Casella Waste Systems Inc (CWST) 2009 Q4 法說會逐字稿

Good day and welcome to the Casella Waste Systems, Inc. fourth quarter and fiscal year 2009 conference call. As a reminder, today's conference is being recorded.

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

Thank you for joining us this morning, and welcome. 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 Chief Financial Officer; and Jim Bohlig, our Chief Development Officer. Today we'll be discussing our fourth quarter and fiscal year 2009 results. These results were released yesterday evening. Along with a brief review of these results, an update on the Company's activities and business environment, and the outlook for fiscal year 2010, we'll be answering your questions, as well.

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

Also, during this call we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial table section of our earnings release which was distributed yesterday evening and is available in the investor section of our website Casella.com/investor.

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

Thanks, Joe. Good morning and welcome to our fiscal year '09 fourth quarter conference call. Our purpose today is to discuss, give you insight into our fourth quarter '09 results and lay out guidance for fiscal year 2010. I'll start with a brief strategic summary. John will take us through the numbers, Paul will run through an operating summary, and as usual Jim will give an update on development activities.

Clearly '09 was a challenging year. We experienced the slowing economy, collapse of not only the financial system but also commodity markets. Particularly in October of '08. In spite of these significant headwinds, I'm pleased to report that we were able to meet our original free cash flow target for the year request free cash flow of 8.8 million. And we were also able to meet our revised EBITDA target for the year with adjusted EBITDA of $115.6 million after adding back the nonrecurring charges. Clearly, as we indicated in early March, the value driver in the recycling business is net revenue and with the increases to tip fees and the reduction of payments to our customers, we have mitigated a large portion of the commodity downturn as reflected in our fourth quarter recycling results.

Our team acted quickly and took the necessary steps to offset the economic downturn. We increased pricing in the solid waste group, raised tip fees in the recycling group and raised the environmental fee, an $18 million impact in the second half of the year. We froze all new hiring, eliminated merit based pay increases, suspended the matching contributions for 401(k), eliminated bonuses. We also reduced our workforce by 326 employees or approximately 12% over the past year. And we also reduced our planned CapEx expenditures by $19 million. It's important to recognize that these actions strengthened the Company for the current recessionary environment and prepared us to remain strong as the economy begins to grow.

Looking forward to fiscal year 2010, our strategy has not changed much from the past year. We are focused and continue to be focused on increasing cash flows to repay debt and taking actions to improve the returns on our invested capital. As such, our team will continue to drive profitable revenue growth, continue to execute cost controls and operating efficiency programs, allocate capital to only the highest return opportunities, and we will also complete a strategic asset review.

During the economic downturn, I believe the team has maintained a good balance between cost cutting and revenue growth. However, I'm working closely with our sales and operational teams to increase focus on driving profitable revenue growth both pricing and new business. We need to raise revenue to prosper, and Casella has a unique set of services to offer new and existing customers to gain new business. Our industry leading resource transformation program, such as Zero-Sort Recycling, are helping to win new commercial and municipal business. Leading with recycling differentiates Casella in the marketplace. Our sales force is working both to expand recycling volumes to our MRFs plus organically grow the MSW streams to our landfills from the same customers.

In addition, we continue to drive pricing through our centralized pricing team with both core pricing and expanded fees. Paul and his team, from an operating perspective, did an excellent job of flexing operating costs to our revenue during a dynamic fiscal year. His team worked hard to accelerate programs to yield cost savings and operational efficiencies ahead of schedule. Our intention during the year was to reduce costs but not make short-term decisions that would hurt our competitiveness as the economy eventually recovers. One clear example of this strategy is on the labor side. We scaled back our workforce, as I said before, by about 12% since last May, but we didn't just do it through thoughtless across-the-board layoffs. The reductions were driven by a team's execution against specific operating programs such as fleet routing optimization, front load conversions, outsourcing long haul transportation and the reorganizing of operations and functions. During fiscal year 2010, we will continue to execute against operating programs that will have near term cost savings and long-term strategic benefits.

As the economy slowed during the fiscal year, we reduced our capital expenditures by $19 million against our original plan to help us achieve our free cash flow targets. The lower capital spend, though, was driven both by lower economic activity, lower landfill capital needs, lower truck and container needs, but also by the success of the operating programs freeing up assets from route optimization. In addition, we re-examined our return thresholds and decided not to move forward with a growth project and several facility upgrades. We believe that we have adequate spare vehicles and containers to augment replacement and growth needs while not driving up fleet age or maintenance costs.

Moving on to capital structure, our goal over the next several years is to reduce leverage to roughly three to 3.5 times debt to EBITDA. To achieve this goal, we need to expand margins and selectively divest of noncore assets at normalized valuations. Maine Energy is one of the assets that we have targeted for divestitures. After running an extensive investment banking process with Bank of America, we've begun to work with the governor of Maine, the state legislator and the mayor of Biddeford to explore a public-private partnership to achieve a mutually beneficial outcome. We have entered this process in good faith, and if our municipal counterparts cannot raise sufficient funds we will consider either re-engaging private buyers or continuing to operate this facility for another 20 years.

I'd like to give everyone a bit of a sense of how 2010 has begun by sharing some facts and figures from the month of May. We have extended or signed new recycling agreements or were named low bidder in several major markets. Some of the things that are equally important is, through the downturn in October, we also have really gone out and renegotiated some of those recycling agreements that were rolling three month averages. And the really bright spot about that is that the level of commitment from a municipal perspective continues to be very strong in terms of the resource optimization strategy as well as keeping recycling as a major component of waste management services.

We have also seen export demand pick up, commodity markets stabilize, particularly from OCC paper and plastics. We've seen fairly significant increase in pricing. To go back to October where we saw actually negative numbers in the Port of Albany and now we are seeing pricing for OCC and ONP in the $70, $80 a ton range and we have seen continued improvement in the pricing from a plastics standpoint. Metals still remain soft and domestic mills continue to take additional downtime, so the domestic market has not improved. However, the export market has picked up very nicely and stabilized the commodity markets.

We have seen week over week improvement in gross solid waste collection revenues in the last four consecutive weeks. Landfills are slightly ahead of plan in both revenues and tons. Transfer stations are unfavorable in revenue but favorable in tons against plan. And our Zero-Sort facility, which has just come online in the Boston market, has put us very close to closing a total of $500,000 annually of new business in both collection and commodity revenues from major customers.

Before I wrap up my comments, I'd like to give a brief overview of our refinancing efforts for our senior secured credit facility due April 2010. We accelerated the year-end close to enable the refinancing process to move forward with audited financials. We believe that our fourth quarter results demonstrate the stability of our operating cash flows and will provide a good platform to launch the transaction. We are currently targeting a total capital raise of approximately $485 million with an amended senior secured credit facility and a secured bond. We plan to have the refinancing completed by July 31st. In addition to providing a stable capital structure, the banks will reset our covenant package to provide adequate cushion against our latest operating projections.

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

Thank you, John, and good morning. As John mentioned, the Company experienced positive operating results in the fourth quarter and I will shortly address those results, but first I'd like to mention a couple of matters of special note from the fourth quarter. The first is the goodwill impairment charge. In accordance with FAS 142, the Company performed its annual assessment of goodwill impairment at the end of the fourth quarter for fiscal 2009, and accordingly the company recorded a $55.3 million noncash goodwill impairment charge. This charge was mainly the result of an increase in the discount rate we used to test the goodwill reflecting the higher cost of capital in the market.

The second item I would like bring to your attention is an environmental remediation charge. In Q3 we recorded an environmental remediation charge of $2.8 million related to our Potsdam site in New York. One of the potential responsible parties for this site is General Motors, and with its recent bankruptcy, we have increased our established liability for this matter by a further $1.5 million. This charge is noncash but we expect that we will need to pay these costs over future years with the bulk being incurred in the fiscal 2011 year.

We also recorded in our G&A costs $1.3 million of severance and reorganization costs as a result of the consolidations and headcount reductions we undertook in the quarter, and there was a $375,000 charge related to reserve on a few development projects.

Regarding the valuation allowance in our tax provision, we have approximately $49 million of deferred tax assets related to the tax losses from prior periods. These losses are not expected to expire until 2022. However, FAS 109 requires we look at recent history in the near term when assessing the recoverability of those assets. We expect we will not be a federal taxpayer for the next few years. As a result we increased our valuation allowance by $24.1 million in the quarter. This charge is also noncash, but to the extent that we become profitable for federal tax purposes, some or all of this charge could reverse.

Finally, John noted that our credit facility has now gone current and as such we recorded the full amount of our facility and our sub notes as a current liability.

That behind us, I'd like to turn to the fourth quarter operating results. Revenue for the quarter ended Q4 2009 was $117.6 million, a decrease of $22 million or 15.7% from the same quarter last year. Of the total revenue decline, the Company's recycling operations accounted for $11.6 million of the decrease and the solid waste group including other revenue accounted for $10.6 million of the reduction. The recycling decline year over year is up slightly from Q3 but believe this is not so much due to the sequential changes as the fact the Q4 last year was quite strong from a commodity pricing point of view. Sequentially, the solid waste group and other revenue show a slowing in the year-over-year decline pointing to what we hope are some indications of the economy hitting bottom.

Recycling revenue fell 34.2% driven by a 26% decline in price and 8.2% decline in volume. Prices stabilized (technical difficulty) in the quarter on a sequential basis. The solid waste operations internal growth was negative 10.9%, recognizing that within the solid waste groups there is a small recycling component which contributed 1.4% of the revenue decline. The lower solid waste volumes included reductions due to the planned end of life decline of landfill volumes at our Pine Tree landfill and the planned closure of Colebrook landfill, and the idling of C&D recycling facility. Excluding these three items, the drop in the solid waste volumes would have been a more modest 5.9%.

Core pricing for the solid waste operations was favorable 3.4% with all the lines of business excluding commodities reporting increases. We shown in our press release this pricing metric separately from our field recovery fee which was 2.0% negative in the quarter. Earlier this year we established a goal to get our core solid waste pricing above CPI. With the actions we have taken we have been able to hit that goal in only six months.

Moving to the cost of operations. For Q4 2009 cost of operations were $78.5 million compared to $94.3 million for the same period last year, a reduction of $15.8 million or 16.8%. The decrease reflects lower volumes noted in the revenue section, lower cost of goods sold in the recycling business. The cost of purchased materials was $8.3 million lower year over year, direct labor was $2 million favorable, and fuel was $3.5 million dollars favorable, reflecting the lower average price of diesel as well as some volume declines. G&A costs of $17.2 million were favorable $2 million or 10.2% in Q4 2009 compared to the prior year. Depreciation and amortization was $16.7 million in the quarter compared to $18.7 million for the same period last year, a decrease of $2 million or 10.9% primarily due to the lower landfill volumes.

Moving to EBITDA, EBITDA for the quarter including the goodwill charge and other unusual items I called out earlier was negative $33.9 million compared to a positive $24.2 million in the same quarter last year. Adjusting for the goodwill impairment and other charges, EBITDA would have been $23.3 million. Last year we incurred a $1.4 million charge in our Hardwick landfill and $534,000 in development charges. So on an adjusted basis, EBITDA was $23.3 million this year compared to an adjusted $26.2 million last year, a decline of $2.9 million. The adjusted EBITDA breakdown for the quarter by line of business is as follows: Solid waste 2009 was $20.021 million and 2008 was $19.0959 million, an improvement of $926,000. FCR reported in 2009 $2.635 million, compared to $6.661 million last year, a decline of $4.026 million. And other was $615,000 this year compared to $411,000 last year, an improvement of $204,000.

Solid waste EBITDA was favorable year over year primarily due to bonus adjustments and improvements in our operating margins as a result of improved pricing and cost controls. FCR's EBITDA was $4 million unfavorable year over year primarily due to a drop in commodity revenues.

Our tax expense for the quarter was $9.1 million after giving effect to the tax valuation allowance of $24.1 million I called out earlier. The Company recognizes the deferred tax liabilities with its amortization of intangibles for tax purposes. Unfortunately, for the purposes of accounting, these are not allowed to be used to offset deferred tax assets which arise from operating losses. This means that even though the Company recorded a loss for pretax income it must record a tax expense effectively increasing the amount of pre tax loss. The Company's net loss for a quarter was $68.5 million or $2.67 per share compared to a loss of $7.8 million or $0.31 per share for the same quarter last year. If all the adjustments are accounted for as discussed in our Form 8-K, the more comparable numbers are a loss of $0.17 per share last year and a loss of $0.03 per share this year.

The average interest rate for the quarter was lower due to lower variable rates at 6.7% including amortization of financing costs. Net of these expenses it was 6.4%. Availability in our revolver at April 30, 2009 was $147.8 million after taking into account the $51.7 million of LCs outstanding.

Excuse me, I'm losing my voice here.

Free cash flow for the quarter was $4.2 million compared to $6 million in Q4 2008, a decrease of $1.8 million. Our cash flow from operations for the quarter was $26.9 million compared to $19.8 million last year for the same quarter. In our statement of cash flows, our change in working capital is favorably impacted by a $13.9 million favorable adjustment as a result of our liquidating our captive insurance company. This cash is not included in our definition of free cash flow from 2009.

In yesterday's press release we provided guidance for the forthcoming year as follows. Revenues between $510 million and $530 million, EBITDA between $111 million and $117 million, and capital expenditures between $48 million and $54 million.

We are redefining free cash flow for 2010 to be net cash from operating activities, less capital expenditures, less payments on landfill operating leases, and less assets acquired through financing leases. We will also adjust any unusual items associated with the refinancing or other major unusual items. With this renewed focus on generating cash to de-lever, we believe this new definition will more closely align with cash available for debt repayment.

On this basis, we expect free cash flow to be between zero and $6 million for the year. The guidance was based on solid waste revenue being negative between 3% and 6%. We expect that volumes and fuel recovery fees will be negative, but price will outpace CPI.

Recycling revenues will be between negative 16% and negative 20% with declines in both price and volume, but we expect pricing to be stable to slightly up from Q4 2009. We will likely record additional tax valuation allowances in 2010 so we expect that we will record a tax expense between $2 million and $5 million. This number is relatively independent of the Company's pretax income or loss.

When viewing this guidance, we would like to remind listeners that the first half of our fiscal 2009 benefited from a more robust economy and higher commodity prices. We expect therefore that the first half of 2010 will show difficult or negative comparisons on a year-over-year basis, but as we anniversary the commodity collapse in around October this year we will start to show improved numbers year over year.

And 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, and good morning. Revenue highlights for the quarter include solid waste price increasing 3.4%, our fifth consecutive quarter of improvement. The growth in solid waste pricing includes a 2.6% price increase at the hauling and transfer companies and a 1% gain at the landfills.

We are pleased with our results in driving pricing discipline across the collection line of business over the last 18 months. We see continued opportunity ahead and we will maintain that focus despite anticipated volume weaknesses. As examples, we executed a price increase this past January yielding approximately $6 million in annualized benefit. In Q4 we executed an increase to our solid waste environmental recovery fee yielding approximately $2.4 million in annualized net benefit. Early in Q1 of this year we increased the environmental fee again by approximately $1.8 million.

During the quarter landfill pricing was strong in our central and eastern regions and down year over year in the western region. Economic weakness in New York and Massachusetts continued to weigh on third party landfill pricing. Despite that weakness, our New York market continued to have very strong operating performance with operating income up 38% in the quarter excluding one time benefits. Landfill volumes were down 17.5% year over year with MSW volumes off 7.5% and C&D and BUD volumes down significantly. Roll-off volumes remained challenging in Q4 resulting in a 15.3% decline year over year on pulls with the greatest weakness in the western and eastern markets. Despite the market challenges, we expanded our net revenue per pull by 4% year over year.

We continue to execute on a number of sales and operating initiatives that are driving top line growth, improving our operating efficiencies and our asset utilization. Solid waste operating margins improved 240 basis points quarter over quarter, while FCR operating margins declined 1300 basis points mainly driven by lower commodity prices. Direct labor costs for the quarter were down 60 basis points as a percent of solid waste revenue. We effectively executed our flex labor plan while also delivering more permanent labor efficiencies that we will continue to realize when the economy does recover. After adjusting for one-time severance and reorganization charges in Q4 '09 and normalizing Q4 '08 for bonuses, solid waste operating margins improved 250 basis points on a full year basis, and operating income improved by $2.4 million.

These are excellent results year over year through these difficult economic times. Our team remains committed on the fundamentals of driving our business and specifically to improve the routing and asset utilization of both our long haul and collection fleets while also streamlining specific functions within our sales and operating teams. As examples, within our long haul operations, we completed the previously reported outsourcing for long haul transportation in Vermont during the fourth quarter and we are exceeding our pro forma objectives of over $800,000 in annualized cost savings and a $1 million reduction in CapEx for this line of business. We are reviewing opportunities to expand this program across our markets.

Within our collection fleet we are also on target with our fleet routing software roll-out and the results from the first phase, our five largest markets continue to validate our pro forma assumptions and drive our reductions. We estimate that these reroutes will deliver approximately $1.1 million of annualized labor savings in FY10 and a further reduction in fleet CapEx requirements. In total we have been able to selectively reduce our capital investment in our collection fleet over the last 18 months without affecting our maintenance spend, and we expect to continue throughout this fiscal year.

One collection fleet investment that we will continue to make, however, is within our rear load to front load conversions. We realized significant operating gains last year in converting specific markets to front load systems and we will continue with them in our most competitive markets. We anticipate that these conversions will yield approximately $1.3 million in savings in fiscal year '10.

Finally, we are very pleased with the results of the integration of our 11 divisions into five market areas through the first nine months of fiscal year 2009. In the fourth quarter we continued our reorganization efforts by consolidating our former northeast and southeast regions into one region, reducing our overall indirect labor requirements. In total, as a result of the team's combined efforts, including the reorganizations, flexing our labor to market conditions and creating operating efficiencies across every function, we reduced our workforce by 12% year over year, yielding approximately $11 million in annualized savings.

Looking forward to fiscal year 2010, we see continued opportunity to rethink almost every aspect of our business. As one example, we have selected Cisco's call center manager application to improve the effectiveness and the efficiency of our call center personnel. We expect to have this software and hardware upgrade completed by mid-July. In all, with initiatives such as this, we expect to reduce our cost by another $1 million over those savings already mentioned.

In summary, we are pleased with the performance in the quarter and throughout the year and we are very excited with the opportunities that we see to grow our business. And with that, I'll turn it over to Jim.

Thanks, Paul. Good morning. Just a few short comments on the development. First about Southbridge and the permitting process there, and second about the Maine Energy task force that we have been working on.

As those who have followed the Company know, Southbridge is a C&D landfill that we purchased four or five years ago. We have been in a permitting process and received in the summer of '08 a site assignment from the Board of Health to convert this landfill from 180,000 tons per year to 400,000 tons and to convert it to MSW. This will be the first MSW landfill in over 20 years in the state of Massachusetts and we are making good process post that award of that outside assignment dealing with the appeal that was filed by the small opposition group. That appeal will be ready to be heard effective the month of June '09. Initial filings have been made by the parties, briefs against those initial filings will be filed within the next 30 to 40 days, and we would expect that a hearing would take place mid to late summer with the decision early fall November of '09. Based upon an affirmation of the permit, we would then reinitiate our DEC permit -- DEP permit with the state of Massachusetts and that would start late calendar year 2009, and we believe we would then convert that facility to an MSW facility early in the calendar year of 2010.

Moving on to Maine Energy, as you know, the governor along with the sponsorship of the mayor of Biddeford formed and asked us to be part of a task force that was looking at how we could accomplish a win-win outcome with regards to the parties. We have been actively involved in this task force for now going on about two months. There's been in excess of seven meetings. Representation includes the governor's office, the legislature, the city of Biddeford, city of Saco and ourself. The purpose of the task force is to develop a win-win outcome with regards to the parties and the long-term use of the facility within the city. We have offered to restructure and sell the facility to the city and state, and the parties are pursuing discussions on that particular perspective.

As we have indicated publicly, we believe the appropriate sale price is $53 million. As all of those of you who work in the public sector know, however, the process will be deliberate, it will be careful, and there are of course no guarantees the state or the city will be able to arrive at an arrangement that will make sense for all the parties. We will exhaust this opportunity, and as energy prices rise, we believe this facility will have more value as we go forward, and we will continue to operate the facility, as John said, for in excess of 20 years and/or seek other outcomes if we are unsuccessful on this course. We believe this course is the right long-term strategy for our position in Maine. While the facility is located in Biddeford, it does involve a number of strategic issues and assets within the state of Maine and we are making progress on a number of those as a result of this initiative.

Moving onto FCR, as you know, both Boston and Philadelphia were converted and finished their Zero-Sort conversions. One of the more notable remarks associated with that, that after every one of the Zero-Sort conversions, we are experiencing quarter over quarter sequential volume growth in excess of 25%. Boston has gone from about 340 tons per day to excess of 500 to 600 tons per day and we continue to believe that that growth will continue. We hope to finalize a contract with the city of Boston this summer and we expect that that facility will grow to capacity much quicker than we originally thought and will be at capacity within the next 12 months.

Commodity pricing has stabilized. While we have given you Q '09 versus Q '10 numbers and our annual numbers actually from Q3 to Q4 '09, all of the commodities have increased. PET has gone up 3%, HTP 26%, plastics in general 16%, OCC 32% and ONP 23% from the lows of Q3. We expect commodity pricing to be flattish through the balance of the year with some slight growth. Generally speaking commodity pricing is being led by export growth with domestic mill activity relatively sluggish as of demand.

Over the last six months I think we have done an excellent job of restructuring all of our contracts to better align these contracts during these low commodity pricing. We have done this by basically asking our partners in these markets to help us sustain these recycling programs during these low commodity markets by offering to pay some of the cost of processing in exchange for either revenue share modifications, rebate restructurings, contract extensions and related program and contract changes. In every instance we have had very, very wide acceptance of the need for continuation for recycling and we have made great progress in restructuring our entire book of business.

We have renewed our Charlotte facility with an additional 10-year contract. The Mecklenburg County will provide the capital for conversion to Zero-Sort. We've renewed Somerville contracts, Hartford and Stratford contracts, and we have recently extended our West Palm Beach facility for an additional five years. So overall I think given the tremendous volatility during the year, I think that the recycling business has done well and is positioned for a recovery as domestic energy prices and global energy prices will again begin to drive commodity pricing.

Moving onto US GreenFiber, Q4 '09 versus Q4 '08, despite a $28 million revenue decline, which is a -- $28 million in sales which was a 13% decline of revenue, we have increased EBITDA from about $300,000 to $2.6 million which represents an increase of $2.4 million. Year over year, despite a 14% revenue decline we have increased EBITDA overall by $3.8 million from $3.5 million to $7.4 million. And although contractor sales and manufacturer sales remain down, retail sales are up 12% and we have done an excellent job supporting Scott's Patch Master sales which are up considerably, as well.

I think it does not come as any surprise that the housing market remains mired in a slump. We do not consider that any new significant construction will occur the next 12 to 18 months. But fortunately the stimulus package that was passed this spring included a $5 billion weatherization program which will be spent over the next 24 months. Incorporated in that $5 billion we estimate at least $300 million of that will be spent in insulation sales primarily focused on cellulose, using cellulose as a principal material. And we believe that this program will, in large measure, fully occupy and taper our utilization rates at our facilities across the country to near 100%. During the past year US GreenFiber has also had free free cash flow in excess of $5 million and paid down debt and done an excellent job in managing the business during the difficult housing period.

With that, I turn it back to John.

Thank you. At this time, operator, we'd like to open it up to questions.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). We will pause for a moment to assemble our queue. We will take our first question from Scott Levine with JPMorgan.

Good morning, guys.

Good morning, Scott.

You mention in your press release or your guidance statement that you have confidence that pricing can remain above the rate of CPI. I was wondering what gives you confidence to make that statement and whether there are, you flagged the western region as the source of disposal pricing. Are there any other observations and differences across your geographic footprint that you would highlight as being relatively strong or weak in that regard?

Well, several things there. First of all, I think one of the benefits of having John join the senior management team with his experience both in his two, recently with Allied and then prior to that with Waste, have a real sense of the differences between our pricing programs and some of the other things that are opportunities from a pricing standpoint. Not only have we centralized the functions under our VP of Sales, both from the landfill standpoint as well as from a collections standpoint, Scott, but we have also really looked at -- we have some opportunities to close the gap from our surcharge program. It seems when we look at our surcharge program, there's an opportunity for us to close the gap in terms of what some of our peers are doing.

We have recently closed the gap with regard to the environmental fee and I think we are also looking at other fees that are opportunities for us to look at some of the volume that's going into the landfills directly, differently. And it's just on an overall basis, looking at every aspect of pricing, and obviously with the benefit of John's experience, looking at how we close the gap with some of the things that are being done from our peers' perspective.

The other thing that we are looking at too, from a recycling component standpoint, we are looking at right now how we might be able to approach some sort of recycling processing fee. As Jim said, what we have done from a municipal standpoint is to go back to the municipal customers, and where we had rolling 3-month averages, eliminate that because of the precipitous drop in commodity prices that we saw. But one of the other things that we are looking at too is from a recycling component standpoint, is there a way that we can incorporate something that's tied to commodity prices from a recycling fee perspective, as well. So we have a number of different programs that we are looking at and we also have the benefit of some additional thinking from senior management standpoint in terms of some of the things that John's experienced in his career.

Understood. Turning to the balance sheet, you mentioned that it's your intention to get to the 3.0 to 3.5 times range. It sounds like you're contemplating a refinance that includes a secured bond, maybe a smaller credit facility. Can you help us think a little bit about what your road map might be in terms of how you get there and what kind of time frame you'd be thinking about at this point?

Sure. I think it's fair to say that we have already identified Maine Energy as one of those assets. I think one of the other things that we are going to do is a strategic review of all of the operating assets. And as we identified two years ago, a year and a half ago the Buffalo assets and sold those assets, we will do the same thing with portions of the business that really are not integrated that could very well create more value in someone else's hands and monetize those assets. And we also have investments in other businesses that will also help us to de-lever the balance sheet over that two or three-year period of time. I think clearly what we have experienced in terms of the global financial market collapse is a very different atmosphere from a risk standpoint in terms of debt, and I think clearly what was acceptable from a debt to EBITDA perspective for 20 years in the business has changed. It changed this past year. We recognize that and I think there's a clear perspective in terms of what we need to do from an operating perspective to de-lever the balance sheet over a two or three-year period of time.

Okay. One last one, if I may. I think you mentioned that you were changing definition on free cash flow calculation slightly. Do you have a sense or give us an indication of on an apples to apples basis what the free cash for 2010 you're guiding to would look like under the old definition, or what growth in free cash flow might look like year over year compared to '09 as defined under the old definition.

Sure. It's John speaking. Under the old definition free cash flow would have been reported higher for 2010, the guidance would have been something more like $12 million to $18 million. The main differences are that the landfill operating leases are excluded from the old definition. Closure, post closure payments and accretion are also excluded. Historically these things offset each other but as time has grown, they have grown, so we just think this new definition is more appropriate.

Great. Thanks, John.

It would be about $10 million of operating leases, is that about?

Yes, yes.

Great. Thanks.

You're welcome.

We will take our next question from Bill Fisher with Raymond James.

Good morning.

Good morning, Bill.

Just to follow right up on the free cash one, does your free cash forecast make some estimate for forecasting any associated interest expense increase on the refinance?

Yes.

Yes, it does.

Okay. And actually, John, you made some comments right up front about the -- and I may just not have heard it, but the four consecutive weeks of -- was that collection revenue improvement?

That's right.

And was that more on a pulls basis or the environmental surcharge kicking in more or can you give some color on that?

It's Paul. It's really I would say all of the above. Beginning in May -- this is all -- these comments are all to plan, Bill, also, not on a year-over-year comparison. We have seen sequential improvement week to week across all of the lines of businesses John mentioned with the exception of the transfer stations, and that has continued into June. We have seen new customer accounts grow, our revenue per account has grown and our margin per account has grown. So we are really seeing the culmination of a lot of different things that we put into play last year starting to come to fruition here in May.

Great. And then on that environmental surcharge, it looks like you netted against a fuel surcharge or in that line on your report, if that's correct. What I'm trying to get at is, do you have a sense of what the environmental surcharge was up year over year on a percentage basis?

Well, we are going to break that out in the future. I don't think it was appreciably up year over year for the quarter because a lot of the changes we made were late in the quarter. We will probably adopt what the industry does more, which is to include fuel recovery separately and include the environmental changes in core pricing. So we have not made that change yet. We will probably start doing that in Q1, [meaning] (technical difficulty) that our numbers -- our pricing metrics will be more comparable to the rest of the industry.

Okay. Great. And then one last, if I could, just for Jim, you mentioned FCR, a lot about the pricing. Do you have maybe just a sense of what the average price per ton for you was in the April quarter and maybe what it is trending in May? Unless I missed that.

I would give you $58 for the Q4 and then $62, $63 in May. It's up a little bit. You're getting different signals. The fiber plat pricing is more flat and seems to be a little more volatile. The plastic pricing all seems to be rising together so taken together on an average commodity pricing, $63, $64 is a number in May.

Okay. Great.

Keep in mind, too, Bill, the export market is where we are seeing continued improvement. And the other -- and the majority of what we are shipping is domestically shipped and we are tied to a lot of contracts that are fixed contracts at $50 floor prices. So on a good portion of it, we are not seeing all of the benefit that we might see if we had a larger portion going on an export. We think that's the right mix. Obviously, when the domestic market comes back, when the economy improves, it's going to obviously drive overall pricing a bit harder than what is being driven right now because it's really just simply being driven by the export market.

All right. Thank you.

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

Good morning. I was wondering if you could explain why you are looking for recycling volumes to be flat next year when you have a couple of big cities ramping.

I think that you would look at that from two perspectives. One is that I don't think any of us are able to call the economy yet and the economy directly generates economic activity, which directly generates recyclables. So I think we are being cautious with regards to where the economy might play through the volume numbers. I think that where we have done single stream conversions, we have seen volume growth and we expect that to happen. But I think it's the right place to be given the uncertainties of the pricing matrix on a go forward basis and the general economy to generally look at volumes being flat. I think the good news that you ought to take away from the discussion, however, is that recycling volumes are not declining so I think the important thing is that there's a floor. They have stayed relatively flat through this entire period of time and they are again beginning to see a slight rise. It's too early for us to, perhaps at the end of Q1 we will have a better visibility on that at that time.

Okay. Thanks. And then could you just give an update on the landfill gas energy projects that are going?

We finished in the fiscal year '09 natural gas energy installations at Clinton County and Hyland. All of those units are up and operating. We also have, as you know, units operating in Pine Tree, Waste USA and Ontario. We are generating additional gas in the month of May than what we did over the winter at Clinton County through a landfill gas collection system upgrades and recirculation of leachate, and we expect that we may very well be above the gas flow necessary to then start the fourth engine which is installed and we expect to have that operating this calendar year, certainly before the end of the summer.

Thanks a lot.

You bet.

We will take our next question from Jonathan Ellis with Merrill Lynch.

Thanks and good morning, guys.

Good morning, Jonathan.

Wanted to first ask, I think you just answered a question about interest expense being factored into your free cash flow this year as early as the refinancing. Can you give us a sense of at this point what that number is, what you're factoring into free cash flow in terms of incremental interest expense?

I don't think we are prepared to talk about that today, Jonathan. It will move depending on the execution of the refinancing and the timing a little bit.

I think that it's also fair to say, based on where the markets are today, both the bond market and senior credit facility market, I think that what we have incorporated into our plan is fairly conservative. We have the information relative to the market, and barring something happening from a market perspective, I think, obviously, we have that information coming from the market in terms of transactions that have been done, but certainly that's volatile at this point in time and is difficult to determine exactly how that's going to come out. But I think that we have tried to obviously be close to what we have seen happen from a market perspective in terms of deals that have gotten done.

Okay, great. And then just maybe let me ask the question in a slightly different way. In terms of looking at your operating cash flow guidance for the year, are there any other factors other than the incremental interest expense that should result in a conversion from EBITDA into cash flow that would be different than past years? Any other unusual factors that should impact operating cash flow this year relative to past years?

I think I called out the fact that we liquidated our captive insurance company. That provided us about a $13.9 million -- I won't call it a one-time benefit but it's not going to repeat in 2010.

Okay. No, but just to be clear, that dissolving of the insurance subsidiary won't have any implications for fiscal 2010 cash flow other than what contribution it had been providing on a normalized basis in the past? No residual impact in terms of sale proceeds that should impact 2010 free cash flow?

I guess what I understood your question to be is what's going to change between 2009 and 2010 besides the interest expense?

That's correct.

What I'm trying to draw your attention to is that in 2009 we had the liquidation of the insurance company which benefited our cash flow in 2009 by about $13.9 million in terms from cash flow operations. Again that's not in our old definition of free cash flow but it is in cash flow from operations and that will not be repeated.

Understood. Okay. That's great. And then just one other question as it relates to the upcoming refinancing. As part of the strategic review, and you touched on where you are with Maine Energy, is your anticipation that you would be potentially selling assets in conjunction with the refinancing?

No.

No? So the process will take much longer if there is a divestiture?

That's correct. We are not anticipating that.

That's correct.

Great. That's helpful. And then just turning our attention to the solid waste business, you talked about how, I think, volumes at the transfer station are ahead of budget but revenues are below budget, and I'm just wondering why would you be seeing pricing pressure at the transfer station and not necessarily at the landfills at this point? And what's the risk that transfer station pricing ultimately has a trickle-through impact to landfill pricing over the course of the year?

It's too early to tell in May. The signals that we outlined to you for the first six weeks of the year, they started out very slow, as we mentioned, and they have picked up. I don't know that you can draw a conclusion at this point in time on, one, have they stabilized and why they are different on a market to market basis. I wouldn't be comfortable answering it.

Okay.

I think that's a fair perspective, Jonathan. It's too early to tell. I think that the positive aspect of it, though, is that what we have seen is stabilization and we have seen that across the board. Obviously, with the exception of the transfer station, certainly too early to tell in terms of what the likely reason for that is, but we may very well have some additional information on that issue after the first quarter.

Okay. And just one last question, more just for historical context. Based on the past trends, does transfer station pricing, landfill pricing tend to track with each other over the course of a year or do you sometimes see dislocations where transfer station pricing may move in one direction, landfill pricing the other for a sustained period of time?

I don't think that there's any real correlation between the two. I think that the pricing is really more related back to the curb as opposed to the transfer stations are a means to get the waste to the disposal facility, so they are really more used on that basis as opposed to a driving factor from a pricing perspective. They are really a tool to move the waste to the ultimate disposal facilities as opposed to a driver from a pricing perspective.

Great. Thanks a lot, guys.

(Operator Instructions). We will go next to Michael Hoffman with WSI.

If I could follow back up on a couple of your assumptions. Earlier in the call there was a statement about $2 million to $5 million in taxes. Is that the book tax rate in dollars that you're assuming in 2010?

That's right.

Okay. And what tax rate is that that you're assuming then?

The point I was making, Michael, is because of the tax valuation allowance, the concept of rate is somewhat irrelevant, because regardless of if we have taxable income or taxable loss on a pretax basis, we are going to put a valuation allowance -- we are going to adjust the valuation allowance on a go forward basis. So this tax just relates to some term differences and the amortization of the goodwill. So what I was trying to indicate is you should expect an absolute dollar tax amount regardless of the income.

Okay. Okay. Fair enough. And then with regards to the landfill pricing comments that were made through the opening remarks, can you just share with the direction in each of the regions, east, west, central, up, down or flat, what's happening in each region in the fourth quarter on landfill pricing?

Michael, this is Paul. The comments that we made were landfill pricing was strong in the central and the eastern regions and down year over year in the western region.

So strong being up or strong being stable?

That's consistent with what we saw last quarter too in the western and New York marketplace.

Okay. But is the strong meaning it's strong as meaning it's up or strong meaning it's stable for the central region?

I would characterize it as stable to up slightly.

Stable to up. Okay. I just wanted to make sure I characterized that correctly.

Stable to up slightly.

And then on the western region, when you look at your transfer stations associated with your western landfills, are you seeing the third party going into the transfer where you're having to lower pricing to get volume to be able to get it into those landfills? Is that what's happening given the competitive environment that's happening in the west?

I think there may be some activity like that. That's probably fair, because that's where we are seeing the most pressure as evidenced by the year-over-year results in the western region from a pricing standpoint. I think that's probably fair. I think it's also fair to say that, notwithstanding that, we also saw stability and improvement, starting probably in April continuing through May.

Okay. And then given where you are geographically, there's a fair seasonal aspect to your business model as you come into the calendar year. Do you have enough data at this juncture to disaggregate between seasonal recovery versus any underlying economic stability?

No we really don't, Michael. We just tried to give a little bit of visibility in terms of what we saw in May but one month, I mean, we really don't have enough information or data at this point in time to really differentiate between the two.

Okay. Fair enough. It's early going. Have you had a chance to look at the May of '09 versus the May of '08 comparison to get a feel for the slope of the line of the seasonality? Are we seasonally recovering normal or seasonally recovering slower?

I would say that it's slightly better.

Okay. So that in theory if that's carrying through, that should help to provide a pricing cushion as we enter into the summer and maybe some of this pricing pressure that's been happening ameliorates?

I think the real telltale there is whether or not we begin to see real economic improvement. I think when we see economic improvement, we are likely to be much more stability in terms of our ability to raise prices and continue that curve, as John has suggested, going out, and Paul, going out into the future. So any benefit from an economic standpoint, it's going to bode well for pricing opportunity going out through 2010.

Okay. And then some mechanical questions. If you've unwound your self-insurance program, what are you doing for insurance now?

What we did was unwind the captive, not the insurance program. the captive is really set up from a Tax perspective. The captive is set up so that you can take the tax deduction on the payments that we make into the captive, but when John really reviewed it, it made no sense because we have the --

NOL.

YeS, we have the NOL so there really wasn't the kind of benefit. So the insurance program really didn't change, Michael. It was just collapsing the captive which actually will save us money on an annual basis and obviously we have the NOLs to offset that so it was just a structure that when John really looked through it, it just made a lot of sense for us to pay down debt. Obviously that is the plan that we are on and the plan that we are going to execute against.

Got it. And then you give some internalization data and I just want to make sure I'm reading it correctly. That data in the press release, that's what's on your trucks going into landfills, correct? As opposed to how much total volume in a landfill is yours versus third party?

Yes, it includes amounts going through transfer stations that ultimately ends up at our landfills or at MERC.

Can you give us just a sense generally of how much volume, physically the total volume in the landfill is yours versus third party?

We could probably get that data for you, just don't have it handy right now. We can certainly get that for you, Michael.

All right. That would be great. And then where do I find in the financials the landfill lease, that $10 million number? Where is that? That's being expensed, I'm presuming, because you called it an operating lease, so is that in COGS or is that in SG&A?

It's being accounted for as part of the amortization, but if you want to see it, I believe it's on the cash flow statement.

So it's not going through the income statement. So then are these really capitalized leases then?

They are, for the purposes of the depreciation and amortization, I believe it's accounted for in the [daw].

So when I look at your financials when you're publishing them, that $10 million is already part of that as I'm trying to calculate a free cash flow number? I just want to make sure I'm not double counting something.

If you start with cash flow from operations and just subtract off what I described, you will get there.

Okay. But when I'm looking at the income statement and it has a daw number and then I go down to the cash flow statement and it has a daw number, those are the same, so that $10 million is in that number already?

I'm sorry. I misspoke. It's in cost of ops, Michael.

Cost of ops, okay. And then last question with regards to the balance sheet, to get to three times you've got to pay down $200 million worth of debt and that's not having any change in your EBITDA, so selling assets that have EBITDA. So doing that in two to three years seems pretty aggressive.

I think that's a fair perspective. As Jim said, the sale of Maine Energy would represent $50 million, and I think that it's fair to say that we have a sense of some of the assets but we really haven't had the time, with the benefit of John on the team, Michael, to go through and do a strategic review of the entire asset base to see how we are going to do that. I think certainly continued additional operating performance will also help us to de-lever the balance sheet by continuing to improve free cash flow generation for the programs that Paul is working on as well. But clearly the biggest portion of that will come from the asset sales.

Okay. And then lastly, you made a comment, I'm not sure who did it. but $485 million was reflecting on the refi. So for my own purposes if we're modeling, that's the number we should be working with in aggregate that you'll restructure? And then can you give us a sense of what that proportionally looks like, the size of the bond versus the revolver just so we can --

We really can't at this point in time. What we can say is, obviously, we reduced the size of the current facility which is currently $525 million down to $480 million, $485 million, but we really are not prepared to give the breakout. We really won't have that settled until we have the refinancing done. We obviously have a sense of that right now but we are not prepared to really give that information at this point.

All right. And then last question, you're spending at about 80% of D&A in your cap spending in a tough economic environment with lower landfill volumes, got it, and you're parking trucks, I got it, you can stretch capital. But you can't do that forever, so when we look at it from a modeling standpoint and you look out in 2011, 2012, what's your thoughts about where CapEx should be as a percent of D&A?

I think that what we are looking at is maybe -- I think we should be in the 10% to 12% range, as you model it out. I think the reason we are comfortable with it is that we have currently, through the programs that Paul has instituted from a rerouting standpoint, and because of the economic downturn we have over 150 pieces of equipment in surplus right now. So we don't think that that's going to be a problem for the next year or two, and then as the revenues grow in the out years, we have got additional CapEx spending to the tune of about 10% to 12% of revenues.

Okay. And I said one last question, but just one last one really. The 240 basis point improvement in profitability in solid waste, that almost is exactly correlated to how much fuel has reversed. So isn't that really a zero margin fuel surcharge coming out since most of your environmental fees and things like that came late in the year? So really I'm getting the margin improvement from fuel surcharge coming out?

I think there's no question that from a pricing standpoint we would have benefited from the lowering of the surcharge as we instituted the price increases, particularly as it relates to environmental fee. But I think that the programs that Paul has instituted in terms of reducing the total number of trucks from a routing perspective, reducing the total labor force, are real, relooking and rethinking the waste shed consolidation, the combination of two regions. All of those activities are real drivers for the overall improvement of the solid waste business. But clearly I think one of the reasons why we're successful and one of the reasons why the pricing program was successful is that clearly the downturn with regard to the overall surcharge from a fuel standpoint was one of the reasons why we were so successful with the pricing initiatives for sure, but I think the balance of those programs also very dramatically contributed to the 240-basis-point improvement on a year-over-year basis.

Michael, it's John Quinn. I need to clarify something. I think there's a little confusion about these landfill operating leases. There are two aspects of them. One of them is the payment of the landfill operating lease and that is shown as a cash flow from investment activities on the statement of cash flow. You can see it's called out specifically as payments on landfill operating contracts. That's what we are thinking will rise to $10 million next year.

Okay. Four or five this year, I don't have it right in front of me but isn't it like --

It's $5 million.

The depletion of that is called out separately as an add back to net income in the cash flow from operations. It goes through the operating cost line items. It's not part of the daw but it is --

Okay. So it's in cost of goods sold.

Did I confuse you?

That's all right. Thank you very much, gentlemen.

You're welcome. Thanks.

This does conclude today's question-and-answer session. At this time I would like to turn the conference back over to Mr. John Casella for any additional or closing remarks.

Thank you, Operator. In conclusion, I would just like to say that clearly from our perspective, the entire team's perspective, we continue to execute well against the factors that we can control. We have done a great job in offsetting the negative economic pressures with operating programs that improve productivity and asset utilization. We are making great progress on the refinancing of the senior credit facility and have confidence that we will get it completed by July 31st, which will give us the balance sheet capacity to continue to execute long-term strategy. I'd like to thank everyone for your attention this morning. Our next earnings release and conference call will be in early September when we will report our first quarter fiscal year 2010 results. Thank you very much, everyone and have a great day.

This does conclude today's conference and thank you for your participation.