not had a good -- an impossible hedging program because there's really no place to do that. And so we really have had to use technology to offset that, and we think we are going to have material positive impacts across our entire system as we roll out our glass beneficiating technology that will allow us to deliver stable and predictable cullet quality to the glass container manufacturers.

[Midcon] was completed during the quarter, is in full operation, has received final processing permits, and we expect to roll out Auburn, Burlington and Ontario Recycle Bank operations in the next quarter, which we are very hopeful will have continued growth in our single stream operations in each of those markets.

Paper pricing has been very volatile. As you know, the last two months has jumped over $40 to $50 a ton. History suggests to us that when it has these kind of movements during this time of the year that it could equally go down as fast. The hedging program obviously is in place to protect on the downside, so we're not seeing much of the upside, although there will be some continuing improvements after paying for the hedging payments associated with that program.

Q4 2006 to Q1 2007 saw a significant drop in plastic pricing and so we remain below where we expected to be a year ago, but plastic pricings are beginning to firm and we are seeing that as well in the metals. So we expect actually this to be a fairly robust year again for FCR relative to commodity pricing.

We're beginning to see a very strong market reaction to Recycle Bank. As you know, the city of Wilmington, the entire city of Wilmington has adopted the Recycle Bank program after an initial pilot program of 6,000 homes. For a city that did no recycling at all, they had no recycling trucks at all in any routes, they are now diverting over 35% of their waste stream into a recycling single stream program, which is being accepted at our Blue Mountain facility in Philadelphia. And we are very, very robust in our belief that Recycle Bank for 2007 will enter a scale up year and there will be a number of additional reports to give you. We have entered into a letter of intent to raise equity with two very Premier Venture Capital firms and we remain very positive about the impacts that Recycle Bank will bring to the overall recycling side of the business.

Moving on to U.S. Greenfiber. U.S. Greenfiber last year over 2005 grew by about 17%. Having said that, as you know, the last two or three months of 2006, calendar year 2006, saw a dramatic slowdown in the housing market, and so even though we grew 17% over 2005, it actually [began] to materialize in the slowdown. The overall housing market today is very, very soft. It remains 30% off of the peak and probably 15% to 18% off of a more traditional level of about 1.6 million to 1.7 million homes.

Manufacturing housing is down considerably. We think -- believed linkaged to the sub-prime lending impacts going on, and we are seeing continued softness and expect so for calendar year 2007. With that, we will expect a significant correction in 2007 over our performance in 2006. It's showing up in the equity earnings that Richard mentioned. We expect it will last through most of the calendar year 2007. For this quarter, the contractor was down 3%. Retail was down 30%. Those who follow the big boxes know that Home Depot and Lowe's are off considerably. Not anyone knows exactly what's driving that, although clearly the housing market is a direct driver to that, as well as perhaps weather and other issues.

But despite that, our market share in the retail market actually held up very nicely, and we think that that's a reflection of the market share shifts that we actually accomplished in 2006 and the fact that we continued to be the low cost insulation provider relative to fiberglass. We think this is still a good business but we will have to work through the slowdown.

With that, I will turn it back to John.

Actually, we will open it up for questions at this point.

(Operator Instructions). Scott Levine, JPMorgan.

Hope you may be able to talk a little bit more about the weakness in volumes you were seeing. You said a couple quarters ago that weather was a factor, you didn't really point to that and indicated that weather might have been pretty decent this past quarter. So was weather reasonably favorable within the region? And is this purely economic or did weather play a part?

I think that it's interesting because weather probably played a part both ways. Interestingly enough, what we found from a weather perspective was October, November, December and mid-January, we had very warm weather, which was good from the standpoint of additional activity from a construction standpoint even though that activity was down, but obviously negative across Vermont, New Hampshire, Maine, from a ski tourism related perspective. So kind of offsetting, interestingly enough. So not a significant impact from a weather standpoint, but it's because those two factors kind of offset each other. So it's really more economically driven than it is weather-related. I think that our perspective is that the warm weather early on in the season is likely to not have a significant -- I mean, it's not likely that we are going to have a significant recovery from a tourist-related activity, but that remains to be seen for the rest of the season.

Other than the Western market, each of the other three regions, while the overall Company was relatively flat on volume, saw a fairly significant volume fall off on the MSW side, and if you know anything about the MSW price in the Northeast versus BUD material and other material and closure material, that's where our highest price is. So while we did a good job capturing additional material, we've got a lower price point and therefore the overall effect actually restrained what could have been even a better quarter than it was.

Is it right to interpret, I guess, your comments, Jim, regarding sequential improvement or stabilization in macro conditions -- is that an accurate read or is it not?

Yes. I think we would -- well, none of us are trained in that particular science or art, as some might call it, we would say that from the indicators that we have we think that we are at the bottom, clearly, and maybe even climbing out of what occurred in the Northeast.

Notwithstanding the current weather and other things that will occur this coming quarter, because we do have a lot of snow up here now, and that always impacts us. But overall, I think that is true.

One last one, then, I guess, on development CapEx. What should we be thinking about there? I know you've got one more quarter to go in your 2007, but looking out further in terms of the inflection point, are we still looking for a material drop off in fiscal 2008?

Yes, I think it's fair to say that we are looking at fiscal 2008 to get close to being neutral from a free cash flow standpoint.

And then in 2009 is substantial improvement. So that's really the plan.

Corey Greendale, First Analysis.

I also wanted to ask about the volumes. I just wanted to clarify, Jim, you'd said in your comments that MSW volumes were off about 10%. Was that in aggregate for the Company or were you talking about some specific region?

No, that was in aggregate for the Company.

And then just in answer to Scott's question, I think you said something about [doing] a good job of capturing additional volumes but at a lower price. Can you just explain what you were talking about, [a record] of those two things?

On the overall, we really look at our waste streams, in two segmentation -- one is MSW and C&D combined, and then the other one is BUD material and other stuff, which could includes sledges. The overall at the Company level, the overall -- we did see an overall price increase for our MSW and C&D. We think that is a good sign. That was as a result of actually an initiative that was taken by the Company. But the corresponding -- in the market that we are in with the economy that we are in, when you post those kind of price initiatives, you do get the other side of that, which is a volume contraction, because the volume goes someplace else. So that is kind of the linkage both in terms of the macro, when you have a non-robust economy, pricing does have an effect on volume and we saw that. But we think it is the right thing, given to where we want to take the franchise.

And were there any impacts on volume from specific landfills like Worcester not running, if that was up last year, or maybe ramping down Hardwick ahead of the zoning issue there?

Yes. We definitely had some impacts from those kind of things. But we kind of like not try to put that out because things do happen that you don't plan to. So we are held accountable to overall performance, but there were some things like Worcester and Hardwick that were adverse developments through the quarter.

And I understand not wanting to make those excuses, but just in terms of understanding the economic impact, can you quantify at all what those kinds of things did, just order of magnitude. Was it a pretty small part of the volume decline?

I wouldn't say that they were on the smaller side. I wouldn't say that they were a huge part of it. I think the overall volume contraction is really on the overall economy.

And then I'll ask one more and then get back in the queue, if that's okay. I just wanted to ask -- I know this comes up from time to time, but given where the stock is at now, your current thoughts on whether you would think about doing something like taking the Company private.

I think our perspective in that regard is that we have laid out a plan. We are at the end of the development plan with regard to the landfill capacity. We are confident that the 3,000 ton a day, the 900,000 additional tons on an annual basis, is going to be delivered over the next couple of years. And a good portion of that, as Jim said, in the next fiscal year. So there is no question, at least from our perspective, that we will deliver on that. That causes us to be in a position to redo and rethink the market areas to lower our costs and put ourselves in a position where simplification of the business, lowering the cost and then looking at the nonperforming assets and divesting of those assets and taking the next steps in that we are at the end of the development process from a disposal capacity standpoint, says to us that that's really where and how we are going to create real significant value for all of our stakeholders.

I don't think that to the extent that we were to take the Company private, we would have very little flexibility from a financial standpoint to execute our plan. So I think it's, from our perspective, much more beneficial to continue to execute our plan to deliver the balance of the $24 million of EBITDA on the existing investment from a disposal standpoint, to reduce and simplify the business in terms of the balance sheets, take costs out of the business and at the same time rationalize the $22 million to $25 million of revenue that currently is nonperforming and divest those assets or swap those assets and get that done in the next year. I think that's clearly our path to real value creation.

And the other thing is we'd miss the opportunity to talk to you guys every quarter, which has been a highlight of our lives for the last seven to ten years.

Well, I'd still call you anyway, so. Thanks. I'm going to get back in the queue.

Bill Fisher, Raymond James.

John, just following up on the regional restructuring and some of the divestitures. I know it's early, but is there something going into it, like you'd like to achieve in order of magnitude in terms of either cost savings or free cash delta like $2 million to $3 million or $5 million to $10 million in terms of like the range of [things] you'd like to get?

I think clearly there is, in fact, a delta, and I think we will be in a position to really talk about that next quarter. I think clearly we have outlined that at this point in time, and I think that the delta from a reduction standpoint, we both have the impact in terms of the divestitures and what that means as well as the simplification of the business. We will be able to really talk to that at the next conference call.

We actually see the simplification as a continuous and ongoing initiative, not just a one year initiative. And we expect by being both more focused on the customer and simplifying our model that we should be able to substantially every year improve our overall business model, and that's our goal and it is going to be a sustainable long-term objective of the Company.

And Jim, actually following up on the other side of that, just on the landfills, it sounds like you might get the physical benefits from the MSW on Southbridge maybe by the summer, hopefully. But could you -- the next piece of that 20 some million from a timing point in view, would that be like Hyland and when might you get some of the benefits from that?

The Southbridge fully negotiated contract actually contemplates two steps. One is to convert the existing landfill volumes, which is 180,000 tons, to all MSW. That is a relatively shorter permitting period, although it might be a bit longer than summer, as you indicated. I would think that late calendar year 2007 would be more reasonable or maybe Q3 2008, which would be the first part of our Q3 fiscal year 2008, but the first part of calendar year 2008.

The second step in Southbridge is to then reallocate the site permitted capacity, which is staying the same of [499,000] tons, and reduce the C&D processing volumes considerably and fill those up with MSW on the landfill side. That would have the landfill then operating at about 400,000 tons. We would expect that to be completed from a permitting standpoint and for us to be making substantial capture of that MSW by the end of calendar year 2008.

With regards to the other facilities, Chemung, Hyland, Hakes, Ontario, we expect all of those to begin deploying benefits back to the Company much sooner than Southbridge. We are substantially ahead on the permitting efforts there under the initiatives that I talked about. And so I would hope that by the end of calendar year 2007 that we would begin to see material benefits flown from the Western region and then in the middle of 2008, calendar year 2008 and toward the end we'll see a very big improvement hopefully from the Southeast region and Southbridge.

(Operator Instructions). Leone Young, Citigroup.

I am going to go ahead and beat a dead horse anyway. I'm still a little confused on this volume, because there was a lot of talk about landfill volumes being relatively flat and then at one point I thought you said MSW was relatively flat, but then overall for the Company it's down 10%. So I guess I am trying to understand, with the economy being flattish, maybe, or some of your overall comments, exactly where did the 4.4 kind of stem from? A particular region, a particular waste stream?

I apologize if I confused you, but obviously others --

Just confused just between what was the region and what was overall or --

First of all, we report on an overall basis. So when you do that, both at a dollar per ton basis and a total volume, it has the problem of getting confusing because actually sitting within that overall number is really two segmented waste streams. One is an MSW C&D, which is kind of the normal business, if you will, and then a second piece of the business in productline is the BUD, which is Beneficial Use Determinations. These can be residuals, they can be sludges and they can be soil projects.

The problem with the understanding of this is both of those segmentations have dramatically different pricing points. So as you do weighted averages and blend those all together at a total overall Company performance, you kind of mask what's really going on. So I was attempting to unmask by highlighting that at an overall volume level, we were relatively flat, but that when you actually look at the segmented MSW/C&D volumes, they were off by about 10%. And since the MSW/C&D is our highest price point waste stream, when that's off by 10%, it has a big opportunity to cause a negative impact. In a sense, while the quarter was significantly improved over 2006, the highlight I was trying to make is that had not the economy been where it was, we actually would have had a much more robust quarter, and therefore we actually are quite upbeat about what we are doing with the franchise and the improvements we are making as outlined by the various metrics that Richard gave you. But we were constrained by the economy this quarter from where our plan was for the quarter.

When you look at the BUD material, which is at a very lower price point, we made up for on the overall volume by having considerably improved BUD [carve-outs] and capture, but the net effect of that, since as a lower yield had both a price point and an EBITDA per ton, is that we weren't able to make up for the loss from the MSW and C&D.

So stripping that about that story, you can have one look at that at the overall Company level and then we could do that for each of the regions and so there is a lot of detail there. But overall, what you are seeing generally and what you would see across the region was that MSW volumes were down, BUD volumes were up and pricing was up -- and pricing for MSW. So, the final linkage that I was trying to help with those on the call was that typically in this kind of elastic economy or inelastic economy, when pricing goes up, the volumes go down because there are not enough volumes to really support all of the operations and they chase, absolutely chase the cheaper price. So that's kind of just I think as much color as I hopefully can give you that will clear that up for you.

And related to that, though, at the outset it sounded like the hauling and transfer was down on a percentage basis more than the landfill side. Would that relate to, again, some of this culling of the unprofitable customers?

I think it is very fair that that is a part of it. It is not necessarily a big part of it we own but it's clearly part of it. There's no question that with Bill Hanley now, who is the new VP of sales, who has been in place now for two years, clearly that is part of the reduction from a volume perspective. But it is a small part of it.

A last question on the SG&A, definitely as you said, you have made improvements. But it is still fairly high relative to the other solid waste companies. Are you taking a look at possibly any cost cutting plans in that area?

I think it is fair to say that when we look at the simplification issue that we identified earlier on in the conversation, just the fact that we, as we have grown the business, we have had balance sheets at every operating level, at every division level, and just rethinking that alone will help in that regard. But because we are primarily in the secondary tertiary markets, it is likely we are going to continue to see our SG&A be a bit higher than those companies that are predominantly in larger MSAs, metropolitan areas.

So I think inherently we are going to have a bit higher, but clearly we are going after and looking at every opportunity that we can to simplify the business, take complexity out of the business and in the process of doing that, it means that we will take cost out of the business as well.

Larry Taylor, Credit Suisse.

I wonder if you could talk a little bit about how you expect to manage the balance sheet, sort of philosophically here. There's still a ways to go, obviously, in this investment program and the leverage continues to sort of tick-up here. Where do you think that goes and what are the sort of control points there?

I think clearly, it lays out for you what we really need to do, which is to bring in the incremental EBITDA, which is obviously the focus that we have on the existing investment. And clearly, where we are currently is in a position where we really need, obviously, to execute the additional EBITDA from the investment that we have made. We need to reduce the cost. We need to simplify the business model and we need to obviously put ourselves in a position then where we can delever the balance sheet with equity. But obviously, in order for us to do that, we've got to execute the strategy and bring in the incremental value that we know is inherent in the disposal capacity that we put in place.

Corey Greendale, First Analysis.

Again, not to beat the dead horse, but on the volume, I just -- the take away I'm coming away with is basically that the economy is a little sluggish. You continue to raise price, so in that kind of environment basically you are losing the volumes competitively. Is that how you would describe it? And do you still view that trade-off positively or at some point do you start lowering price somewhat to recapture some of that volume?

I think that we are doing the right thing from a pricing standpoint. I don't know as we're losing that competitively as much as it's fundamentally not there. I think that clearly, obviously we will lose some of that from a competitive standpoint, but I think that it's more a function of from an economic perspective, the tonnage is not there. It's a combination of both those things.

The pricing matrix, the return on the investment capital relative to our disposal investment, it's clear from our perspective that we're doing the right thing. We're doing the right thing across our entire customer base from a pricing standpoint, and we are going to continue down that path because that is really where we need to be is pricing properly based on the return that we are looking to get from a disposal standpoint across our entire franchise. So we are not looking for volume; we're looking for returns and we're looking to increase the contribution from all of our customer bases.

And then I had a question on U.S. Greenfiber. Jim, could you finally give us any insight into what their calendar 2007 BUDget looks like at this point?

Well, we have some ideas, but the market is still pretty much being fairly volatile. We don't know how long the bottom is of this housing market. We think we're in the bottom of it, but we're not sure of that. And then we've had kind of a couple other FX. One is paper pricing, which is being very volatile. And while it's somewhat good news for us on the FCR side, it is not good news for U.S. Greenfiber. And in the current environment, while we are still a low-cost provider by considerable volume over fiberglass, it's a tough environment to put pricing increases in. So I think that we would like a little more visibility, and I think the end of our Q4 period in three months, we should have a much better window on that and we'll give you that information then.

John, how does the down cycle affect your thinking on monetizing that, if it does at all?

Obviously, at this point in time, it would not be the time to monetize Greenfiber. I think that from our perspective, the new products that are in the marketplace, it's likely that at some point the cycle will come back and we will have that decision to make at that point in time. But certainly, at least at this point in time, where we are from a market perspective certainly doesn't make sense to monetize Greenfiber at this point.

And if I could just squeeze one in for Richard, because I feel badly that he's been left out.

We all do feel badly for Richard.

I don't mind you leaving me out, Corey. That's fine.

Well, I'll try to make this painless. I was wondering if you have any -- and I know you're not giving guidance for next year yet, but any thoughts at all on best guess at tax rate we should be modeling at and best guess on when the NOLs run out at this point?

The NOLs will last another couple of years. I would think on the tax rate, I gave you guidance for the current fiscal year. We assume that our pretax income will be significantly improved, so the tax rate would be more in the 50% range next year, I would expect. It's a guess at this point because we've not done our BUDgeting and looked for that. Obviously, I'll give you more specific information about that on the fourth quarter call.

Yes, thanks. Just a guess. It's appreciated. Thank you.

And that concludes our question-and-answer session today. Mr. Casella, I will turn the conference back over to you.

In closing, just a couple of items that I would like to emphasize in terms of our immediate focus. It's threefold. First and foremost, to harvest the additional value from the investment that we've made from a disposal capacity perspective; hopefully, we have been able to give you a perspective of where we are in terms of the additional 3,000 ton a day and the 900,000 tons a year of that capacity that we will bring in.

Second, the simplification of the business model to drive cost out, and then third, divestitures of the lower margin businesses or the underperforming assets as well. So clearly, a threefold focus. We will execute those issues. We'll bring that value in. We'll simplify the business, reduce costs, continue to reduce costs and at the same time, we'll rationalize on a waste shed basis out those assets that are non-performing. And as I indicated, it's about $22 million of revenue.

I would like to thank everyone for their attention this morning. Our next earnings release and conference call will be in mid-June when we will report our fourth quarter and full year numbers, as well as outline our expectations for fiscal year 2008. Thank you very much. Have a great day.

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