Casella Waste Systems Inc (CWST) 2008 Q1 法說會逐字稿

Good day, everyone and welcome to this Casella Waste Systems first quarter fiscal year 2008 financial results conference call. As a reminder, today's call is being recorded.

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

Thank you for joining us 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 will be discussing our first quarter fiscal year 2008 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 answer your questions as well.

But first as you know, I must remind everyone that various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the SEC's Safe Harbor provisions. Actual results may differ materially from those indicated by those forward-looking statements, as a result of various important factors including those discussed in our prospectus and other SEC filings. In addition, any forward-looking statements represent our views only as of today, and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change and, therefore, you should not rely on those forward-looking statements as representing our views as of any date subsequent to today.

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

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

Thanks Joe, and good morning, and welcome begun everyone to our first quarter '08 call. The purpose is to give you some insight into the performance for the first quarter. As usual, Richard will go through the details from a numbers perspective and Jim will give you an update on the development activity, and then we'll go, as Joe said through your questions. First, just an overview, from an operating perspective, we had very solid operating results for the first quarter, driven by cost reductions as well as pricing gains.

From my perspective, the biggest positive during the quarter was our execution against the plan that we had laid out in the fourth quarter. Our team was given clear direction to improve operating efficiencies and harvest cash flows from the landfill initiative. I think we've come together as a team and are executing against strategy. Core focus is to increase shareholder returns and repay debt with positive free cash flow. I think we've made significant progress on two key metrics. We've improved our free cash flow by $10.7 million year-over-year, and we increased our return on net assets by 70 basis points.

The results were strong on the year-over-year basis with the strength being driven by the following factors: Management's focus on operating efficiencies, bad weather didn't hamper our business like last year. The regional economy has, in fact, begun to stabilize. We competed the restructuring of our Massachusetts assets. We've eliminated the overhang of two non-performing assets and I think commodity prices and volumes were strong in the recycling business. Operating income was up $3.9 million, or 44.8% over the same quarter last year. EBITDA was up $6.2 million or 23.3% over the same quarter last year and EBITDA margins improved by 260 basis points. A little bit of color on the economy.

As we've talked about for the past year, the northeast economy has been soft, impacting the volumes in the region. The economic activity index in the region continues to show positive momentum, especially in Massachusetts market where GDP growth has outpaced the U.S. for the past few months. Our rollouts were down 2.2% year-over-year for the first quarter. Interesting though, another fact or statistic, the revenue per lift was up 2.6% during the first quarter as well. Commercial construction in non building project awards were up in the region year-over-year while residential construction awards are down. However, the increased construction contracts have not yet translated to higher temporary rolloff work on the year-over-year basis.

A little bit of color on price and volume. Solid waste volume was up 1% for the quarter, excluding the impact of closing the Hardwick landfill. This reverses a six quarter trend. Solid waste volume gains for the the quarter were driven at the landfills with tonnages up 13.5% or 122,000 tons year-over-year at the active landfills. Solid waste pricing was up 1.3% including the surcharge. Positive pricing at the hauling business was offset by lower third-party C&D and bud landfill pricing, while MSW landfill pricing was up slightly. About one-third or 44,000 tons of the lower priced third party C&D tons were taken to our Pine Tree landfill that has no annual capacity limit and will be permanently closed December 31st of 2009.

With regard to our revenue growth and sales programs, our collection pricing programs are working well. Our sales team is targeting the right customers at the right price and churning out the lower even negative margin customers. Year-over-year trend continues in a very positive manner. We increased the average revenue per new account by 5% and reduced the average revenue per lost account by 18.4%. The impacts are more meaningful if you look back to when we introduced the new collection pricing programs. Over the past two years, Bill Hanley and the sales team have increased the average revenue per new account by 31.5% and reduced the average revenue per lost account by 42.7%.

Our recycling business performed well with EBITDA up $2 million year-over-year for the first quarter. The EBITDA gains were driven by higher commodity prices, increased volumes, and lower processing costs. One of the most significant drivers in the quarter was a 14% gain year-over-year in plastics pricing per ton. Unlike fibers, we have no hedges in place for plastics, which led to higher revenue share for SCR during the quarter. Shawn and his team are working actively to established fort contracts to reduce the downside risk on the plastics commodities.

Operating strategy, just a brief overview of our execution against the operating strategy that we laid out on the June conference call. Plan focuses on profitable revenue growth, cost reductions, higher return capital deployment to generate free cash flow and increase shareholder returns. This year we plan to be free cash flow positive and next year generate over $20 million of free cash flow. As part of our storm tracker, we plan to use free cash flow to repay debt and ultimately get our debt to EBITDA below four times. A little bit about the landfill development plan. We continue to execute the remaining steps to capture the incremental 900,000 tons of annual landfill capacity and the $24 million of EBITDA that is currently in permitting at all of our existing sites. During the first quarter, we continue to work with a regulatory agencies and local governments on each of the permitting initiatives. Jim will run through an overview of the permitting process and the timeline for execution for each of these sites in detail in his part of the presentation.

A little bit of color with regard to the waste shed management plan that we had outlined and the cost objective in terms of eliminating $6 million of costs over the next 12 to 18 months. During the quarter we did complete the reduction of the southeastern and northeastern markets into waste shed management structure. This initiative will yield the $1.5 million of cost savings during the fiscal year and $1.8 million of annualized savings.

With regard to our Mitchell Madison sourcing program, we've received proposals for legal, engineering, temp labor, fuel, tires, and long haul transportation from that initiative. We've completed the process with regard to temporary labor and expect to save $450,000 annually from our $3.6 million spend. We'll give additional detail on the other categories as we finalize those contracts. I think, though, that it is clear from our perspective that we will be able to achieve the overall savings that we had laid out from Mitchell Madison from a sourcing standpoint of the $2 million that we talked about in the fourth quarter as part of the $6 million plan.

Also, the management team and our employees continue to focus on operating efficiencies from a safety training prospective. We are targeting $1 million of cost savings through operating initiatives during the next 15 months. Beyond our ongoing programs we're rolling out maintenance standardization program which utilizes transman software to schedule preventative maintenance, managed maintenance warranty claims and control inventory.

Also, with regard to capital deployment and divestitures. Our deployment of capital has resolved from a focus on growth capital investments to a focus on debt repayment through positive free cash flow generation. We're committed to divest, swap, restructure, or close underperforming and non strategic assets after successful sale of the Holliston transfer station in April, we still have roughly $11 million of annual revenues that we're still working actively on today. We plan to have this process completed in the next 12 months and use the proceeds to repay debt. Just a brief overview on our announcement last night with regard to Fulcrum, brief explanation on our Clean Energy collaboration with Fulcrum, Fulcrum BioEnergy is developing a platform of existing technologies to convert waste into liquid biofuels. We're collaborating with Fulcrum to provide processing expertise for the waste-derived fuel and we plan to provide waste as fuels for the program. Like to stress that we're not investing any capital in this Fulcrum -- we're adding our ability to source the fuel for the project. It's an exciting project into the extent it's successful we'll have very interesting implications a go forward basis for our industry. With that, I would like to turn it over to Richard who will go through the details of the numbers.

Thank you, John. For the quarter ended July 31, 2007, revenue increased $11.7 million to $152.4 million or 8.3%. Internal growth for the quarter reflects higher pricing across the hauling and transfer operations in the solid waste segment. However, landfill prices showed a net decrease while MSW prices held firm or increased, C&D prices saw a 5% drop. Our strategy is to generate free cash flow at the risk of some price decline but only in the C&D market. And of course we have a limited time remaining to fill our Pine Tree landfill so we're driving C&D volume at that site. Transfer station volumes were flat and hauling volumes were down slightly while total landfill volumes increased.

The mix change at the landfills noted last quarter continued. With MSW volumes down very slightly and C&D and bud up to more then compensate for the decline. The realignment in the southeast region after the sale of the Holliston transfer station has moved some transportation revenues from the southeast to the northeast region. FCR's volumes increased and commodity prices again moved upward including plastics. The fiber increases were partially offset by the hedging program put in place to minimize volatility. The increase in surcharges are up to 51 basis points. So revenue for the quarter breaks down as follows. Solid waste, $114.8 million, FCR $29.8 million, and other $7.8 million for a total of $152.4 million. Gross margins for the quarter were flat year-over-year. The gain this quarter for the lower transfer and hauling volumes were offset by lower operating costs so most of the expense categories decreases. Direct labor and direct operating costs were down across the board. Maintenance costs were up slightly due to higher parts and container repairs. Partially offsetting the solid waste improvement, was purchased material of FCR which were up as a percentage of revenue by 2% mainly due to the higher cost of materials year-over-year. Purchased materials prices were again up over 80%.

Administration expense decreased in the quarter as a percent of revenue year-over-year by 270 basis points. And in dollars. Most categories of expenditure showed declines. In part due to the continued focus on this area and easy prior year comps. The communications and marketing expenses front loaded last year did not reoccur, bonus accruals were down, bad debt provision was normalized plus we had nearly a $300,000 bad debt recover Roy. Legal and consulting expenses were all down. Moving onto EBITDA, at $32.8 million, EBITDA was up 23.3% versus the prior year and it breaks down as follows. Solid waste, $26.5 million, FCR $6.0 million and other, $300,000 for a total of $32.8 million. Solid waste EBITDA was up from the prior year and margins increased by 270 basis points driven by lower transportation costs as lower G&A.

FCR's EBITDA improved by $2.1 million and margin increased this quarter by 310 basis points back to a more normal 20.2%. Average selling prices were up this quarter as outlined previously as were volumes. Tons shipped were up 9%. A large component of the EBITDA increase was the net price increases, net of the hedge effect cysted by the higher volumes. Invariably operating costs were also down $0.55 a ton. Depreciation and amortization expense was up $2.3 million year-over-year.

Depreciation was up $450,000. And annual amortization showed a large increase over the prior year arising mainly from the higher amortization rates of Pine Tree because of the shorter life agreed with the state that talked about on previous calls. The fact of amortization at Hardwick because of the closure was more then offset by higher amortization at Southbridge due to more amortizable tons at that site. Interest expense. Since the preferred shares were classified as a current liability in the balance sheet, based on our determination that the stock would be redeemed on schedule, GAAP requires that the dividend for the first quarter be reflected in the financials as interest expense rather then a dividend. Accordingly, $925,000 was classified as interest expense. Other income expense. The main item included in this caption is the reversal of the balance of the provision for the main energy settlement of $2.1 million which provision was set up when we purchased KTI. All of the litigation has been settled and for less then originally estimated. Also included in this caption is income from the net assets under contractual obligation.

These assets were not deemed to be a true sale at that time of the transaction because the risks of ownership had not transferred to the buyer. We booked essentially as a receivable, the amount we've deemed retailable which were less then the full amount collectible. The amount recorded in the balance sheet is now bean repaid so the cash received is now reported in income. The minimum amount still owed the company under the notes are $2.9 million. Income taxes. The tax rate, which was very volatile this last year continued that trend in the first quarter. The effective rate came in at 30.9% higher then guidance due to the reversal of the main energy provision which attracts a higher tax rate as well as the classification of the preferred dividend as interest. The tax rate for the remainder of the year is expected to remain in this range.

So for the quarter, net income was $1.7 million or $0.07 per common share including the benefit of the main energy provision reversal amounting to $0.05 a share. Moving onto miscellaneous statistics, the average interest rate for the quarter increased slightly to 8.9% including amortization of financing costs. Net of these expenses, was 8.4%. In August, the company entered into three further interest rate swap agreements for a notional amount of $105 million expiring in May, 2009. Availability on the revolver at July 31st was $229 million after taking into account $49 million of our legal standing and prior to the redemption of the preferred shares. After the redemption, availability would decrease to $154 million.

At the end of the quarter, our debt to EBITDA ratio calculated for the bank providence was 4.2 times and interest coverage was 3.2 times. The preferred shares were redeemed effective August the 11th for $75.1 million utilitying the fund for the revolver. And capital expenditures for the quarter amounted to $22.4 million. Free cash flow showed a $10.7 million increase for the quarter, a significant improvement over last year due mainly to lower capital expenditures. The negative working capital change was driven by the higher accounts payable outstanding at April the 30th, which reverted to a anormal normal level. Accounts receivable were up from the higher revenue in July versus August -- versus April, excuse me, while DSO was up from last quarter by one day. We remain on track to deliver positive free cash flow this year in the $5 million range and expect that to increase to $20 million plus next year.

Finally, a few words on the outlook. The year has got off to a good start, but we do not plan to change our guidance at this time. If the second quarter comes in well, maybe we will revisit guidance at that time. However, when we look forward to next quarter, we should remember that last year in the second quarter we had a $1 million pickup at the EBITDA line from the finalization of the accounting for the Brockton project. Also, we expect G&A, which benefited from lower bonus accruals and bad debt recovery this quarter to increase as a percentage of revenue. But for the year we do expect G&A to come in at a lower level of the guidance range at mid 13% subject to our normal fluctuations.

Last year G&A was at 13.7% of revenue. We are now targeting 13% or better this year. With that, I will hand it over to you Jim.

Thanks, Richard, good morning. The recent subprime mortgage issues and doubts have added yet another burden to the New England economy, which was in the recovering mode.

Vermont and Maine remain soft and both those states continue to struggle more deeply then Massachusetts and New York which is beginning to demonstrate strengthening activity. Generally it's low growth throughout the region. Disposal income is being affect -- as John indicated. The overall dodge indexes are slightly indicating some growth in New England. We're not seeing it completely aligned with all of our results yet, but in line with that we have seen MSW market flows generally be steady, both in volume and in pricing. As Richard noted, we have worked hard to harvest additional C&D material, particularly in the northeast where we are up quite a bit in volume. Understandably, with a reduction in price of about 5.6%.

Our overall volumes, third party volumes are up 13% at the landfills and a majority of that or almost all of that is C&D as indicated. Internalization rate, slightly improved 57.1% 56.1, driven primarily by improvement in the western region which offset small declines in some of the other markets. Again, driven by the reach for materials outside of our own trucks understood to drag the landfill volumes. The overall landfill margin increased Q1 '08 versus Q1 '07 materially 46% versus 38% and this is understandable as we have fixed cost and we drive higher volumes, we expect to see these landfills run where they should be running.

On the development front, as John indicated, back in 2003, with identified six major landfill expansion programs, Ontario, Southbridge, Chemung, Hyland, headaches and Juniper Ridge where we would aim to develop over 900,000 tons per year of additional capacity. Each of those facility we've aim to have plus 20 years of long-term facility capacity and through the harvesting of this expansion we expected to be able to develop that capacity at an attractive development cost $4 to $5 per ton. We believe that we're very much on target for that program and as we harvest those tons, we believe that they will yield approximately $24 million of incremental EBITDA over the next year and a half to two and a half years. A detailed report in each of these facilities, the Ontario facility we're targeting for 300,000 tons of that 900,000. We've received preliminary approval at the local level expected in October to receive a negative declaration from Ontario county and have on target Q1 2009 for that facility to be accepting at its full volume relative to this plan.

Southbridge, last quarter made excellent progress in negotiating a final agreement with the town of Southbridge. That particular facility was targeted to go up to 405,000 from 185,000 and would be a 220,000 ton increase and convert it from C&D to MSW. We have November board of health meetings scheduled and we're hopefull that by Q4 '08 we can begin to not only have a permit to begin but to realize additional tonnage in that facility, up to 400,000 tons. Hakes, is the third facility on the list there, we have a minor mod of 150,000 tons. The application has already been submitted. We expect the application to be deemed complete within the next 60 days and we would expect early in calendar year '08 to actually receive the permit. Even though it's targeted for Q4 '09 we may be as early as a year early to that schedule. Hyland we're on track to submit the minor mod in December for 153,000 tons. There will be a required title five air report and we've targeted Q2 '09 for that to come on line.

Chemung county is 160,000 tons with an initial increase from 120 to 108 scheduled for calendar year '08. We're running about six months late on that schedule and as I've indicated before these projects tend to have their own lives with some being ahead as in the case of Hakes. Overall I would say we're actually right on target or maybe slightly early to the overall plan that we've been working against and that John has laid out. Juniper Ridge and Pine Tree we've completed those discussions and we reported on that last quarter and so we're in a good position for Juniper Ridge to replace Pine Tree and be the major facility for us in Maine.

On Maine Energy, power contract, as you know, we came off of our power -- long-term power contract in June of this year. While that contract continues into 2012, it continues at market rate and so we have elected to terminate that contract and are in the process of negotiating a new contract, the advantages of the new contract over the old contract is that principally the old contract had us buying our house loads at a high retail rate of $0.098 or $0.10. The overall old contract has an effective rate of about $0.6 and we believe we'll be able to have a new contract in that ballpark within the next 60 days, which will improve our performance in that area because for the last month or two, since the termination of that contract we've had to kind of live with the worst of all worlds which is the current market contract, buying house loads at retail rates.

Move onto recycling and other sustainability programs, FCR had another good quarter. EBITDA margins improved over Q4 '07 and material EBITDA improvement in terms of actual absolute numbers. Pricing is up. Volume is up 11%. Commodity pricing P&P is up 4%. Natural HDP is up 2%. Pigment HDP is 14%. Aluminum was steady. O&P softened a little bit $5 to $10 a ton and OCC remained very strong and may increase somewhat as we go forward. Overall recycling tonnage are off and shipped 11% with an average commodity price increase of about 28%.

Contract renewals we've did not a good job this quarter. Memphis we've extended for five years. Greensboro's been extended for four years as has Camden. We're in the final negotiations with Stratford for a ten year extension there and we've seen very good response to single stream pilot program rollouts including Boston, where we've seen increase in recycling of up to 48%. We expect to roll out recycle bank in Massachusetts this fall and we're anxious to see how that will effect the marketplace. Results in Wilmington, Delaware for the first five months are nearly 40%. For FCR the variable cost was down slightly about 1.5% and we monitor that closely because variable costs is an important element of the recycling business and on a forward forecast basis commodities look to be steady if not to slightly gain in pricing.

Finally, U.S. Green Fiber it continues to seek its bottom. We don't believe it's there yet. We believe the bottom will be reached within the next six to nine months and there will be a slow recovery sometime in mid to late 2008. Good news is that the new home family formation numbers remain strong, but probably the biggest issue is affordability and the recent subprime mortgage issues have obviously discouraged a lot of financial packages that had been out there. However, retail business remains very strong and has been counter cyclical to the contractor business and although the contractor is down 24%, the overall business has only been down 25% through this housing.

Just as a note for understanding when we're in the middle of this contraction, this is a business that ran in calendar year '06 at 18.7. In calendar year 2007 we forecasted EBITDA somewhere between 9 and $11 million and will be cash flow positive and we believe in a normalized business cycle this business runs 16 to $18 million on a go forward basis bis. With that, I'll turn it back to John.

I think at this point, we'll open it up for questions.

Thank you. The question and answer will be conducted electronically. (OPERATOR INSTRUCTIONS) And our first question will come from Scott Levine with JPMorgan.

Good morning.

Good morning, Scott.

Someone talk a little bit about the solid waste pricing. Numbers down from the last few quarters here anecdotally you're saying you're seeing good tractions in the initiatives you have on the collection side of the business, but wondering if you could put that number into some context and think about what we should expect going forward?

Well, clearly overall pricing was up 1.3% which is down a little bit. I think it's reflective from an economic prospective on a go forward basis, I think it's probably steady as you go. I think as we indicated, the economy seems to be stabilizing as opposed to really beginning to feel the benefit of some of the activity from a dodge report standpoint. We've not yet begun to feel those impacts and as we indicated rollout pulls while rollout polls are down about 2.2%, the actual price per lift is up slightly. So, I think we can probably expect to see more of the same on a go forward basis, Scott some.

And as far as the gross margin leverage to that. Looked like it was flat year-over-year. Should -- if we see continuous success with those initiatives start to see a bit of year-over-year expansion?

I think that there is a couple of different factors there in terms some of the impacts from purchase materials et cetera, I think there have been some positive impacts from a cost prospective, but I think as we go through the process and execute the plan, we should see some improvement in the gross margin.

Okay. Turning to SG&A, looks like the efficiencies are greater then you expected. Hoping you might be able to elaborate a little bit more about where the Delta is versus your initial expectations which is enabling us to come in 50 basis points as a percent of sales where you initially expected.

Yes, Scott. I think in the the quarter we did have a couple of benefits. First of all we had a very easy prior year comp because if you remember last quarter we had a number of communications and marketing expenses that did not reoccur. We also had lower accruals this quarter and bad debt normalized substantially versus the prior year and also sequentially. So, everything was a green light this quarter and that's why I gave some guidance on the outlook with our expectation that as a percentage of revenue, G&A will increase next quarter and the absolute dollar number will also increase closer to the $19 million range then the $18 million range.

We still expect on an annualized basis that we'll be better then our plan and on an overall basis and some of that has to do with reductions in cost from a legal -- from a consulting prospective, from a marketing communications standpoint and I think those main areas we're going to see gains. I think the other activity that is on going that we we'll see benefits from is the sourcing program that we're working through with Mitchell Madison as well.

Got it. One last one quickly on the initiative with Fulcrum. I know you said you're not investing any capital on that. I was hoping you could elaborate about the plans. How many facilities what are the economics potentially look like are you going to get paid for the trash. How do see that am playing out.

I think at this point in time, as we go through the process over time, we'll begin to put more detail to answering all of those questions. At this point and time I think clearly what we've laid out is the level of detail that we want to give. We're in the early stages. We'll begin to go through the process from a permitting prospective and as we begin to evaluate and look at technologies, we'll be able to answer those more detailed questions in terms of what it's going to mean from a commercialization standpoint.

I think the important aspect is on a go forward basis we see waste as a resource. This is another example of that. We think that there is real substance to the opportunity. We're very excited about the relationship with Fulcrum and as time goes on as we begin to define the permitting and really begin to define better the costs and the technologies associated, we'll be able to answer those detailed questions.

Great, thank you.

Our next question comes from Corey Greendale with First Analysis.

Hi, good morning,.

Good morning, Corey, how are you?

Good, how are you.

Perfect.

Great. You gave a lot of detail and thank you for that. Part of this might be repetitive and sorry if I missed it but I was hoping you could just give a little more detail on the impact specifically of Pine Tree taking more volumes there on the volume growth in the quarter and on the price growth in the quarter.

Yes, sure. On an overall basis, the tonnages were up 13.5% or 122,000 tons. Close to 50,000 tons of that were lower third party C&D tonnage actually that went to the Pine Tree facility. As we indicated, that facility will close in '09. So we did have pricing deterioration on this third party C&D but we also -- the MSW pricing actually increased slightly. So we increased tonnages, the substantial aspect of the increase in tonnages was related to the C&D and a portion of that was related to driving the tonnage at Pine Tree.

Okay. So would that be Pine Tree basically be the reason that volume comparison was so much better in the July quarter then the April quarter?

A big portion of that is driven by Pine Tree.

Yes.

And so it wasn't -- given that you talked about moving away from the C&D market in Massachusetts and that Southbridge hasn't ramped up yet it's not like that part of the market, the southeast market has ramped up volumes the MSW side. You have to wait for Southbridge to get the conversion for that to happen, is that right in.

That's right. If you want to look at it from a planning standpoint, Pine Tree which will run until December '09 will have a nice segue with the startup of Southbridge and ramping up the volumes and stepping up conversion to MSW and then increase the volumes to 405,000 tons there. So, that will be a nice step up in overall plan as that grows.

Could you possibly take a stab at what the solid waste internal price growth would have been if it weren't for taking those lower price volumes at Pine Tree?

We don't. We maybe able to do that offline. We don't have it, I don't think react at the -- do you have it Richard? Maybe we will do that off line with you later on.

Okay, I'll follow up. Just on that decision to maximize free cash flow taking C&D volume at lower price. Is that entirely a Pine Tree phenomenon or are you doing that elsewhere in the system.

That's entirely -- it's really more a Pine Tree phenomena because of the closure of the facility in '09 as opposed to anywhere else.

Well it's an overall company drive for free cash flow and so and so we're looking to drive free cash flow where we can and Pine Tree is a place that there's a big opportunity. So naturally becomes a good target.

And for Richard, if I could, the, looking historically to get some sense of what to expect sequentially in Q2. Historically there was a more modest step up in EBITDA. Sequentially Q1 to Q2 there was a bigger step up but there was none recurring stuff in Q1 and Q2 and the years before last year would that be the best thing to look at as kind of a benchmark to what to expect this year?

I think so. I don't think you'll see that -- a big stepup in the second quarter. I think sequentially. I tried to explain that our G&A has got some big benefits this quarter that won't reoccur and so I think that is the best approach.

Also the benefit that we got from the Krofton facility in the second quarter last year as well.

So all else equal, fiscal '05/'06 we saw 2 million increase sequentially and so something more along those lines then the 7 million was last year?

I think it's more likely to be flat from quarter to quarter. We had a very good first quarter this year and taking into account the one time items I mentioned is directionally more flat.

Okay. The absolute dollars you mean flat sequentially.

Yes.

Great, I'll get back in the queue. Thank you.

Our next question will come from Eric Prouty with Canaccord.

Good quarter, couple of detailed questions. First on green fiber with the real slowdown in the business there, is that going to have any potential impact on your either recycling volumes or the pricing you might be getting out of the recycling? Then I have another question.

Interesting enough. While the housing market has been obviously in the very deep corrections, the O&P pricing, which is much more importantly driven by probably export sales has actually risen. So that's put burden on the U.S. Green Fiber because a big part of their cost is O&P and I don't think the housing market will have any impact on O&P pricing and the current market is supportive of that. Long-term, I think the O&P market continues to be primarily driven by export demand and we see that being continuing to be strong.

So are you shifting volumes away from green fiber and funding ready markets for it?

No, wherever we can we're shipping volumes to green fiber because it's part of our strategy, but obviously not all of our FCR facilities are located in the same markets where U.S. Green Fiber. So U.S. Green Fiber is not having to buy fiber from third parties. They're in a active harvest and collection program themselves and I believe they're going to be able to significantly improve their position within their O&P market and do a better job of purchasing paper on the go forward basis, but there's a lot of work there and a lot of opportunity for them to do that, balance the export pricing problems that curves in the O&P market.

Great and then finally on some of the landfill gas to energy projects that' were outlined in the last call, can you just give us a little update on where those stands. Has ground been broken at the facilities yet, and expected timing, and maybe also what you're seeing on the northeast as far as any credits or incentives, kind of the demand for this sort of green power and what your outlooks should be for that part of your new business.

I'm glad you asked that question. We probably should have updated you but we forgot. All of those projects are moving ahead Hyland, the construction project I believe was signed this week and we had just finalized the final interconnect and three ring bus arrangements, both with the local community that's acting as a host and the utility. So we expect to have that under construction this fall and it would come online early in calendar year '08. Maybe as early as impact Q4 '09 results. We're completing Chemung county and will likely start construction on that in the next few months. We're in a similar situation at Southbridge and expect construction there shortly. Pine Tree is under construction, probably 50% done and we would expect to have that completed and operating early in calendar year '08 and again to have an impact on result.

Overall we think that the landfill gas energy market is one that is a good place to be for a number of reasons. First, which you mentioned, theres a very robust regiment in the northeast where you can harvest up to $0.04 to $0.05 for renewal energy credits and that makes generating interesting through this particular channel to be a good business to be in. Second, we think it's the right thing to do from a gas collection and nuisance and odor and we've long had a philosophy around here to going to a zero discharge model with our landfill and so we overdrive our collection systems in order to put as much vacuum effectively on the landfills as possible and eliminate future emissions and third, there's huge opportunities from an overall business standpoint to continue, not only harvest our own landfills, but look around in the New England market where other landfills are being poorly managed and to apply our expertise at those opportunities and we think some of those will come available in the next 14 months as well. So, I think it's a good market. It's the right market relative to sustainability and renewable initiatives. It is strongly being supported from a pricing standpoint and we believe that will continue.

Great thank you.

And our next question will come from Leone Young with Citi.

Good morning, gentlemen.

Good morning, Leone.

Make sure I'm clear on this. Based on your comments, it seems to me that your characterizing the pricing situation as still supportive and not really reflecting a change in the competitive situation rather in your case it's really Pine Tree and mix, is that a fair statement?

Yes, it is. Yeah, that's right on target Leone. .

That's good to hear. Also, along those lines, though, you mentioned Pine Tree was really one off. I assume you haven't changed your philosophy at all vis-a-vis free cash flow and going for pricing growth?

Not at all. I think clearly MSW pricing increased slightly in the quarter and the only place where we saw any decrease was as we indicated on the C&D side. So --

Actually transfer pricing increased 2% so the downturn was just in the C&D situation.

Yeah. So there's no change in philosophy or prospective other then the issue that we talked about with regard to Pine Tree.

And the competitive environment. What are you seeing your competitors do?

The competitive environment remains the same. I think there's the same prospective. I don't see any changes from a competitive standpoint relative to pricing at all.

Thank on that. And congratulations on the execution on the cost side. Did you just remind me what is included in the guidance in terms of -- is it $2 million of the $6 million you've targeted?

That's correct.

Thank you very much.

You're welcome Leone.

Our next question is from Bill Fisher with Raymond James.

Good morning.

Good morning, Bill.

Just to follow up on the pricing. You mentioned the rolloff collection pricing was up 2.5%. Was commercial up nicely as well.

Yes it was. Both front load and rear load were up as well.

In that same roll off range.

We're also pushing out and Bill Hanley and sales team have also done a really good job of looking at our overall customer base, pushing out volumes that are, in fact, negative. So there's a bit of churn that is really self inflicted from a sales prospective that's improving pricing across the board. We've also improved pricing at our major accounts business as well. So across the board we continue to drive the pricing and I think we're really beginning to see fairly significant success in terms of the overall programs that have been in place for the past couple of years. We expect to see, I think, continued pricing, positive both from a rollout prospective as well as from a real load and front load prospective.

And just a couple of minor things for Jim. You did get the initial Hyland expansion. Is that up to capacity now or the limits that you have?

Well the Hyland capacity is for up to 153,000 tons. We're currently at 312 and that could take you to 465 and expansion beyond that would require full expansion under the New York regulatory scheme and so we think that is properly match together market.

Okay and then I know the Merck energy went off contract I didn't quite follow the household and retail rates. You were touching on that. Can you follow up on that.

The overall previous contract had two features to it. We sold gross power, which means than 20 to 22 Megawatts of everything we produced and we sold that at $0. 082 putt we were required under that contract purchase our house loads which were about 4 megawatts at retail and retail was almost $0.10, so when you look at the actual effective rate, it looks like a $0.063 rate. That contract, while it runs to 2012, went from a gross sale price of $0.083 cents in June of '07 to a market rate of $0.063 cents. And so for the last five years it's at market. We thought that wasn't favorable, particularly because we're buying house loads that retail so we have terminated that contract and we're on an interim contract. We're negotiating a new contract. The new contract will have is us selling net, which will be about 18 mega watts at $0.063. We'll have a better then what the interim contract and certainly better then the long-term contract but until we get that done, which we expect to get done in the next 30 or 60 days, we have had some slight volatility off of where we have been historically.

Perfect. Thank you.

Our next question will come from [Matt Villaroso] with Barclay Capital.

Nice quarter. I just had a broad question about the business. I'm trying to better understand the southeast region there. Internalization in the 27% range. How far are you hauling the garbage from that area and is that a profitable business?

Well, I think that one of the things that we're doing with regard to the southeast is restructuring that business and really building our business around the Southbridge facility. So you'll begin to see, as we execute the strategy, convert Southbridge from currently, which it is C&D to MSW and as Jim said in his discussion of the development side, you will begin to see the internalization rate move up and you will begin to see obviously much better performance from the southeast region. The divestitures that we had last quarter were in the southeast region. We're rationalizing that business. We moved to the waste shed and you will continue to see improvement in that region as we develop around the Southbridge asset.

And do you see other opportunities to divest in that region?

There are some smaller opportunities from a divestiture standpoint that we're looking at that's coupled with the $11 million of revenue that we have let of the $22 million that we talked about in the fourth quarter.

Okay. And then just lastly, just to clarify so I understand the taking out of the preferred. So basically, in August, you just borrowed against your revolver so pro forma your net leverage would be closer to 4.6, am I thinking about that right?

You're correct that we did take them out using the revolver but the bank covenant and calculation the debt to EBITDA ratio I provided you already assumes the preferred shares were treated as debt so that leverage number would not change.

4.2%. That's right and the preferred shares were included as debt in that calculation.

That does appear to be all of the time we do have for questions. I would like to turn the call over to Mr. John Casella for any closing or additional remarks.

Thanks. In closing I would just like to emphasize that we will continue to execute against the plan that we laid out in June. First harvesting the significant value potential of the successful landfill development strategy over the last few years. Second, simplification of the existing business model to drive cost out of the business, and third, divestitures and swaps and restructuring of the lower margin or underperforming assets. Thanks again for your attention and your time this morning. Our next earnings release and conference call will be in early December when we will report our second quarter '08 results. Thanks, everyone and have a great day.

That does conclude our teleconference for today. We would like to thank everyone for your participation and have a wonderful day.