Casella Waste Systems Inc (CWST) 2010 Q4 法說會逐字稿

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

At this time for opening remarks and introductions, 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, Jim Bohlig, our Chief Development Officer, and Paul Massaro, our Principal Accounting Officer.

Today we'll be discussing our fourth quarter and fiscal year 2010 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 Accepted Accounting Principles. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial table section of our Earnings Release, which was distributed yesterday afternoon, and is also available in the investor section of our website at IR.Casella.com.

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 2010 fourth quarter conference call. Our purpose today is to discuss and give you insight into our fourth quarter fiscal year 2010 results, and lay out guidance for fiscal year 2011. I'll start with a brief (inaudible) summary, Paul Massaro, Principal Financial Accounting Officer, will take us through the numbers and guidance. Paul Larkin will run through an operating summary, and as usual, Jim will give an update on development activity.

Before I get started, I'd like to give you a brief update on the CFO search. Senior management team and our Board have interviewed a number of great candidates over the last few months. We've been deliberate in the process, ensuring that we have the right fit for the role. We expect to finalize terms and make an announcement in the next few weeks.

This is an overview. I want to start by saying that our team did an excellent job this past year to meet our fiscal year guidance targets for revenue, adjusted EBITDA, free cash flow, in a very challenging economic environment. We are encouraged by the performance of the business during the last six months of fiscal year 2010. We had positive revenue growth in both the third and fourth quarters, something we have not achieved since early fiscal year '09. While we still think it's too early to say that this growth reflects a sustainable economic trend, the results do reflect strengthening in key parts of our business.

Revenue growth in the fourth quarter was driven by successful collection pricing increases, higher landfill volumes attributable to new long-term disposal contracts, new major account contracts, and strengthening recycling commodity prices. We continue to meet our pricing goals in our collection line of business, and volume losses are moderating as we anniversary tougher year-over-year comps. The landfill line of business continues to benefit from additional special waste materials available in our markets.

Recycling commodity prices improved sequentially from the third quarter to the fourth quarter despite reduced export demand. The strengthening of US demand drove the improved pricing, a dynamic we have not seen since mid-2008.

Adjusted EBITDA for the quarter was $29.1 million, up $3.8 million from the same quarter last year. Robust collection pricing, higher landfill volumes, higher recycling commodity prices and operating efficiencies were the main drivers of growth. Adjusted EBITDA margins were up 70 basis points for the quarter, reflective of the operating leverage we have gained through the implementation of permanent cost controls and pricing programs.

Free cash flow for the fiscal year was up $1.9 million from the previous year, or up $16.3 million excluding the one-time impact from the dissolution of our captive insurance company in the previous year. During the fourth quarter of fiscal year 2010, we also paid $5 million in one-time operating lease payment to Shamong County as part of a renegotiated host community agreement that will enable us to increase tonnages at the site to 417,000 tons per year, subject to permitting. Excluding this one-time payment, free cash flow was up $21.3 million year-over-year.

In fiscal year 2010, we overcame $3.5 million of additional cash interest expense as a result of our July '09 refinancing. We expect cash interest costs to increase by another $10 million in fiscal 2011, due to the timing of interest payments. We made just one payment on the second lien bond in fiscal year 2010, and we expect to make two payments in fiscal year 2011.

As we laid out previously, we have targeted leverage of 3.5 times debt to EBITDA over the next two to three years, to better position ourselves for our next major debt refinancing in December, 2012. To delever the balance sheet, we will stay focused on the same four key initiatives that we launched last year, driving profitable revenue growth, increasing pricing where supported by the market, executing cost controls and operating efficiency programs, harvesting value from landfill investments, and divesting select assets.

In this soft economic environment, we have worked hard to attract new customers at a profitable level, and we have worked even harder to maintain our existing current customer base. This past year we did a great job of achieving both these objectives, and it shows in our numbers for the year. Especially in the fourth quarter, when our solid waste group had positive revenue growth for the first time in over two years. During fiscal year 2010, we achieved 3.7% or $8.1 million of pricing in the solid waste collection business.

In addition, during fiscal year 2010, we sourced new long-term contracts to our New York landfills that have added significant tonnages, and most importantly have allowed us to reset the pricing dynamic in the market. We believe that the floor has been set for pricing, and pricings will begin to rebound, although we expect a negative rollover impact during fiscal year 2011 from those new contracts. Looking forward into fiscal year 2011, we've targeted solid waste pricing of 50 basis points in excess of CPI, and positive volume growth driven through increased landfill volumes and in-market volumes sourced by our major accounts group.

Cost controls on operating efficiency. Paul and his team has done an excellent job flexing operating cost to our reduced revenue base during a dynamic fiscal year. Our intention over the past two years was to improve our cost structure 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 by 13.1% since May of '08, through several operating programs such as fleet route optimization, front load conversions, outsourcing long haul transportation, consolidating operations and launching a shared service center. In fiscal year 2011, we plan to further the successful fleet efficiency programs, and have targeted roughly an additional $1.1 million of cost savings for the year.

We also have planned to expand our initial success with the shared service center in our fiscal year 2011. Over the past year, we centralized customer care for about 40% of our operating locations. We will centralize the remaining locations by the third quarter of fiscal 2011. Most importantly, we set two goals for the customer care center. First and foremost, improve customer care, and second, reduce overhead. Both of the goals have been met.

In late fiscal year 2010, we also began efforts to centralize our back office functions to a shared service center, which really will affect cash applications accounts payable. We plan to further these efforts in fiscal year 2011, and expect the efforts to reduce costs by an additional $1 million annually.

To the landfills. In late May we received an important permit from the Mass DEP to convert the Southbridge landfill from 181,000 tons per year of C&D residuals to MSW. We expect the Southbridge landfill conversion to add roughly $2 million of adjusted EBITDA annually. With the issuance of this permit, we now move forward with our long-term strategy to more fully integrate our Massachusetts assets and improve the return on our investments in that market. Over the next two years, our team will be focused on executing the next steps as outlined in the 2008 site assignment, to ultimately ramp the facility to 405,000 tons per year.

In the near term, our biggest opportunity to pay down debt and reduce our leverage is to sell selected assets. As discussed last quarter, we've identified approximately $75 million of assets that we plan to divest over a two-year period, with roughly $25 million of non-strategic, non-contributing assets targeted to be sold by December, 2010. As of June 1, we have received $3.3 million of cash proceeds for the sale of our Highland Electrical Interconnect assets, settlement of two assets which had been previously recorded as assets under contractual obligation. There was no EBITDA loss on these sales.

We're currently in due diligence for the sale of a hauling company and two transfer stations. We expect to close this transaction by early July. These assets generate roughly $1.1 million of EBITDA during fiscal 2010. We've also retained a firm that specializes in selling secondary direct investments to market our shares of recycled rewards. If there's a market for these shares at the appropriate price, we will expect to have that sale completed at the end of the second quarter.

We are exploring the sale of select assets to generate the remaining $50 million of targeted divested proceeds, and I think most importantly, all assets are on the table. Our main criteria is strategic fit, balanced with valuation. We will continue to update the market as asset sales are completed. This is an important ongoing focus for our management team.

To wrap up, I just think that one of the -- when you look back over the last few years, a number of years ago we set an objective to increase our landfill capacity. With 100 million tons of long-term capacity in a market where the average rate is $33 a ton, I would say we met that objective.

Last year we were faced with a challenge of refinancing our five year Senior Credit Facility amidst the worst credit crisis this Country has seen since the Great Depression. We met this challenge, refinanced our credit facility, and gave ourselves over three years of runway before the next major debt refinancing. Our challenge now is to delever our balance sheet to 3.5 times debt to EBITDA. As I have said, over the next two to three years we will achieve that goal.

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

Thank you, John. Good morning. Turning to the results for the quarter, the Company reported revenues of $130.7 million, an increase of $13.4 million or 11.5% from $117.3 million for the same quarter last year. At $94.7 million for the quarter, solid waste revenues increased 6.7% from $88.6 million in the prior year, with internal growth coming from collection pricing, increased disposal volumes and fuel recovery fees, partially offset by lower collection volumes and landfill prices.

FCR recycling revenues increased $6 million or 29.7%, to $26.3 million, from $20.3 million in the prior year quarter, with commodity prices up 26.2% and volumes up 3.5%. Paul Larkin will provide more color on solid waste revenues, and speak to price and volume by lines of business later in the call.

Cost of operations increased $10.3 million or 13.2% to $88.7 million in the quarter, from $78.3 million a year ago. The dollar increase in cost of operations is primarily due to higher cost of purchased materials associated with increased FCR revenues, as well as higher solid waste operating costs including host and royalty fees due to higher landfill volumes, fuel and insurance costs. Cost of operations as a percentage of revenues increased to 67.8% from 66.8% in the prior year quarter.

General and administration expenses decreased $1.3 million or 7.8% to $15.8 million in the current quarter, from $17.1 million a year ago. The dollar decrease in general and administration expenses is primarily due to lower compensation, severance and organization costs, as well as lower bad debt expenses. General and administration expenses as a percentage of revenues decreased to 12.1% in the quarter from 14.6% in the prior year quarter.

Moving to adjusted EBITDA, adjusted EBITDA at $29.1 million was up $3.8 million from the prior year, and margins improved to 22.3% from 21.5% a year ago. The adjusted EBITDA by business segments is as follows. Solid waste for the current year, $24.5 million, up $2.4 million from $22.1 million from the prior year, and FCR up $2 million to $4.6 million, from $2.6 million in the prior year.

Solid waste adjusted EBITDA improved approximately 100 basis points year-over-year. Solid waste revenues were up 6.7%, and cost of operations increased as a percentage of revenues from higher host and royalty fees, fuel and insurance costs, which were more than offset by lower direct labor and general and administrative expenses from lower compensation, severance and reorganization costs year-over-year.

For FCR, adjusted EBITDA was up $2 million, and margins improved by 480 basis points to 17.4%, primarily as a result of a partial recovery of commodity prices, as well as a decrease as a percentage of revenue of cost of operations including lower direct labor, facility and other operating costs, and lower general and administration costs from lower compensation and bad debt expenses. Jim Bohlig will provide more detail on FCR later in the call.

Depreciation and amortization expense decreased year-over-year, primarily due to the planned closure of the Pine Tree Landfill, which ceased operations in the third quarter of fiscal year 2010.

Reported net interest expense increased $5.4 million or 58.6% to $14.6 million in the quarter, from $9.2 million in the prior year quarter. Cash interest for the quarter was $12.4 million, and for the year, $44.2 million, compared to $40.6 million a year ago. This increase is primarily attributable to higher average interest rates associated with the Company's new capital structure, which was put in place in the first quarter. Net interest expense as a percentage of revenues increased to 11.2% in the quarter ended April 30, 2010, from 7.9% a year ago. The average interest rate for the quarter was 10.5%, including amortization of financing costs. Net of these expenses, it was 9.5%.

Availability on the revolver at quarter end was $92.3 million, after taking into account $50 million of LC's outstanding. The provision for income taxes increased $800,000 in the quarter, and we ended the year with a provision of $3 million.

For the quarter, the net loss amounted to $5.2 million or $0.20 per common share, compared to a net loss of $68 million or $2.66 per common share in the prior year. As you may recall in the fourth quarter of fiscal year 2009, we took $58.5 million in pretax charges primarily from goodwill impairment.

Free cash flow was a positive $1.7 million in the quarter, not including the positive effects in the prior year from the dissolution of our captive insurance company, the Company's free cash flow increased $16.3 million for the full year. Free cash flow for the year was positively impacted by lower capital expenditures and financing leases, and improved working capital partially offset by higher cash interest and payments of landfill lease obligations.

In addition to the FY 2011 guidance details provided in our press release yesterday, I want to provide additional guidance on interest expense, taxes, and GreenFiber. Assuming no material shifts in the interest rate environment in the upcoming year, we expect cash interest to be approximately $55 million, and reported interest expense of approximately $61 million.

We expect tax expense in the range of $3 million to $5 million, and cash taxes of approximately $1 million to $1.5 million for the year due to state taxes. The effective tax rate will be dependent and sensitive to pretax book income or loss. We expect to continue to see equity method losses from our interest in GreenFiber for the upcoming year in the range of approximately $2 million.

One additional statistic that is important to note regarding solid waste revenue growth is the commodity price volume impact. This is expected to be roughly a negative 1% next year, with MERC negative partially offset by positive commodities.

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

Good morning. Solid waste revenues were up 6.7% year-over-year, the first quarter of growth in eight quarters. Components of revenue growth include solid waste price, which increased 0.8% year-over-year, and has now improved for eight consecutive quarters. Our collection division delivered price improvement of 2.5%, as a percent of collection revenues. While disposal price was down 1.9% as a percentage of disposal revenues, we did experience sequential improvement from the third quarter when disposal price was down 4.2%.

The landfill price decline was primarily driven by several large new contracts in Ontario County, which were taken at market rates late last fiscal year, as well as mix shifts to lower price BUD materials. As part of the new contracts into Ontario, however, we have price escalators in place that have already begun to favorably shift pricing in this market as evidenced in the sequential improvement in disposal pricing this quarter.

Solid waste volumes increased 4.1% year-over-year, the first year-over-year growth in eight quarters. Collection volumes were down 3.7% as a percentage of collection revenues in the fourth quarter, but overall losses moderated sequentially as rolloff polls were up year-over-year for the first time since fiscal year 2009. We are encouraged with the lead generation coming from our marketing campaigns, and our sales team continues to make great progress selling Zero-Sort Recycling services.

Landfill tonnages were up 19% year-over-year with MSW volumes up 17.1% and C&D and BUD both higher. C&D volumes were driven by special waste streams, a category where we see continued growth opportunity. We outperformed our normal sequential seasonal trend, mainly due to the new contracts ramping online during the quarter. Finally, fuel and oil recovery fees were up 0.2% on a year-over-year basis.

Cost of operations for the fourth quarter was $88.7 million, or 67.8% of revenues, an increase of 100 basis points as a percent of revenue from last year. Solid waste cost of operations increased 50 basis points as a percent of third party revenues, mainly due to increased major accounts top line growth. FCR cost of operations decreased by 220 basis points, as we gained operating leverage with higher commodity pricing and greater volumes.

Solid waste direct operating costs were up 185 basis points as a percent of revenue, with insurance up 110 basis points and landfill depletion and host fees up 110 basis points with higher volumes. The net impact of our fuel oil recovery fee negatively impacted solid waste margins by approximately 75 basis points in Q4.

Offsetting these cost increases were solid waste direct costs, down 40 basis points as a percent of revenue, primarily driven by improvements in our long haul transportation, and secondarily by lower third party disposal and purchased material costs. Solid waste direct labor costs were down 125 basis points as a percent of revenue, and solid waste maintenance costs were down 20 basis points as a percent of revenue.

With revenues up year-over-year, we gained 90 basis points of operating leverage in a number of fixed cost categories. The decline in solid waste operating margins was offset by lower SG&A costs. Solid waste's G&A costs were down 170 basis points as a percent of revenues. Improvement was recognized in labor, benefits, bad debt, provisions, facility costs and the non-recurrence of several costs recognized in the last quarter.

Solid waste adjusted EBITDA margins were up 90 basis points year-over-year, reflecting the operating leverage gains with cost efficiencies and continued pricing gains. FCR adjusted EBITDA margins improved by 480 basis points due to both improved commodity pricing, success of best practice operating programs, and the non-recurrence of one-time costs incurred in Q4 2009.

We continue to expand our major accounts business line, which has high free cash flow but lower margins than integrated solid waste business. Year-over-year revenues increased 17.9%. And although very positive to our top line and free cash flow, total Company margins were compressed by 40 basis points year-over-year from the additional major account revenue.

In summary, our sales and marketing teams have done a great job in returning us to revenue and volume growth. We are pleased with our lead generation and customer acquisition strategy, and the returns over the last quarter. We are also excited about the customer feedback coming through our customer care network, and the continued opportunity to improve our customer experience.

Jim?

Thanks, Paul. Good morning. First, a few comments on FCR's operations. FCR's commodity prices were higher on a year-over-year basis, and pricing improved again sequentially. We believe this is primarily being driven by a firming domestic demand and coupled with diminished supply, which drove these pricing gains.

On a sequential basis, gross commodity prices increased 27% on a net revenue per ton, while our actual net revenue prices increased by 9.5%. On a Q4 FY 2010 to Q4 FY 2009 basis, net revenue per ton increased by 3.5%. Adjusted EBITDA for FCR is up $2 million on a year-over-year basis, while it is down sequentially from Q3 which is traditionally a stronger quarter than Q4.

With the volatility in the European markets, the forecasted slowdown in Asian markets, and the strengthening of the US dollar, we do expect slight softening to the commodity pricing over the next few months and into the new fiscal year. As such, we have taken the opportunity to increase our fixed pricing positions and our hedging contracts directionally to take advantage of what we expect to occur over the next 12 months.

We continue to be focused on our risk mitigation strategy, which is aimed at dampening the volatility of commodities, while helping us to maintain and optimize net revenue profile over the course of the year, while minimizing any downside exposures. FCR's shipped volumes are up 3.2% year-over-year. And we continue to expect flat to weak volumes until the economy begins to recover and the consumer returns to the markets. Although single stream conversions and increased diversions in select communities have helped offset the reduced consumer activity during the recession, and as we experience additional single stream conversions, we expect to get those benefits.

On a development front, we made good progress. First, I think John mentioned Southbridge. Let's go through that development sequence. The MSW permit was actually issued late in May. That is the first of a five step program that was fully negotiated and came out of the result of the Board of Health finding of facts. The next steps include construction of new access road which is under construction by the town of Southbridge, and installation of power, water and sewer up to the industrial park, followed by the installation of landfill gas energy facility that will then allow us to operate at 300,000 tons. And then after operating for a year at that level, we will be able to progress to the 400,000 ton final permit limit.

This is great progress. It's the first MSW landfill developed in Massachusetts in 25 years, and we believe it will auger very well for our solid waste operations in Massachusetts over the next many, many years.

Shamong, as John mentioned, I thought that this was a very good restructuring for both parties. It allowed both parties to restructure the existing OML, which as you know is a 25 year operating lease, and it allowed us to restructure the payments between the parties and certain obligations including lease payments. And also to adjust the pathway to getting over 400,000 ton permits, which we'll be able to start this year. We expect those permits to require approximately two years to achieve, but as we go through that process, the restructuring will allow us to do so with a better financial outcome from the overall operations.

And finally, north country as you know, we completed our formal application with the New Hampshire DES. Public hearings have started and we believe that we will receive an end of year determination on that application for 1.5 million tons to a very good facility for us, that has served us well over many, many years.

Moving on to Zero-Sort conversions, we have just completed this month the Mecklenburg Zero-Sort conversion. That was funded by the Mecklenburg County. We renewed our contract for an additional 10 years, and we expect the materials actually to start rolling in beginning in July. For our numbers, we've assumed about a 20% increase in volume materials as a result of this conversion.

Zero-Sort conversion in Ann Arbor is under way, also funded by our partner, and we expect to receive close to 25% additional material there. Fort Myers has also begun work on their conversion, again funded by our community partner. And we expect that to be completed in September. We also plan in our capital plan to do one additional facility over the course of the year for single sort conversion.

Moving on to US GreenFiber, the management team at GreenFiber continues to do an excellent job in a very, very challenging housing market, as everyone obviously understands. While the revenues were down $7.4 million, and EBITDA was down $3 million, GreenFiber continues to position themselves within the building services market as a leading provider of building services and insulation energy efficiency services. GreenFiber did experience volume declines during the quarter, in line with the industry. We are running at approximately 30% manufacturing capacity, but we believe we are very, very uniquely positioned once homes return to the 1.4 million annual start basis to harvest and take advantage of our national footprint.

Looking forward to fiscal year 2011, we expect GreenFiber revenues to be up roughly 5%, EBITDA to be up 13% to approximately $7 million, and to contribute about a $1.6 million loss on the equity investment basis, rounding it off to roughly about $2 million on equity investment basis.

And with that I'll turn it back to John for his next comments.

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

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions). We'll take our first question from Scott Levine with JPMorgan. Mr. Levine, your line is open. Please check your mute button on your phone, sir.

Hi, can you hear me now?

Yes, sir.

Okay, it's Rodney Clayton here for Scott. How are you guys?

Good morning, Rodney, how are you?

I'm fine, thanks. So, first, on the asset sales you're pursuing right now, the free cash flow guidance of $1 million to $8 million for 2011, is that inclusive of $25 million of proceeds from asset sales?

No, it's not. I think that there's only a couple of things that are incorporated, maybe $1.5 million to $2 million, a very small amount is incorporated into the guidance.

Got it. Okay. That's helpful. And then CapEx looks like it's going to be increasing a little bit year-over-year. I'm assuming some of that is for Southbridge. Is there anything else that you would flag there for the increase?

Not at all. I think ordinary course of business, depending upon sell development from a landfill perspective, we are experiencing some increases in volumes at the landfills, so I think it's fair to say that there's nothing out of the ordinary, Rodney, just ordinary course of business there.

Okay. Got it. You talked about, I guess disposal pricing looks better sequentially. Can you talk about what some of the drivers are there? Are you seeing any impact from the pending consolidation of two of your competitors there or is there anything else we should think about?

I think that it's fair to say that from the third quarter to the fourth quarter, we saw the business model stabilize and we began to see improvement. I think the combination of the two competitors in New York is a net-net positive, but we also took the strategy to take contracts at market rates, which we had not done historically, and as Paul said in his remarks, that's very positive. It's been very positively received in the marketplace and we're beginning to move out the lower priced volume that we do have coming to those facilities.

So net-net, I think that the business model stabilized in the third quarter. We began to see improvement. Our sales and marketing team has gone out and accessed additional streams that we believe will continue into the future. The combination of IESI, WSI, is a positive in the marketplace as well. So we do believe that we've hit bottom and we've begun to see positive aspects in terms of, not only from changes in the marketplace but changes in our own activity and how we were approaching the market as well.

Okay. Very good. And one final one, if I may. Recently the EPA came out with some recommendations for handling of fly ash. Do you -- and obviously I guess there were rules, it's unclear which half they're going to go at this point, but both of them seem to encourage the eventual disposal of that material. Do you see a meaningful opportunity there at all?

I think that certainly within our geographic reach, to the extent that that material needs to be handled with a subtitle V facility, it obviously would lend itself to be an opportunity for us on a go-forward basis, for sure, particularly from a geographic perspective in terms of those facilities that are located in the northeast.

All right. That's all I have. Thanks, guys.

Thank you.

We'll take our next question from Michael Hoffman with Wunderlich Securities.

Hi, good morning. Congratulations on posting positive free cash.

Thanks, Michael.

Very modest --

You didn't think there was going to be any question about that, did you?

There's modest, as it were, there does appear that the debt was paid down sequentially, so just want to follow through that that's exactly what you did with the excess cash, was paid down part of the revolver?

That's correct.

Okay. And the -- there was a second batch of acquisition or asset sale opportunities, have you started a process with regards to those yet or is this going to be run in series?

I think that it's fair to say that we've begun that process. I think we're in early stages but the answer is, we have started the process on the second basket of assets.

Okay. And then --

Early stages, Michael, and obviously we're staying focused on delivering on the first $25 million that we had talked about, for sure. That is the focus. But we are beginning -- we are early stages in the second, execution on the second basket.

Okay. And then with regards to Maine Energy, about a year ago you entered into a task force discussion with the State and the Town. We're approaching sort of an anniversary there. Do you have any thoughts with regard to -- it doesn't appear that the State's probably going to be able to help them buy the facility. So where are we in the State being more accommodating about you maybe doing a strategic sale again?

I think that it's fair to say right now we're in the process of continuing down the path to try to reposition the facility, and certainly Jim can chime in. But we're in a position right now of trying to reposition the facility to be a long-term asset for the communities from an energy perspective. We'll continue down that path. But as we said last quarter and the quarter before, we're not anticipating the sale of Maine Energy as part of our deleveraging strategy at this point in time, because it is so difficult to predict the opportunity with regard to partnership with the public sector. So it's not included, but I do think that to the extent that we're not able to reposition the facility, then obviously at some point in time we should be in a position to rekindle the potential sale of the facility.

Okay. And then with regards to volumes, I realize we're in very, very early stages of any type of economic recovery, but are you seeing increased tonnages in the front end loader business, maybe it hasn't turned into service center vol increases yet. Clearly if you've seen special waste, I'm assuming that's discretionary business, not regulatory driven, so--.

I think that it's fair to say that we're seeing -- we've seen a bottom. We're beginning to see improvement. But not necessarily from an economic perspective. Our sales and marketing team has gone out and secured waste streams that are, from a regulatory standpoint, likely to continue on a go-forward basis that are particularly -- that are unique in our region. So I think that it is fair to say that we think that the volumes that we have accessed are likely to continue and, but it's not necessarily -- it's not driven from an economic perspective. It's more driven from a special waste perspective.

Okay, and then lastly, the free cash flow guidance seems kind of a wide range as things are starting to tighten up, and a little better visibility. Can you help us understand what flexes this range?

Well, I think that -- I think if you look at the low end of the CapEx to the high end of the CapEx in terms of the guidance that we've laid out, I think that's one of the reasons why we have as wide of a range that is out there from a free cash flow standpoint.

Okay. Great. Thank you very much.

You're welcome. Thank you, Michael.

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

Hi, good morning.

Good morning, Corey.

I had a few questions about the guidance. First of all, is there any insight -- .

We lost you, Corey. Are you there, Corey?

Mr. Greendale? He has disconnected. We'll go next to Jonathan Ellis with Banc of America.

Thank you. Wanted to just first ask about disposal pricing. You mentioned that it was up sequentially. And I'm wondering, can you gauge for us how much of that sequential improvement was a function of contract escalators that were already in place as opposed to any changes in open market pricing?

I think it's probably very limited impact from escalators. The impact from the escalators is going to come later in the year, so I'd say a very minimal impact was related to the escalators, Jonathan.

And can you quantify for us what the impact of escalators will be later in the year? In terms of the price growth, contribution of price growth in the solid waste business?

There's a number of different contracts, so it's not something that we would be able to do off the top of our head.

Okay. On the collection pricing, if I look at the trend in collection pricing in the third quarter, in terms of year-over-year change and the fourth quarter, I notice that some deceleration. I guess, is there any particular market on the collection side where pricing was a little bit more challenging sequentially, or was it just a function of anniversary effect or some other impact in year-over-year comparisons?

Jonathan, it's Paul. I think it's mainly driven by our focus on building density in the markets in which we serve and operate, more than anything else. We've done a nice job with collection price over the last four quarters, with the volume growth that we saw in the quarter, the slowdown in collection decline on a year-over-year basis. We're focused on retention in the areas that are going to drive density and expand our margins, which is exactly what we've done.

I see. Okay. That's helpful. Just turning to the outlook, I just want to make sure I understand some of the sort of the thought process behind the guidance for revenue growth in the solid waste business. I think you said here between 0.5% and 2%, and included in that price growth at 50 basis points in excess of CPI. Just so I understand it, if we look at where CPI is trading right now, looks like it's around 2%, so that would imply price growth of 2.5% but you said here volumes are supposed to be up. I'm trying to just reconcile the price and volume growth forecast, vis-a-vis the overall revenue growth forecast for solid waste.

John, there are a couple of moving pieces here. Probably the first is, we're not expecting CPI maybe to be as robust as the national estimates today in the northeastern US. And then the second factor, and Paul Massaro mentioned this during his statistics on the call, is that we actually expect a negative year-over-year revenue component from the Maine Energy facility, with electricity prices being down as we roll off the long-term contracts. It will be about a negative 1% component. That will be on top of the price and volume statistics that we disclosed externally, so there is a little more room in those numbers to get to the math that you had laid out.

I see. So Maine Energy affects the overall revenue growth for solid waste but not the price and volume components? Is that -- ?

Yes, runs through, if you notice in our press release, we have price volume and then commodity price volume. The electricity rate and the volume component run through that commodity price volume line in our revenue growth numbers in the release.

Okay, they both run through that. Okay. That's helpful. Thank you for that.

And then the only other question I wanted to ask, just on the recycling business in the guidance there, you're modeling or you're forecasting volumes to be down. I know you just referenced the sluggish economy. But just, again, given the ramping up of some of the Zero-Sort facilities and given the volume growth that you achieved in the fourth quarter, I'm curious why you think there should be incremental weakness in volumes going forward unless there's an anniversary effect that I'm not familiar with.

It's probably a bit cautionary in the sense that there are a couple factors driving it. One is, we do expect to continue to see O&P volumes reduced as they have in the past, so there's going to be some tempering due to that. But probably a bigger factor is that we have a very clear risk mitigation strategy with regards to how we price and go into markets. And as you know, that's aimed at stabilizing and optimizing net revenue per ton, while avoiding the downside through commodity pricing when that does occur. That has us in a different profile relative to some of the other people that we compete in that market, particularly waste management which doesn't seem to be as sensitive to the downside and is being more aggressive to the current commodity prices.

So we're being -- we're sticking to our knitting, so-to-speak, and we are anticipating some pressure in a couple of markets over the next 12 months that we are in, where we may lose some volume. So we're just being careful and cautious.

Great. That's very helpful. Thanks, guys.

You're welcome.

We'll take our next question from Eric Glover with Canaccord.

Hi. Good morning.

Good morning, Eric. How are you?

Fine, thanks. I just wanted to make sure I understood the guidance for the recycling business. You mentioned I think that pricing was going to be up for the year, but I thought I heard that pricing might be down for the first few quarters of the fiscal year. I was wondering if you could help me understand that.

Corey, how we laid out -- I mean, Eric. I'm sorry. As we laid out our pricing for the year, we put our plan together in the, kind of the March time frame, and commodity prices have increased slightly since that period of time. But what we really looked at throughout the year was just a softening market. It's hard for us to have that far out of a vision in our forecast on commodity pricing, so we have had commodity pricing come off by about 15% from the first quarter through the fourth quarter, just sequentially in our model for the year.

Okay. Thanks. And I was also wondering if you could provide an update on the landfill gas energy business?

Well, the landfill gas energy business is driven by energy prices and by renewable energy credits. Those two revenue streams added together is total revenue stream. Facilities operate at north of 95% availability, so their availability is very high. So the largest volatility is really energy pricing and renewable energy credits.

As you know, energy pricing right now is on the shoulder of avoided gas pricing, and so is probably as low as we've seen in the last two years. And renewable energy credits are just -- we just I think saw an auction with national grid and they were at about $20, which is on the low side as well. So all in all, we appear to be at kind of a low spot in the energy recovery curves.

And in terms of development, could you talk about what projects are in the works and what the timeline is in.

Well, as you know, I mentioned in Southbridge we -- as part of the permit development there, will be building a landfill gas energy facility, so there is one. And there's adequate gas at the Southbridge facility. We won a year ago the [Stabin] project and are bringing that to -- it's a publicly owned project but we partnered with them in a project management capacity. And then recently we just won a renewable energy project at Loveland in New Hampshire which has not started yet. So we continue to be working that market as appropriate.

Okay. Thank you.

We'll go next to Corey Greendale with First Analysis.

Hey, guys. Sorry about that. My cell phone was working fine until the second I got on the call and then it cut off. So --

Not a problem. Welcome back.

Thank you. I don't know if you heard any of my question but I'll repeat it. I was asking about the newer contracts in New York, and what you're assuming in the guidance for incremental EBITDA contribution for fiscal 2011 versus 2010 in some of those contracts.

We really haven't laid that out, Corey. I think that clearly the contribution from those contracts are fairly significant, in that incrementally it was a fairly significant number, amount of tonnage, but we haven't laid it out in terms of the incremental benefit from those contracts.

Okay, does the pricing reset on those contracts happen on the one year anniversary, so Q3?

Yes, it does. That's correct.

Okay.

Absolutely.

And then I had a couple more questions on the guidance. I know you're not assuming any acquisitions in the guidance. Are you assuming anything from divestitures as far as EBITDA coming out from divestitures in the guidance?

No. There's nothing assumed from an EBITDA perspective in the guidance.

Okay. And is there anything you can say about the -- in the press release I know you said what the revenue impact is of MERC shifting to current market rates. Do you have any estimate on what the EBITDA impact is of that?

It's the same impact. It's all price.

Okay.

$5 million.

And -- okay. Good. And the other question I had, fuel surcharges in Q4, the price impact of fuel surcharges was a little less than I would have expected given where fuel is at. Is that just timing with a month lag or something, or has something changed structurally that you might not get as much from that as you did in the past.

Nothing changed structurally. It is exactly what you had indicated. It's just a lag. We lag up and lag down, both sides of it. But that's exactly what it is.

Okay. And I think my last question was, I know you laid out, John, pretty clearly what your target is on delevering over the next couple years. Do you, and I don't want to -- I realize some of these things are a little hard to pin down more specifically than that. But do you have a fiscal 2011 year end bogey you're trying to hit in terms of either debt level or debt to EBITDA or anything like that?

We don't. I think that the target that we set was the execution of that first basket of $25 million by December of this year, so -- but other than that, no. We've not really talked about any goal for fiscal 2011.

And you haven't set a goal for the second basket yet in terms of -- ?

No, we haven't.

Okay. Great. Thank you very much. Thank you.

Obviously, over the next two to three years, obviously, but --

Yes, thanks very much.

You're quite welcome.

We'll take our next question from Al Kaschalk with Wedbush Securities.

Good morning, guys.

Hi, good morning, Al, how are you?

Good, thanks. My other questions have been answered. So I want to just touch on the fridge on a couple. First, on the GreenFiber JV line, could you share with us perhaps maybe where you're coming from, an expectation to the one point or $2 million loss that you're expecting in fiscal 2011 on that line item? In other words, what was previously an expectation there, and now where are you, you're at $2 million?

The loss this year was $2.7 million, Al.

On a year-over-year basis, it's a slight improvement, Al.

Let me -- okay. Let me try it a little differently. I think what you provided in terms of guidance is a $2 million loss. And historic number, that was $1.4 million. I think we'll agree, we're far from that start basis.

I think what we said, we have a housing start currently of about 500,000, and what I said was the asset, when the housing market returns to 1.4 million units, we'll be positioned to grow substantially. But in the current depressed housing market, they're actually doing a very good job and doing a better job than last year by a slight improvement on the equity contribution line.

Okay, so if you have $2 million in expected for this year, maybe that was a little bit worse, and now with the continued strong performance and relatively modest unit improvement, that's closer to $2 million this year. That's what I hear you saying.

I think Ned indicated that our numbers for last year included $2.7 million of net loss, and for a contribution from US GreenFiber, so a net loss of $2 million is a slight improvement year-over-year, just to try to be precise.

Sure. Okay. And then a little bit on the cash flow number that was talked about. The discretion in the CapEx I guess accounts for the zero to $7 million of free cash flow number. While it's not an absolute number on a relative basis it is, at least in my view. What's the timing of the items that are holding back or not allowing you to maybe put in sand, a little bit tighter range of free cash flow or tighter range on CapEx.

Can you go through that question again. It was a little bit -- couldn't quite understand the question. Got the last part of it was why the range. Could you just ask that question again, Al?

Yes. Sounds like you're providing some discretionary timing on CapEx, and I wanted to maybe get an appreciation of why there's so much flexibility in that number that therefore, creates a wide range on the free cash flow estimate.

Because the CapEx has two components. One is the maintenance CapEx and then there's some development CapEx that's incorporated in there as well. Obviously, the maintenance CapEx is pretty well-known at this point in time in terms of where we're going to come out there. But there's two components in the total CapEx that we had provided guidance on, and part of that is obviously single stream development and development with regard to the landfill gas to energy program.

Okay. And then finally, just on the cost savings perspective, I think there was some commentary about labor and equipment utilization. Is there a dollar amount in fiscal 2011 that you're anticipating from a cost savings or strategy, synergy type number to come out of the business?

Yes, it's about $2 million, $2.5 million of additional costs that will come out.

And do you have to spend any particular dollar amount to get the $2.5 million savings or is it just better blocking and tackling?

No, it's just better blocking and tackling. We really -- for the shared service model and for the customer care model, those expenditures were made in 2010. Those facilities are in place and our capability to execute that additional savings, the CapEx was spent in 2010.

Okay. Great. Well, good work on the end of fiscal 2010 and look forward to an improving fiscal 2011.

Thanks, Al, appreciate that.

We'll take our next question from Steve Hirshon with Maine Securities.

Hi, Steve. Are you there?

One moment. Mr. Hirshon, your line is open, go ahead, sir.

Okay. Hi. How are you folks this morning?

Terrific. How are you in.

Great, thanks. Little bit more clarity on MERC, please. Just kind of want to know where we stand with all that, and vis-a-vis the private part, private public partnership and where all this is headed or not headed, as the case may be.

Well, I don't know. It always takes two parties to make a public private partnership. And so we can speak on our behalf, but I think that the other party at the table is, frankly, really distracted because of budgets and because of other legislative agendas and other things going on. So we don't -- we're not making any kind of forecasts or any projection about what's going to occur. We think that there's a great opportunity here to accomplish a number of things. As you know, the State won recently $30 million from DOE grant, and a part of that output of that was the Maine Green Energy Alliance which is a commitment that is associated with the plan as well.

So there's a lot of things going on but I don't think that we were -- we would be in a position nor have we ever tried to kind of handicap how things will go forward. We can only create our vision of what we would like to see happen, and we've done that clearly and precisely, and we'll have to let the other sectors work on it at their own appropriate pace.

Right. As a follow-up, are there any other jurisdictions where you're participating in any of these DOE grants?

There are other DOE grants that we have applied for in Maine, if you refer to that jurisdiction as the entire State of Maine.

I was thinking Company-wide.

I don't -- I think we've always been mindful of those opportunities, and where appropriate, we've made applications.

Okay. And nothing hanging out there that might be of interest to anyone?

I don't know that we're in a position to -- I mean, we announce, when grants are granted we announce them, and until they're announced we really don't know because it's kind of a byzantine process to go through and it's really hard to predict how and why grants are awarded, under what conditions. So we're just happy and pleased to have an opportunity to make a difference on energy efficiency. We think that program's going to be very, very successful. We totally support the Governor's goals of converting 400,000 homes within 20 years, and we think that we can bring a lot of tools to accelerate that that haven't been able to be utilized up to this point. So I mean, I think that's -- that will be something that will be very interesting to watch for everyone if we can accelerate those retrofit residential retrofit ramp-ups.

Okay, thanks a lot.

You bet, thank you.

There are no further questions today. Mr. Casella, I'll turn the call back over to you for any closing comments.

Great, thanks, Tom. In conclusion, I would just like to point out I think that it's very clear that we are executing well against the factors that we can control. Done a great job of offsetting negative economic pressures with operating programs that improve productivity and asset utilization. Sales team is doing a great job differentiating our services in the market with unique resource renewal offerings. These efforts are helping us to profitably grow revenues as evidenced by the detail that we have put forth in the call.

We also have laid out a plan to delever over the next two to three years. Our team knows what we need to accomplish, and I'm confident that we'll meet this challenge as we have met other strategic goals over the past several years.

Thanks 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 2011 results. Thank you, everyone, and have a great day.

This does conclude today's conference call. We appreciate your participation.