Casella Waste Systems Inc (CWST) 2008 Q2 法說會逐字稿

Welcome to the Casella Waste Systems second quarter fiscal year, 2008 financial results conference call. As a reminder this call is being recorded. At this time I would like to turn the conference 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, our Senior Vice-President and Chief Financial Officer, and Charlie Leonard our Senior Vice President for Solid Waste Operations. Today we'll be discussing our second 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 tables section of our earnings release which was distributed yesterday afternoon and is available in the investor section of our website at Casella.com/investor. Now I will turn it over to John Casella who will begin today's discussion. John?

Thanks, Joe. Good morning, everyone, and welcome.

The purpose today obviously is to give you some insight into our second quarter results. Before we go through that, though, I'm sure most of you saw the announcement in a press release last night that Richard will be retiring in January. Richard will plan on going through the numbers as usual, and then he will let us know how he's going to spend his time in retirement. Also, Jim will go through and give an update on the development activity, and then as usual, we'll answer your questions.

Now for the quarter results. From an operating perspective, we had a great second quarter driven by pricing, commodity pricing, pricing programs, commodity pricing and cost reductions. During the quarter we continued to execute well against the plan that we had laid out in the spring. The team has given clear direction to improve the operating efficiencies. Harvest cash flows from the landfill initiatives, and they are executing very well against those objectives. Our core focus remains the same,increase shareholders returns, repay debt, increase free cash flow. We made solid progress on two key metrics. We improved free cash flow by $4.7 million year-over-year, and we increased our return on assets by 70 basis points. Excluding the impacts from the final accounting for Brockton closure project in the second quarter last year, operating income was up $1.4 million or 10.1%, same quarter over last year. EBITDA was up $3.5 million or 10.9% over the same quarter last year, and EBITDA margins improved by 60 basis points. From a price and volume standpoint, volume was up 1.2% for the quarter, excluding the negative impact of closing Hardwick and Brockton facilities. This certainly continues the positive -- last quarter's positive trends.

Solid waste volume gains for the quarter were driven at the landfills with third party tonnages up 28% and overall tonnages up 19% or 165,000 tons year-over-year at the active landfills. Solid waste pricing was flat year-over-year excluding the surcharges, positive pricing at the hauling business was offset by lower third-party C&D, Bud, and MSW. pricing. As with last quarter, about one-third, approximately 60,000 tons of the lower priced landfill tons were taken to our Pine Tree landfill that has no annual cap and will be closed in 2009. The economy, just a little bit with regard to the economy. The northeast economy remains quite soft, impacting seasonal and permanent collection volumes, mostly noticeable from a roll-off perspective. We believe that the economic data suggests stabilization in the northeastern economy, however, we've only seen slight gains to flatness on the year-over-year basis. It generally appears, though that the brunt of the downturn was felt in the northeast last year, and things have certainly begun to stabilize. The construction slow down and soft economy continues to negatively impact our collection business. And as I said, most significantly from a roll-off standpoint. Our pulls are down slightly at 3.5% on a year-over-year basis.

Actually, our recycling business performed well with EBITDA up $2.4 million up year-over-year for the second quarter. The EBITDA gains were driven by higher commodity prices, increased volumes and lower operating costs. One of the most significant drivers in the quarter was a 31% gain year-over-year in plastics pricing. Unlike fibers, we had no hedges in place for plastics, which led to higher revenue share for FCR for the first quarter. Again, we continue to work to establish four contracts to reduce the downside risk there.

A little bit in terms of the operating strategy that we had laid out in the spring. The plan focuses on profitable revenue growth, cost reductions, and higher return capital deployment to generate positive free cash flow and increase, obviously, returns. The year we plan for this year we plan to be free cash flow positive $5 million to $8 million, and next year double that free cash flow. Recap against the execution from a planned standpoint; during the quarter we made great progress towards achieving our landfill development goals. In September we received the annual permit increase at Hakes for 150,000 tons. In October we received minor modification for a 300,000 ton a year increase in Ontario. The permit increases represent roughly one-half of our target in the annual capacity increases. Both in Hakes and Ontario permits were issued about nine to 12 months earlier than anticipated. Great news because the regulatory risk is gone. However, our managers and sales force now need to obviously ramp these facilities up during fiscal '09. In light of -- also, it's important to recognize, in light of the current economic conditions, traditional seasonal increases in volume during the winter and the lead time required to contract new volumes we currently do not expect to yield meaningful gains from these expansions during this fiscal year. We plan to ramp up these facilities during the 12 months of fiscal year '09. The other expansions are on track as well, and Jim will give some more detail on those through his part of the presentation. We continue to move forward with South Bridge and the other projects as well. To complete the development work our sales team has built also a tool to effectively source and price volumes to the expansions. Basically that tool has enabled us to really understand the movement of all waste. So with the current softness in the economy we plan top ramp up the facilities, as I said, in a thoughtful way to maintain market pricing and achieve our goal of adding the incremental $22 million of EBITDA.

Again, additional recap, we are making good progress against our plan to eliminate $6 million of costs from the business over the next 12 to 18 months. Again, a plan that we had laid out during the fourth quarter and first quarter of this year. Fourth quarter of last year and first quarter of this year. The strategic sourcing initiative is moving forward as well. Mitchell Madison recently completed the RFP process on engineered services, and has identified about $400,000 of savings. We've also received proposals for tires, fuel, legal services, and have identified another $800,000 of savings. Including the 450 that we had already talked about in the first quarter this is roughly $1.6 million of the $2 million of targeted save that is we had outlined in the first quarter. We're still working on our long haul transportation piece and expect to have those proposals by next quarter.

In March we had laid out the plan also from a divestiture standpoint. Just to give you a little bit of an update in terms of where we are there; the plan that we had laid out was to divest, swap, or restructure or close underperforming non-strategic operations. With the sale of the Buffalo facilities in October, and the Holliston facility in April, weave divested approximately $20 million of the $22 million that we had had projected of annual revenues from the low-margin operations that don't fit from a long-term strategic standpoint. We've also -- so consequently we've substantially completed the divestiture program that we had laid out. And we're also continuing to take a look at our business units and determining if there are any other opportunities that will also increase shareholder returns.

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

Thanks, John. I am happy to talk to everybody about my new fishing boat, as you suggested, but maybe we should talk about the results first.

For the quarter ended October 31st, 2007, revenue increased $8.9 million to $151.4 million or 6.2%. Internal growth for the quarter reflects slightly higher pricing across our hauling and transfer operations in the solid waste segment. However, landfill prices again showed a net decrease. While MSW prices were down slightly, average C&D prices saw a 5% drop. As John mentioned, we have limited remaining time to fill our Pine Tree landfill so we're driving C& D volume there to generate free cash flow. Other landfill material prices dropped significantly. That was mainly due to mix. On the volume side, transfer station volumes were up and hauling volumes were down slightly so they pretty much offset. While total landfill volumes increased. The mix change of the landfills noted last quarter continued although MSW volumes were up 6% this quarter and C and D and Bud increased 30%. These were more than offset on a dollar basis which is how our price volume measures are computed. By the closure of Hardwick and the non-reoccurrence of the Brockton true-up last year. Those two sites created a negative year-over-year volume variance of 2.1%. Without those two items, solid waste volume would have been up 1.25%, rather than down 0.85%.

Moving on to FCR; FCR's volume increased, commodity prices again moved significantly upwards including plastics. The fiber price increases were partially offset by the hedging program put in place to minimize that volatility. So, revenue for the quarter breaks down as follows--solid waste $111.8 million, FCR $32.0 million, and other $7.6 million, for a total of $151.4 million.

Moving on to gross margins, gross margins were down year-over-year 90 basis points. Again this quarter, the flat transfer and hauling volumes were offset by lower operating costs, so most of the operating expense categories decreased. Direct labor and direct operating coughs were down across the board. Facility costs benefited from settlement of property tax disputes at North Country and Maine Energy. Maintenance costs were up slightly due to higher parts expense. An offsetting factor was purchase materials at FCR which were up as a percentage of revenue 2.3%, mainly due to the high value of commodities year-over-year and consequently the higher payments to (inaudible). Purchased material prices were up 71%. General administration expense decreased as a percentage of revenue year-over-year 80 basis points and was flat in dollars. Bad debt, audit costs, compensation, legal and consulting costs were all down and were offset slightly by higher year-over-year bonus accruals.

Moving on to EBITDA;EBITDA at $35.5 million was up $1.8 million or 5.3% versus the prior year. And EBITDA breaks down as follows-- for solid waste, $27.9 million, FCR $7.5 million, and other, $100,000, for a total of $35.5 million. Solid waste EBITDA was down from the prior year and margins decreased by 90 basis points. However, in the prior year the close-out of the Brockton project generated $1.7 million worth of EBITDA on $2.1 million of revenue. Without that adjustment, solid waste EBITDA would have been up 800,000, or 20 basis points. Also in the current quarter, we converted MTS, the soils processing operation to a batch mode as well as cleaned up the site. Those actions created a negative expense variance of another $800,000. FCR's EBITDA improved by $2.4 million, the margin increased this quarter by 300 basis points to 23.5%. Average selling prices were up this quarter as outlined previously as were volumes. Tons shipped were up 1.4%. The major factor in the EBITDA increase was the net price increases; in other words, net of the hedge effect. But in addition, we reclassified to cost of operations the cash received from the net assets under contractual obligation,which I mentioned were about $640,000. Those assets were not deemed to be a true sale at the time of the transaction because the risks of ownership had had not transferred to the buyer. We booked essentially as a receivable the amounts we deemed realizable, which were less than the full amount collectible. The amount recorded in the balance sheet has been repaid, so the cash received is now recorded as a reduction of expense, and the minimum amount still owed the company are $2.3 million.

Depreciation and amortization; this expense was up $1.1 million year-over-year. Landfill 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 upon with the state, as we mentioned previously. The fact that was no amortization at Hardwick and Brockton was more than offset by higher amortization at some of the other sites.

Interest expense. As you heard last quarter, since the preferred shares were classified as a current liability on the balance sheet, based on our determination that the stock would be redeemed on schedule, GAAP requires that the dividend be reflected in the financials as interest expense rather than a dividend. Accordingly, $925,000 was classified as interest expense in the first quarter and $113,000 in the second quarter.

Income taxes. The tax rate continues to be very volatile and difficult to predict as we again saw this quarter. The tax provision is always computed on a year-to-date basis using year-end estimates of taxable income. So the quarter provision is adjusted to end up the correct year to date amount, hence, the benefit this quarter. The rate for the rest of the year will continue to be volatile because of the low level of booked income anticipated, but we presently expect to end up the year with a tax expense and a rate in the 60% range.

Net income for the quarter amounted to $2.8 million, or $0.11 per common share. In discontinued operations, as we announced previously, we've sold our Buffalo operations for net proceeds of $4.8 million. This created a backed loss of some $400,000 after tax. These operations had been somewhat of a drag on earnings and represent the substantial completion of the previously announced divestiture program although we continue to look at all of our operations to ensure they fit with our long-term strategy.

Miscellaneous debt statistics, the average interest rate for the quarter decreased slightly to 8.5%, including amortization of financing costs. Net of these expenses; it was 8.27%. Availability on the revolver at the end of the quarter was $155.6 million after taking into account $43.0 million of LCs outstanding. And our debt to EBITDA ratio calculated for bank covenants was 4.15 times. Free cash flow. Free cash flow showed a $4.7 million increase for the quarter, significant improvement over last year due mainly to lower capital expenditures and improved earnings. The change in working capital was consistent with changes in payroll and accruals offsetting while accounts receivable increased from hire revenues. We remain on track to deliver positive free cash flow this year in the $5 million range.

Now a few comments about the outlook. The second quarter came in a little better than expected, but we do not anticipate much year-over-year improvement for the third and fourth quarters. Earnings will continue to be depressed by U.S. GreenFiber which we had budgeted to break even. Their current forecast for our 50% of U.S. GreenFiber's income is now in the range of a $1 to $2 million loss. That's our 50% share. However, we do expect with revenue and EBITDA for Casella to come in at the high end of ranges given in guidance. In other words, that was for revenue, $560 to $580 million, for EBITDA, $114 to $118 million.

Finally, on a personal note, you read in the press release and John mentioned, I shall be retiring in January from active business life. The last seven and a half years have been full of interesting challenges and opportunities. I am exceptionally proud of our finance and accounting staff. We set out to build a first-class financial and accounting reporting structure distinguished by its reliability and integrity. I believe we've been successful and then some. Despite my retirement stake holders from investors to employees should be assured that this structure and more importantly the people who make it happen are rock solid and well equipped to handle the challenges of the future. In any case, I'm remaining in the New England area and I will continue to be involved with the company on a consulting basis, so I'm confident of a smooth transition. The company is currently conducting a nationwide search for the best candidate for my replacement, which may be very difficult because we all know the best accountants are British, but the search is moving ahead at a good pace and we expect it to conclude in the next 30 to 60 days. With that, pass it over to you, Jim.

Thank you, Richard. We all should take a moment to take a deep breath after that one.

Good morning. Some comments on the economy first; if we examine the Dodge Index, it's clear, as John indicated to you, that New England preceded the national slowdown that's underway. The current Dodge Index nationally indicates a fairly substantial slowdown relatively New England and Massachusetts are significantly reduced off of that in terms of an impact with Massachusetts being essentially flat and New England being down 10%. Having said that, a year ago, given the impact that the economy had in new New England, our year-over-year indices are actually indicating a slight improvement. I think it's indicative of what's happening and what continues to happen with New England leading a generally a softening economy. Specifically, while Vermont and Massachusetts remain steady, Maine is weak, and we are seeing is beginning softening in the western New York market. So overall we're in a recovery mode in New England. I'm sure the subprime credit issues are continuing to quench local activity, and the overall economic activity index for the last three months is relatively flat.

Relative landfill volumes, Hardwick and Brockton tends to obscure what happened Q2 '07, but generally our volumes are up, primarily driven by the C & D waste that we've attracted. MSW. volumes are up as well. Not surprisingly in this particular economy it results in a price per ton reduction that we can actually get, and so we are very careful and mindful that as we search for additional volumes to either close out Pine Tree or to meet our harvesting goals associated with the landfill expansion programs, that too aggressive a program can actually drive the market quite substantially and we will be careful and mindful of that as we go forward. As John indicated, we are pleased with the overall expansion activity, and I will talk about that in a second. But as we go and seek volumes we'll have to be thoughtful about it.

Overall internalization is relatively flat although we've seen some shift with decreasing in the western markets and increasing in the central region but overall internalization from Q2 '07 is essential flat. From the development standpoint as I outlined in previous discussions we have four or five major facilities which make up our landfill development disposal strategy. We're well over half-way through that receiving permitting expansion authority. Specifically during the quarter, as John mentioned, we were very successful and pleased to receive a 300,000-ton increase. This was early-to-plan for Ontario, and that, along with early-to-plan to Highland, helped offset the late-to-plan [Tremain] where we we believe permitting there represents at least a nine to 15-month delay to our previous schedule. Net-net, we still remain ahead of our plan, and recent developments in South Bridge are also very encouraging. The permitting path in Massachusetts requires a MEPA certification which is basically the environmental arm of Massachusetts certifying that the facility's scope and range of its changes we've received that now and that is a gating issue for the board of health meeting which is will begin in the month of December in terms of a scheduled -- a schedule to be discussed next week, and we believe actually in hearings early in January, and that should auger well for our current target of having south bridge repositioned to accept MSW at the permitted capacity rates that we reported by the end of Q4 '08.

As I mentioned to you, acquiring these volumes will need to be thoughtful. We've done quite an extensive market survey. We are targeted municipalities and certain waste sheds that we think will not impact the market as much as others and we are using our low-emission landfill technology to attract waste that is thought to be from the people that own that waste who are interested in achieving increased greenhouse gas footprint reductions. So we are thoughtful that in '09 that we'll be able to acquire the additional tons that we've now got capacity to match with, and do so in a thoughtful way that does not push the market adversely.

Moving on to FCR, another good quarter. Roughly 100 bases points improvement in margin for this quarter over Q1 '08. Volumes are up and the pricing was up as well. Commodity pricing, generally PET and all the plastics are up ranging from 2% for PET to pigment of HP about 17%. Aluminum, O & P and OCC are fairly steady, or slightly strengthening. And then ferris is undergoing some softening. We expect that that outlook will continue as it seems to be pretty well anchored in the globalization for commodities driven by China and India. We expect overall commodity prices will continue to be fairly solid at around the current price that they are. Our processing costs for the quarter raised about 3.5%. I think given the amount of fuel and other issues that go into that, that that's a reasonable job in terms of controlling our dollars per ton processing costs on a same-store and a same-store without brokers basis.

Moving on to contract renewals, FCR has recently received notification from Oakland County in Michigan, which is a suburb of Detroit. We have been selected for the Southwest Recycling Authority of that plant there. We'll be negotiate ago contract shortly. As reported earlier, Greensboro, Camden and Memphis have all undergone extensions. We have received notification at Stratford for final negotiations on extension there. Recycle bank rollouts in Massachusetts have been quite promising. First, as you know, we've rolled out single stream in those markets. Our Auburn facility has seen a nearly doubling of product into that facility. In conjunction with the South Bridge recycle bank rollout where we've seen roughly a 300% increase off of very low base, augers well, I think, for additional opportunities on both single stream and the application for recycle bank.

Moving on to U.S. GreenFiber, obviously housing market continues to seek a bottom. We do expect that bottom to be within the next six to nine months. There will be a very slow recovery. We do not expect to see a recovery in this business until at least 2009. Having said that, the new home formation is still strong, which is based on immigration. And I think the issue is affordability continues to drop, we'll be able to bring new buyers back into the market, and obviously I think the recent pending announcement of a rate freeze hike on the subprimes will certainly help assist in the recovery in that market as well. We have seen continued O& P pricing increases and other chemicals which have put pressures on it. We are currently forecasting a $5 to $6 million bid of business for calendar '07 as well as '08 with recovery in '09.

On one note of positive here is the November data. EBITDA was significantly strengthened over our forecast. Retail sales were up 3%. The contractor was on forecast, manufactured housing was up 14 % . So those might be early indicators of some recovery in the housing market but I think we're at least 12 months off before it's sustain afternoon. With that I'll turn it back to John.

Thanks. Operator we'd like to open it up for questions now.

Thank you. The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) And we'll pause for just a moment. And our first question will come from Scott Levine with J.P. Morgan.

Good morning.

Good morning.

I was hoping you might be able to talk in a little bit more detail, elaborate on solid waste pricing trends. If we normalize for what's going on with Pine Tree. Anecdotally are you seeing any weakening in either the collection or the disposal sides of the business within any region?

I think clearly from our perspective, you know, flat. MSW pricing is flat, down slightly. I think the majority of the impact from a pricing standpoint is clearly on the construction-demolition side.

So, within the last cyclical business lines no, appreciable change versus what we've seen last few quarters?

I think that's fair, yes. No appreciable change on the M.S.W. line.

Got it. Could you remind us, turning to fuel, we've seen a move-up in diesel prices. Could you remind of us your surcharge capabilities, how much you're recovering within what time frame, any lags, so on and so forth?

Sure. Our surcharge, we're recovering the costs. We're tied to the National Diesel Index. We've had the surcharge in place for three or four years now. It works very well. I think what -- we certainly recover all the costs. The issue clearly, though, is that you are not covering the margins, so you have slight margin deterioration, even though you're recovering the cost from a fuel perspective.

Okay. One last one. It sounded like you said on the incremental contribution from the new landfill $22 million. It sounded as though you guys had been saying $24 million impact. Has there been any change there, and if so where is that coming from?

I think that -- I think it's fair to say that from an economic perspective, $22 to $24 million is, you know, still our target. I think perhaps from a -- from an economy standpoint, you know, we may see some weakness there, continued weakness from a C & D pricing standpoint, but I think we're clearly -- I think reflecting that from an economic standpoint, particularly on the C & D side that we're likely to be $22 to $24 million.

So, the expectation on the volume hasn't changed at all?

No, not at all. And I think that as we indicated earlier, I think that we're trying to do is be somewhat thoughtful in terms of how we go about ramping up those tons so that, you know, we don't disrupt the marketplace.

That's both a function of available tons in the marketplace, returning capacity, and the economy. So if you integrate great all three of those together I think we're confident that we're going to be able to harvest the tonnage and expansion of the landfill. The issue is just exactly what time frame that occurs in.

Got it. Thank you.

And our next question will come from Raymond James, Bill Fisher.

Thank you. Good morning.

Good morning, Bill.

Hey, couple questions. Just following up on the landfill side, for John or Jim, I think there's some legislation in Congress that would possibly tighten permitting on the rail transfer stations that I guess are moving waste out of the northeast to Ohio. Do you feel -- can you update us on that and see, is that something that could boost maybe pricing for interior or something down the road?

I think it is -- there is activity from a congressional standpoint that those facilities that are not permitted with a solid waste permit could very well be at risk. I believe there's something that has gone through the house in terms of a bill, so any of those facilities, Bill that would be-- that are not permitted from a solid waste standpoint that are being simply permitted from the surface transportation exemption would be at risk. Now, how many of those--it certainly is going to impact some of those transfer stations that are handling waste coming out of the northeast market. But obviously not all of them because some of them are permitted from a solid waste standpoint, but it certainly could have an impact.

Okay. And then actually for Richard, you mentioned the -- I think there was MTS. Was that $800,000 cost in this quarter, and does that go away next quarter?

Yes, that's correct. It was a one-time issue. We have a soils processing operation up in Maine, and we converted to the a batch mode from continuous feed, and also cleaned up the site, which resulted in expenses in this quarter of $800,000, so it was a one-time hit.

And then just lastly, on the $6 million or so of cost savings you talked about, how much, roughly, you think is embedded in the Q2 figures? You touched on that.

I think two and a half -- how much do you think is embedded in the second quarter? We'd probably have to go off-line to give you an actual number on that, Bill. I don't know off the top of my head, but we can certainly get you the number on that. Do you have it it, Richard?

The market centralization project has moved ahead, and the cost savings associated with that are being reflected in the numbers, but they're roughly running about $400,000 a quarter, if I remember correctly. And the temporary labor is really only just started in this last quarter, so we wouldn't have seen much pickup from that. And the other initiatives that John mentioned are still in the proposal stage, so they will be seen in the future.

Yes, I think ballpark number, I'd say there's about $2, $2.5 million of the $6 million that would be incorporated in the first and second quarter. But we can go off-line and get a better number on that.

Okay. All right, thank you very much.

(OPERATOR INSTRUCTIONS)

Bill, this just -- just to clarify, Richard just clarified, the $2 million that we had talked about was actually for the year as opposed to for the quarter. So that -- it would have been $1 million from the first two quarters.

(OPERATOR INSTRUCTIONS) Our next question will come from Corey Greendale with First Analysis.

Good morning.

Hey, Corey. How are you?

Congratulations, Richard. It's been a pleasure working with you.

Thank you, Corey. It's been a great pleasure working with you and I appreciate the time we spent together.

Sure. I think the biggest surprise in the quarter is that you are going to be staying in New England.

Well, we could get into that, but maybe you should have that discussion with my wife. That was not my call.

Let me know the number for that conference call and I'll follow up.

First of all, just wondering, it sounds like the economic environment is stabilizing a bit, has there been any spillover at all on the commercial line of business? Do you see any weakness there in addition to construction?

I think that it's fair to say that, you know, there's some weakness there. I think you can feel that certainly on an overall basis, but again, I think if you look at where we are today, on a year-over-year basis we've got obviously significant improvement, but we felt the brunt of that last year as well. So I think, you know, even to the extent that there may be some mild -- some deterioration from a commercial standpoint, in terms of when we look at roll-off pulls, clearly some of the roll-off pulls that are impacted are the commercial business as well when we have an economic slowdown. So some of that activity from a roll-off standpoint is commercial business in terms of the roll-off pulls being down on a year-over-year basis. I think the important thing is that it's our sense that the bulk of that impact we felt last year, and we're fundamentally in a position where we're flat to stabilizing. With some metrics--that are an indication, some leading metrics, indication of slight improvement, but we're not seeing that at this point.

Okay. And you've talked about the impact of Pine Tree in a couple ways. Is there any way you could take a stab at what the impact of pine tree was on the interim volume and price metric?

I don't think -- we don't really have that information. I don't have that here. I mean, I think we would just be guessing, unfortunately. It's not something that we've looked at. It is a fairly significant portion, though, of the increase in terms of tonnages, fairly significant increase is the C & D tonnage, sought should be disproportionately a larger portion of that impact for sure. Exactly what the number is I don't know.

Then a couple of clarifications on the guidance. First of all, Richard, I think you said GreenFiber you'd expect $1 to $2 million loss. First of all is that what you said, and what period would that be for?

For our fiscal year, and that would be our share of the loss.

Great. So that would suggest it would be fairly positive in the January and April quarters to get to the $1 to $2 million for the fiscal year. Is that right?

No, their business is very seasonal. Correct?

Yes. I mean, the U.S. GreenFiber, as soon as the weather turns cold people wake up to insulation. At least in the northeast we're getting compared to previous years a very early douse of winter, so not surprising retail market sales jumped immediately in November, and this is our strong, really, next five, six months anyway. So we'll see that, and it's encouraging to see some stabilization in the contractor segment and growth in the manufactured housing segment. So, yes, this is seasonally our strongest quarter.

Okay. I wanted to clarify that. Richard, I think you said you were expecting flat year-over-year. What metric was that?

I was talking about EBITDA. I'm sorry. I should have made that clear.

That's fine. So if you assume flat EBITDA year-over-year, getting overall EBITDA for the year a little bit above the high end your range? I don't know if you're not -- maybe there's impact of discontinued operation, but does that sound reasonable? Assuming flat EBITDA, that you'd end up a little bit above the high end of the guidance range?

Anything is possible, you know, my calculator is getting old now. I'm retiring, so maybe it doesn't work as well as yours.

I think it's fair to say Corey, in all fairness, that what -- you know what Richard has laid out is that we think we're going to be at the high end of the range, and depending on what happens, we'll obviously relook at that in the third quarter, but clearly at this point we're very comfortable indicating that we're going to be at the high end of the range and we'll see how -- we're coming into the weak -- the weakest part of our fiscal year in terms of the third and fourth quarter, the seasonal weaknesses, so we'll see where we are after the third quarter and then revisit that issue.

Thanks. I had to give you a hard time one more time, Richard.

No problem, Corey. I shall miss it. Actually, I think Pine Tree, most of the tons were actually third-party. That incremental C & D was third party. It wasn't internal waste, to answer your earlier question.

Thank you.

And our next question will come from Eric Prouty with Canaccord Adams.

Thank you. A couple of quick questions. You mentioned some of the new recycle bank programs. Have you actually started seeing a meaningful volume increase flowing through the facilities from recycle bank, and could we expect in the future, as those programs fully kick in, an actual acceleration of your FCR volumes?

I think clearly at this point in time, Eric, it's premature. We're seeing increases that, particularly our Auburn facility, as an example, the creases there are really related to our conversion to single stream. We've just started the recycle bank program, so clearly over time, as we convert our facilities and recycle bank is implemented in the marketplace we will continue to see increased utilization and efficiencies at our existing facilities, and obviously we're looking at trying to enhance the performance of the existing facilities first. So I think at this point in time, you know, the majority of the creases that we've seen have been because of the single stream, yet we've only really just begun over the last month the rollout in South Bridge, so we'll begin to see impacts there, and we're also beginning to roll out in Chittenden County, Vermont in the month of December so we will begin to see improved performance coming from the recycle bank program, but have not as yet.

It's a two-tier issue here. Single stream has to be in place for recycle bank to be able to roll out. We're seeing a real opportunity with change of dynamics to roll out more single stream and to have higher benefits from that, and ultimately down the road that will benefit FCR. And then as a second layer on top of that we think recycle bank will further help. But first step first is single stream, and we're getting good responses out of that. And we expect to move down that path, and we'll have some more data next quarter based from our South Bridge and Burlington roll-outs that we might be able to give you some more insights on that.

Great. And then on recycling, obviously a lot of your fiber is hedged, but those hedges roll off. Just as a point of references, the old hedges roll off, and you put on new hedges. How -- I guess what is the differential in pricing with the new versus old hedges given the pricing that fiber has moved up here recently?

Actually, it's very interesting. We're in an ideal market to do hedges right now, because as prices are high what we're, as you know, we're hedging to do a good job on our plant and our budgets. We're not doing it for speculation purposes. So what we're doing is for future higher prices and giving those up, or a portion of those up in exchange for downside protections. So as the markets creep up this is a positive time for us to do hedges as opposed to when the market is soft. So we're actually extending our hedges right now and have an active program taking them out, staggering them both in terms of terms, most of them out three years some longer, but also making sure they don't overlap, all on the same date, so when they come unwound they don't unwind all together. So we're actually feeling quite robust of our paper strategy. The issue that we do want to point out is that we're working hard to find plastics hedges. We don't have that, and so that is driving our prices up right now, but also represents a volatility in the future should pricing go down like it did ten months ago.

Just from a modeling and a point of reference standpoint, again, just ballpark, when you are putting on these new hedges, extending them out, are they at higher prices than the older hedges? By what increment, et cetera, any ballpark you can give?

I think we would look at just remaining at the levels that we're at now as opposed to increasing that -- as opposed to increasing that. To the extent that commodity prices continue to escalate, Eric, over time, then perhaps it would make sense, but from a practical standpoint we're just projecting the commodity prices to be flat for the next 12 months.

Sure.

So rather than increasing the modeling, at this . In time I think it would probably make more sense to look at it in terms of, we're going to have some improvement, but I don't know as that improvement is going to be all that material over the next 12 months.

For the sake of getting your model more accurate, you put at risk the downside, we'd rather be steady state and have your model be conservative when you talk about commodities.

Sure. That's fair. Then finally, maybe just a -- I might have missed it, but just an update on any of the landfill gas projects and where we stand with those.

We've started -- well, we're nearly completed Pine Tree, expect to be synchronizing and producing power within 30 to 45 days. The Highland facility is under construction. Building is up. Engines will be moved in this month. Expect to produce power probably by the end of Q4 '08, or if not, first part of the summer. Clinton County is under construction, although it's winter construction, so we won't see substantial progress there until beginning March, April, but that should be on-line second quarter '09. We are actively negotiating to start the construction at South Bridge, once we get the permit, and certainly have the gas flow there, and have a couple other projects lined up for start in '09 as well. So I would say that our product line, landfill gas energy is doing as we had hoped, and we think there's good opportunities out there, and we're robust toward it.

Great. Thank you very much.

You're welcome. Thank you. And our next question will come from Lionel Jolivot with Banc of America.

Good morning.

Good morning.

Just on U.S. GreenFiber, sorry to go back there, but, EBITDA is free cash flow done quite a bit. I'm just wondering, are you still free cash flow positive at GreenFiber, and marginally, what's the liquidity position of GreenFiber? Is there a risk if market conditions don't change or get a little bit worse, is there a risk that you might have to --

I think there's two factors that drive the answer for that question. First is, where's the housing market and hat reached the bottom. I think that we're a little bit yet early to declare that it's at the bottom but we think we're essentially at the bottom. The second factor is how well has GreenFiber, in advance of the market, did GreenFiber react to restructure their operations, and we've had two major restructurings. We've taken out about $10 million of costs over the last 12 months, trying to be ahead of this. I would like to compliment the GreenFiber guys, because I think they did a good but difficult choice to restructure and to reposition themselves when the market turns in '09. So I guess our hope is that they're pretty much at the bottom, and they're going to lug along here for awhile, and we'll start to see an improvement in late '08, calendar year '08.

Okay. So you really don't expect to have to fund them with cash at any point?

No, we don't. I think as Jim said what we expect, to the extent that we see further deterioration, we will took at -- will look at taking more costs out. I think it's our perspective at this time, with their current credit facilities we don't anticipate having to fund. They have their own own credit facilities, and so at this point, we don't anticipate --

Part of the restructuring that was approved by the U.S. GreenFiber Board was to restructure the necessary -- keep them cash flow neutral and I think they're relatively on that track so I don't think there will be any funding.

Great. And then obviously your leverage went up a little bit after you redeemed the preferred. Your guidance, or your -- you seem to guide to a little bit of free cash flow generation this year and a little bit more next year. Given where your leverage is, should we assume that the priority now will be to pay down a little bit of debt and bring back the leverage in the mid three's, where it has historically been?

Yes, I think that's a fair perspective. I think we've said on a number of cautious that at -- at for times EBITDA, that's really the threshold from our perspective. We'll look at different mechanisms that will allow us to de-lever the balance sheet back to a more respectable level. Some of that obviously was done in the last quarter where with the divestitures that we've put in place, and clearly we will look at opportunities to continue to de-lever, use the free cash flow, generate the free cash flow, use the free cash flow from a de-levering standpoint, and at the same time look at the asset base and make sure that any opportunities there are executed on as well.

Okay. Great. Thank you very much.

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

Hi, it's actually [Elena Solera]. Good morning, Elena. Good morning. Just wondering if there's anything in the energy bill that could affect your operations either positively or negatively. I think there are some incentives for renewal energy, and I'm assuming that includes landfill gas.

Yes. I think everything about the energy bill should be viewed as positive relative to our strategy and what we're trying to do. So I don't know any part of the energy bill that wouldn't be viewed as positive.

All right, great. Thank you.

You're welcome.

And our next question will come from Brian Butler with FBR.

Good morning.

Hey, Brian.

Hi. I just wanted to follow up on the taxes and just try to get a little bit more detail. I understand it's hard to put numbers on them, but just when you think about the rest of the year, are you going to get a benefit for the remainder on booked taxes, and then also does that rebound to some normalized level for '09?

Yes, I think I indicated earlier, Brian, that it will, at the end of the year, for the total year, it will end up being an expense, because we'll have -- we'll be adding back non-deductible items, so we'll end up the year with an expense, not a benefit. The benefit was a result of just making a huge adjustment through the quarter numbers. And next year, obviously taxes depend on profitability, and we've not yet given guidance on next year, so we'll be doing that on the June conference call.

Okay. But assuming -- if Casella was to be profitable, would you see a more normalized tax rate? I mean, is that a reasonable assumption?

Yes, I think, obviously, the way that tax calculations work, the higher the profit, usually the lower the tax rate. One is a function of the other. So next year's tax rate would depend on the level of profitability and subsequent years the same.

Okay. Thank you very much.

You're welcome. And our final question will come from Matt [Bidariso] with Barclays Capital.

Just a little more clarity on the free cash flow expectations. Working capital has been a pretty big burn the first couple quarters. I guess that's coming back in the second half of the year?

Yes, that typically comes back in the second half of the year with our seasonality revenues drop, receivables drop, and particularly at the end of the year we -- with capital accruals, the working capital situation tends to reverse itself.

And what was driving -- it seems like it was a larger burn this year. Anything in particular there that was driving such an increase in working capital?

The accounts payable at the end of last fiscal year were unusually high, and we had had significant capital accruals at that point, and so at the end of the first and second quarters we've fallen down to a more normal level, and that's the main swing, I think, you'll find.

Okay. And have you given guidance on what cap-ex will be for this full fiscal year? I mean, should we continue to move along at the $20 million-ish per quarter?

I think it was $72 to $76, wasn't it?

We can get that you number. I believe it was $72 to $76, in that range, but we can actually get that number for you. Don't have it right here.

That's great. And just real quick, have you guys put out any kind of data on the breakdown or any kind of breakdown between C & D and MSW., either in landfills or collection or both?

No. It's -- we're not -- we don't report it separately.

Do you have any color there that you can provide or no?

Well, color in terms of -- I think we went through the third-party C & D is being driven substantial part of our increase was the third-party C and D was about -- approximately 60,000 tons, and that tonnage was all third-party that is going to the pine Tree facility as we indicated on the call. That facility will close in '09. So that's pretty much the driver in terms of the overall C & D increases.

Okay. All right, thank you very much.

You're welcome.

And we do have a follow-up question from Leone Young.

Good morning. Thanks for take my follow-up. I was just wondering if you would be willing to make any comment on your willingness to use equity to de-lever the balance sheet.

Sure. I think we've said all along, Leone, that if we are able to get to the high teens, low 20s that we clearly would de-lever the balance sheet from an equity perspective. I think that our sense is obviously generate the free cash flow, demonstrate successful execution of our landfill strategy, move to positive free cash flow to demonstrate, quite frankly, the value of the investment that we've already made, and to the extent that we do that, and we're able to move our -- our price -- as I said, $18 to $20 a share, then clearly we would use equity to de-lever the balance sheet.

Thanks, and congratulations on your turn so far.

Thank you.

At this time, there appears to be no further questions in the queue.

Great. Thank you very much. In closing, I'd like to thank Richard for his commitment to Casella. All of our people and our shareholders. I think his daily contribution and unbending commitment to the Company is clearly going to endure in the talented financial team that he's built over the last seven years. As Richard said, we have retained a search firm and expect to have a new CFO hired in 30 to 60 days, but I think most importantly is the positiveness of the relationship that we have and the fact that he's going to work on a consulting basis to make sure that there's a clear successful transition.

In closing, I'd just like to emphasize again, we are executing against a plan that we laid out in spring. I think clearly the results are showing that and we have a continued focus to drive value by harvesting. As I said before, the significant value potential of our successful landfill development strategy and clearly simplification of our business model, rethinking our business model to drive costs out of the business. We've got great response from all of our people. We're making great efforts and great strides in terms of rethinking that model to take costs out. Then third, efficient utilization of capital and a focus on, you know, generating free cash flow to reduce debt.

I'd like to thank you for your attention this morning. Our next earnings release and conference call will be in early March when we'll report our third quarter '08 results. Thank you very much, everyone. Have a great day.

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