Casella Waste Systems Inc (CWST) 2009 Q3 法說會逐字稿

Good day, everyone. Welcome to today's Casella Waste Systems Inc. Q3 2009 conference call. Today's call is being recorded.

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

Thank you for joining us this morning and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Paul Larkin our President and Chief Operating Officer; John Quinn our new Chief Financial Officer; and Jim Bohlig our Chief Development Officer.

Today we will be discussing our third quarter fiscal year 2009 results. These results were released yesterday afternoon. Along with a brief review of these results and an update on the Company's activities and business environment we will be answering your questions as well.

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

Also, during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial table section of our earnings release, which was distributed yesterday afternoon, and is available in the investor section of our website at www.casella.com. Now I will turn the it over to John Casella who will begin today's discussion. John?

Thanks, Joe. Good morning and welcome, everyone to our fiscal third quarter conference call. First I'd like to introduce the newest member of our senior management team, John Quinn. John joined the Company in early January as our Chief Financial Officer, he brings over 25 years of solid waste finance experience to the team. And is already making a strong contribution with his work on our senior debt refinancing. John will take us through the numbers and then Paul will run through an operating summary and Jim will give an update on the development activity.

First, a little bit of an overview for the quarter. Third quarter as I am sure you are aware was extremely challenging quarter. The recycling group faced unprecedented head winds, as global commodity markets collapsed in November. In addition we began to experience negative revenue impacts in the solid waste business, as a widening recession weighed on economic activity across the northeast. Even with this slowing, we were able to maintain our MSW landfill volumes year-over-year, however roll off pulls and C&D rain fill volumes were off significantly. Our team did rise to the occasion of these challenges, acted quickly, with steps to improve operating performance and scale operations to lower market demands.

In the third quarter, EBITDA was down $4.7 million year-over-year, there are a number of one-time gains and charges that occurred during the quarter and support to cut through the noise to understand the true operating performance for the quarter. John and Paul will spend time going through these issues but I want to take, I want to take a little bit of time on some high level points on the Company's operating approximate performance. Solid waste, EBITDA was roughly flat year-over-year in the quarter. The integrated solid waste business continues to exhibit typical recession resistant qualities with pockets of weakness in more economically sensitive markets and lines of business. Overall our people did a great job of flexing costs to match the decreases and the disruption that we have seen from a revenue standpoint.

As we began to experience the economic downturn in November and the commodity collapse in November and early December, we took a number of steps to help offset the revenue contraction. I want to emphasize that many of these actions are part of the comprehensive 18 month effort to improve all aspects of our operating structure and daily business practices which Paul will take you through some of those details with more specificity. We are focused on making intelligent choices, choices that reduce costs, improve asset utilization and improve our ser services to our customers. These are choices that will strengthen the business today as well as into the future.

A little bit of a, again, high level overview on some of those actions that we have taken. On the revenue front we advanced two major pricing initiatives during the quarter. In December and January, we rolled out a solid waste price increases. To date we have experienced limited roll back, and the price increase has yielded roughly $6 million of annualized benefit. With the deterioration of the recycling commodity revenues, we actively worked with the majority of our municipal and commercial customers to increase tipping fees and processing fees and restructure some contracts. This work has resulted in a $9.6 million annualized benefit with only a limited benefit in the third quarter.

Also, want to point out that commodity pricing has begun to see some improvement. Not much of this has worked its way through our numbers because pricing was far below our floors over the past three months, however it is positive to see emerging market stabilization. Three factors are emerging which could further help to rebound, help the rebound of the commodity pricing. The Chinese economy is beginning to pick up, mills and manufacturing facilities that were idled are again taking orders and need materials. The global recession has resulted in less recycled commodities which in turn is causing a supply shortage. And we expect that the US and global stimulus packages will help drive demand for one of the lowest price commodities today which is steel. As well as other metals. As I'm sure some of you are aware, recycled steel is used primarily in rebar.

On the cast side, we pursued a strategies in both offset, to both offset temporary business issues and make long-term structural charges. Over the last four months of the fiscal year, we have cut discretionary variable costs by $4 million. Since February, 2008 we reduced our workforce by roughly 9.1%, mainly as a result of reducing labor to match lower volumes, fleet optimization and reorganizing nine operating divisions into four new market areas all resulting in an estimated $10.5 million annualized benefit.

We expect further contraction as we complete our merc conversions at our Boston and Philadelphia operations. And in December we froze new hiring, eliminated merit pay, and our management performance bonuses as well as impacting 401-K. Starting on March 15, we plan to out source our long-haul transportation in Vermont to MBI which is a national transportation company, primarily moving solid waste. This is a great sustainability initiative. First from an economic standpoint, we will reduce our operating costs by about 750,000 per year, and also, importantly, on a go-forward basis we will reduce our ongoing capital fleet requirements. It also makes a positive environmental impact by eliminating 250,000 over the road miles as well as 850-tons of carbon dioxide.

In addition, to the benefits gain during the quarter from pricing and operating costs initiatives, we reduced our capital expenditures by roughly $17 million, from our projected fiscal plan, '09 plan. The capital reductions are mainly as a result of our fleet routing optimization efforts, lower landfill volumes than expected for year-to-date, routing initiatives have improved asset utilization and will allow us to redeploy trucks instead of buying new equipment, and we expect to continue flexing capital to match volumes. As we laid out in the press release we are maintaining our free are cash flow guidance of 8 million to $14 million for the year. Year-to-date free cash flow is up $4.6 million over last year. With that here is John to take you through the numbers.

Thank you, John, and good morning. Revenue for the quarter ended Q3 2009 decreased $19.7 million to $121.2 million or a decrease of 14% compared to the same quarter last year. Of the total revenue decline, the Company's FCR recycling operations accounted for $12.9 million of the decrease in the solid waste group, $7.3 million. Other revenue increased $400,000 mainly as a result of major accounts growth. The main driver of the revenue decrease was the dramatic fall in commodity prices.

The FCR revenue fell 38.2% driven by a 30.8% decline in price and a 7.4% decrease in volume. At FCR we saw commodity price declines in October but the drop accelerated in November when the market hit bottom for the quarter. Since that time we have seen prices stabilize and improve slightly. When considering this revenue decline, it is important to look at it in conjunction with the cost of operations, and I will come back to that discussion in a moment. The solid waste operations internal growth was negative 7.7%. Within this solid waste operations there is a small recycling component. As such, pricing and volume within the solid waste group contributed 1.7% to the revenue decline. Solid waste volumes were lower by 8%.

The lower solid waste volumes included reductions at our Pine Tree and other landfills that are in the closure phase, and at closure of a recycling facility, C&D recycling facility. Excluding these three items, the drop in solid waste would have been a more modest 3.6%. Again, within the solid waste group, landfill revenue declines contributed 1.2% to the lower volumes and we continue to see the roll off line of business being impacted by the construction slow down.

Pricing net of fuel recovery fees declined for the solid waste operations was favorable by 2% with all lines excluding the commodities reporting increases. Fuel, and environmental surcharges were down $474,000 from the prior year accounting for a negative 0.5 impact to that reported price number. However, fuel for the quarter was lower by $2.2 million, showing that the net impact of fuel recovery charges was positive overall.

Revenue for the quarter breaks down as the quarter as follows and since we've revised our prior amounts to reflect discontinued operations I will give you both the current and prior year quarters. Solid waste revenue for 2009 for the quarter $91.5 million, compared to $98.8 million in the prior year. FCR revenue was $20.9 million in 2009 and $33.7 in 2008. Other revenue was $8.8 million in 2009 and $8.4 in 2008. Moving to the cost can of operations, for Q3 2009, cost of operations were $85.5 million compared to $96.2 million last year. A reduction of $10.7 million or 11.1%. The decrease reflects the lower volumes noted in the revenue section and the lower cost of goods sold from the FCR business. The cost of purchase materials was $7 million lower year-over-year and direct labor was $1.3 million favorable. As mentioned previously, fuel is lower by $2.2 million reflecting the lower average price of diesel year-over-year as well as the volume declines. Maintenance costs were $1 million favorable reflecting the lower volumes and our continued efforts on improving our maintenance programs.

I would like to take a moment to explain a bit the impact of the rapid decline in commodity prices on the FCR business during the quarter. I mentioned that the FCR revenue was lower by $12.9 million in the quarter. This decline was offset by lower cost of purchase materials of $6.5 million. Did I mention part of the cost of operations. The net impact of these two items was the $6.4 million decline. We normally expect the impact on margin to be lower, but because we had inventories on hand or had made purchase commitments from municipalities and other suppliers for a portion of the materials, it took the balance of the quarter to adjust the market to the lower prices.

During the quarter, we moved our customers from, who bring the materials to our facilities from, we used to pay them and we start instituting tip fees at many of our mercs. In addition, during the quarter we were commissioning our new single-store facilities in Philadelphia and Boston and as a result incurred extra costs for labor, transportation, and other. We expect the impact of the inventory adjustments, the cost of goods sold, adjustments relative to our tip fees and the costs associated with the Philadelphia and Boston conversions were approximately $4 which we did not expect to see repeat in Q4.

G&A costs for the quarter were $13.9 million and were favorable $4.3 million or 23% compared to Q3 2009. The primary reason for the decline was a reduction in compensation associated with reduced bonus accruals and lower salaries and wages creating a variance of approximately $5 million, this was partially offset by an increase in the bad debt expense for the quarter totaling $1 million.

Moving to EBITDA, EBITDA for the quarter was $21.7 million compared to $26.4 million for the same quarter last year. I would like to note here that the EBITDA does not include the costs associated with an environmental charge we incurred during the quarter which has been called out separately in our 8-K filing last night and which I will address in a moment. The EBITDA break down by line of business is as follows. Solid waste group in 2009 was $22.1 million compared to $18.7 million in 2008. FCR reported a small loss of $421 million of EBITDA line compared to a profit of 7.7 in 2008. And other was $51,000 in 2009, $28,000 last year.

This solid waste EBITDA was favorable year-over-year primarily due you to the aforementioned bonus adjustments offset by a management restructuring charge last year. Without those adjustments solid waste results would have essentially been flat year-over-year. FCR's EBITDA was $8.2 million unfavorable year-over-year primarily due to the drop of the commodity prices, and the result in cost adjusted to lower, costs associated with adjusting to lower commodity prices as I described in the cost of operations. Depreciation and amortization expense was $2 million favorable or 10.5% favorable from $19 million in Q3 2008 to $17 million in 2009. This decrease primarily-- is primarily attributable to lower overall volumes at our landfills and the closure of our Colebrook facility.

During the quarter, we recorded an environmental remediation charge of $2.8 million related to a previously disclosed remediation project at one of our transfer stations. We do not expect the bulk of this charge to manifest into cash until fiscal year 2011. On an aftertax basis this equates to $0.07 per share. The effective tax rates on a year-to-date basis increased 7.9% as a result of our change forecast for the year. Lower pretax income means a higher tax rate because of adding back the nondeductible items. Because we are reporting a small loss, the tax rate for the quarter is lower than the prior two quarters. We expect the rate for the fiscal year to be in the 79% range, but the rate will be volatile because a small change in expected income can cause a longer swing in the rate.

For Q3 2009, the Company's net loss was $3.8 million or $0.15 per share compared to a net loss of $4.6 million or $0.18 per share in the same quarter last year. The environmental remediation charge in this year had an impact of $0.07 per share, last year we had a management restructuring charge of $1.2 million or $0.03 per share. Adjusting for these two items, this year's EPS would have been a loss of $0.08 per share compared to a loss of $0.15 per share last year. The average interest rate for the quarter was lower due to variable rates at 6.82% including the amortization of financing costs, net of these expenses it was 6.58%. Availability on the revolver at January 31, 2009 was $142.3 million after taking into account $38.6 million of LCs outstanding.

At the end of the quarter our total debt to EBITDAR ratio calculated in accordance with the bank covenants was 4.76 times compared with our covenant of 5.25. And our senior funded debt to EBITDAR ratio was 3.16 times compared to our covenant of 3.35. Free cash flow for the quarter was $238,000 compared to $505,000 in Q3 2008, a decrease of $267,000, lower EBITDA of 44.7 million was offset by a reduction in capital expenditures of $4.7 million. The favorable change in cash interest of $2.2 million related the lower rates and the timing of interest payments was largely offset by an unfavorable change in working capital all of which netted to the small decline. In yesterday's press release we provided revised guidance for the year reflecting our Q3 performance and our expectations for the balance of the year.

As many of you are aware our bank facility becomes due in April 2010. During the quarter we have met with almost every bank in our current revolver as well as a number of banks banks not in our current facility. The feedback we have received from this group has been fairly consistent. What we are hearing is that the banks are open for business but the term loan B markets are very tight. The bond markets are also active, and deals are getting completed including a number in our sector. We have internally launched a process and it is our intention to be in the market before the end of the current quarter. At this time based on the feedback we've been receiving from the banks with whom we have met we will be replacing our facility and issuing a secured bond.

Until we go to market we are not prepared to discuss the relevant size, pricing or other details of the structure, however, given the credit markets we expect that the new facility will, and our interest expense and cash interest will rise by a material amount. In conjunction with that new facility, we expect to reset our covenants to reflect the higher interest costs and other changes in our projected income and capital spending as determined at the time we launched the deal. With that I would like to pass the call over to Paul Larkin for some comments on the operating performance of the Company.

Thanks, John. This was a very difficult quarter and we are really pleased with our team's ability to drive both growth and operating efficiencies in this rapidly changing economic environment. As John mentioned, total Company revenue declined 14%, with FCR's revenues down 38% year-over-year. And solid waste revenue down 7.7% year-over-year. Highlights for the quarter include solid waste price excluding surcharges, increasing 2.5%, and has now improved for four consecutive quarters, growth in solid waste price reflects 2.1% higher pricing at the hauling and transfer business and a 0.4% gain at the landfills.

Give the dramatic changes year-over-year in both fuel and commodity pricing, we implemented a $6 million permanent annualized price increase this past December and January. The execution of this price increase was excellent as we actively worked with all of our customers.

During the quarter landfill pricing was very strong in out central and northeastern regions and down year over year in our southwest and western regions. Growing economic weakness in New York and Massachusetts continued to weigh on third party landfill pricing. Despite slight weakening in third party landfill pricing, the western region had a strong operating performance in the quarter, with operating up 55% excluding one time benefits. Landfill volumes were down year-over-year with MSW volumes up slightly and C&D and bud volumes down significantly.

Roll off volumes remain challenging with the continued weakness in construction. We experienced a 19.4% decline year-over-year in pulls with the greatest weaknesses in the southeastern and western markets. Despite the market challenge, we expanded net revenue per pull by 7% year-over-year.

We continue to deliver on a number of sales and operating initiatives that are driving top line growth, improving our operating efficiencies and our asset utilization. Excluding one-time benefits solid waste operating margins improved 227 basis points year-over-year or $1.9 million our third consecutive quarter of improvement. These strong year-over-year improvements were driven by our continued ability to consistently execute against those pricing and operating initiatives. Direct labor costs for the quarter were down 100 basis points, and we continue to do a great job of flexing our business while also driving profitable new customer growth. We expect to realize additional operating gains the remainder of the quarter throughout optimizations, rear load to front load conversions and container upsizing.

Our vehicle and container maintenance costs for the quarter were down 45 basis points as a percent of solid waste revenue. We continue to realize improvements from the implementation of our fleet maintenance software, which has streamlined our operations, improved our inventory productivity, and increased our warranty recovery rates. Improvements this quarter were mainly made in parts and repairs while labor costs were up slightly year-over-year, we expect continued improvement going forward, as we continue to draw down our fleet base consistent with our routing initiatives.

We also had another excellent quarter for safety programs and the resultant risk management costs. Workers comp incidents were down 19.5% year-to-date fleet accidents are down 15.3% year-to-date. During the quarter we made great progress on our ongoing efforts in reviewing and improving all aspects of our operating structure and processes. In particular, three programs had significant impacts.

In long-haul as John mentioned during the quarter we entered into a long haul transportation out sourcing agreement with MBI. He gave you the details around that structure and we're currently analyzing additional liens in Massachusetts, Maine, and New York. In fleet routing, last quarter we completed an extensive evaluation of a new fleet routing software application, within our Burlington and Montpelier markets. With the success in these test markets we began a phase Company-wide roll out. Our routing team is focused now on our five largest markets and we expect these implementations to be completed at the beginning of Q2 fiscal year '10. We estimate that we will realize approximately 1.1 million of analyzed cost savings in FY '10 from hourly labor reductions and reduced fleet requirements.

Market area consolidations was our third impact for the quarter. And during the third quarter we recognized -- we reorganized nine operating divisions into four new market areas improving our operating performance and our customer service while eliminating redundant positions. The focus of the consolidation efforts are operational, back office and management synergies. In total, these consolidation efforts are expected to yield 1.4 million in annualized savings.

In the third quarter we yielded roughly $3.25 million of additional annualized savings bringing our year-to-date total to roughly $4.5 million well above our original $2.0 million target. In summary, we are pleased with our execution against operational aspects that we can control, our team is doing a great job using the sales and operational platforms that we have put in place to drive performance in this uncertain economic environment. I'll turn the call over to Jim for a development update.

Thanks, Paul. First I will talk a little bit on our development activities, and then add a little more color to FCR and fiber and we'll turn it back to John. With regards to Southbridge which is really the principle landfill development project underway, as you recall, we did an assignment issued in June of '08. As is the standard at least of expectation if you are in the development business in New England, issuance of this is a very valuable thing but comes with almost a certainty of an appeal from the opposition. Their strategy rests upon an effort to try to delay the permit key is obviously trying to move forward, and accelerate the process.

And so what is occurring here is exactly within a backdrop of having developed over 65 million yards of landfill capacity in New England over the last six years, very much consistent with what we would expect. And within that frame work, we have moved for a summary judgment, the appealing party is moving for a delay. We are now, received a denial on our summary judgment which we are requested which is, which was expected and we will now enter into the heart of the adjudication which expect to have done on the appeal within the next three to five months.

Following that we will complete the solid waste permit modification application to the DEC and we are still targeting for late 2009 early, 2010 calendar years to receive our initial permit. As you remember, the Southbridge facility initially goes to MSW and then has two incremental steps on its way up to 405,000-tons which we expect to be in the market to be able to take that waste within about 18 months. The road has been put up to bid and an apparent low bidder has been nominated by the city, the town of Southbridge. And additionally, the town is actively seeking industrial park business candidates to fill out the industrial park which is both good for us from an environmental standpoint but more importantly, indicates and eliminates the town's intentions in terms of getting the road built and continuing the division that they and ourself have created over the last two and a half years.

Moving on out of that, the landfill energy development. During these times when markets are volatile and businesses are flexing down, the same is also true for development. And so we are very much focused on continuing the development without the use of internal capital. I will talk to that in a second. First with regards to the resource optimization, differentiation strategy. We are committed to have our landfill gas energy at every one of our landfills by 2010.

Last quarter we reported that Hyland and Clinton were completed ahead of schedule and we were actually expecting to bring the fourth engine online at Clinton in the next three to four months. Both units are operating at power. We have introduced recirculation successfully and will do so at other landfills not only for the ability to reduce (inaudible) costs but more importantly recirculation affects in early decomposition of rates and early generation of land fill gas and therefore a movement forward of the value of those gas when coupled to a landfill gas unit.

Our next target within the Company is Juniper Ridge, I would like to take a second just to paint a picture of what we are doing there because I it will help to eliminate the opportunities which are coming down the pipe in a number of locations. Juniper Ridge is gassing now at a rate that would support landfill gas synergy. What we have done is to propose the University of Maine, which operates their main campus in Orono, about five miles from the site to actually run a pipeline and to produce and use landfill gas to completely substitute the 3.4 million-gallons of number 6 bunker oil. The benefit of this to the overall state, to the air shed and to participants are as follows.

We expect to produce about $1 million a year savings to the University of Maine, this will eliminate the use of 3.5 or 3.4-million gallons of number six bunker oil, it will reduce the greenhouse gas footprint by about 65%, and when, as the gassing function at the landfill increases we will then enter a phase two project where we will produce or build first a ten megawatt coal generation facility, use the waste heat from that, completely displace the entire thermal plant and generate 10 megawatts of power of which they will buy about 80% at a significant discount over market. These kind of opportunities are popping up really throughout a number of different geographic locations, certainly in the northeast it is true, and I think they're going to be accelerated.

In the case of Maine we expect to apply for access to some of the stimulus money and some of the university funding in exchange for advancing these agendas, we think that makes a lot of sense for both the state, for university and for the country.

These kind of configurations exist at at least three other locations that we are actively involved in, and I think it will help to illuminate what we are doing in the development area to advance our strategic differentiation strategy while at the same time flexing down and using as little or no internal CapEx while we work through the external analogies of the marketplace.

Note on our multifuel processing Paul and John both talked about placing in operation during the quarter, Philadelphia and Boston multifuel processing platforms. These are advanced Zero-Sort platforms which can effectively take even a broader stream than just a pure segregated single strain and pull out recyclables and other valuable commodities. Both of these units were placed in operation, the Charleston facility represents over 220,000-tons per year processing driver facility, and the demonstration of that technology. We believe it differentiates us from all other competitors and hopefully supporters of that we currently are under a long-term contract to the city of Boston in response to a RFP that just issued, appear to be the lowest bidder for an extension to that contract which I think signals a good promise with regards going forward.

During the last quarter, we have had unprecedented volatility and tonnage, but the actual tonnage at the Charleston facility has significantly increased as local alternative processes and materials have had to cease accepting materials. We've been able to lift this technology to enable our markets, lower our processing costs and accept a higher volume into that facility. We expect that that will work auger well for a post Q3 commodity market which we are expecting is developing.

Segueing into FCR, obviously this quarter is probably one of the worst quarters in the history of recycling. We have seen average commodity pricing go from $130 to $40-ton in less than two or three years. Export markets shut down entirely on both the East and West Coast going from $140 a ton to 0, and OCC went from $130 to $40, plastics reduced from $800 a ton to $200 a ton. So as you can see, we've had huge disruptions.

Now one of the purposes of these conference calls is not just to report, it is to also give you some insight on what's going to go forward as a continuing attribute with regards to the business model. During this quarter, we had a number of one-time issues that are now essentially past us. They included the Zero-Sort facility and issues associated with the commodity markets. On a go-forward basis, the best way to look at this is from a net revenue standpoint. Net revenue is basically gross revenues less the revenue share of the customers less the effects of cost of purchases and tip fees that we receive, the combination of those taken together produce a number which we call net revenue. During this quarter, we have been able to shift that dramatically, in a positive, particularly with the cost of purchases and the tip fees we have received from our customers.

The effect of that once we work through Q3 is that on a run rate basis, we are off about $1 million of EBITDA on a net revenue basis, so on a forward -- moving forward we expect to be closer to about $1 million off of where we were when our peak given the gross revenue swings that we have occurred, and the effects of our actions that we have taken. I think that we have done a great job of mitigating not only the price swings, but more importantly, the volume swings. I will remark to you that, in most markets that we operated in, most facilities ceased for 60 or 90 days to take any materials because they could not move it. They went first to storage and then they just stopped accepting material. They wanted a noteworthy productivity issue at FCR. During this period of time we accepted all materials, our material flow increased, although the mix went from commercial and dual stream shifted more toward single stream and all of our warehouses that we did utilize for a few weeks are now empty and we are actually outsold, oversold on a go forward basis.

The commodity markets appear to be strengthening. We are very cautious about what this means. But it is certainly directionally the right indicator. And with that, I will shift into screen fiber and talk a little bit about what's going on there.

Q3 '09 versus Q3 '08 we are actually, our sales, we are down about 18% on a gross revenue basis, but EBITDA was up by $250,000 and 8.6%. The screen fiber has actually led the housing decline. They were early in that cycle, they have done unprecedented jobs of restructuring. They've had four restructuring during this period of time, and we see them actually having a year-over-year increase in EBITDA of over $3 million, representing not only the restructuring effects but also the benefits of the steps that they've taken to lower the paper costs.

On a go forward basis, we think US screen fiber will be positively impacted by the stimulus package. Within that package there's about $10 billion of energy recovery designated projects and within that we think about 15% of that will go to insulation which is 1.5 billion. We think US screen fiber shares is about 5%. So that's about 75 to 100 million which is almost a doubling of our business opportunity and we intend to go after that. The retail segment is growing very strongly in terms of insulation even though overall I think retail is pretty much following the housing market. And we think that there's an opportunity to see the beginnings of a resurgence of US screen fibers opportunity in this new market as the stimulus package goes through. With that I'd like to turn it back to John for final comments.

At this point in time, operator, we'll open it up for questions.

(Operator Instructions) we will take our first question today from Bill Fisher with Raymond James.

Morning.

Morning, Bill.

A couple of things. One I'm sure your not through the April 10, budget or anything, but just big picture looking at the CapEx line item just wanted to touch on what areas you would be looking at to enhance free cash flow like the growth CapEx sounds like you are reducing your fleet size and then the long haul. Just if you can touch on some areas you would be looking at?

Sure. I think it is fair to say from the actions that we have already taken, we've clearly flexed out capital and will continue to do so as we have in the third quarter, some of which is reflective of volume, some of which is reflective of the operating changes that Paul is doing, referred to the capital requirements, so pretty significant in terms of the fleet that we had in place with the out sourcing now with MBI. That's going to reduce our CapEx. And on a go forward basis, Bill, we will, we will look at what the needs are, and continue to flex out capital in all of those areas where we can. Obviously, we are also flexing capital in terms of utilization of vehicles. We are going to eliminate, will be able to eliminate some capital expenditures associated with that as well. And certainly we are looking at development projects as certainly something that can be flexed as well.

Okay. And then maybe along the same thing, on cash flow for Paul, just on the collection operations, obviously you have done a lot on that front, but just wondering if you look at specific operations, I assume you have some that generate cash and some that don't. Is there any further opportunity to look at markets and make changes in that fashion?

There are, Bill. You know that that process has been on going for some time. The last 12 months we have really looked at where the operation is today and where do we think we can take it with all of the work we have done. Where we think we can take it ultimately leads us to a decision point. There's more work to still be done there because we are really achieving tremendous improvements on the operating side. So, the bar is moving a little bit.

And more specifically, Bill I think it is fair to say similar to what we did with Buffalo last year, we are looking at all of the asset base on the basis of capital necessary and the returns on that capital, and our position in those markets and we will, we are doing that evaluation right now, and we will, look at monetizing any of those assets from a return on capital perspective would be better off with other folks, similar to what we did with the Buffalo assets last year.

Okay. Great. And last real quickly for Jim just on that bridge you did with FCR, the $1 million change in EBITDA, I mean would that imply if prices stayed flat sequentially, could you get around $5 million in EBITDA at FCR in Q4?

Yes, that's about directionally in the order. It is about what we are thinking is possible based on where the pricing is forecast to go.

All right. Great. Thank you.

We will take our next question from Eric Prouty with Canaccord.

Thanks, a lot. Just two questions on FCR, John maybe you could just give a little detail on volumes at FCR, what's driving volumes, and what you expect going forward? And then second, what was the impact during the quarter on some of the hedges the floors especially on your fiber-related material, and how is that going to impact the quarters going toward? Are those hedges--?

I will give you a brief synopsis and then Jim can jump in as well, Eric. The volumes, as Jim said interestingly enough what we found during the period of time is that we were able to take all of the material that was delivered to the facility and even as we raised our tip fees dramatically, we went from in most cases, no tip fee to $55 a ton tip fee, and depending upon the specific facility anywhere from 40 to $55 a ton for the tip fee. And even in view of that, you might have thought that you would have a lot of folks who would no longer be bringing their materials to the facility and it was quite to the contrary. We found volumes slightly increasing in those areas where we were increasing tip fees.

I think, so, on, and I also think that the other, the other aspect is that we took all of the material at every one of our facilities from every commercial and municipal customer. There was no disruption in service for any of our customers, and obviously, we had the complexity of the retrofits going on in Philadelphia and Boston that also complicated the quarter results because of the additional costs of having to transport those materials to other facilities in order to process them as we were upgrading those facilities to the new processing equipment.

Now, I--.

What was the second part of that question?

The floors.

Yes, I think it is another interesting question because you think as our commodity prices go up our margins go down; as our commodity prices go down our margins go up. And that's really difficult for people to, to understand. Part of what happens is that instead of us paying out hedges, we are actually clapping on those hedging now. So, arguably instead of paying out hundreds of thousands of dollars a month for the protection that we do have on that portion of our revenue stream that has risk mitigation attached to it, we are now collecting hundreds of thousands of dollars a month on those hedges.

It is also true, also associated with our cost of purchases, where we are actually buying materials in high markets and in lower markets we are not buying as many materials and we are actually incurring tip-fee revenues associated with that material coming in to be processed. The effects of that is to do exactly what John just outlined which is to, in this kind of market, to see some incremental sequentially improving margins against say two quarters ago where the average commodity prices were $140 a ton.

Just a couple of comments, you asked about hedging, we are actually -- our hedging program is very robust. We have received quite an assistance from that program, we are quite pleased with that. Of course all hedges had terms to them. So they will run out in time. But right now, particularly in fiber it is serving us nicely by generating over $3 million of supporting revenue. From a tonnage standpoint, as I mentioned to you, commercial tons were down 26%, dual stream tons were down by 22%, but single stream tons were up by 71%. And I would say that overall if you were looking for a marker with regards to the resource optimization strategy, there wasn't a blank in the marketplace relative to what the municipalities and what the general public wants to do with regards to recycling them. New England if anything there was a strong working element with us, understanding commodity prices were deeply depressed almost every municipality we went back to not only in New England but up and down the Eastern Seaboard were co-operative, co-operative and in many instances subsidized with the business by providing a tip fee either because it was provided for in the contract or negotiating outside of the contract to provide support for this business because I think it indicates their philosophical support to resource recovery and more importantly recycling in the strategic point we are in at our research optimization strategy.

I might just add too, Eric. I don't think that that's necessarily the case in Canada. I think that we have heard some anecdotal information that some of those facilities may have shut down that also created a positive for those of us from a supply and demand standpoint. Not necessarily consistent in Canada and possibly other areas of the country. I'm not sure what happened on the West Coast but as Jim said throughout the northeast and throughout our customer base, very, very positive feedback from our customers to be a partner in terms of figuring out solutions for the disruption.

Great. Thank you.

We will take our next question from Corey Greendale with First Analysis.

Hi. Good morning.

Hey, Corey, how are you?

I'm fine. How are you?

Terrific.

My first question is about the volumes. Can you talk about the monthly trend in the volumes and the negative 3.6% excluding the various facility closures, is that pretty representative of what you are seeing now, or is it more negative realtime?

I think it is representative of what we are seeing now. The biggest issue that we seen is the majority of that disruption is really in the C&D construction demolition side of the business, as opposed to the normal solid waste. We are seeing disruption from the solid waste standpoint, but the real dramatic impact has really been on the construction demolition side.

Okay.

Roll off pulls, roll off business and the construction demolition volume going to the landfills.

Got it. And then on the price, the $6-million annual impact from the price increases, can you just say a little bit more about was that the entirety of the customer base that you went to or was it certain types of accounts and could there be more opportunity for similar things if you rolled that out?

One of the things that, one of the positive things of John's experience in his 25 years in the business, there's really fairly significant opportunity for us on a go forward basis from a pricing standpoint. Our environmental fee is lower. Our surcharge is lower than some of our competition. So we believe that we have some real upside from a pricing standpoint on a go forward. We need to be thoughtful in terms of how we go about doing that. We were thoughtful in terms of the customer base that we touch with the $6 million, in terms of those customers who were below a threshold and I think that it is clear from our perspective that on a go forward basis, we have two or three different areas where we think that we have opportunity from a pricing standpoint. I think it is fairly significant over time. But again as we really obviously go through that thoughtfully and particularly with the reality of the economic market that we are in now.

John, when you say significant opportunity you are talking more from a competitive standpoint or do you have significant numbers of customers who you think you are actually below water on?

No. I think that it is, it is twofold. I think that we are, our environment l fee is less than some of our competitors in the marketplace. I think that lends itself to an opportunity for us to improve margins on a go forward basis. The way we are looking at it is that we believe that we have some real opportunity to continue to improve margins on a go forward basis with pricing.

My next question was op the capital where if -- you are obviously doing a lot to improve the capital efficiency, at some point there is a trade off in, with John Quinn's former employer there was a time when, when they were kind of highly levered in a downturn, and on the one hand we are getting some capital efficiencies on the other hand, in retrospect we are somewhat underinvesting in the business. Can you help a little bit with how we can see that balance and that you are not moving into underinvestment mode?

I think that it is a very fair question. I think there are two factors that come into play here. I think we need to march maintain the fleet and be thoughtful but over the top of it is in your view, maybe that fleet will get a little bit older at this point in time because one of the things that we are actively doing is really driving the hybrid technology. We are working with our partners, we're trying to understand what are the likely vehicles that we want to put in place so what we really want to do is we have to be thoughtful there. We need to be -- we are fortunate in terms of the work that Paul is doing and that we are rerouting, we are, we are rerouting and we are really, we are really putting ourselves in a position from a utilization standpoint to minimize that capital, that CapEx on a go forward basis, but also, we're not, from our perspective we want to be in a position in a year or so where we are buying more trucks with hybrid technology and I think we are are probably about a year away from seeing technology that is going to allow us, 35 to 45% fuel savings. So I think there's twofold there. We are through the programs that Paul is instituting, we are affecting that capital spend in a positive way on a go forward basis and I also think that we want to be in a position a year from now or so where we are replacing our trucks with new technology as opposed to putting a significant amount of vehicles in place now. Jim, do you have.

No, no.

Great. Thank you.

(Operator Instructions) We will go next to Jonathan Ellis with Merrill Lynch.

Thanks and good morning, guys.

Jonathan.

Want to kick off with a question regarding your guidance. You probably updated guidance for the full year and we can back into what that implies for the fourth quarter. It looks like you are anticipating a fairly meaningful sequential decline in revenues by my calculation about $8 million. Yet it looks like EBITDA should be increasing around $2 million sequentially. And I understand you have done a lot with both on the pricing side and on the cost savings side to help support EBITDA, but I guess my question is I would have thought given particularly the price increase and the fees that you have implemented that would lend a little bit more support to the top line. So I'm kind of surprised how dramatic the sequential decline is in revenues vis-a-vis EBITDA. Can you speak to that at all?

It is John Quinn speaking. We gave a fairly wide range in terms of the revenue and I guess we start by saying that we, our expectation is that we will come in somewhere in the middle of that range because we did that without a range there. We do see some volume declines continuing but notwithstanding that, we talked about the pricing that we did did in Q3 so we are going to have that as a favorable impact. Fuel, diesel prices have continued to fall in the market. That will have a slight impact on revenue but it will actually drive the margin better as well. Jim spoke to the FCR revenue and the hedge impacts. As we move from volume materials to instituting tip fees, that can lower revenue but the tip fee comes through a (inaudible) margin. Similarly to the hedges as we move from being in a position we are paying on a hedge to receiving it. Again, that flip is 100% margin as well.

In addition, Paul has been working very hard on some of the structural changes taking out costs in terms of some of the head count. We re going to see some of that impact coming through in the quarter and then we also have just lower purchase materials. So we think the margin will improve slightly sequential and year-over-year potentially. Sequentially, we also avoid some of those costs that we have at FCR associated with the precipitous drop in the commode prices.

Okay. That's very helpful. I appreciate that. Wanted to also talk just about the price increases that you put in place, and it looks like this from the data you provided earlier of breaking out landfill pricing versus collection pricing, it looks like if I'm not mistaken, more of the price increases are concentrated in the collection side of the business. Can you just speak a little bit towards, you mentioned other opportunities from a pricing standpoint. Are those opportunities primarily on the collection side or do you also see opportunities on the landfill side?

I think it is fair to say, Jonathan that the price increases have been on the collection side and I think that on a go forward basis we are looking at those opportunity both from a collection as well as from a disposal standpoint but clearly, the existing price increase is more driven from a collection perspective.

Okay.

There's on a go forward basis, I think that we are more of a mindset that we are looking at the entire customer base across both collection as well as disposal and also looking obviously at opportunities where we have opportunities from a tip fee perspective as well on the recycling side, additional opportunity.

Okay. And just on the price increases with collection customers in particular, it looks like I think you alluded to this you have done a pretty good job as surcharge fees have come down, trying to get some kind of core price recovery as those fees compress. Is most of the pricing that you're, both you've achieved the last quarter and also what you can achieve going forward a function of trying to convert those surcharge fees into core prices or is it more so just going to customers and simply trying to get an increase off of a base price?

I think the answer is yes. It is both frankly.

Okay.

We are going to take a look at where we are with respect to the market on fees, and core CPI continues to exist in the economy. We will continue to try to push through pricing on that front as well.

Okay. Great, and two more questions. First on the cost savings that you highlighted, can you help us understand perhaps how much of that is what we call sustainable cost savings versus how much is more volume related?

I think if you are talking specifically about the $10.5 million from a standpoint our sense is about 2.5 million to $3 million of that is permanent.

2.5 million to $3 is permanent.

Sorry about 2.5 on a go forward basis of that 10.

Okay. That is helpful. Then my final question, is related to just given the given what you are trying to do from a capital structure standpoint now, and what you highlighted about appears to be incurring related to Greenfiber any thoughts over the next few years about potential trying to monetize the Greenfiber investment?

I think it is fair to say that we have always had a perspective that at some point in time, the business model would be better served, Jonathan, as a building materials Company. The challenge that we had obviously is the current market but on a go forward basis, it is clearly an opportunity for delevering as well.

Great. Thanks, guys.

Thank you.

And gentlemen, that does conclude today's question-and-answer session. I will turn things back to Mr. Casella for closing remarks.

Thank you very much. In conclusion, I would like to clearly commend everyone in the organization. I think that we really, truly have executed well against the factors that we can control. Paul and his team, Jim from the development standpoint, the addition of John in terms of the financial team. I think we have got a team well positioned and executing really well all the way down into the organization. We are working hard to offset the negative pressures from an economic standpoint. The operating programs that we have talked about, increasing revenue, reducing costs, reducing flexing CapEx that will ultimately improve productivity and asset utilization. I think it is really important that the way we are approaching this process is to be in a position where we come out the other side of this as a improved more efficient operation and one in which the efforts that we have taken during this period of time really improves our overall margin and performance on the other side. We are also making good progress on the refinancing of the senior credit facility and have confidence that we will get this completed by the end of our fiscal year.

I would like to the thank you for your attention this morning. Our next earnings release and conference call will be in late June when we will report our fourth quarter and give our fiscal year results. Thank you very much, everyone. Have a great day.

Thank you, sir. That does conclude today's conference call. Thank you for your participation. You may disconnect at this time.