Casella Waste Systems Inc (CWST) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the Casella Waste Systems fourth quarter fiscal 2007 earnings results conference call. Today's call is being recorded.

At this time, I'd like to turn the call over to Mr. Joe Fusco. Please go ahead, sir.

Thank you for joining us this morning, and welcome. We're joined by John Casella, Chairman and Chief Executive Officer of Casella Waste Systems, Jim Bohlig, our President and Chief Operating Officer, Richard Norris, Senior Vice President and Chief Financial Officer, and Charlie Leonard, our Senior Vice President for solid waste operations. Today we'll be discussing our fourth quarter and full 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'll be providing an outlook on our expectations for fiscal year 2008. We'll also answer your questions as well a little later in the call.

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 financial 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 afternoon and is available in the investor section of our website at www.casella.com/investor.

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

Thanks, Joe. Good morning, and welcome, again, to everyone. As Joe said, we'll go over our fourth quarter results, we're going to layout guidance for '08 and then obviously we will spend sometime answering your questions. As usual, Richard will go through the detailed numbers and Jim will give an update on development activity. But first, just a little bit of highlights in terms of the quarter. Overall, the quarter and the past fiscal year has been challenging. We faced a weak economy in the northeast and broad impacts to our roll-off line of business from the construction slowdown. Our people have indeed responded well and remain focused on pricing discipline and we're really beginning to work hard in terms of cost reductions on an overall basis.

Setting aside the impacts of nonrecurring charges, EBITDA was up $900,000 year over year for the quarter. Solid waste pricing was up 2.9% in the quarter, while volumes declined 5.8%. It's important to recognize that 5.8% volume decline in the solid waste operations was driven by a 5.1% reduction in lower margin hauling and transfer volumes, and 400 basis points -- a 0.4 basis point decline because of the closure of the Hardwick landfill. I think it's really important also to understand that over 60% of the 5.1% loss of hauling and transfer volumes is associated with this strategic realignment of assets in the southeastern region, away from the CND business to higher-margin MSW business, centered around the Southbridge landfill.

As we talked about for the past several quarters, the New England economy has been soft. Construction business continued to show weakness across the region during the fourth quarter. Our roll-off pulls were down 6.1%, or roughly 2,100 pulls year over year for the fourth quarter. This weakness was felt across all regions of the business, except for our western region, where actual pulls were up on a year-over-year basis. We have begun to see early signs of recovery in the regional economy. However, our guidance for the year conservatively assumes flat to slightly down volumes.

The economic activity index in the region has shown positive momentum during March and April, especially in Massachusetts market, where the three-month change was 1.6% in March and up 2.6% in April. Year over year, the fourth quarter total construction contract awards were flat for New England and up in Massachusetts, while most importantly, commercial construction contract awards were up 25% year over year for New England and up 110% for Massachusetts. Have to stress that construction awards are a leading indicator and we will not see incremental volumes until these awards translate to actual starts over the next several months. Our May results demonstrate the traditional seasonal increase. This is really important because last year, we did not experience this trend, and very important in terms of starting off the new fiscal year, year over year, for May roll-off pulls were up 7.1%, or almost 1,200 pulls. Landfill volumes are up and EBITDA is back to seasonal levels. It is certainly premature to talk about this trend continuing through the year, but certainly very pleased with the seasonal uptick and the results for May.

The recycling business performed well, with EBITDA up $1.1 million over the fourth quarter. The increases that we saw in O&P and OCC pricing in February corrected during March and April, and we experienced a modest rebound in plastics pricing during the quarter. During fiscal year '07, we made significant progress with our long-term landfill development growth initiatives. We are now -- most importantly, we are now entering the next phase of our long-term business strategy. Our primary focus has shifted from developing new projects to harvesting the cash flows from the existing investments that we've made over the last several years and to repay debt. This year we plan to be free cash flow positive.

Our operating strategy for fiscal year '08 focuses on profitable revenue growth, cost reductions, high return capital deployment to generate positive free cash flow. We're driving revenue growth in two main areas. First, executing the remaining steps to capture the incremental 900,000 tons of annual capacity and the $24 million of EBITDA that is currently in permitting at our existing sites. Jim will go through some of the detail in terms of where we are on that permitting in his -- his discussion as well.

We're also driving organic growth with our pricing discipline and standardized sales programs. In late May, we made a major step forward when the Southbridge town council voted to approve the amended extension agreement for the operation of the town's landfill. We executed a new contract on May 29. We expect permitting process at Southbridge to take six to 12 months and we'll see the first benefit from this project in 2009. We also made great progress towards a minor modification of our permit in Chemung. The minor mod will allow us to expand the annual MSW tonnage by 60,000 tons. We expect to receive this permit in the next six to nine months, and we'll actually see this facility ramp up during the fourth quarter of this fiscal year, or '08.

The collection pricing program from a sales standpoint that were rolled out at the beginning of the year are making an impact in the business. We're now seeing the largest benefit in our western regions, where the program is fully implemented. Our sales team is targeting the right customers at the right price and churning the lower, even negative margin customers. During the last 12 months, it's important to point out we've increased the average revenue per new account by 24% and we've reduced the average revenue per lost account by 29%. Also, during the last 12 months, we've raised prices on 65% of the bottom quartile customers who had little or no margin. The other 35% is under contract and will be repriced as contracts expire. We will see the rollover benefit of these pricing increases during fiscal year '08.

The environmental services fee has added $1.9 million of revenue since it was implemented at the beginning of the second quarter. This fee is an important tool in generating appropriate returns on our landfill investment, as it helps us offset cost inflation in permitting, landfill construction, as well as environmental compliance. One of the other important programs that we laid out during the fourth quarter was to set a goal of the elimination of $6 million of costs from the business in the next 12 to 18 months.

We completed the first step of this process through the reorganization of the southeast and northeastern regions into a weigh shed management structure. The restructuring will be complete in the first quarter and will save $2 million of the $6 million during fiscal year 2008, which we have incorporated into our plan or budget for the year. We believe that the weigh shed business model will enable our managers to better manage waste flows and service customers, most importantly, and simplify the accounting processes, reduce management and accounting overhead. We're also targeting an additional $4 million of cost savings not incorporated into our budget, with a target of recognizing $1.5 million to $2 million of additional savings during the fiscal year. Our focus will be on additional opportunities to restructure opportun -- operations, operating initiatives and procurement savings.

Since our last conference call, there's been a number of questions relative to additional detail on our cost-cutting programs. I will run through a breakdown of the targeted $4 million of cost savings. Again, as I said, we've basically implemented $2 million of the $6 million that will be completed before the end of the first quarter and we've incorporated that $2 million into the budget. The $4 million of cost savings to be captured in the next 12 million were committed to taking costs out of the business during the fiscal year; however, the full-year impacts will not be felt in all cases. Currently we are assessing opportunities for additional waste shed restructuring, which can save an additional $1 million and in March we engaged Mitchell Madison, a sourcing firm, to review our annual expenses. We've identified a pool of $75 million to $80 million in areas of legal, engineering, temporary labor, fuel, tires, lawn haul transportation for review. Mitchell Madison is in -- is four months into a nine-month review and we're currently targeting a minimum of $2 million of cost savings. Over the past three years, our programs in safety turnover and selection and training have yielded excellent operating results. This year we're focused on implementing a maintenance standardization program, warranties and other aspects of that program from the standardization standpoint, which will save an additional $1 million.

One of the other important aspects is our deployment of capital. Deployment of capital has evolved with our business strategy from a focus, as we have said, on growth investment to a focus on harvesting cash flows to repay debt and the restructuring of operations to strengthen margins. As we laid out last quarter, we identified $22 million of annual revenues in underperforming, nonstrategic operations that we planned to divest, swap, restructure or closed. On April 30, we sold our Holliston, Massachusetts transfer station to Covanta. This transaction represents nearly half of the identified revenues at $10.4 million in revenues. I think it's also important to point out that there were three lines of business at the Holliston transfer -- the Holliston division; transfer, hauling and long-haul brokerage. The transfer business, as I said, was sold to Covanta. The assets from the hauling business were transferred to Southbridge to build our MSW business in central Massachusetts, and the low-margin long-haul CND brokerage business was shut down. During fiscal year '08, we also plan to allocate over half of the growth capital to high-return landfill gas to energy projects.

Before I turn it over to Richard to go through some of the detailed numbers for the quarter, I'd just like to welcome a new team member to Casella. Eric Reibsane joined the Company in May as our Chief Information Officer. Eric joins us from Asplundh Tree Expert Company, a $2.5 billion company, where he was CIO since 2000. We're very pleased to have Eric join the team and look forward to his moving the systems department to the next level of performance.

And with that, here's Richard with the numbers.

Thank you, John. For the quarter ended April 30, 2007, revenue increased $6.1 million to $130.3 million, or 4.9%. Internal growth for the quarter reflects higher pricing across all regions in the solid waste segment. However, volumes were down in the hauling and transfer operations. This was the major factor in the southeast region because of the strategic realignment of the assets to higher-margin MSW around the Southbridge landfill. Overall, landfill volumes were flat, but there was a mix change. FCO's volumes were up slightly. The commodity prices took a leap in the quarter based on a year-over-year comparison. This was mainly due to the large swing year over year in average fiber prices. The increases were partially offset by the hedging program, which was put in place to minimize this volatility. The increase from surcharges amounted to 43 basis points in the quarter. So revenue from the quarter breaks down as follows. Solid waste, $95.1 million, FCR, $28.3 million, and other, $6.9 million for a total of $130.3 million.

Gross margins improved by 61 basis points year over year. The lower transfer and hauling volumes were offset by lower operating costs, so most of the operating expense categories decreased. Direct labor is down and it included a great quarter from a a workman's compensation perspective. Direct operating costs were also down across the board, thus solid waste gross margins improved. Partially offsetting the improvement was purchased materials at FCR, which were up as a percentage of revenue 2.8%, mainly due to the higher cost of materials. These purchased material prices were up 83%, so FCR's gross margins suffered from this change. Most of this material was fiber, so you can see why margins were impacted, although EBITDA increased. When fiber prices change radically, free cash flow is not affected, but the change can have an impact on FCR margins.

General administration expense increased as a percentage of revenue year over year 160 basis points. Most categories of expenditure showed declines due to the continued focus on this area. Only two categories showed large increases, bonuses and bad debt provision. In 2007, we trued-up bonuses each quarter, while in 2006, most of the adjustment was made in the fourth quarter, so the prior-year comp was tough. Bad debt expense was up 40 basis points, as we provided $0.5 million for certain slow paying receivables. There was also about $200,000 or ten basis points associated with the southeast region consolidations, one-time aberration.

EBITDA for the quarter at $25.2 million was flat versus the prior year. EBITDA breaks down as follows. Solid waste, $18.9 million, SDR, $6.4 million, and other is a negative $39,000 for total of $25.2 million. Solid waste EBITDA was down from the prior year and margins decreased by 70 basis points. However, these amounts include costs associated with the consolidations effected in the north and east and southeast regions amounting to $400,000, or 40 basis points comprising mainly severance and legal costs. Also, there was the one-time bad debt provision mentioned above for $0.5 million or 50 basis points. Without these two items, solid waste margins would have been reported as slightly higher at 20.8%. Looking at the dollars, transportation, direct operating costs and third-party disposal were all down, partially offset by higher maintenance costs and higher G&A due to the factors cited above.

FCR's EBITDA improved by $1.1 million, although margin decreased this quarter by 70 basis points to 22.4%, which was still a very good result. Average selling prices were up this quarter as outlined above, as were volumes. Tons shipped were up 4.8%. A large component of the EBITDA increase was the net price increases, that is to say net of the hedge effect. The margin was impacted by the higher prices and volumes of purchased materials. Total Company-wide EBITDA adjusted for the one-time items and purchased materials would have been $26.1 million, or an increase of 3.6% year over year at a 20.4% margin, which would have been a slight increase.

Depreciation and amortization expense was up $2.5 million year over year. Depreciation was up $700,000, while landfill amortization was unchanged from the previous quarter, but it did show a large increase over the prior year, mainly due to the favorable FAS 143 true-up at year-end last year, and that true-up did not recur. Well, the true-up recurred, but it was not as favorable as it was in the prior year. In addition, the amortization rates at Pine Tree have increased by some $6 a ton because of the shorter life agreed upon with the state. This site will now close in December 2009 and the air space assumptions have been revised accordingly.

The Hardwick impairment and closing charge. As a result of the (inaudible) of Hardwick's actions in rejecting our application to expand our landfill there and after considering our legal options, the Company elected to close the landfill permanently. The impairment charge represents solely the cost of writing-off the net assets of Hardwick and providing for the associated capping, closure and post-closure costs. Once we work through the necessary permitting with the state, we expect to incur cash outlays of some $3 million in fiscal 2008 on the capping and closure, which is included in the current portion of closure, post-closure accruals in the balance sheet. Development project charges. Under this caption, we elected to write-off the costs associated with unsuccessful attempts at obtaining land fills, as well as a composting project.

Moving on to income taxes, the tax rate, which has been very volatile throughout this last year, finally settled at a credit of 34%. This rate is still relatively low for Casella and that arises because the Hardwick loss, which largely drives the provision, will likely not be utilized at the state level, so evaluation allowance has been set up accordingly. Without the various one-time items, the rate would have been 65%, close to the guidance previously provided.

Discontinued operations. As previously announced during the quarter, we sold our Holliston transfer station for sale proceeds of $7.4 million, while the pretax loss on sale amounted to $1.2 million. As you can see from the income account, this operation had been a drag on our earnings, plus there was a $3.5 million capital expenditure requirement in fiscal 2008 had we continued to run the operation. This transfer station was tied partially to Hardwick, so it clearly no longer fitted in our portfolio. Since this divestiture is required to be treated as a discontinued operation, prior-year amounts have been restated accordingly.

Net income for the quarter after preferred stock dividends amounted to a loss of $20.3 million, or $0.80 per common share. The average interest rate for the quarter decreased slightly to 8.7%, including amortization of financing costs. Net of these expenses it was 8.4%. Availability on the revolver at April the 30th was $145.5 million after taking into account $52.5 million of LC's outstanding. We announced during the quarter that we've increased our borrowing capacity and amended our covenants. The preferred shares have a mandatory redemption date of August 11, 2007, at which time the cost will be $74.5 million. This amendment was meaning to provide further flexibility to deal with this issue. As well, we were able to reduce current pricing by 50 basis points.

Capital expenditures for the quarter amounted to $25 million, and the growth component of these expenditures, $11.6 million, was largely made at the landfills, especially at Chemung. In addition, we also spent $2 million at the [Midcon and Oburn MRFs] in completing the projects that we've talked about on earlier calls. Two small tuck-in hauling acquisitions were closed during the quarter for total purchase price of $1.1 million. The purchase price multiple paid was 3.7 times EBITDA. Free cash flow is close to break-even for the quarter due to a significant improvement in working capital. Accounts payable and other accrued liabilities took a big jump at the end of the quarter, due to better management and year-end capital accruals. The cash receivables were up from the higher revenue in April versus January, while DSO was down from last quarter by two days and back to a more normal 38 days.

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

Thank you, Richard. Good morning. As usual, I will attempt to provide some color and granulation to the comments which Richard and John have already provided you. First, some color on the economy. As you are aware, I think the (inaudible) remains a continued challenge and has some weakness throughout this economy, principally driven by a low-growth environment. I think it's been also impacted by the housing downturn that is experiencing across the country and that, in combination with the rising hydrocarbon pricing, which is really, I think at the low-income levels, particularly in the rural marketplace, putting pressures on just generally economic activity. It's not surprising then in the quarter we've seen weakness in three of our four regions; the northeast, the southeast, and in Vermont and the central. Surprising, the western market, which is principally New York, has actually shown strengthening in the quarter and that, taken in context with the improvements of May, I think indicate that we are beginning to see the turn of this.

If you look at the Dodge index report for Q4 '06 versus Q4 '07, we are, in New England, generally flat at a total construction level, but if you use Massachusetts as an early proxy, they're actually up 25% on a construction level -- that was an overall construction -- on a non-residential construction, it's actually up 100%. And on a sequential basis, which measures the trailing three or four month quarter over quarter, we're seeing quite an improvement, both in New England and in Massachusetts. So we believe that -- as John indicated, that both the anecdotal information that we have in the May actuals, as well as our own instincts toward the end of the quarter, is that we are beginning to see the reemergence from where we have been from a challenge standpoint. If you look at the economic activity index published by the federal reserve, they are also supporting and tracking the Dodge index information generally.

Landfill volumes are essentially flat for the quarter. We did see quite a shift around in mix, both in terms of pricing and volume, which is fairly typical when the economy is challenged. Folks go out and work hard to capture additional waste. I think the fact that the economy is weak and that we were flat and some areas actually did a very good job of attracting waste is a good indicator of both the long-term nature of the assets and the ability for them to be a good anchor for the Company as we go forward. From an internalization standpoint, the central region was at 78%, which is roughly flat, or down slightly a little bit from where it was Q4 '06, which was 79%. Northeast is up to 56.5%, southeast is up to 42.1%, and western had -- it is about flat at 49.8%. The overall Company is up from 56.6% in fiscal year '06 to 58.3% for fiscal year '07, so we're seeing an internalization improvement. And as we bring these landfills on as part of our strategy, we believe that obviously that internalization rate will go further north of this number, particularly at the end of fiscal year '08.

From a capital expenditures standpoint, we are clearly focused on the new phase, which is completing our landfill development and moving into harvesting of this incremental capacity. I think last quarter or the quarter before we talked to you about our landfill development disposal strategy; I'll go over that again by each site. But the principle issue is really to now harvest the free cash flow from the existing investments in these sites, which will be principally completing the permitting and then bringing in the additional waste. Our basic model for our landfills has been to enter a market, particularly one that has been a troubled facility. Southbridge is a good example.

Go into that market, these are normally publicly-owned facilities. Earn the trust of the public. Do the necessary long-term planning in capacity and development at the site through performance. Reenter a negotiation with the community for a win-win. Execute a host community agreement. Work the permitting, and then bring the capacity and the volume to that capacity and match it. We've -- we've done this effectively and we've demonstrated the ability to do this, being the only company that has added over 65 million tons of capacity in the last five years in New England. And we believe that our model, which is aimed at harvesting and bringing about a million tons of additional incremental tons to these assets over the next three years, and about $24 million of incremental EBITDA will significantly change obviously the financial impact of the Company and will validate the basic strategy that we've been on for two and a half, three years.

First, Ontario. We are in a minor mod discussion, which would be a 312,000-ton per year annual increase. We're making good progress. We would expect by the end of the fiscal year -- calendar year of '07 to be substantially completed with our negotiations with the town and with the county, and we -- should we achieve that with them, which the current discussions are favorable toward that point, we believe that we would have a chance to bring in 40,000 tons during fiscal year '08 and perhaps another 50,000 or 60,000 tons of mod material during fiscal year '08. Neither of these numbers -- or neither of those numbers, obviously, are in our current plan.

Southbridge, very welcomed long period, but very welcome period to have finally signed an agreement with the town of Southbridge, which details out the entire development of that site from a 180,000 ton CND facility to a 405,000 ton MSW landfill. We are starting the permitting now through the board of health. We expect that to be a nine to 16-month period, and at the end of -- or the beginning, early part of fiscal year '09, we begin to expect to be able to materially ramp up from the 180,000 tons to the 400,000 tons. As you know, Southbridge sits in the middle of the Massachusetts market, which is both robust pricing from an MSW standpoint and is currently exporting about 1.5 or two million tons out of the state, so we think it's in position to intercept that waste and come up to volume quickly.

The Hyland landfill, we will have another minor mod above 150,000 tons. We expect in fiscal year '08 to actually bring in 32,000 tons into that facility. Hicks is running at capacity and we are in our next phase of [secra] to expand that. And then the Chemung facility, which John mentioned and in our numbers, we expect to see that completed in August of 2007 and that's to yield about 51,000 tons for fiscal year '08 and on a annual basis, take the facility from 120,000 tons to 180,000 tons. As I mentioned, all of these key facilities are centered to the landfill development and aimed at yielding over a million tons of incremental capacity and about $24 million of incremental EBITDA by the end of 2010. We are very much on track for that and expect to be able to make those -- to make that plan. We are driving as hard as possible, but our current plan only assumes Chemung, which has already been approved, is in the fiscal year '08. All others will be as they become available, but we have not planned or put them into our targets that we had given you, or will be giving you today.

Moving off of the landfill, very pleased to announce this morning that both [Bitterford] and the [Sockwell] disputes have been completely settled. We settled Bitterford in April. Sockwell we settled actually this morning and I signed the agreement this morning. This is a long-standing dispute, really preceded our purchase of KTI. We've been working on trying to regain the trust of these two communities for over five, six years, and with this settlement, I think we both -- all three of us, two the communities and ourself, are signalling that it's time now to look into the future and start seeing where we can add value for both of us. We will pay a $1.4 million, which was a fully provided for settlement to Sockwell. There will be a pickup of about $2 million in Q1 and this is signed this morning. It's a Q1 activity, not a Q4 activity from '07. Moving beyond that, the Midcon project was fully accepted by CRRA and is in full operation. We were also party and worked with a number of parties that overturned the bottle bill legislation that was pending in Connecticut, particularly as it dealt with the PET recovery of material, and we're pleased by that effort and the efforts of our folks at FCR with regards to that.

Moving outside of the solid waste business then to FCR, recycling continues to be a very bright spot. EBITDA was up over 21% quarter over quarter. Pricing was up 31% and revenue was up about 4.8%. We continue to see a strong commodity market, although it's very volatile. The high prices that we saw early December and January driven by the Chinese have now fallen off as quickly as they went up, but they're fully within our plan and forecast, and we expect that the -- that this business unit will continue to outperform as it has its peers across not only New England, but up and down the eastern seaboard. We've recently signed a consulting contract with West Palm Beach for a new dual system design there, which we're pleased about, and we continue to see strong market reaction to Recycle Bank, as we expect to roll that out in Southbridge around Auburn, Massachusetts, Burlington, Vermont, and Ontario, New York this summer. And we'll get to see our first real traction from that tool, both in terms of additional penetration for recycling, but more importantly, for what we think will be a very strong pull with regards to additional trash and densification in our solid waste operations.

Moving to EuroScreen Fiber, I think everyone's aware that the housing market continues to be down essentially 30% or 35%. I think there is some general consensus that the market is perhaps at its bottom. I think there is no consensus that the market will turn until probably calendar year '08 -- mid calendar year '08, and so it's not surprising that they're down 13% in overall sales and off considerably in EBITDA, but the good news is that for their calendar year, while contractor sales are off about 30%, manufacturers are down 20%, retail is actually up for the quarter 29%. Fire and Sound, which is a new product, is up 30% and then Scott Seeds are up 14%. So overall, we've had a mitigated effect of the housing impact by being able to manage overhead and work these other product lines. And we think a major driver for profitability over the next 12 to 18 months will remain both the green nature and sustainability nature of the business, as well as how well paper pricing works out. If the paper pricing continues to moderate like it has, we expect that -- this business to continue to improve, and then pick up as, obviously, the housing starts to pick up in the summer of '08.

With that, I will turn it over to Richard for remarks on the fiscal year '08 plan.

Thank you, Jim. I'll just give you a few comments now on our 2008 outlook. For the solid waste business, we assume that volumes would continue to be flat to down, while net price increases, which continue to be strong, are budgeted at approximately 3%. The price increase excludes the fuel surcharges, which were assumed to cover any fuel price increase in excess of a cost assumed of $2.75 per gallon. FCR commodity volume is budgeted to be flat year over year. This is due to the loss of some contracts being offset by higher volumes at Midcon from a full year's operation under its new contract. ONP and OCC prices have softened from the spike we saw in the fourth quarter, while other commodities have stayed relatively flat. For the outlook, prices are expected to remain at present levels in the first quarter, gradually decrease through the second quarter, then hold steady. Therefore on average, we expect pricing to be up slightly so that the end result is that FCR is expected to be flat year over year, with growth coming from the solid waste group.

The market consolidations that John referred to earlier, which we achieved in the northeast and southeast regions, will provide a benefit of $2 million in fiscal 2008, many from reductions in the labor force. For the next year, general and admin expense is budgeted to be down slightly from this year as a percentage of revenue in the mid 13% range, but it will show the usual seasonal fluctuations. Depreciation and amortization, which increased this year as a percentage of revenue, will increase further, closer to the mid 13% range. Again, that will show the usual seasonal fluctuation. The increase in D&A is largely driven by Pine Tree, which as I mentioned earlier, is now expected to close by December 2009, so we will be driving volume at that site, but the decrease in air space resulted in a corresponding increase in amortization.

Not included in the above EBITDA is the $11.6 million of EBITDA forecasted in our fiscal year 2008 for US GreenFiber, compared to 2007 results of some $15 million. Their net income before tax is forecast to be break-even for our fiscal year, and that includes a charge of $700,000 related to the exit and severance costs arising from the shutdown of two plants. These results reflect the slowdown in the housing market and the higher newsprint prices. We will also record our 24% share of Recycle Banks losses on an equity basis. Those are expected to amount to between $500,000 to $$1 million in fiscal 2008.

Interest expense will show an increase mainly from higher balances outstanding due to the assumed redemption of the preferred shares on August the 11th. We will essentially be exchanging the preferred dividend for interest expense. The average rate approximates the present range, as we assume some upward movement in LIBOR. The income tax rate, which was volatile in 2007, will display that same volatility in 2008 for similar reasons, and at this time, the rate is anticipated to run in the 10% to 20% range. Free cash flow will be positive in fiscal 2008. Capital expenditures have been reduced from $103 million to $72 million to $76 million, and the growth expenditures amounted to $12 million to $16 million, will not be at the landfills, since those expenditures are completed. All landfill expenditures in 2008 are forecast to be maintenance in nature. The growth expenditures comprise mainly two gas-to-energy plants and upgrade -- excuse me -- upgrades to a MRF. These are high-value projects and the internal rates of return from those projects are expected to exceed 20%. Operating lease payments are expected to amount to some $7 million next year. The main components are: Ontario, $3.2 million; Southbridge, $2 million; and Chemung, $1.8 million.

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

Great. At this point in time we'd like to open it up for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) We'll take our first question from Brian Butler of Friedman, Billings and Ramsey.

Good morning.

Good morning, Brian.

Question on, I guess, the EBITDA outlook for 2008. It looks like you're forecasting flat margins despite what appears to be some good progress on the cost cutting as well as adding more volumes at the landfill. What's holding the margins back from expanding?

I think -- clearly the May results with regard to the volume increases and the pickup in the actual roll-off business for May is not what we -- is not how we budgeted. We budgeted basically volumes to be flat or slightly down. So I think clearly if the -- if May is an indication of exactly where we are from an economic perspective, obviously we'll have to revisit that throughout the year. But currently, we budgeted volumes, Brian, to be flat to down slightly.

And that -- so I guess those volumes are then some of the -- at least margins on those volumes are at least in line with your corporate average, if not a little bit better?

Certainly I think with all of the work that we're doing on the pricing programs, I would think that the margins relative to the -- the new business from an economic activity perspective would be certainly the same, but I'd like -- I would -- I would say that those margins would be slightly better.

Okay. And then on the CapEx side of the business here, it looks like your CapEx is going to be more or less in line with your depreciation and amortization. Is that the case for the next three years as you harvest these? Is that the right way to think about it, or is there going to be, as some of these new permits work through, that you're going to need to see some additional CapEx for the landfill?

No, I think that it's fair to say that the major investment in the landfills is over at this point in time and we'll be moving to the harvesting stage. Clearly as we add additional capacity, the maintenance capital numbers will go up. As we continue to add -- as we continue to add additional capacity, maintenance numbers will go up. And we do have a little bit of work left at only Chemung, so there's a little bit of development capital that will be utilized at Chemung. The balance of the facilities, though, are really in the harvest mode. The only thing that you will see, though, is as we increase capacity, we will increase maintenance CapEx. In other words, as Jim said, as we increase our annual utilization of capacity by $1 million, that will increase slightly our maintenance CapEx on a go-forward basis. So you could -- you could expect to see increases in maintenance CapEx and a bit of capital left for Chemung.

All right -- (MULTIPLE SPEAKERS).

-- EBITDA growth that goes with that, so I think your conclusions are correct.

Okay, and then just two housekeeping questions real quick. What's the after-tax impact of the Hardwick and the development charges? And then do you have a good tax rate to look at for 2008?

The tax rate for 2008 will be in the 10% to 20% range and I'm not quite sure the thrust of your other question. You wanted to know specifically what those individual items were?

Just the after-tax impact? I mean you gave the before tax, right, so I'm just trying to figure out the after tax. I'm trying to get to the $0.07.

Hardwick was $16.8 million and Holliston on an after tax basis -- well, you can see from the bottom of the income statement, the loss on disco was $700,000, after tax.

Thank you.

And we'll go next to Scott Levine of JPMorgan.

Good morning.

Good morning, Scott.

A question on the balance sheet here. You're going to take out the preferred here in a couple of months. I was wondering if you could speak more broadly, John, about your thoughts on the balance sheet going forward? Expectation obviously is not that you're going to do a lot of delevering here, but that that's going to accelerate in '09. If you could talk more broadly about your thoughts on the balance sheet over the next couple of years here?

Sure. I think clearly as we've -- as we've stated, we're moving from development to harvest mode. We're also very much moving in terms of overall consolidation and cost reduction to increase margins and I think that where we've laid out a plan, we've executed against that plan in terms of the $6 million of costs out, we've got $2 million that will be completed that we've put in in the plan for next year, and we will execute the balance of the cost savings across the business. So I think it's fair to say that from a leverage perspective, we expect to move over the next few years, harvesting the additional EBITDA from the landfill investment that we've already made and taking costs out of the business.

And I think taking costs out of the business is not a real fair perspective. I think going to waste shed management is also going to allow us to get closer to customers, do a better job from a customer service standpoint at the same time that we take costs out of the business as well. So it's really two-fold, but clearly we're in a harvesting mode and that's clearly the perspective that we have. We need to obviously harvest the value from the investment that we've made over the last few years and that in itself will really help us to delever the balance sheet. I think that performance also should be -- should be well received from an equity perspective as well. So I think clearly when we execute the harvesting, I think we will be -- we will be well positioned from a balance sheet perspective.

Okay.

That's clearly the mode that we're in now. That is what we're competent executing against, is to get to free cash flow positive this year, continue that trend, take cost out of the business, and improve the margins.

Sounds good. You indicated I think in the past that Southbridge is about a third of the $24 million in incremental EBITDA from the new landfills. Did you say how much Chemung is? I think that's the one that you said is in the budget for this year. Or could you comment or elaborate on any other sites that are a material component of that $24 million?

The -- that is correct with regard to Southbridge being about a third. I think for Chemung, it's about $1 million.

Not quite that high, but --

Yes, not quite $1 million in '08.

If you -- if you did the $24 million, if Southbridge is 33%, Ontario's about -- this is the incremental going up to 3,000 tons a day, which is under way right now, it is about 15%. Highland is about 10% and [Hakes] is about 10% and the balance are from a couple other facilities, including Juniper Ridge, so that's kind of how it breaks out.

Got you. One last on the volumes --

And just to clarify on that, Highland, as you know, we've gotten the Secor approval, which is the more difficult one. We're operating against that now and we're now moving against the minor mod, which is a relatively modest from an environmental standpoint, permitting hurdle. We have an excellent relationship with the town. Similarly with Southbridge we're engaging board of health and I think we're feeling good about that and certainly have done an excellent job building community support in Ontario and are engaging there. So I think that well over 60% -- 65%, 70% of the $24 million is very visibly on track and proceeding in a very positive environment.

Okay. Very well. One last one on the volumes. It sounds like you're pricing up the unprofitable or low-margin customers and waiting for the contracts on the ones that are under contract to expire so you can price those up, while the macro outlook seems like it's somewhat positive here in the spring. So with regard to the volume expectations, is it accurate to characterize the losses as attributable to the price for volume trade-off or the pricing up of unprofitable customers? What can you say on the volume outlook, economy versus strategy of trading up or pricing up that business?

Well, as I said in my remarks, over 60% of -- 5.1% of the 5.8% volume decline, 5.1% of that is lower hauling -- hauling and transfer volumes, and over 60% of the 5.1% is a loss of hauling and transfer volumes that's associated with the strategic realignment in the southeast region around, away from the CND assets to the MSW assets. So, a fairly significant portion of that volume decline is associated with the strategic realignment in the southeast region. Certainly some of that obviously is the economy and the economic impact from the fourth quarter perspective, but a very significant portion of it is related to the effort that we went through in terms of the divestiture of the Holliston transfer station and eliminating the lower-margin business that we --

And Hardwick.

And also Hardwick as well.

Okay, thank you.

[OPERATOR INSTRUCTIONS] And we'll go next to Corey Greendale of First Analysis.

Hi, good morning.

Good morning, Corey.

On the repositioning in the southeast market, as I understand it, step one here was pulling some capacity out of CND and repositioning that capacity for the MSW market. Can you talk through the game plan from here, when you start to get more -- more volume in that MSW market, the timing of that, and what else it is that you're looking to divest in that market?

I would say that step one was really getting Southbridge positioned to become an MSW landfill. Step two was building based on that -- on that confidence, building and reorganizing our hauling operations around Southbridge so we could take advantage of that. Step three was to look at those assets which were not long-term assets in that marketplace, i.e., Holliston and -- or AEI, which is a long haul -- hauling business, which we essentially shut down, and to rationalize those assets, sell them, swap them, or whatever, which we've announced. And then step four is to complete the permitting and use our main asset there around Southbridge to densify our MSW routes and completely enter the MSW business as opposed to the entry business, which was CND, which is really what -- all that we could enter back in 2000 when we chose to enter this market. I think we're actually kind of in step three of a six-step program and are well positioned -- assuming that the permitting at Southbridge goes as we expect -- to completely revamp that market and take the benefits of a more traditional MSW disposal strategy as opposed to CND processing, which is where we've been over the last three years as we've worked through our problems in converting the Southbridge facility.

Okay. So you're not going to start going after a lot more MSW volume until you've got the additional capacity at Southbridge and can internalize that volume?

Well, I think that -- I think clearly from a sales perspective, Corey, we've already begun that effort with revamping of the market,, moving to weight sheds. We've realigned the entire sales force there and we're currently have quite a bit of activity from the sales perspective on an MSW basis, which is an indication of what has happened from a roll-off standpoint in May. So clearly we will increase our presence from an MSW standpoint. That sales effort is under way right now to compliment the permitting process with Southbridge.

Okay. On the CapEx side, looks like you're looking for a bit less on the maintenance CapEx than you've had the past couple years. What areas are you getting the savings?

I guess specifically what -- the maintenance capital this year is about $60 million?

Yes.

And we were, what last year, about -- we were about the same last year, about $63 million, $65 million.

Yes, you had $65 million and $67 million the year before that.

Yes. Some of that may be CapEx related to sell development, because there could be a year where we have a little bit less sell development, so there could be a $2 million or $3 million swing in actual maintenance sell development from a landfill perspective.

I think the rest of it comes from facilities (inaudible) improvements as well.

Yes.

Okay. Where my question's coming from is just obviously the -- with the preferred getting taken out it increases the debt load, and just whether that's going to constrain your ability to invest in the business as you service the debt?

Well, certainly the changes that we've made in the capital structure and the flexibility that we've given ourselves, from our standpoint we should not have any issues in terms of maintenance CapEx. I think we've already indicated that, from a growth perspective, we're going to be limited in terms of growth capital over the next few years as we harvest the investments that we've already made. So I don't think that we'll have any any limitations in terms of maintenance CapEx, but clearly we've indicated that we're in a harvesting mode as opposed to in a development mode.

Okay, and one quick last one, if I could, just the timing of the $24 million. So if we add $23 million or something like that to your '08 EBITDA, would we expect that to be the number all else equal for fiscal 2010, or is that more the run rate you'll be hitting at the end of fiscal 2010?

I think the run rate at the end of 2010.

Okay. Thank you.

(OPERATOR INSTRUCTIONS) And Mr. Casella, we have no further questions, sir. I'll turn the call back over to you for any additional or closing remarks.

Terrific, thank you. In closing, I just -- I'd like to really emphasize what our focus is, and obviously we've talked about it consistently throughout the call. But just in closing, clearly we're in a harvesting mode to really harvest the significant value of our successful landfill development strategy. And, again, I think -- we pointed it out earlier, but clearly we're the only company that's developed disposal capacity in the northeast in the last three to four -- in the last ten or 15 years. That very clear success in terms of developing 65 million tons of disposal capacity, which is really the long-term sustainability of our cash flow, which really is a long-term cash flow sustainability for our franchise, I think clearly in that harvesting mode. Second, simplification of the existing business model to increase our margins. And then third, as we executed in the fourth quarter, divestiture and swaps of the lower-margin, under-performing businesses.

Clearly we're in that harvesting mode at this point in time; simplify the business, improve the margins, and reduce our overall costs. And, again, the fourth quarter is a clear indication of what -- what we can do there. We've had real success in terms of the divestitures, real success in terms of some of the combinations in terms of reducing costs, and we look forward to a continuation of that in '08 and '09. I'd like to thank you for your attention this morning. Our next earnings release and conference call will be in early September, when we'll report our first quarter '08 results. Thank you very much, everyone, and have a terrific day.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.