Casella Waste Systems Inc (CWST) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Casella Waste Systems first quarter fiscal year 2010 conference call. Today's call is being recorded.

At this time I'd like to turn the conference 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 fiscal year 2010 first quarter results. These results were released yesterday afternoon. Along with a brief review of these results and an update on the Company's activities and business environment, we'll 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 Accepting 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 it's available in the investor section of our website at casella.com.

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

Thanks, Joe, and good morning, and welcome everyone to our fiscal year 2010 first quarter conference call. 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 activity.

Our business continues to perform well through the economic downturn. The solid waste group is generating strong cash flows and the recycling group is benefiting from a moderate strengthening in commodity prices. Through the first three months of the fiscal year, we are tracking well against our fiscal year 2010 guidance ranges. Revenues are slightly lower than planned, with landfill and transfer revenues weaker and recycling revenues stronger. We're experiencing our normal sequential seasonal revenue growth from the fourth quarter to the first quarter in landfill volumes and rolloff pulls, albeit, at a lower starting base.

Adjusted a bit up for the quarter was $31.4 million, down from the same quarter last year, but again, tracking well against our guidance range. As projected, weakness in commodity recycling revenues made up a large part of the year over year adjustment in the business decline.

Just as a brief overview on the quarter, we continue to make progress toward our goals of improving free cash flow. Free cash flow for the quarter was $5.1 million, up $12.7 million from the same quarter last year. In early July, we executed a favorable debt refinancing, in a very challenging market. In spite of the challenges from the market perspective, we received strong demand for both our notes offering as well as our term loan B, because of the efforts, obviously, to bring in, from an operating standpoint, our fourth quarter, a significant improvement over our third quarter. But the operating efforts made by the entire Company, really boded well as we were out on the road working on the marketing for the refinancing.

The strong demand that we had, we were actually able to flex down the interest rates in the OID fees and ultimately structure a deal that maximized pre-pay ability by downsizing the second lien notes, and upsizing the term loan B bank deal. Again, very, very significant execution by everyone from an operating standpoint to give us a real opportunity to market the stability of the business as we went through our refinancing. Now with our next significant debt maturity in December of 2012, we have the capital structure in place that will allow us to execute our intermediate strategy to reduce debt leverage and increase shareholder returns. Over the next three to five years we have targeted a leverage of 3 to 3.5 times debt to EBITDA, and ultimately we believe that bringing our leverage down to this range will reduce our cost of capital for future borrowings.

And again, as you know, we did a number of years ago set out to add disposal capacity to the franchise. We were very successful in that execution in adding 70 million tons of disposal capacity. Obviously a very significant challenge to refinance the balance sheet in a very, very difficult market, and had great execution there. And now our challenge obviously is over the next three years, in particular, but over a three to five-year period of time obviously to delever our balance sheet, something that we are very much focused on and will execute against.

We also set a three-year target for return on net assets, and we have aligned management compensation down to the division manager to this target. Our fiscal 20-year strategy to achieve our goals to reduce leverage and increase returns, we're focused on the following. Driving profitable revenue growth, increasing pricing where the market will support it, executing cost controls and operating efficiency programs, divesting of non-core assets, and selectively investing in resource renewal solutions. Something that Jim will talk a little bit about on the development side.

Before I turn it over to John, I would first like to wish John the best in his new role at LKQ as their new CFO. While we're all disappointed by John's decision to leave the Company, John's time here was very productive as he played a key role in the successful refinancing of our credit facilities earlier this summer. John will be with us until September 25th, and a great deal of momentum in a number of different areas that we will keep moving forward in terms of the overall financial aspect of the business model and the impacts that we've had on the entire financial team. We have already started a search for a new CFO, and I expect the transition to move forward smoothly. In fact, we have the same outstanding finance team in place as during the last transition period.

And with that, I'll turn it over to John to take us through the numbers.

Thank you, John, good morning. Before I begin, I'd like to go over a few definitional changes we made in the Form 8-K in yesterday's press release. I believe these changes will help investors to better understand our results, and to allow for clearer comparisons across the industry and our peers.

The first item is the notion of adjusted EBITDA. During our recent road show, we found ourselves explaining to investors that accretion and depletion expenses associated with our landfill operating leases are components of our cost of operations that are very similar to depreciation and amortization and needed to be added back when determining cash flows. We also noted that some other companies in the industry add back accretion, although I believe we may be the only company incurring depletion on landfill operating leases. So to make the numbers easier to understand, we'll be referring to adjusted EBITDA and we'll regularly adjust for these two items.

In addition, if there are any unusual or non-recurring items in the future we may include those in the definition but as of this quarter we're not calling out anything in that vein.

In our press release yesterday we adjusted our guidance for this new definition. The numbers are consistent with the previous guidance, so it should not be considered a revision.

A couple of other items to note, we're using the definition of free cash flow that we discussed last quarter, namely cash flow from operations, less capital expenditures, less payments from operating leases and assets acquired through financing leases. We've also broken out the revenue streams by our major line of businesses, including the amount of recycling revenue that was included in the solid waste operations. In addition, we've broken out our pricing between core price, which includes environmental fees from fuel recovery fees so you have additional clarity there. You'll see in our filings we've shown the prior years stated on a consistent basis. As I said, I believe each of these changes will bring additional clarity to our numbers.

We had a busy quarter from a financing point of view, as John mentioned. We've ended our existing senior credit facility with a restated amended credit facility and a new second lien bond. The structure included $177.5 million revolver, $130 million term loan and $180 million second lien bond. We're very pleased with the way the financing came together. As a result of the refinancing our next major maturity is not until December 31, 2012. With this out of the way the Company has the time and the runway to execute on its plan of improving the core business and rationalizing under-performing or non-core assets with the aim of delevering.

Before I move on, I'd like to acknowledge the work of the finance and legal teams here at Casella in conjunction with the refinancing, and to thank our financial partners for their support in this effort. So thank you.

Turning to results for the quarter, Q1 2010 revenue was $135.9 million, a decrease of $22.0 million or 14% from the same quarter last year. Of the total revenue decline, the Company's processing and recycling operations, included in both FCR and the solid waste group accounted for $13.8 million of the decrease, and the solid waste group, excluding the processing an recycling revenue accounted for approximately $9.2 million of the reduction. Paul Larkin, our President, will provide more color on revenue and speak to the price and volumes in each of the lines of business.

Moving to cost of operations, for Q1 2010, cost of operations was $90.6 million compared to $104.4 million for the same period last year, a reduction of $13.8 million or 13.2%. Last year included a $800,000 favorable benefit as a result of the contract restructuring under our Southbridge landfill so the year over year reduction was actually a little higher. The lower cost of operations reflects lower volumes and lower cost of goods sold in the recycling line of business. The cost of purchase material was $6.6 million lower year over year, direct labor was $2.4 million lower, and fuel was $4.7 million lower, reflecting the lower average price of diesel, as wells as the volume declines.

G&A costs of $16.3 million were favorable by $2.1 million or 11.4% in the current quarter, compared to the prior year, as a result of lower personnel costs of $1.3 million and other cost controls including $500,000 savings in travel and entertainment. Depreciation and amortization was flat year over year at $19.5 million. Landfill amortization was lower by $400,000 due to lower volumes being offset by a high rate at our Pine Tree landfill as it approaches its end of life. Depreciation increases associated with our landfill energy projects and our single stream investments offset the decrease in the landfills.

Moving to EBITDA, adjusted EBITDA for the quarter was $31.4 million, a decline of $6.1 million compared to the same quarter last year. The adjusted EBITDA breakdown for the quarter by line of business is as follows. Solid waste Q1 2010 was was $27.4 million, compared to Q1 2009 of $30.9 million, a change of $3.5 million. FCR Q1 this year was $4 million and $6.7 million last year, a decline of $2.7 million, and other was $100,000 favorable. The solid waste adjusted EBITDA was impacted by the lower volumes, the $800,000 adjustment last year and lower commodity prices. FCR was impacted mainly by the drop in commodity prices last October.

A few other items of note, included in our other expenses in our income statement is a loss on debt modification of $500,000 or $0.02 per share, related to our refinancing. Our tax expense for the quarter was $677,000, after giving an effect of the tax valuation allowance on our current quarter pre-tax loss. We previously provided guidance of $3 million to $5 million tax expense for the year, and I would expect the results to come in at the high end of the range.

The Company's net loss for the quarter was $2.8 million or $0.11 per share compared to a profit of $2.2 million or $0.08 per share for the same quarter last year. Without the charges related to the refinancing loss, the loss for the quarter would have been $0.90 per share. Average interest rate for the quarter was 7.2%, including amortization of the financing cost. Net of these expenses it was 6.7%. The availability on the revolver at July 31, 2009, was $91.6 million, taking into account the $51.7 million of LCs outstanding. 67% of our debt is at fixed interest rate, 23% has a 2% LIBOR floor and floats above that. The remaining 10% is floating.

Free cash flow for the quarter was $5.1 million compared to negative $7.5 million in Q1 2009, an improvement of $12.6 million. Our cash flow from operations for the quarter was $24.7 million compared to $19.8 million last year for the same quarter. Our capital expenditures were $18.3 million this quarter with no new assets acquired under financing leases, compared to $22.4 million of capital expenditures last year with an additional $4.5 million of financing expenses.

With that, I'd like to pass the call over to Paul Larkin for some comments on the operating performance of the Company.

Thanks John, good morning. As mentioned, total Company revenue declined 14th%, with solid waste revenues declining 12% year over. On a tonnage basis landfill volumes were down 8%. Landfill volumes increased sequentially from Q4 '09 and were in line with normal seasonal trends. Rolloff volumes remained challenging with continued weakness in the construction sector. We experienced a 14% decline year over year in pulls with weakness across all markets. Roll off pulls were also up sequentially from the fourth quarter, but again in line with normal seasonal trends.

Landfill pricing was flat, in our central region and down year over year in our eastern and western regions, driven mainly by weakness in pricing and continued shifts in material mix to higher percentage of soils and beneficial use materials. MSW pricing was flat to slightly up in all regions. 3.2% of the solid waste revenue decline was a result of the reduction in fuel and oil recovery fees, and solid waste price increased 1.8% and is now improved year over year for five consecutive quarters. FCR revenues declined 28.8%, year over year driven mainly by declines in commodity pricing.

Cost of operations for the first quarter were $90.6 million or 66.7% of revenues, an increase of 60 basis points as a percent of revenue over last year. We've been working to expand our major accounts business line which has high free cash flow but lower margins than the integrated solid waste business. During the quarter, the revenues in major accounts increased by 11.1%. However this lower margin revenue compressed overall margins by 30 basis points. In addition with lower revenues year over year, we lost operating leverage in a number of fixed costs categories such as facilities, insurance, property tax, rent and utilities.

Solid waste operating margins benefited again this quarter from our continued focus on flexing labor to volumes, while also delivering more permanent labor efficiencies. Solid waste direct costs were up 80 basis points as a percent of revenue mainly due to higher third party disposal cost. Solid waste direct labor costs were down 20 basis point as a percent of revenue and solid waste maintenance costs were flat as a percent of revenue. The cost reductions in labor and maintenance are in a large part due to the success of our fleet routing programs.

As laid out earlier, we remain focused on increasing free cash flow from our operations with two over-arching objectives. Run the top line to profitable revenue growth and driving operating efficiencies and reduce SG&A costs. To grow our top line we continue to review pricing opportunities where supported by the market, source new volumes to our landfills, expand our major accounts business, and differentiate ourselves in the market with Zero-Sort Recycling. We've had a few important gains in each of these areas in the last quarter. In early June we increased the environmental recovery fee by an additional 1.6% to a total of 6%. As projected for the fiscal year, we recently won a new municipal contract in New York State that will add 180,000 tons per year at the current market rate to our Ontario County landfill. This long-term contract starts this September, and with this new tonnage, Ontario will be near its annual permit on a full year basis. By taking this practice step to fill the site, we can begin to cycle out lower price tonnages and begin to reshape the market dynamics.

Also, the additional tons will allow us to bring in incremental tons of beneficial use material, further enhancing the site's margins. Our major accounts group won several new accounts during the quarter with total annualized revenues of over $3 million and we see continued opportunity to grow this line of business and generate free cash flow. Our Boston sales team has been successful in selling our differentiated service of Zero-Sort, recycling organics and waste disposal in the market. And lastly, as reported last quarter, we continue to professionalize our customer service infrastructure. We've completed an upgrade on our voice system to support Cisco's cost on an integrated solution and full implementation of the Cisco software will be completed in Q2. We believe when completed that this call center solution will significantly improve our ability to grow the top line.

Finally, we remain focused on driving revenue efficiencies within our collection fleet and converting railroad routes to front load, our two most significant near term opportunities. We continue to exceed our pro forma expectations for our fleet routing software implementation through the first quarter and we are on target to meet our expected annualized labor savings of $1.1 million for the full year. We also continue to reduce our fleet requirements directly related to routing improvements. As mentioned last quarter, we are investing in our front load collection fleet in key markets throughout the fiscal year. The efficiencies gained with these conversions are significant and we are on track to deliver our expected annual cost savings for the full year.

In summary our team remains focused on a small number of key initiatives that drive top line growth, improve our operating efficiencies, that will ultimately improve our operating margins.

With that I'll turn it over to Jim.

Thank you, Paul. A couple of quick comments on development issues. As you recall, the Southbridge recycling and landfill development project continues its path forward. As you may recall, last year the Board of Health issued a final site assignment determination allowing us to convert to MSW in expanding ultimately to 405,000 tons per year. Both the Board and ourself have been working to overcome an appeal, which is now in its final stages. Those appeal hearings were heard in August of 2009, and we believe we'll have a final decision on that appeal before the end of the calendar year. Upon that determination, which we expect will be favorable, we expect Mass DP will issue an MSW permit and we will begin our landfill progression to 405,000 tons per year over the next two to three years, in accordance with the Board of Health filings. This is in a market that continues to undergo some landfill removal, particularly Falls River, so we think our development project is timely and we'll benefit from it over the next year or two.

Second, the Company, as you may know, has been participating with the Governor Baldacci sponsored task force to evaluate alternatives related to the Maine energy facility located in Biddeford, Maine including the sales to the City of Biddeford. The task force is expected to report out by year-end of this calendar year the results of these discussions and we have agreed to limit our comments to this and to allow the task force to do the speaking on behalf of all the parties.

With regard to FCR, I would like to talk a little bit about commodity prices and some of the points that John and Paul went over. On a year over year basis, commodity prices were lower, with the sequential; strengthening in the Q4 into Q1 of this year, particularly driven by firming export markets in spite of a very weak domestic demand. On a year over year basis, while gross commodity prices decreased 47%, net revenue per ton only decreased by 10%. For the quarter, Q1 versus Q4 on a sequential basis, EBITDA for FCR was actually up from $2.6 million, to $4 million, an increase of $1.4 million, reflecting these firming commodity prices.

We have talked recently, particularly during the credit efforts, about our risk mitigation strategies and I'd like to go over those once again. Our risk mitigation strategy really consists of five elements. We have commodity revenues, we have a revenue share program, we have a hedging program, we also have contractual programs with our customers related to tip fees which are tied to commodity pricing, and then we have a net purchase program. The five elements of that program taken together working through each of the markets, actually helps to dramatically dampen the volatility of the commodities. Again, the best demonstration of that is in Q1 F10 versus Q1 F09, gross commodity price decreased by 47%, but our actual net revenue impact only decreased by 10%. That is a tremendous tool that we've used, and it's helped to stabilize our EBITDA, and It's helped us to move forward in our overall strategy of expanding our business platform in regards to FCR and recycling.

While that is a very good story, as commodity prices recover, we do get the benefits of that. But not on a dollar to dollar basis, as we need. We need to work through either our floors or our tip fee agreements with our customers, allow those tip fees to be reduced as the natural commodity prices increase. So we are seeing a good forward movement on that in this quarter and we do expect for the balance of the year to see positive benefits with regards to commodity prices increase. As far as deep economic corrections over the last six months, which deeply affected commodity pricing and economic activity in all markets, FCR's volumes are actually only down 4.5%, and we expect to continue to see flat to rising volumes as the economy recovers and communities convert to single stream recycling and increase diversion of waste material into recovery programs.

A few quick comments on resource optimization development projects, as John mentioned. We continue to make a multiple number of market changes with regards to Zero-Sort, and in every one of those markets, such as Philadelphia, Boston we're seeing volume growths in the area of 5% to 25%. We've recently renewed our contract with Mecklenburg County for an additional 10 years. Mecklenburg County, as you know, is the county in which Charlotte is located. It's investing in the necessary capital to convert the facility from a dual stream to Zero-Sort. That will be completed in the next nine months. They have selected an equipment vendor and they plan to be operational by the summer of 2010.

This City of Charlotte has purchased 200,000 95-gallon carts for a citywide roll-out and we're very confident not only will it help us to continue to present a very progressive program there, but will significantly increase the volumes, as well. We recently renewed our contract with the West Palm Beach facility for an additional four years and they're on their final shake down of the newly constructed Zero-Sort facility that will go operational this month. Again, West Palm Beach invested the capital for this conversion and we're pleased and delighted to be a long-term partner with them.

In Stratford, Connecticut, we have completed a two-year extension agreement with (inaudible) and with an additional seven-year extension based on the future commitments from the communities to convert to Zero-Sort Recycling. We have presented a shovel-ready proposal to the governor and hope that perhaps stimulus funding will accelerate that project. In Ft. Myers, they have selected a vendor to complete their Zero-Sort recycling conversion. And this will again be invested by the community and we expect construction to begin later this fiscal year. And finally in Concord, New Hampshire we were selected as the operator of the plan Zero-Sort Recycling facility, again invested by the community. We expect construction to begin late this calendar year.

Moving on to US Greenfiber. The US Greenfiber management team has done an excellent job managing their business during this projected downturn in housing. Despite revenue being $9.1 million, or 30%, EBITDA was actually up 24% by $160,000. Greenfiber is experiencing volume declines in their line of business as the housing market continues to struggle to recover, but despite this, they've been able to move forward in a net price per bag price increase year over year of 8%. Greenfiber was able to increase their EBITDA year over year through a continued effort of flex manufacturing, cost reductions, SG&A and so forth. And on a trailing 12-month basis, EBITDA was $7.5 million, which was up 67% over the previous 12 months. During that period of time, their Capex was very low, and they actually generated over $5 million that went to paying down debt.

Greenfiber is running at roughly 30% manufacturing capacity, and we believe that the current $5 billion federal stimulus revitalization package, which now has been distributed to the states, will begin to impact this business platform as we will see the principle direction of this money will be in cellulose for which Greenfiber is a primary producer in North America.

With that I'll turn it over to John for his comments.

At this point in time, Operator I think we'd like to open it up for questions.

Thank you. (Operator Instructions) We'll go to Scott Levine of JPMorgan.

Good morning, guys. I think you characterized in the release and in the your comments the seasonal activity or uptick, whatever you want to call it, as normal relative to prior years. I just wanted to confirm that that's true, and without asking for quarterly guidance, which obviously you don't give, if you could help us understand if indeed the seasonality is typical, maybe some thoughts with regard to how the quarter should play out, any additional commentary you would be willing to give would be appreciated.

Sure. There's no question, one of the things we want back and took the time to really take a look at and understand was, in fact, did we see the normal seasonal uptick. We compared this seasonal uptick against last year and it's very consistent in terms of the percentages in terms of the uptick. Although obviously at a much lower level in terms of overall growth revenues. So the answer to the question is, yes, we saw our normal seasonal uptick for the quarter, and I think it's clear that August is tracking as expected, as well. Nothing significant either way, but it's certainly tracking as expected.

Would you characterize that pattern as a pleasant surprise versus what you expected heading into the summer months or were you expecting the usual seasonality?

To be honest with you, I think we were expecting that we would see some seasonal uptick. The real question obviously is, we had no idea whether we would or not in the current economic environment. However, we did think that we would see a seasonal uptick. And obviously we did, but at much lower volume levels because of the economic reality. We were not surprised to see the seasonal uptick. We expected that we would have some seasonal uptick.

Okay. But what you saw was relative to your expectations in line? .

Yes. Absolutely.

Okay. Okay. Turning to pricing, positive territory for solid waste pricing, which is good. Could you comment on the competition, behavior of your third party customers within your various regions. And is the easing of fuel prices or stability at a minimum, maybe helping the competitive dynamic on the disposal side?

I think over time it will. I think it has to a degree. I think we're really seeing is more pressure from the C&D standpoint and MSW pricing flat, if you will. I think, as Paul indicated in his presentation from an operating standpoint, we also have put ourselves in a position with a new municipal contract to begin to look at our lower priced tonnage going into our, particularly our upstate New York facilities, to start to rationalize some of that lower cost tonnage over time. It will take time, Scott, but I think that the reality of what we're seeing right now is we continue to see pressure on the C&D side and MSW remains somewhat flat. And we're changing, I think that we have an opportunity to change the dynamics now with this new municipal contract. Over time, again, that will take months to see that impact as we're able to push out the lower priced tonnage that we're currently handling.

Just one last one if I may. I think in the release as well, you mentioned the intermediate term strategy with regard to the delevering process. Can you help us frame some thoughts around timing here. I think Jim gave some milestones with regard to Maine Energy and the task force there. But help us get a sense in regard to timing and some of the steps that might be first steps in regard to the program other than your free cash flow outlook.

It's John Quinn speaking. I think one of the first steps, now that we've got the financing out of the way, is we're going to do a review of all of our assets over the next month or so. That will probably take us really through the end of the year before we can start making decisions on that. What we'll be looking at is where we have assets that are generating cash flow, where do we have assets that are using cash, and making an evaluation of those as to do we continue to develop them? Is there a payoff at the end? Do we sell them or are they better in somebody else's hand or do we just shut them down. That's the first step. Some of the other assets that we have, we have investments in what I would consider non-EBITDA contributing assets. If the market is right for those, the opportunity presents itself, we would probably rationalize those sometime in the next couple of years before our next major refinancing.

And I think that it's also just from a general perspective, Scott, it's fair to say that we need to execute at all levels. We need to drive the profitable revenue growth. We need to take those assets that are in the portfolio that we get no credit for from an EBITDA standpoint. Look at those assets. Go through the asset review, as John said, and over that three to five-year period of time, we're not going to be able, obviously, to delever in a 12-month period of time, but we should be able to pretty significantly impact our leverage over the next three years.

I understand. Thanks guys. John Quinn, best of luck in the new position.

Thank you.

We'll go next to Jonathan Ellis of Merrill Lynch.

Thanks and good morning, guys. I wanted to just first ask about pricing and you had mentioned the increase in the environmental fee and I know you had done a lot of work to implement some core rate hikes over the last few quarters. Within that context I'm just trying to understand why, we've see core pricing trail off here a little bit, and what I mean by that, is I think last few quarters you've been raising, or the price growth has been somewhere between 2.5% and 3.5%. This quarter you reported 1.8%. Can you just help us understand why you may have seen a deceleration in core pricing this quarter.

Sure Scott, this is John Quinn. I'll take a shot, then Paul can add comments if he wants. In terms of the solid waste group, the collection business is actually still performing well. It had a 3% pricing, just in that group. We saw some softness on the landfill side, which is driving down that average. And that is, as John mentioned, the MSW pricing has been, is up year over year. We've seen C&D pricing up, and we've seen a mix change, because C&D volumes are off, and because the MSW volumes are lower, our soil business has been actually relatively stable, which is a lower priced business. That is driving down the average price in the landfill business. So it's not so much a market dynamic, because the MSW prices are holding up, but we are seeing a mixed change in the landfill in terms of we proportionately have more of the soil jobs which are pulling down the average prices and that's dragging down the whole solid waste group. We put in the environmental fee and we've raised that twice this year. The customer acceptance has been pretty good, and we're still feeling pretty good about pricing on that side of the business.

There's also, Jonathan, more opportunity with regard to the environmental fee, because we have a larger portion of the revenue base that we can put that environmental fee to over the next couple of quarters. So we think that we'll be able to continue the pricing program on a go forward basis, and continue that momentum, but as John said, a mix issue, lower prices from a C&D standpoint at the landfills. But we do see additional opportunities on a go forward basis. We also have the disconnect in terms of our surcharge being lower than our peers too, that is another opportunity as we look to the future.

Okay. Excuse me, that's your fuel surcharge?

Correct. Yes.

And our landfills and transfer stations, we've not implemented either of those programs yet. So there is a little bit of runway there.

Got you. Okay. Great. And then just on the tonnage, you had mentioned that landfill tonnage was down 8%. To be clear, does that include everything -- MSW, C&D and soil? And if so what was just the MSW decline in the quarter?

That was all third party tons. And just a second we do have that number, John's looking it up. One other thing to add relative to the price was, is that the way that we're looking at those markets now, they've been tough on price for a while, that being the western market that John was alluding to earlier. With that new municipal contract that we're bringing in, those 180,000 tons, we are looking at it differently than we have in the past, as well. Yes it's going to impact price, but on a bit of a margin base for that market with the other material that's going to complement it, we actually foresee our EBITDA margin increasing.

Okay. So to be clear, that new contract will drag down your average pricing?

Yes.

Can you roughly quantify how much the drag is going to be, once it's fully up and running?

We can get back to you on that, Jonathan.

Okay. Fair enough. If you don't have the number on the MSW yet, one question I was just going to ask, is on the collection side of the business, can you talk a little bit about volume trends specifically in the front load part of the business?

This is Paul, Jonathan. We're shifting a lot of our business from rear load to front load, first and foremost. We've been going at that now for about a year, and we're going to continue that through the course of this fiscal year and then beyond to convert the volumes over from rear load to front load. It's a much more efficient system and delivers a much higher both EBID and EBIDA margin. So to try and break it out for you, in terms of how much volume on the front load system, couldn't really do that for you right now.

Okay, great.

My point is, it gets blurry because of the shift we're undertaking.

Sure. I understand. Maybe, then, just qualitatively can you talk a little bit about in the commercial line have you seen any changes in terms of weight per container or service frequency in the last few months?

We're changing that, as well. That's blurry also. We started that about a year-and-a-half ago. We went through a very rigorous program of upsizing all of our containers. Probably "rightsizing" them is a better terminology for it. To balance our service with the customer requirements, so our actual container size are increasing across the board, and if we're balancing the service correctly, our weight per container when we lift it should be up.

I see. Okay, great. Just a couple more very quick questions. First off, in the recycling business, your existing hedges, particularly for paper and metal products, I know there's so much static but can you give us a sense when, is there a concentration of rolloffs in those existing hedge contracts?

Probably the biggest rolloff right now going on this quarter is the rolloff aluminum, because we've only been able to traditionally hedge those for about 12 months.

We've already had that impact.

That impact has already occurred through the quarter, so the balance of our hedges are longer term than that. They spread out over a lot of different periods. But I would say that our plan was that we would be in the position to recapture the market hedge as the market comes up, and if the market continues to respond, we believe that we'll in large measure be able to reposition ourself before the bulk of those hedges come off. But they run roughly 12 to 24 months.

I see. And then just to be clear, which is a bigger offset to declines and commodity prices, has it been the hedges or has it been the tip fees that you've put in place?

From a risk mitigation strategy, I would say that the hedges were in place all along, so those were not new actions. I think the actions that we took in the last six months relative to going back to customers and getting them to participate in re-negotiating the contract, therefore, the answer to your question is I think pretty clearly from our mind the tip fees have been a major contributor to the expansion of our risk mitigation strategy and the results that we have reported.

Okay. Thanks a lot guys.

Jonathan, just to follow up on your question, the third party MSW tons were off 8.5%.

Thank you very much. Appreciate it.

We'll go next to Michael Hoffman, Wunderlich Securities.

Hi, thank you very much. I wanted to get inside the income statement a little bit. The (inaudible) seems to be awfully high as percent of revenue if the volumes are down as much as they are. I picked up something you said earlier in the commentary about Pine Tree, that maybe that, in fact, is a contributing factor, the way at which you're accelerating that. And if that is the case, then how do you think about D&A going through the rest of the year?

Jonathan, the, the D&A is up -- or I'm sorry, Michael. Pine Tree is coming to the end of its life, and there's a true up on the depreciation where you're trying to predict the tons into the landfill from the last six months of the year, so we're basically making sure that we don't have an issue there in Q2. I think you should see it trending more towards historical numbers, would be the best way to answer your question.

Just to put it in perspective, the consensus, just taking as consensus had you at 13% for D&A for the quarter and obviously you're at 14.4%. Should we think of it as there's a point and a half in there for Pine Tree for this quarter, next quarter, and then third and fourth you take that out?

Just a second.

John's going through the numbers right now.

Let me just that look up, Mike. Do you have any other questions while I'm looking that up?

I hate to belabor the price, but just so we get all the machinations here, you gave a clear number that collection was up 3%, and that's across permanent rolloffs, and the commercial business. Presumptively your municipal business is tracking at a level of DPI, which is pretty consistent of that on a look back basis. But to be 1.8% for the whole quarter means the landfill was down not just the C&D side but the MSW side, price.

No. Because the issue there is because of the amount of BUD in the mix, Michael. The MSW pricing, as we said, was flat but the offset in the C&D pricing was down significantly and the balance of that is mix in terms of a higher percentage of sludges, a higher percentage of beneficial use material coming into the facility at lower rates. Not MSW.

All right, so to be very clear, you're not lowering gate rates for MSW to get volume into the landfills.

No.

Okay.

No and even on the contract that we just took, that contract that we just at market, took it at a market rate, a current market rate. So no, that's not the case.

Okay. So if you were to blend out this mix issue, and do an apples to apples, what do you think your pricing was in the quarter on an apples to apples basis in good old regular trash.

We don't have the answer to that, but we could certainly -- do we have it? What was it?

It was up 1.5.

Oh, yes, I'm sorry, we do. It's up about 1.5%. MSW is up about 1.5%.

C&D was down 7.1 and the remainder, as John said, was a mix.

We're expecting the DAW to drift down every quarter for the rest of the year to get back to, on a full year it will be close to what it was last year as a percent of revenue. It's because of Pine Tree, it's front end loading a little bit.

Okay. Just to repeat, you look at FY '09's full year percent of rev and manage your quarters down to get to that as a full year number.

Yes.

Okay. And then the down volumes down 9%, actually given the northeast and the economic pressure there, call that an actually pretty decent number on a relative basis to others that have reported, suggesting maybe there's some pockets of strength in parts of the business. And I get that you're making this switch from rear load to front load and I'm understanding the total tonnage, but even if you aggregated everything together and weren't working at it so much on a container basis, is there some underlying strengthening or is that the seasonality?

I think that it's probably more seasonality that we're feeling as opposed to a significant difference relative to the economic activity. I think one of the positive things is that we would characterize the economic activity as stable to slightly improving, but no real economic rebound, and not even in pockets. I think that we would just simply characterize it across the board, Michael, as stable, maybe light slightly improving, but I think we've seen that stability, for three to six months, and we're continuing to see the domestic market from a recycling standpoint is beginning to get better, and that's obviously a positive, as well. The OMB just came out this week and it's positive again. So I think that we're beginning to see activity from a domestic standpoint where, over the last four or five months there's been much more activity from an export standpoint in the recycling business, where now we're beginning to see, if there's any beginning activity that we're seeing, it might be on the recycling side from a domestic standpoint, but I would characterize this solid waste business as stable to slightly improving, but really more stable. No real recovery that we can see.

Okay. And then one last question, as you look at your business model and your internal models, what quarter do you turn earnings to positive?

Michael, I don't think we've given quarterly guidance.

Okay. It was a good try anyway. John, good luck and give Joe Holston my best, he's a great guy.

Thanks, I appreciate that, I will.

We'll go next to Bill Fisher from Raymond James.

Good morning, thank you. Maybe John, you mentioned you're going to be doing a review of some of the under-performing or non cash generating solid waste operations. Is the review scheduled to be done by the end of this fiscal year?

Yes.

I'm trying to get if you sell or divest something, could you have a divestiture this year or would it be more likely in the next fiscal year?

I don't know that we would, it would take a while to actually do a divestiture. The plan is, go out and get a good forecast from each of the locations and aggregate these at waste shed type level and then review them with the various constituents and make sure we have the right plan, the right strategy, the right people, and see if there's something off there, then do we have the right assets. Is it a question that we need to go and get the right assets to fix the market. If we can't, then we would make a decision as to what do we do with this? Do we sell it or do we shut it down? One thing I've learned over my life, it's a lot easier to buy than to sell. It takes a little bit longer to sell things. And so I think by the end of the calendar year we should have a good view with respect to -- the red, yellow and green kind of list, -- and then we'll make a decision and we'll see is this the right time to sell something, and can we find the right buyers.

Okay. Great. And actually on the Capex, you mentioned you're converting to more front loaders. Having to buy more front end load trucks this year, what I'm getting at is, is Capex likely to be up a little bit this year relative to what it normally would be?

It's already in there. What we have done i, because of the economic reality, we have a number, over 100 vehicles in surplus right now, and all vehicles that we purchased in this year's Capex program, Bill, are front load trucks so that we can go forward with those conversions. So the vast majority of the trucks purchased this year will be front loads.

Okay. And just if we're on a steady state, as you move into the next fiscal year, could some of that come off a bit since you have that surplus or not really?

It would only be, we only see investment in front loaders going into next year.

But, if your question is Capex going to be lower next year, the answer is no.

Okay. Yes that's essentially was the question. Okay. And then lastly for Jim on the recycling volumes, I think you mentioned you hoped they'd be, or expect them to be flat to up for the year and they're down four. When you see pricing be up in August, do you get more recycling activity, are more people pushing stuff maybe out of the way stream in recycling, or is it more a function of you just have some single stream facilities coming online?

Again, it's a lowered effect. You have the effects of economic activity, which is, is a damping effect, you have the effects of conversion, which is an inflating effect, and you have the general effect with regards to the stimulus packages and those programs which have been aimed at trying to focus on carbon footprint. So net net, we expect to see a slightly improving volume picture there. The majority of that will be taken as a direct result of conversion into single stream across the footprint.

Okay. Great. Thank you very much.

We'll go next to Chris Smith of SCM Advisors.

Thanks, good morning. Maybe I missed this, but what was leverage coverage as per the credit agreement this quarter, did you disclose that?

No but we'll get it for you.

That is in our Q, which we'll be filing later today.

Okay. That will be disclosed there.

Yes.

All right, I'll look for it.

Let me see if I can find it while we're looking.

Do you have an additional question, Chris, while John's looking that up?

No, that was it.

We'll get that, we'll try to get that before we end the call.

(Operator Instructions) We'll go to John Dessauer of Stone Tower.

Can you hear me?

Sure can, John.

Thanks. I was wondering about your excess capacity in containers. Where are most of your excess container capacity at this point? What types?

You're talking about types as in rear load or front load?

Yes.

I would say probably the majority of excess capacity would be in rolloff containers in terms of containers sitting. Where we've had the most fall off, obviously, is in the C&D construction side of the business, so we have a lot of rolloff containers sitting as opposed to -- the normal contraction of the commercial side of the business, you're not taking containers in per se. Really what you're doing is, and somebody who might have three times a week service, they go down to once a week service, so there's not an inordinate amount of inventory in rear load and front load containers. We will have, obviously, rear load containers from the conversions that we'll be selling and monetizing, but that's just a function more of the conversion than it is economy.

Is there a true secondary market for containers in general or is that mythological? Is there a marketplace?

There is, but in the current environment, obviously, it's really, really difficult equipment. The value that you're likely to get from an equipment sale is not significant, particularly in the current environment.

But your ability to procure secondhand containers, is that easy to do, at the flick of a switch, or is that hard to do in general? Would you be less willing to buy containers painted the wrong color, et cetera, , or would you be willing to buy used containers?

We normally don't buy used containers. From a practical standpoint, we're not going to sell rolloff containers. We have a significant number of rolloff containers in inventory right now. At some point in time the economy will come back and we'll need those containers, so we're not in a position, nor would we sell, we wouldn't sell the rolloff containers, as an example, at this point in time. We would get rid of, as I said, the rear load containers because we wouldn't need those on a go forward basis.

Just to clarify, the Capex that's required for those conversions is already in the FY plan.

But generally speaking, if it's an acquisition of any type of container, you prefer to buy new versus secondary, correct?

Yes.

And that really has to do with the return?

There are obviously exceptions to that. We've bought used containers, probably more on the compaction side, used compactors, refurnished compactors. So we do buy used equipment, not all new, but normally when you're doing a conversion, the conversion is all new equipment, new containers, new trucks.

Okay. Thank you very much.

We'll go next to John Zaro of Bourgeon Capital.

Hi, guys, I'm relatively new to this story, and I just have a quick question. Given everything that's gone on, and you did a great job in the refinancing, why did it take so long to look at the sites and decide what are the most profitable and what are the least profitable and ones you should work on getting rid of? I'm assuming you've done that all the way along.

We have done that review once and we executed a strategy where we sold $22 million worth of assets in the Buffalo market a year ago, maybe a year-and-a-half ago now. I think you want to be really thoughtful in terms of going through and doing that review. At the same time, there's no question that we need to do that with a sense of urgency. I think it's fair that we want to do that thoroughly, but we want to do it as quickly as we can.

I would assume that this review is coupled with the fact that you have had some interest from people on the outside, but also have interest in other properties that you've been looking at anyway, and in addition to that, probably substantially help your stock.

That's correct.

Okay, thanks very much.

It's John Quinn. I'll just share with everybody our covenant compliance. Total funded debt to bank defined EBITDA is 4.72, and the covenant maximum is 5.5 at the end of the quarter. Senior funded debt to the equivalent of bank EBITDA is 3.13 versus 3.65. And our interest coverage is 3.2 and the minimum was 2.5. Again, you can find that in our Q later today.

And at this time I'll turn the conference back to Mr. Casella for any additional remarks.

Thank you, Operator. In conclusion, as evidenced by our performance over the last two quarters, we execute well against the factors that we can control. We've done a great job of offsetting the negative economic pressures with operating programs that improve productivity and asset utilization. We're doing a good job. Our operating team is doing a great job of re-thinking every aspect of the business model and really attacking that to bring more productivity and efficiency to everything we're doing. The sales team is doing a great job differentiating our services in the market, with a unique resource renewal offering. These efforts are helping us to profitably grow revenues. And now, with a successful debt refinancing, we don't have any major debt maturities until 2012, it gives us the necessary time and balance sheet capacity to continue to execute our long-term strategy and delever our balance sheet.

I'd like to thank everyone for your attention this morning. Our next earning's release and conference call will be in early December, when we'll report our second quarter fiscal 2010 results. Thank you everyone, and have a great day.

That concludes today's conference, we thank you for your participation.