Casella Waste Systems Inc (CWST) 2009 Q1 法說會逐字稿

Good day and welcome everyone to the Casella Waste Systems first quarter fiscal year 2009 financial results conference call. This call is being recorded. At this time, I would like to turn the call over to Mr. Joe Fusco. Please go ahead, sir.

Thank you for joining us this morning and welcome. We're joined by John Casella, our Chairman and Chief Executive Officer of Casella Waste Systems, Paul Larkin, our Chief Operating Officer, Jim Bohlig, our Chief Development Officer, and Richard Norris, who although he has retired as our Chief Financial Officer, remains with us as sort of a third base coach, I guess. Today we'll be discussing our fiscal year 2009 first quarter 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. Now, I'll turn it over to John Casella who will begin today's discussion. John?

Thanks, Joe. Good morning everyone and welcome to our fiscal year '09 first quarter conference call. This quarter a little housekeeping first. This quarter we appointed Paul Massaro as Direct of Finances Principle Accounting Officer. Richard, as Joe said, has continued in his consulting role during our search for his replacement, and will go through the numbers as usual. With respect to the CFO search we recently made a decision to switch search firms and have engaged Spencer Stuart as our new firm. I expect to have the search completed by calendar year-end. After Richard's summary, Paul will go through the operating summary and as usual, Jim will give an update on development activity.

Before we get into the quarter, I wanted to briefly discuss Maine Energy, our one waste-to-energy facility. As you may have seen last week we issued a press release that discussed the potential sale of Maine Energy to a local development firm or other interested parties. We believe that Maine Energy is not core to our portfolio and does not fit with our long-term strategy. Unlike the divestitures from last year, however, Maine Energy is a high-performing asset. The sale of Maine Energy at the right price would be used to delever the balance sheet. At this time, it's too early to disclose any financial specifics, and this potential transaction is not in our plan or our guidance for fiscal '09. From an overview perspective, I couldn't be more pleased with the financial performance in the first quarter. Both from an operating perspective in terms of rethinking every aspect of the models but also from a resource transformation perspective in terms of the efforts of the recycling team to add additional processing capacity to our footprint. Our efforts to improve asset performance and build incremental value through resource transformation programs have helped offset negative headwinds from the sluggish northeast economy, and a very rapid increase in diesel prices throughout the quarter.

As part of the new extension agreement, from a development standpoint, with the Town of Southbridge in June, we received $2.2 million of cash related to previously paid closure and post-closure funds resulting in a net benefit of $800,000 to EBITDA during the quarter. Including this benefit EBITDA for th quarter was up $1.3 million and operating income for the quarter was up $1.7 million over the previous year. While this quarter represented solid start to fiscal '09, the economy remains quite weak in the Northeast. Solid waste volumes continued to decline and landfill pricing, particularly in the western region, remains a challenge, especially with substantial fuel oil surcharges that are currently being passed onto the market. The volume declines are being driven by a combination of slow economic activity, continued construction weakness, energy pressures on landfill's that receive long hall tonnages and the early impacts of increased sustainable practices by business. Despite these factors, we believe that our revenue EBITDA and free cash flow guidance is sound and achievable. As Paul will lay out, we're focusing our attention on managing operating costs and other factors that we can directly control to achieve our fiscal year targets. Our core focus remains the same, maximize shareholder returns by improving our return on net assets, and generating positive free cash flow. We continue to execute well against these goals. We improved a return on net assets by 20 basis points over last year. Free cash flow was off year-over-year, mainly due to working capital but continues to track well against plan and our guidance for the year.

As we laid out last quarter, our strategy for '09 is quite similar to last year. It focuses on improving performance of our base operations and selectively pursuing growth opportunities in high return resource transformation opportunities. During fiscal year '09, our plan focussed on improving the performance of base operations by rethinking the model to increased operating efficiencies and linking sustainable solutions with core offerings. Completing the landfill permitting work and rationally ramping tonnages to expanded facilities, and improving our asset mix in deploying capital to meet emerging customer and market needs.

With the current weakness in volumes in upstate New York we have chosen to be conservative with our strategy to fill the Hakes and Ontario facilities. Our landfill pricing was firm in our central region, however, where we internalize 80% of our volumes. Landfill pricing and volumes were up in the western region where we rely more heavily on third-party long hall tonnages. Our sales team continues to work at the direction of Bill Hanley on third-party transfer stations, broadening our market activity to expand the sources of volumes to increase the volume flow to our facilities at the appropriate returns. As we stated last quarter, we expected to take about three years to ramp the new facilities, and even with the current sluggish economy, we're confident that we can achieve that target.

A little bit more about how we're rethinking every aspect of the model. And I think that really goes to the efforts that Paul is making with the entire operating team to really rethink every aspect of the business. It goes to our oil filtration system where we've been able to reduce our oil consumption. It goes to the next generation of hybrid trucks to reduce our overall fuel consumption by 35 or 40%. It's understanding what aspects of innovation and technology can have positive impacts on how we operate our business every day. I think our continued focus on operating efficiencies and reducing costs is especially important in light of the economic conditions. Paul's effort on the collection side of our business to manage operating costs, to market demand, are mainly offsetting volume weaknesses. It is important to execute well at what we control, and that's our cost structure. We're doing that quite successfully. In addition, we're working hard to further differentiate ourselves in market by linking sustainable programs to core offerings, while consumers might not pay more today for sustainable programs, at competitive prices many are choosing solutions that reduce their impact on the environment. Our challenge has always been to tie the economic model to the sustainability model, for nothing is sustainable unless the economic model works.

Our sales force is working with our existing customers and new customers to create value through programs like our zero sort recycling and waste outage. [Shawn] and the recycling team are executing on every opportunity to add processing capacity to our franchise. A critically important component because we believe, as we move from waste management to resource management, we're going to see more material processed and less disposed of over time. And also, as we said, that's going to happen over a five, 10, 15-year period of time, but clearly it's our view that processing capability is an important factor from a value-creation standpoint, as we transform the industry and as we move from waste management to resource management. We're also gaining market share by differentiating our service offerings is really a prime goal of our sales team. So it's, really rethinking how we approach our customer base, again, re-inventing ourselves in terms of how we approach our customers to help to create value for them at the same time that we're creating value for our stakeholders.

Our investments in high-return projects that create sustainable solutions in an economic model that creates real value for us from traditional waste streams are moving forward very well. We made great progress from landfill gas to energy perspective, our processing additions, adding processing capability and even progress in terms of waste-to-liquid fuels. The Pine Tree Landfill gas-to-energy plant came online in Q1. The Highland Landfill gas-to-energy plant is constructed and came online August 30, and will ramp during the second quarter. The Clinton County Landfill gas-to-energy plant is constructed and will come online late in -- it will come online late in the second quarter and will begin to ramp.

The Camden zero sort recycling conversion was completed in Q1 and the facility is online. The Hartford, Connecticut zero sort conversion was completed in late August. I might add that the authority, Connecticut Resource Recovery Authority invested roughly $3 million to convert that facility and that we had just rebuilt the dual stream facility about a year and a half to two years ago, but they put in the capital necessary to convert that to a zero sort facility. The Philadelphia zero sort conversion is underway, and Boston zero sort conversion is also underway as we speak and we expect those to be completed by the end of the calendar year. We also will be begin recycling operations in Detroit, on October 1, as we were awarded that contract. And we were just named "Preferred Vendor" in Toledo, Ohio, where we're negotiating a contract to design and operate their recycling facility.

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

Thank you, John. For the quarter ended July 31, 2008, revenue increased $9.4 million to $157.9 million, or 6.3%. Internal growth for the quarter reflects higher pricing across hauling and transfer operations in the solid waste segment. However, landfill prices again showed a net decrease. C&D prices, while down from last year, on average did show some seasonal firming from the fourth quarter. Pine Tree and the closure projects dampened prices by 51 basis points. Hauling and transfer hauling were down in the quarter while landfill volumes were flat overall. MSW volumes were essentially flat while C&D was down, offset by some bud projects, especially at Ontario. Our closure projects at Worcester and Colebrook, which are not included in our landfill statistics benefited from another large volume increase at Worcester at good margins. Although the pricing was down slightly.

At FCR, average commodity prices continued to reflect year-over-year increases and volumes were also up. Surcharges were up significantly in the quarter, driven by the large hike we suffered in fuel prices. However, we did not fully recoup the total fuel and lubricants price increase. The increase from surcharges are matched to 1.9% as a percentage of total company revenue, 2.5% as a percentage of solid waste revenue.

The fuel increase also had a significant impact on margins. As fuel prices remained unchanged, EBITDA margins would have been higher by 60 basis points or 90 basis points for the solid waste segment. Revenue for the quarter breaks down as follows, since we've revised the criteria to reflect the discontinued operations and reclassification, I'll give you both the current and prior-year quarters. First, for the quarter ended 7/31/07, solid waste revenue amounted $111.4 million; FCR, $29.3 million and other, $7.8 million for total of $148.5 million. For the quarter ended 7/31/08, solid waste revenue was 113.9; FCR, 35.2 and other, $8.8 million for a total of $157.9 million. Gross margins were down year-over-year, 90 basis points.

Since transferring hauling volumes were down, most operating costs were lower as a percentage of revenues, including third-party disposal costs. A portion, some $800,000 of the $2.2 million cash payment received from the town of Southbridge in the quarter relating to the new agreement, was credited to cost of operations as a return of monies previously given to the town for closure and post closure costs. The two main factors offsetting these favorable variances were fuel prices and purchase materials. As already mentioned, fuel prices were up substantially in the quarter and caused significant margin decline. The higher value of commodities year-over-year and consequently the higher payments to municipalities drove purchase materials at FCR higher so as a percentage of revenue these costs are up 169 basis points. Purchased material prices were up 33.2% year-over-year. The higher volume of major accounts were also drove higher transportation costs.

General and administration expenses were down in the quarter, 30 basis points as a percentage of revenue. Most categories of expenses were down as percentage of revenue but they were partially offset by higher bad debt expense, the main factor being a $300,000 credit received last year from a bad-debt recovery. The latter also accounted for a large part of the year-over-year increase in the dollar amount.

EBITDA at $35 million was up $1.3 million versus the prior year. And breaks down as follows - - Firstly, for the quarter ended 7/31/07, solid waste was $27.0 million; FCR $5.9 million; and other, $900, 000 for a total of $33.8 million. For the quarter ended 7/31/08, solid waste amounted to $28.4 million; FCR $6.6 million; and other was a small loss of $58,000 for a total of $35 million. Solid waste EBITDA was up from the prior year and margins increased by 70 basis points. Despite the large increase in fuel and transportation costs, most of the other operating costs came in lower as a percentage of revenue, assisted by the Southbridge credit.

For FCR, another solid quarter with EBITDA improving by just under $800,000, but margins down this quarter by 110 basis points to 18.9%. Average selling prices were again up this quarter as were volumes. Total tons shipped including intercompany tons were up 1%, although there was a change in mix. A major contributing factor to EBITDA was the commodity price increase. Average commodity price increase -- prices increased 24.2% net of revenue share to $110 a ton. FCR's margins, however, were adversely impacted by the higher prices paid for purchased materials mentioned previously.

In addition, in the other segment, the restated amounts for last year include income from assets under contractual obligation amounting to $740,000, $660,000 of which at any time reoccur this year. If you recall, in the second quarter last year, we reclassified that item from other income to cost of operations.

Depreciation amortization expense was down some $400,000 year-over-year. Landfill amortization accounts for half the decrease, arising mainly from lower volumes of Colebrook, as it comes to the end of its life, partially offset by the higher volumes at Worcester. Depreciation was also down as certain assets came to the end of their useful lives.

Income taxes. The effect of income tax rate came in a little lower than forecast at 51%. We're now expecting depreciation and amortization to come in at a lower level than when we gave guidance. That is to say, it will be closer to the 12.5% range than the 13% number previously provided. That decrease stems mainly from the expectation of volume being switched between Pine Tree Landfill, which has a higher amortization rate and Juniper Ridge, which carries a lower rate, as we manage Pine Tree's over its remaining life. The result will be higher pre-tax income and a decrease in the effective tax rate.

Discontinued operations during the first quarter we completed the sale of Greenville and reported a loss from discontinuing the operation of $11,000 after tax, and a gain on the sale of $228,000, which became the loss of $34, 000 after taxes of $262,000. The taxes were so high because of the book write-off of goodwill, which was not deductible for tax purposes. Net income for the quarter amounted to $2.2 million or $0.08 per common share.

Now a couple of miscellaneous statistics. The average interest rate for the quarter decreased again to 7.28%, including amortization of financing costs, net of these expenses it was 7%. Availability on the revolver at July 31, was $154 million, after taking into account $40 million of (inaudible) outstanding. At the end of the quarter, the debt-to-EBITDA ratio calculated for the bank covenants was 4.4 times.

Finally, free cash flow, free cash flow showed a $2.6 million decrease from last year despite higher EBITDA, due mainly to a higher cash interest and the greater use of working capital. The increase in cash interest is simply due to timing of payments. The greater use of working capital stems mainly from higher current assets in accounts receivable, the latter arising mostly from higher revenue. These two factors were not offset fully by higher payables and accruals but we do still do expect free cash flow for the year to be consistent with our guidance. And with that, I'll hand it over to you, Paul.

Thanks, Richard. We're pleased with our performance, again, in the quarter despite the economic headwinds that John has already mentioned. Revenue for the first quarter was up 6.3% year-over-year, our solid waste revenue was up 2.2%, as a percent of segment revenues with price up 2.8%. Volume was down 1.5%, and commodity price volume was up 0.9%. FCR revenue was up 20.3%, again, as a percent of segment revenues with price up 12% and volume up 8.4.

Our volume strategy for the two landfill closure projects and the Pine Tree Landfill impacted solid waste price and volume statistics for the quarter. The Colebrook closure project was substantially finished during the first quarter. Excluding these impacts, solid waste pricing was up 3.3% year-over-year including the surcharges, and solid waste volume was down 2.5% year-over-year. During the quarter, our standardized pricing programs at the hauling companies continued to yield positive results with the average revenue per new account up 13.5% year-over-year. Overall, our hauling revenue is flat year-over-year, yet an increase in our overall gross sales margins delivered a positive net impact for the quarter. The improved gross margins are the result of our continued focus on assessing the profitability of our hauling accounts, and our increased willingness to voluntarily walk away from unprofitable revenues.

Our turnover of customers was consistent year-over-year; however, we were putting more emphasis on effectively identifying reasons for lost customers. As an example, we voluntarily churned 16.5% of the total lost customers because they were unprofitable accounts and we could not obtain the appropriate pricing. We continued to expand our integrated resource optimization selling strategy that leverages our recycling infrastructure, and our expertise. We're pleased with the progress we've made, specifically with our zero sort recycling program in Massachusetts. We rolled out the Worcester mass curbside recycling program on July 1. The program has been very well received and early indications point towards a higher recycling volume for the city. When the Boston zero sort facility comes online later this year, it will give us an opportunity to market additional services to commercial and municipal customers in the competitive Boston market.

We maintained our landfill pricing in the central and northeast regions while pricing eroded in the western market. Part of the pricing decline was driven by negative mix issues with increased volumes above, but generally the market softened and the impacts of transportation to long-haul landfill's is weighing on pricing. The reorganization of our landfill sales group last quarter and the introduction of standardized pricing programs is helping us to period of time optimize tonnage flows and pricing in this environment. Solid waste internalization for the quarter was up year-over-year from 55.6% to 61.9%.

We've continued to see pockets of weakness in the roll-off line of business during the first quarter. Roll-off pulls were down 3.4% year-over-year with pulls off in the southeast and western markets. We're doing a better job of pricing the roll-off business and net revenue per pull is up in most markets. The Dodge Index Total Construction Awards were up 6.8% in New England in the first quarter, with strengthening in commercial contracts and continued significant weakness in residential contracts.

For the first quarter, our operating costs were up $104.4 million, 90 basis points year-over-year as a percent of revenue, due to significant margin pressure from diesel fuel and purchased materials, while our fuel, oil, environmental surcharge program recovered much of increased energy costs during the quarter, diesel and oil costs were up 175 basis points as a percent of revenue, year-over-year. Excluding the impacts of the fuel and oil revenue and costs, we actually expanded operating incomes by 60 basis points year-over-year. The main drivers of the margin expansion were, the successful cost efficiency programs with improvements in direct labor, maintenance and risk management costs, the roll-over impacts from the improvements in our asset mix made last year and the execution of our Southbridge extension contract. Recycling purchased material costs continued to negatively impact our margins, although our revenue hedging programs eliminated most of the cash flow variability.

Our consistent focus on building our people has continued to yield very positive results. For the first quarter, direct labor as a percent of revenue was down 45 basis points, year-over-year, gains were achieved through flex and labor costs through volumes, productivity enhancements, and improved risk management. We had another excellent quarter for our safety programs and the result in risk management costs. Workers compensation incidence are tracking down 9% and fleet accidents are tracking down 15% year-over-year. We're working hard with all our people to continue these very positive trends.

Also in the first quarter, vehicle and container maintenance costs as a percent of revenue were down 40 basis points year-over-year, inflation in a number of key areas were up more than offset by gains realized by the implementation of our fleet maintenance software package, which stream lines maintenance and operations as well as improves inventory productivity and warranty recovery. And the continued success of our onboard oil refining system installed late in FY 2008. In total, we did a very good job managing our controllable expenses.

As we laid out last quarter, we planned to take $2 million of additional annualized cost out of our operation during fiscal 2009. We plan to accomplish this goal by focus on two primary drivers, improving our operating margins by introducing standardized processes and programs across our operations and improving operating margins in key high-impact market areas. Last quarter, we identified six high-impact market areas within our hauling operations. We determined that each market had significant operating income upside and created details sales and operations plans to quickly improve our performance. These plans are very tactful in nature and strike a balance between top-line growth and operating efficiency.

During the first quarter, we executed specific operating tactics that are projected to yield $600,000 of estimated annualized savings and to be clear, that $600,000 of projected savings is part of a $2 million program. The main drivers to the savings were the reorganization of two divisions into one market area in our western region, with a consolidation of sales, administrative, customer service, maintenance and general operations, routing initiatives to reduce truck operating hours and free up time to grow our business in core markets, and increasing customer container sizes and converting certain routes to automated equipment. We expect to drive additional savings throughout the remainder of the year by using these same tactics at other locations.

In summary, we're pleased with our first quarter results. We see terrific opportunity throughout the year to continue to rely on our highly skilled and dedicated people and to leverage the sales and operational platforms that we put in place. And with that, I'll turn it over to Jim.

Thank you. Thank you, Paul. I'm going to quickly report on development activities. As you know, they're principally aimed at staying in tune with the resource transformation recovery and renewables that John highlighted earlier and which we believe to be a (inaudible) part of our future. The wasteline remain challenging as Paul and Richard has indicated. Alternatively. the recycle shed volumes continue to grow and as we believe as a strategic initiative that we will be able to continue to grow our recycle volume sheds to match or exceed any pressures that we continue to see on the waste side. Paul mentioned that the volumes have increased and pricing increased on a year-over-year basis for FCR from a recycling standpoint and both of these exceed the adverse impact on the volume side from the landfill's.

Oil pricing and security, we believe, remains the principal strategic issue driving these recycle sheds and they have increased a number of opportunities, Hartford, Stratford, Detroit, Toledo, John's touched on them, has given us a number of additional opportunities to deploy our core competency in front-end processing. Zero sorting, which is really our technology for single-stream technology, is materially impacting the recovery and the volumes and we believe that its convenience will continue to drive that as a strategic issue. Energy pricing is continuing to support energy investment and energy projects returning high IRR returns in double-digits and supporting rapid conversion to lower emission landfill technology, landfill gas energy, and other conversion technologies.

Quickly on Southbridge, unlike western New York, Massachusetts remains relatively rich in waste particularly because a large number of those tons are constrained by the higher fuel pricing and are needing to be on locally exposed of rather than sourced outside of the state, but Southbridge, as you know was issued in June and we closed and made effective our site assignment and community agreement with the town. We have recently settled with Sturbridge their appeal involvement in the appeal process, and we are aggressively working through the appeal process with a few remaining parties outside of the issues side assignment. We are now in a position to take waste into the facility outside of Southbridge albeit at the 180,000 tons. Incrementally, as you know, the development path of Southbridge has us going first to 300,000 and then 400,000 tons as we complete the landfill gas energy and other requirements of the site assignment after the completion of the DEP permit issuance. There is a new site manager, a city manager and a new council and they seem to be well on their way to providing governance in a very positive way and we expect this fall to start the landfill gas energy facility as well for the bid for the road to go out this month which is a key enabler for the project.

On the energy recovery front, John mentioned Highland is now producing power, all three engines. We actually have gas for a fourth engine, once we get final permitting done there, we will work towards installing a fourth engine. Clinton county will be producing power during the month of September and will materially add to the Q2 results. Both of these projects are slightly ahead of schedule. We have adequate gas at Juniper Ridge and we expect that will be a major project for 2010 as we look forward to harnessing that recovery as well. Pine Tree Landfill gas is running with engine availabilities greater than 90%. We are having some adverse impacts due to hydrogen sulfide associated with the gas stream and are working on solving that. As I mentioned, Southbridge is on target for development.

Our multi-fuel processing platform technology, single-stream, John has indicated we have converted Camden, Hartford, Philadelphia, we are scheduled to do Boston in October, Detroit we will take over and have a plan to convert to single-stream this fall as well and Toledo we have been named the "Preferred Vendor." These are all important platforms for us, not only for their recycle shed but for the technology development that we feel is key to our future and in other waste sheds. FCR has done a great job again this quarter, both volume and pricing are up. I will note that I think that the commodity pricing from Q4 '08 is probably -- has already peaked and we are coming down slightly. This is somewhat in line with energy. And I think commodities will continue to stay fairly close, closely linked to energy pricing.

Operating cost is up principally driven by fuel, labor and purchased material pricing as Richard indicated, but overall, the business unit is a very important part of our future, not only for recovering and matching waste volume reductions by also for our sustainability and resource transformation strategies that John outlined.

Moving onto US GreenFiber, I believe that we are beginning to see close to the bottom of the housing market. While revenue declined 10% year-over-year, we are seeing signs that we are at the bottom. The unit has done a very good job despite the housing crisis underway. EBITDA is up $1.4 million over Q1 '08, this is primarily a reflection of a very aggressive G&A reduction program, over $1.9 million. A go local fiber replacement program that has allowed us to identify in access 40% of our fiber from outside the O&P channel, we have a target to have that at 80% within 12 months and nearly 100% certainly within 24 months. That will significantly delink us from commodity pricing and should add a lot of stability to the overall unit.

While contractor was down 38% and manufactured homes was down 19% a bright spot is the retail, up 33%, primarily reflecting housing renovation and energy recovery initiatives locally. And we believe on a go-forward basis that retail have early indications of double-digit increases quarter-over-quarter as we go into the Q2 quarter, and we believe that that will be sustained through this winter as almost every part of the country is being marginally or materially impacted by considerations associated with energy recovery and energy conservation.

With that, I'll turn it back to John.

Operator, at this point we'd like to open it up for questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). We'll take our first question from Bill Fisher, Raymond James.

Good morning.

Good morning, Bill, how are you?

Just fine, thanks. I have a couple questions. Just you talked a lot about the zero sort and new facilities on recycling, FCR. I think you're doing around a million tons of shipments annually. What, as you get all these on, I realize they're over the next 12 months or so, what kind of capacity are you effectively adding in terms of tons or however you want to look at it?

Well, in most cases, when we take a facility from the dual stream to zero sort, we're looking at the potential of doubling the tonnages, but it's, again, a situation Bill where you're going to ramp that over a period of time. But in almost every case, we will be doubling the capacity. So if we're handling 100,000 tons we would be able to handle 200,000 tons. So depending upon the original size of the facility, we will really look to double the capacity of the facility as we add the zero sort or single-stream capacity to the facility and the technology to be able to do that. I mean, it's one of the powers of that whole process is we're really taking -- we're adding value to invested capital that is already in place by better utilizing that asset on a 24 hour a day basis as opposed to where recycling facilities have been historically at one shift operations, it just makes no sense. So I think -- it really depends on the total capacity that the facility was originally designed for, and then it will be ramped over a year period of time. Interestingly enough, our Auburn, Mass., facility, we were able to ramp that facility from about 3,000 tons a month to almost line now tons a month in about a six-month period of time. So that's in the middle of a very large market obviously, but that's an example of how that facility ramped.

Okay. And I guess the follow-up related to that though, I think you cited like six facilities or so. If you look out over the next year and a half, would it be on the order of another 100,000, 200,000 tons to that million? Or what kind --

I think, Bill, Detroit is an example, is about a 50,000, 60,000-ton facility, we believe that's not single-stream right now. We believe that's the very single-stream enabled or capable of being enabled. So that market could easily support and grow to 100,000 tons. We'll see similar growths at Camden and in Philadelphia in terms of being able to reach into the New Jersey market. We're contemplating some additional single-stream conversions in New Jersey as well. As John, I think, really clearly outlined, the Boston single-stream conversions will expect to see a significant material growth. So I would think that it's not unreasonable to think on the order of, 100 to 200,000 tons. And the important metric here is that we think that growth should easily match any volume constriction on the waste landfill side particularly when you think of the free cash flow per ton available that recyclables have over waste. So we actually see this as a positive development and a good step forward.

Okay. Thank you.

We'll go next to Leone Young with Citi.

Hi, good morning, it's Aileen Salares for Leone. I know you are not disclosing the number specifically around Maine Energy but can you just give us a sense right now of the size of Maine Energy right now, as it stands, either on a revenue basis or EBITDA basis?

No, we're really -- it's really premature right now, Aileen, to really get into any real financial disclosure. I think we've tried to lay out where we are and how we see the facility with regard to our portfolio on a go-forward basis, but it's a bit premature to really talk about it in terms of its contribution. I think it is fair to say, though, that it is a high-performing asset, and we would expect that in order for us to move forward, it would have to be a significant delevering event for us and we'd obviously need to have a very fair value for the facility. So I think that that's a very fair perspective in terms of how we view it. It's a very high-performing asset, we would continue to operate it in we were unable to be able to significantly delever our balance sheet.

Okay. All right. Also, Richard mentioned lower taxes obviously in the quarter. Should we be using them more like a 50 to 51% tax rate going forward or should we keep it at around 55%?

The guidance effectively changed to 51%, Aileen, as a result of the changes I said and the expected depreciation charge.

Okay.

So use 51% on a go-forward basis.

All right, great. Thank you very much.

You're welcome.

And now we'll go to Eric Prouty with Canaccord.

Thanks, good quarter, guys. Maybe a little more discussion around oil. Obviously, we're all watching in the market, oil seems to have peaked. Do you feel like with some of the surcharges you pushed through we're going to play catch-up this quarter where we will even that out, and then similarly, maybe a little discussion on the FCR side with plastics with any progress you guys have made with hedging out or entering into contracts on the plastic recycling side?

Well, I think there's the -- clearly we will, as the prices come down from an oil perspective, you're right, that will even out a bit as we go into the second quarter, particularly if there continues to be softness from oil pricing standpoint. There's a lag going up and there's a lag coming down. And so that's a fair statement, Eric. I think with regard to the overall perspective with regard to plastics, I think we are making progress with plastics. We've got a number of different opportunities that we're executing against. We're really not ready to begin to talk about those because we've got -- we're in the process right now of negotiating some contracts. We get those contracts completed, we're hopeful that we'll have them done in the second quarter and we'll be talking about those perhaps in December. But it would be a little bit premature. But as we have said over the last couple of quarters, it's one area where Shawn, Jim, the entire team ha has been working really hard to try to find a solution for plastics and get ourselves tied into a manufacturer or utilizer of that commodity so that we can close that loop and protect ourselves. Because that is the area of -- from a commodity standpoint where we don't have currently hedges in place. So we've made a lot of progress, we're not prepared to really discuss what we're doing from a contractual standpoint right now, but I think we'll be in a position probably next quarter to give more specifics in terms of exactly how we've approached that issue.

One thing I would add is that you do have to have a view about peak oil. If you believe in peak oil directionally, oil pricing is going up. But the future of peak oil is you're going to have high volatility. So we're not looking at this from an oil standpoint strictly on quarter-to-quarter, we're looking directionally where is oil and, therefore, where is plastics going to go? And I think plastic pricing will continue to be fairly linked to oil and directionally it will continue to increase, although we probably will see volatility from quarter to quarter. And we continue to be driven by trying to accomplish the same strategy as John indicated that we have done on fiber which is to create effective budgeting derivative programs for purposes of stabilizing that quarter-over-quarter volatility. And I think shortly that we will probably be able to create some additional advantages for the company in that direction.

Just, I guess, to get you to kind of reiterate and clarify some comments made earlier, I know in your earlier guidance from the previous quarter, you had guided to revenue and had been looking for kind of flat revenue, flat volumes from a recycling standpoint. I mean, it sounds like your overall guidance remains the same, yet there's now a bit more of a shift where we might now expect recycling to grow a little bit more and to offset maybe some reduced growth on the solid waste side. Is that a fair comment?

Will have that's the a very fair comment. I think it's very consistent with the whole resource transformation strategy, Eric, that's exactly right. It's what we anticipated several years ago and I think that the only thing that we're seeing is a validation of that perspective.

Great. Okay. Thanks guys.

We'll now go to Corey Greendale of First Analysis.

Hi, good morning.

Good morning, Corey, how are you?

Good, how are you?

Outstanding.

Good. I'm going to be sneaky and try to combine the first two into one question, I hope you don't notice.

Go for it. Thanks for the warning.

So the first question is looking at price and volume in the waste business combined, it came in a bit lower than you were looking for in the first-year guidance, I was wondering how you feel about the first-year waste and volume guidance at this point. The second part of that question is investors are pretty used to hearing from the national public companies that they're just going to keep raising landfill price and if it pushes volumes away, oh well because we know we can sell that space later at a higher price. It doesn't sound like that's what you're seeing particularly in the western region, can you speak to why the dynamic is different than what those national companies are talking about?

That's a very good question. I think that is the perspective. I think that it is affected by other independents, though, that are in a given market areas. I think there's a bit more competition in the western region. We're not seeing that in the central region. We're not seeing that in the Northeast where we have more competition from the national companies. But in places where you have independents or you have other companies, there's -- you have a bit of a disconnect from that overall strategy. I think for two-thirds of our market area, I think that that's absolutely true. We're not seeing the kind of pressure that we are in upstate New York. That's a different market with different folks with capacity in that market.

Okay. And in terms of how you're feeling about the initial guidance for solid waste price and volume?

I think we're still pretty confident that as we said we're likely to see an offset in terms of increased price and volume from the recycling component on the processing side. And I think, we have seen stabilization in the Northeast of the economy. I think for a period of time, about a year and a half ago, we were seeing significant deterioration on the quarter-over-quarter basis. Over the last couple of quarters, we've seen stabilization so I think that we're consciously optimistic in terms of where we are from a price and volume standpoint for the rest of the year.

All right. And the other question, if I could, for fall, is it sounds like you're finding some low-hanging fruit in terms of improving operations. Can you give us some-i'm going to try to extrapolate from that, how much of an opportunity there might be to apply similar things to the entire company, can you give us a sense of revenue base you're working on now, and whether these regions are really outliers and whether you're getting them up to where others are operating, 2 million, savings you're looking at, whether there's a chance to build that to 10 million as you build it out to the entire company?

We're looking at the entire company, I would say we're focusing very hard on specific markets. Everything that we've seen in those specific markets -- it's also a combination of two things, I think very disciplined and focussed sales programs combined with driving the operating efficiency in those six. And yes, it is something that we feel we can take and to all the markets in the footprint.

And I think is fair to say that there's -- we think that there's considerably more opportunity in terms of the overall footprint of the business, but a lot of that has to do with not just simply looking at the legacy model and trying to take out cost but to rethink the legacy model. And so I think it's critically important, a lot of what Paul was doing is helping our culture rethink this model so that we use innovation and technology to help reduce our overhead and reduce our costs. It's what's in the next generation of hybrid truck, what's the next opportunity from an oil processing. What are the things that we can do and what are the impacts from an innovation and technology standpoint that can help us. And I think it's very fair to say that some of the success that we've had from the cost standpoint is because our people are rethinking the model and we're using innovation and technology to do that. So it's not just staying in the legacy model and taking costs out, it's really rethinking that model that's critically important to that question, Corey.

All right. That's very helpful, thank you.

Our next set of questions come from David Feinberg, Goldman Sachs.

Good morning.

Good morning, David, how are you?

Good, thanks. I wanted to ask some questions more generally about the industry and a little less specific on the quarterly results. There's been obviously a lot of news about consolidation, whether it's occurring in the big 3 or even in some of the smaller players buying private companies. I wanted to hear you folks weighing in on, A, what you thought in terms of consolidation in general, would any of your market areas be impacted, I guess more explicitly, are there anymore opportunities as you begin to roll out some of the new initiatives you talked approximate, not only to dispose assets like Maine Energy but to acquire other assets?

I think that clearly with the potential activity from a merger-acquisition standpoint with regard to waste, Republic Allied, that transaction as well as the Waste Allied transaction could present opportunities on a go-forward basis in terms of assets that overlap with us. So I don't think that there's any question but that that could create significant opportunity for us from an overlap standpoint in our existing solid waste franchise.

Do you believe that you're in a position to bid on those assets if and when they come to the market?

I think that currently we have $150 million of availability. I think that we'll have to look at that, the size of that potential transaction, the potential overlap, the value creation, what it means in terms of executing against our strategy, and creating value on a long-term basis. We certainly have a capital structure that would allow us to grow if, in fact, we can create significant value with those assets.

And if I can sneak in one other follow-up related in terms of the private companies coming to market, we have seen one example of a relatively large private company selling itself to a public company. Are you finding that there is any acceleration in terms of private companies trying to sell?

I guess I'm not really sure what the question is. What are you really trying to get at?

I'm trying to find -- we picked up that given that it's an election year, there is some concern about changes in the capital gains taxes. And that may or may not be bringing private company owners to market who are concerned about whether or not they sell in '08 or '09 or even '10, what implication that might have for taxes. As a result, there might be more folks coming to market in late '08 to sell their business before the end of the calendar year. That's explicitly what I'm trying to ask.

Very good, now I understand the question. I think that there's certainly -- those folks who are predisposed, who have already made a decision that they're going to sell their business would very likely be working very hard to get that done before year-end. I don't think that there's any question about that. But I don't think that that factor alone is going to be the cause. I think that it would only cause those folks who have already made a decision that they want to monetize their asset to really try to move that process forward and get it done before year-end. But I don't think that that would be a -- the driving factor for someone.

I guess more explicitly, have you found anyone, is there a pipeline for Casella Waste?

There is a pipeline. We're working on a number of opportunities. We continue to close small transactions where it's a complete tuck-in to our operations and we look at any larger opportunities as they come up. I think that there's clearly a bit more activity there than we've seen over the last few years and of course we're looking more seriously at that ourselves at this point in time where we can add processing capability consistent where we're trying to take the business, as well as help to raise our internalization rates to our disposal facilities.

Thanks.

I think your point is well taken. I think that there is a bit more activity out there right now. We're beginning to see more activity from a sales standpoint, more people interested in selling their business. I think that there is a bit more activity in that regard.

Thank you for letting me sneak in the extra questions.

Not a problem.

And we'll now go to Scott Levine, JPMorgan.

Good morning, guys.

Good morning, Scott.

Given what you've seen in the western region with regard to disposal pricing, would you say that your plans for ramping hikes in Ontario are consistent with what you expected maybe three to six months ago or maybe ratcheting back a little bit, what you're expectations are going forward?

I think it's fair to say that there's been a little bit of a change. But I don't think there's a change in terms of our ability to ramp it over a two are-year period of time. I think it may be a little bit slower for the first year, and I think that's consistent with getting a fair return for that invested capital. So, yes, I think that probably there's a bit of slowing on -- in regard to the first year, but I still think that I'm very confident that we'll be able to ramp it over the three-year period of time that we have laid out.

A little more of a back-end trajectory over a three-year period?

I think probably more in the second and third year as opposed to maybe being off slightly in the first year.

Got you. And then one last one.

I think that we need to be thoughtful in the marketplace and we need to be thoughtful in terms of how we approach it and as I said earlier, there are a couple -- there's one pocket where we have different dynamics from a competitive perspective.

Got you.

The other thing that I think is also critically important to that equation, Scott, is we're also seeing now oil prices come back. That's another big factor in terms of those facilities because they're impacted by third-party long-haul transportation. And so that's another factor as oil prices come back, I think that also bodes well for pricing -- bodes well for pricing there as well.

So we see continued stability in the diesel price complex that would bode well for pricing in New York specifically?

Yes, I think that's very fair, particularly if it stays at the $100 level and we don't move ourselves back up to $140.

Got you. One last one on I think Richard, you mentioned the 51 basis-point impact to your reported solid waste pricing due to the closure activities. Did you give a volume impact number for the quarter? And if you had the numbers for the last quarter normalized for closure activity in solid waste price and volume, just kind of looking to see what the trends were directionally quarter-on-quarter after normalizing for Pine Tree and closure in general.

Yes, I'm afraid govern the last quarter numbers here, maybe you could call Ned after the call and get at that data from him. But the volume at Pine Tree and the closure facilities was actually up in the quarter, as you would expect. It was up about 96 basis points.

Okay. 96 basis-point increase to volumes due to the closure activity?

Yes. The combination of Pine Tree and closure.

Pine Tree and closure and 51 basis-point hit to pricing.

Yes.

Got it. Thanks guys.

You're welcome.

And ladies and gentlemen, that does conclude the question-and-answer session. At this time, I'd like to turn the conference over to John Casella for any closing remarks.

Thanks. In conclusion, our strategy is working well and we continue to work and execute very well against all aspects of the -- of that strategy. Extremely pleased with the first quarter results from a development standpoint, from an operating perspective, from the execution of our plan to add processing capability. I think that we have absolutely terrific first quarter. I look forward to the rest of the year. I think we executed well against factors we control. These efforts have mainly offset the negative -- those efforts really mainly offset the negative headwinds from sluggish northeast economy and the rapid increase that is we received in diesel prices. We continue to be committed to increasing shareholder returns and generating positive free cash flow. Thank you for your attention this morning. Our next earnings release and conference call will be in early December when we'll report on our second quarter fiscal year '09 results. Thank you, everyone. Thanks for your attention this morning and have a great day. Thanks.

Ladies and gentlemen, that does conclude today's conference. You may now disconnect.