Casella Waste Systems Inc (CWST) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Inc. Q2 2011 conference call. At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Joseph Fusco, Vice President. Sir, you may begin.

Thank you for joining us this morning and welcome. Our team for today's discussion includes John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Paul Larkin, our President and Chief Operating Officer; Ed Johnson, our Senior Vice President and Chief Financial Officer; and Jim Bohlig, our Chief Development Officer.

Today we will be discussing our second-quarter fiscal year 2011 results. These results were released yesterday afternoon. Along with a brief review of these results and an update on the Company's activities and business environment, we will be answering your questions as well.

But first as you know, I must remind everyone that various remarks that we may make about the Company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the SEC's Safe Harbor provisions. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors including those discussed in our prospectus and other SEC filings.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and therefore you should not rely on those forward-looking statements as representing our views as of any date subsequent to today.

Also during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial table section of our earnings release which was distributed yesterday afternoon and is available in the investor section of our website at IR.Casella.com. And now, I will turn it over to John Casella who will begin today's discussion. John?

Thanks, Joe. Good morning and welcome to our fiscal year 2011 second-quarter conference call. Our goal today is to discuss and give you insight into the second quarter fiscal 2011 results.

We will start with a brief summary. Ed will take us through the numbers, Paul will run through some of the operating summary and as usual, Jim will give an update on development activity.

To start off, I think it's fair to say that we're pleased with the performance in the second quarter especially at our landfills where tonnages and adjusted EBITDA were up significantly year over year. Our team continues to do an excellent job winning new business, taking care of our existing customers and improving operating efficiencies.

Differentiating ourselves through resource transformation service offerings has continued to make a big difference through this protracted downturn in winning new customers and really helping to add value to existing customers, meeting their needs as they also deal with the reality of the economy. As an example, we've been quite active in marketing bundled residential waste pickup and zero sort recycling services to customers.

With this program, we have shifted from a net loss of residential customers in fiscal year 2010 to a net gain of customers year-to-date in fiscal 2011. Our team is building on this and other successes with additional targeted marketing programs across our customer segments, advancing our resource optimization strategies.

Revenues were up 5.9% year over year in the quarter driven by increased volumes at the landfills, increased recycling commodity prices and volumes and moderating losses and collection volumes. As we mentioned last quarter, we don't believe that this growth is due to a general economic recovery, but is clearly attributed to the new long-term disposal contracts, our focused sales and marketing efforts, and positive impacts from zero sort conversions leading to increased recycling volumes.

Solid waste price was weak in the quarter as we anniversaried -- as we discussed last quarter, as we anniversaried large collection pricing increases instituted in the spring of '09 and we began to anniversary the market price landfill contracts that were sourced from September to December of 2009. With the planned introduction of our new pricing tools this summer, we did not budget any meaningful price for the first six months of the fiscal year.

We did make progress in the quarter with the completion of systematic customer by customer profitability analysis to more effectively target pricing. We also completed introduction of the new sales commission structure to drive implementation.

While it will be difficult to meet the pricing targets for the year, the implementation of our pricing tools coupled with our reaching our daily volume capacities at the landfills has put us in the position to attain annualized price growth of 50 basis points in excess of CPI by the fourth quarter. Adjusted EBITDA for the quarter was $33.5 million, down $0.9 million from the same quarter last year, primarily driven by lower prices at Maine Energy, the closure of the Pine Tree landfill and the sale of the Cape Cod hauling and transfer assets in the first quarter which resulted in a negative $3.2 million year-over-year impact to adjusted EBITDA.

Offsetting most of this decline, adjusted EBITDA benefited year over year from higher landfill volumes, the conversion of the Southbridge landfill to MSW and cost savings from our operating efficiency programs which we continue to execute at every level from fleet optimization, long-term transportation, shared services, all of the programs that we have been working on over the last year. Free cash flow for the quarter was $4.4 million and $9 million year to date. We are on track to meet our free cash flow guidance range of $4 million to $11 million for the fiscal year.

We remain committed to reducing our leverage to 3.5 times total debt to EBITDA over the next two years to better position ourselves for the next major debt maturity in December 2012. We believe that our strategy to repay debt and reduce leverage is the right plan to drive long-term shareholder value.

To de-lever the balance sheet, our management team remains focused on the same four initiatives that we launched last year; driving profitable revenue growth, increasing pricing where supported by the market, executing cost controls and operating efficiency, harvesting value from the landfill investments and divesting of select assets. Of these initiatives, we made the most progress during the quarter on our effort to harvest value from the landfill investments.

Landfill tonnages were up 16% year over year with MSW tonnages up at Ontario, Southbridge, North Country, and BUD tonnages up significantly as we continue to source new streams of special waste materials. With increased tonnages, landfill adjusted EBITDA was up 24% and margins improved by 550 basis points year over year.

Now that we are running at or near permanent levels at the landfill on an annualized basis, we have begun rolling out lower-priced tonnages and raising spot prices. We will gain additional returns at our landfills as we improve pricing and complete the permitting at Southbridge and Chemung.

During the quarter, we repaid $2.9 million of debt. Our biggest opportunity to pay down additional debt to reduce our leverage is to sell select assets.

We remain focused on delivering that initiative and certainly share the sense of urgency, however we remain committed to following a disciplined approach that we believe will yield a fair value for the assets divested. Our management team continues to be dedicated to that effort and dedicates significant time and resources to the goal.

During the second quarter we made substantial progress with negotiations and due diligence towards the sale of assets in excess of the $75 million divestiture target that we established last year to be completed next year. And while we have not reached definitive agreements, we expect to reach this step by the end of the fiscal year, about a year, as I said before, about a year ahead of our target.

I think most importantly too from a standpoint of where we are now in that process, we will as we execute those definitive agreements and when those agreements are executed, we will update the market at the time. Now here's Ed with the numbers.

Thank you, John, and good morning, everyone. Before getting into the details of the quarter, I'd like to preface my comments with some color on our strategic activities.

As John mentioned, the senior management team continues to focus on various divestiture opportunities and we're pleased with the progress so far. But we're just not in a position yet to report a transaction.

During the quarter, we have incurred an expense, $700,000 in legal and professional fees related to these potential divestitures. Despite that unusual expense, the Company still reported revenue, EBITDA and EPS ahead of analysts' consensus numbers.

We're also showing sequential improvement from Q1. As a reminder, comparison to Q2 is affected by the closing of the Pine Tree landfill in Q3 of last fiscal year, the sale of the Cape Cod operations last quarter and drastically reduced energy sales prices resulting from the expiration of a long-term contract to sell energy from our Maine waste energy plant. We have overcome these headwinds with increased efficiency in other operations and with increased volumes at our landfills.

So looking at the results compared to the prior year, the Company reported revenue of $141 million, an increase of $7.9 million or 5.9% from Q2 2010. Solid waste revenue was up $3.4 million primarily from the landfill volume increases and FCR recycling revenue was up $4.5 million due to higher overall commodity prices.

Breaking down the revenue changes from Q2 last year, FCR enjoyed 5.8% volume growth and a 14.6% improvement from commodity prices. Pricing growth in the solid waste operations came in slightly negative overall at minus 0.1% with collection yield being positive and landfill and power yield negative. Volume growth was strong at 8.7%, 8.1% of which comes from volume growth at the landfills and the rest from collections.

I'd like to go a bit deeper on the landfill pricing because the results are actually very good but distorted by the way the statistics are computed. I mentioned on the last call that pricing year over year was affected by a large municipal contract that started ramping up in Q2 of fiscal 2010 that was brought in at a discounted rate.

Landfill volumes are up 15.5% this quarter and a good piece of that increase is due to that one contract which brings down our average price per ton even though it is on new volume. The result is that price growth appeared to be negative despite the fact that our base volume pricing and our gate rates have gone up.

The reason we view this as a positive result is that this contract not only gave us incremental profits on the new tons, it contributed to our current position of reaching our permitted daily capacity and we have been turning away customers at some sites. That puts us in the position to work pricing up for non-contracted customers.

Cost of operations increased $6.6 million and from 64.9% to 65.9% of revenue. The dollar increase in cost of ops is primarily due to higher cost of purchased materials associated with increased FCR revenues.

The increase in the percentage of operating cost to revenue was driven primarily by commodity price increases at FCR which has a pass-through effect, raising purchase cost and revenue. The cost of ops percentage improved slightly in the solid waste operations despite the revenue loss from reduced energy prices at our waste energy plant in Maine.

General and administrative expenses remained at 12.3% of revenues, same as last quarter but down from last year's 11.1%. The comparison from last year is affected by comp accrual adjustments in Q2 last year and the $700,000 of divestiture costs we expensed in Q2 of this year. Adjusting for those two items, G&A remained in line with revenue.

Savings that may have been expected from our shared service initiative and other cost cutting initiatives have been temporarily reinvested in marketing. Adjusted EBITDA for the quarter came in at $33.5 million which is 23.8% of revenue as compared to $34.4 million or 25.8% of revenue in the second quarter last year.

The primary EBITDA differences between this year and last year are the closure of the Pine Tree landfill in Q3 2010, the sale of our Cape Cod operations last quarter, reduced energy prices and the expensing of divestiture costs partially offset by increased landfill volumes. By business segment, the EBITDA contributed from solid waste operations was $29.8 million and FCR provided $3.7 million.

The closure of the Pine Tree landfill eliminated $3.1 million in depreciation and amortization expense that was reflected in the second quarter last year. As a result, D&A for the current quarter declined $1.5 million despite higher revenue. D&A went from 13.8% of revenue in the second quarter last year to 11.9% this quarter, consistent with Q1.

As a result of all these moving pieces, operating income increased from $13.7 million in last year's second quarter to $13.8 million this year. As you know, the Company did its refinancing in the first quarter of fiscal 2010, so we're now lapping the higher interest cost levels.

Net interest expense was $14.5 million in the quarter, down from $15 million in the prior year second quarter due to reducing debt levels. The average interest rate for the quarter was 10.2% including amortization of finance costs. Net of finance cost amortization, it was 9.2%.

Availability on the revolver at quarter end was $97.7 million after taking into account $49.8 million of LCs outstanding. The provision for income taxes was $300,000 in the quarter, down from $500,000 last year. The positive tax provision on negative pretax earnings is primarily due to state taxes and the impairment provision on deductible goodwill.

At October 31, the Company had approximately $50 million in federal net operating loss carry-forwards fully offset on the balance sheet by valuation allowances. For the quarter, the net loss from continuing ops was $1.2 million or $0.04 per common share compared to a net loss of $1.7 million in last year's second quarter or $0.06 per share.

We have confirmed our guidance for revenue and adjusted EBITDA, CapEx and free cash flow for the fiscal year 2011. And with that, I'd like to pass the call over to Paul Larkin for some comments on the operating performance of the Company.

Thank you, Ed. Solid waste revenues were up 2.9% year over year, the third consecutive quarter of year-over-year growth. In addition to the detail found in our press release, I would like to run you through a few comments on the components of revenue growth.

Solid waste price was down slightly year over year and was a bit weaker than planned for the quarter. Our collections delivered price improvement of 0.5% as a percent of collections revenue, pricing growth was a bit weaker in the quarter as we anniversaried large collection pricing increases from last year.

Late in Q2, we began to systematically roll out price increases, first targeting our lowest performing customers. This systematic review is expected to get us on track to meet our annualized pricing target of 50 basis points above CPI by the fourth quarter.

Disposal pricing was down 29% as a percentage of disposal revenues with positive C&D and BUD pricing offset by negative MSW pricing. We expect MSW pricing at the landfills to improve year over year in the fourth quarter when we fully anniversary the large new contracts in Ontario County which were taken at market rates starting in September 2009.

Solid waste volumes increased 8.7% year over year, the third consecutive quarter of year-over-year growth. Collection volumes were down 2.6% as a percentage of collection revenues in the second quarter, holding flat sequentially from the first quarter. Rolloff totals were up 2.7% year over year in the quarter.

Landfill tonnages were up 15.5% year over year with MSW volumes up 12.7%, C&D volumes down and BUD volumes higher. BUD volumes were driven primarily by special waste streams, a category where we see continued growth opportunity.

Cost of operations for the second quarter were $93 million or 65.9% of revenues, an increase of 100 basis points as a percent of revenue from last year. Solid waste cost of operations decreased by 40 basis points as a percent of third-party revenues.

Direct costs were down 120 basis points as a percent of revenue, primarily driven by improvements by our long-haul transportation team and secondarily by lower third-party disposal and hauling costs. Direct labor and facilities costs were also lower as a percent of revenues.

The loss of operating leverage at Maine Energy resulting from lower energy revenues had a predominately fixed cost structure, higher fuel costs and increased direct operational costs at the landfills partially offset the cost improvement in the quarter. FCR cost of operations increased by 680 basis points as margins were compressed with higher purchase materials costs on index-based contracts. With index-based contracts, we make a fixed rate per ton for processing, so when commodity prices rise, we see margins compress while cash flows remain stable.

The higher purchase material costs were partially offset by lower direct labor costs resulting from best practices initiatives and increased operating leverage of fixed facility costs. Solid waste adjusted EBITDA margins were down 100 basis points year over year, however after normalizing for the large year-over-year variances from the lower energy rates at Maine Energy, the closure of Pine Tree and the sale of the Cape Cod hauling and transfer assets in the quarter, solid waste margins were up 20 basis points, reflecting operating leverage gained with cost efficiencies, partially offset by higher G&A.

As discussed previously, we're implementing several fleet efficiency and cost reduction programs this fiscal year. After a successful pilot of [fleet mines] onboard technology, we've completed the rollout of five locations and have seen excellent results in improving driver productivity, reducing administrative overhead and improving customer care.

We plan to systematically roll out this technology across our network over the next two years. We are on track to achieve roughly $1.1 million of cost savings in fiscal year 2011 with this and other fleet efficiency programs.

We're very pleased with the continued progress within our customer care network. Our integration is essentially complete and our results are meeting or exceeding all of our expectations.

Sales conversion rates, speed to answer and customer feedback have all improved sequentially since our care center startup one year ago. In summary, our sales and marketing teams have done great work in returning us to revenue and volume growth.

We're pleased with the continued success of our lead generation and customer acquisition strategy, especially within the residential and industrial segments over the last quarter. We're also excited about the customer feedback coming through our care center and the continued opportunity to improve the customer experience.

And now Jim will take you through our development work.

Thank you, Paul, and good morning. Just first a few comments on the FCR commodity pricing and operations before I get to the development.

Commodity volumes continue to increase, up 6.4%, both driven by a slightly firming economy as well as the beneficial effects of the dual stream to single stream conversions of which three were completed and are now up and operating at full facilities in Charlotte, Ann Arbor and Fort Myers. Pricing is also up slightly year over year and is certainly firming.

There are some early indications that this will continue throughout the balance of the year, but we are not handicapping this at the moment. Our risk mitigation strategies which have been aimed and focused on net revenue and are aimed at making that a very stable outcome regardless of how gross revenues move around continues to be very successful. We have seen year-over-year increases in net revenue in line with the general overall increase in the gross pricing which has been about 34%.

As I indicated, volumes are up at all of the facilities and both on a year-over-year and sequential basis. We think that the commodity and FCR processing business will continue to perform in line with its historical pattern and we expect a slight as I indicated firming outcome from the commodity pricing.

We have had very high activity in terms of new projects from a zero sort standpoint. As mentioned, we completed conversions of Charlotte, Ann Arbor and Fort Myers.

All have ramped up to steady-state operation by the end of Q2. We did as you can imagine taking and having to continue the process over 200,000 tons of (inaudible) material during those upgrades did take some short-term impacts on our operating costs which now will be recovered as we drive down through the improved efficiencies of single stream and yields.

We were also during the quarter awarded the FCR Morris selection for Morris County, New Jersey to build, design and operate a single-stream facility there. This will be a very important anchor facility, anchoring in addition to our Camden facility. We are very pleased to have entered into a long-term contract and to have that award made during the quarter.

With regards to landfills, Southbridge continues to move along. As you know, we have now formally been issued our MSW permit for MSW out of the region which means that we can bring in material from throughout the state of Massachusetts or throughout New England.

We are doing that and operating that facility up to a permit limit. The new road has been completed and trucks are actually egressing into the site via that road which is a tremendous improvement from this previous route that was required and that in conjunction with the application to go to 300,000 tons allows me to basically characterize that the development of Southbridge is on schedule and ramping up as we have previously discussed.

On a new matter, during the quarter University of Maine has announced at their trustee level entering into a long-term agreement with Casella to build and deliver landfill gas from the Juniper Ridge landfill. As you know, we operate that.

It's a state-owned landfill but we operate that under a long-term contract with the state. This landfill gas pipeline will deliver and provide 100% of the University of Maine's Orono campus [entire thermal] needs and as the landfill gas rate ramps up, we will also enable a Phase 2 phase of the project which will allow the construction of a 5 MW CHP unit.

The negotiation has been completed, the contracts are done. We've executed on our side of the transaction. We expect the university will do so within the next week or so once they convene the trustee level board meeting.

Moving on to US GreenFiber, US GreenFiber continues to be impacted obviously by the housing market. But the team has done a very successful job through this entire housing downcycle of downsizing and remaining cash flow positive each and every year and each and every quarter.

While the kind of gross revenues in this quarter are down slightly, reflecting the warmer fall and the slower retail start, they have really bumped up in the last three or four weeks. And I think the most notable comment that is indicative of the leverage as the housing market comes back is that throughout this period and in the last quarter, or the last two quarters, we have been able to follow the fiberglass lead and raise pricing in each of our segments, averaging in excess of 5%.

And I think that this both recognizes -- demonstrates the recognized attribute values that the market believes the product has been and as the housing market returns, we believe US GreenFiber will participate in a very strong fashion. With that, I'd like to turn it back to John for his final thoughts, comments.

Thanks, Jim. Operator, we'll open it up for questions now.

(Operator Instructions) Michael Hoffman, Wunderlich Securities.

Good morning, nice job fundamentally in the quarter.

Thanks, Michael, good morning.

Jim, a little clarity. Pine Tree, can tell us what our comparison year over year Q3 2010 for Q3 2011, what should be the adding and attracting so we model that right?

Well I think you -- the D&A numbers are now stable. So the decrease in depreciation and amortization is -- you can look at the same first quarter, second quarter, it'll continue.

I don't have the other Pine Tree numbers in front of me. So I can't really say where it's going to come out. But it closed in the third quarter, so I don't think you'll have much more effect, just the one quarter left.

Okay, is that something we can follow up just on the -- what the negative would be as you've provided that to us as your reported earnings, what that negative comparison in EBITDA is?

Sure, okay (multiple speakers) absolutely, Michael.

Great. And then on the cost saves, have you booked the full 1.1 as far as you've managed to pull them out and now we're just capturing them each quarter until we anniversary it? Or are you still making progress to achieve 1.1?

Michael, this is Paul. No, we are on track to achieve the 1.1 and that is in the numbers that you are looking at for the balance of the year.

Okay, so the way for me to think about that is I should have positive cost saving impact to the business model in Q3 and Q4 incrementally to what I had in Q2?

Well the 1.1 on a full-year basis was in our guidance for the full year.

No, I was just talking about from a modeling standpoint, the way to think about it.

The 1.1 would be achieved through the course of the year. So it would be $0.5 million or is it already achieved with (multiple speakers) that's Michael's question.

We're probably probably two quarters of the way through. So you could look at it that we're $550,000 through the 1.1 total, Michael, I think is the right way to do it.

Okay, that's helpful. And then, Jim, on the Southbridge landfill, I understand your comment that you're adding volume and it equates to your revised permit, to the 180,000 annual tons, you're absorbing that kind of tonnage into Southbridge now or did I misunderstand that?

No, that's correct. We're basically at our permit limit. The permit change that was effected in June after working through this entire thing is now allowing us to transit up to 400,000 tons.

The first step of that was to get full local authority to bring in waste from outside of the local market and to shift to MSW from C&D. That has all been accomplished.

We are now applying for the next step which is in that 400,000 tons is -- the next plateau is 300,000 tons. That is conditioned upon the construction of the landfill gas energy facility which is under permitting and we expect to be there within the year and then we will go to 400,000 tons.

Okay, that was the next question. So the gating factor here is to get the landfill gas operation permitted, up and running and then it's a bureaucratic process to get the 300,000 stamp.

Correct, the local Board of Health basically created that gate and it was basically driven by their public policy advocacy for sustainability (multiple speakers) carbon. So they want the landfill to be one of the lowest carbon landfills in Massachusetts, and so that's a vehicle to get that done. We accepted that gate as a way to get the 300,000 as we believe in it as well. So it's why it got created from the Board of Health adherence.

I apologize for the background noise from the train station. On the FCR side, should we see a seasonal dip in price in your January/February timeframe?

Michael, could you repeat that because I'm -- you broke up a little bit.

The FCR, should we see a seasonal dip in price in January and February?

We do have that as a pattern, back pattern, if you look back. Because what happens is you have a high generation rate during the holidays which creates a lot of materials and that tends to (inaudible) the markets a little bit.

And then as generation falls, January/February, you kind of get the opposite effect later in the spring. But where frankly we're -- I think some of those effects are being overcome by general market expansion in terms of pricing, so it would be a little bit hard for us to call it this year.

Michael, this is Ed. I had a chance to look up the Pine Tree number for Q3. It's going to be a $500,000 effect with nothing in Q4.

Also we should note the Merck energy sales contract coming off. That'll be a $700,000 drop-off in the third quarter and then a smaller number in the fourth quarter, I don't know exactly what, but there will be something in the fourth quarter as well for that.

Bill Fisher, Raymond James.

Just had a couple things. You talked a lot about the landfill volumes and price and you mentioned I think some non-contract volume. If you had to guess, what portion of your landfill volume is non-contract that you can potentially reprice say in the next 12 months or so?

We can get you the specific number, but I would say it's probably somewhere in the 30, 35% or so, Bill. But we'll do the math on that for you. But I would say it's probably somewhere around 35%.

Okay, thanks. Then just maybe somewhat related, Ed, I thought maybe that one contract you got that was larger, you mentioned the (inaudible) contract, does that have or maybe some other ones have some escalators moving out a year?

Yes, it sure does. It has very good escalators. So on the anniversary date, that contract moves significantly from a pricing perspective and we do anniversary that contract, we do have some negative drag for the third quarter with that contract, but it goes away in the third quarter.

Probably for the reason Ed mentioned. We just have to anniversary it fully. If you remember, we signed two large ones. One has already anniversaried and this is the tail end of the second large contract.

So you get a price bump-up on those say Q4?

That's correct.

And then just on the -- you mentioned -- you seem to be pretty optimistic on the sustainability on the special waste. Is that contaminated soils or what's kind of driving your kind of optimism there?

That's exactly what it is. It's special wastes, it's soils.

I think that some of it is reoccurring. So I think we are pretty confident that on a go-forward basis, we're going to continue to see positive impact from that. Some of that represents contracted waste, some of it is spot. But this stream will continue to flow out into the future.

Okay, great. Just hopefully a quick one for Ed. You mentioned the $700,000 of the deal or legal fees or whatnot. Does that -- do you have a rough handle on what that will be for the year or how that flows in the next quarter or so or could that just jump around?

It's pretty tough to judge, but I would think you may see a similar number or maybe a little bit smaller in the third quarter.

Okay, great. Thank you.

Corey Greendale, First Analysis.

Hi, good morning. Wanted to start actually on the divestiture front. I realize you are limited in what you can say.

It sounds like there is a little change in the tone given you had been talking about two separate buckets of assets and now you're talking about the whole $75 million. So it sounds like it has been accelerated.

The question is, is there anything you can do to help us kind of think about what the -- either the free cash flow or the EBITDA associated with those assets you would be looking to sell is? Just trying to get a sense of what your leverage would be after the divestitures, assuming you complete them, would be?

Well I think that probably the easiest way to answer that question would be to look at what we had set for a target. We had set trying to get to 3.5 times debt to EBITDA as our goal.

And so it would be premature for us to give you more information or that level of information. We'll certainly do that once we get to definitive agreements, Corey.

But I think the sense of what we set out to do was try to drive our debt to EBITDA to the 3.5 times over that two to three year period of time. To the extent we're able to execute on a schedule that we just outlined, we'll be doing that as you said much more aggressively than what we had laid out.

So do you think -- and maybe this was asked and answered already, but do you think that between the divestitures and just your free cash flow once you complete that divestiture that gets you to 3.5 without having to do an equity offering or something to that effect?

I think that -- you know, again, it would be premature for us to really go into the details. As soon as we have a definitive agreement, we'll lay it out at that point in time.

I understand. Then my next question was about the pricing. Sounds like you're starting on some selected price increases to some underpriced customers. Can you just give us a sense of how wide a group of customers you're doing those price increases to and the magnitude of the increases?

Sure, I think the essence of the look is across the entire customer base and I think that clearly we are looking at each segment, each of the buckets if you will from a customer perspective. And that detailed analysis and understanding from a modeling and pricing perspective, our level of sophistication there in terms of the modeling is -- we've worked hard over the last year to put ourselves in a position to really understand that so that as we go back to each of the customer segments that we're pricing appropriately relative to the profitability of that specific segment of customer. Maybe, Paul, you want to add a little bit?

Actually, that's right on the button. We're just a lot further along in understanding where we are and maintaining a good balance of price and volume.

Is there any way -- and that all makes sense -- is there any way of quantifying -- I know some of the large nationals were doing similar processes. They had talked about in some cases double-digit price increases to the underpriced customers. Is there any way of putting some --

I think it's hard to establish exactly how much of the customer base would be in that scope. But certainly any customer that is completely underwater -- I mean obviously the essence of that price increase would be to bring them back to profitability, obviously. So some of that could indeed be fairly significant price increases on the basis of the actual profitability from that particular customer.

But it's hard to say that that is inherent across the board. I would say it's probably more the exception, Corey, than it is the rule across the customer base. But certainly you would find some customer bases where you would have fairly significant price increases if in fact they weren't profitable.

Just one last quick one. On FCR, I understand the reasons margin's down with higher commodity prices. Can you just help me understand why the actual dollar amount of EBITDA is down about $1 million year over year?

I think the principal driver there is just the excess operating costs associated with shutting down three facilities, transferring and converting them to a single stream from dual stream, having to divert that material to either system facilities or work around that material and then bring them back up online.

So looking into the current quarter, would you expect that that doesn't recur and assuming pricing holds that EBITDA is up in FCR year over year?

Yes.

Thanks very much.

Scott Levine, JPMorgan.

I don't know if you did this or can do this, but on that municipal disposal contract that -- I think second of the two that lapsed I think you said in the third quarter, can you quantify the impact that had on reported volume and price either on a segmented or on a total Company basis?

(multiple speakers) hold on just a second.

We can follow up online if that's easier.

Yes, probably that would be better, Scott. It's not something that we have at our fingertips. We would have to get that information for you.

Got it. Okay, well then a follow-up on a related subject. Really trying to determine -- if we were to normalize for that and we look at the trend sequentially, Q1 fiscal into Q2 and then beyond, on a normalized basis, are things kind of like bumping along the bottom or getting any better? It sounds like from the anecdotes in the release that things are kind of stable, not deteriorating, but not improving. Is that accurate?

I think that's very accurate. I would say stable with slight improvement. But again, not any real bump from an economic activity perspective.

But certainly stable, we would characterize it as stable, slightly improving. And a lot to do really with the effort on the sales and marketing team. So I can't -- I would not characterize that as being driven from an economic perspective as much as it's being driven by the efforts of our sales and marketing team.

Got it and then any notable variances positive or negative with any of the individual regions in the quarter or afterward?

No, I think that probably notable obviously is the performance of the landfills. Obviously the Western region performed very well. So I think that's clearly notable in terms of the Western region facilities performing at a higher level.

Got it. And then turning to pricing really quickly, it sounds like in the quarter, a little disappointing versus your expectations. But you're putting your foot on the gas with some of these initiatives, targeting select customers.

If we were to talk more about the landscape in the competitive environment in general, have there been any notable changes recently or is this -- the pricing improvement that you foresee really expected to be a function of corporate strategy and execution there?

I think it's more corporate strategy and execution. I think the other thing that we're beginning to feel the benefit of is the efforts that we've had with our customer care, the movement to centralize customer care, we're doing a better job of interfacing. We're doing a better job of closing the business that is out there.

We're also now beginning to feel some of the benefit of the marketing programs that we've put in place to advance the resource optimization strategy. And that too has been going on for two or three quarters now. We're beginning to feel the benefit of that and get some momentum from that as well.

Thanks, John. One last one on CapEx. No mention in the release, I know you cut some of the growth CapEx you had budgeted for this year previously.

I'm assuming that there's no change there and maybe if you could provide some insight without asking for guidance for the next year, what you would need to see in order to maybe ramp up some of the spending you have curtailed recently.

I think one of the things we've said all along is that from a vehicle perspective, we have increased our vehicle spend as we've looked out strategically. We've incorporated that into our strategic planning and some of that is really driven by our movement from diesel to CNG trucks.

What we are trying to do and what we have consistently done because of the downturn, we have parked over 100 vehicles. When revenues obviously collapsed two years ago, we parked a lot of vehicles.

So we are not going to in our view impact the fleet. And then when we do begin to ramp up, we've already incorporated that planning from a strategic standpoint and we are going to invest and have already started investing in the infrastructure to put in CNG filling stations around those areas where gas is available. We have already put our first trucks on the road in Burlington, Vermont. We're building a fueling station there right now.

So as we build out, you will see a bit more of a spend. It's been incorporated into our strategic planning.

And I think that we're really in our view anyway approaching that in a right manner. Because the last thing we wanted to do over the last two years was put old technology in place particularly in light of what is transpiring and what continues to transpire with regard to the EPA and climate issues.

Notwithstanding the political change, the EPA is on a clear path and the administration is on a clear path in terms of regulating those issues. So I think we're on the right track there and we have incorporated it into our strategic plan.

(Operator Instructions) Jonathan Ellis, Bank of America.

Thank you. First question, the environmental fee that I think you increased last quarter, I believe it was 150 basis points, can you talk at all about the success of implementing that and if you can, quantify what the -- either in dollar terms or percentage terms the impact on your pricing in the solid waste business [for this quarter] from that?

We did put that in place last quarter. You're right, it's 150 basis points.

The impact of that increase relative to what we have stated for our goal of 50 basis points above CPI, that was in our plan. Relative to breaking it out by dollar amount, I don't know that we have got that handy for you right now, Jonathan. We can get that back to you.

Okay, but I guess maybe just from a qualitative perspective, would you say that that was successfully implemented or did you face resistance from customers this quarter in implementing that higher fee?

No, I think overall as John alluded to earlier, we're very pleased with where we are with our pricing holistically, both core price including environmental and then the work we're doing on the fuel surcharge as well. It is -- we are not experiencing resisting.

We're just very methodical and very thoughtful in terms of the markets and the customer base that we are touching and how we are touching them. We're just being -- striking the right balance between price and volume.

Can you give us some sense if that environmental fee increase hasn't fully been implemented yet, is it the intention to complete that by year end or any sense on timing there?

It's already in, Jonathan.

Great, second (inaudible) just on the second question, just on the landfill contract that was already anniversaried, first off, was there any escalator associated with that? I think if memory serves me correctly, I think that you talked about last quarter about a 4% escalator on the larger contract or expect to anniversary (multiple speakers)

That's exactly right. That's exactly right.

Any escalator on the contract that has already anniversaried?

That was 4% as well.

Okay, great. And the other related question for that contract that has already anniversaried, any way to quantify what the sort of diminished year-over-year drag was from that contract? Again, putting aside the escalator for a second, but just the fact that it anniversaried, any way to quantify (multiple speakers)

We can certainly do that. We don't have it at our fingertips, but certainly we can get that information for you; not a problem.

Okay, I'll follow up with you offline on that. Just one other question related to landfill (inaudible). Just trying to sort of understand the rationale and the thought process behind -- you talked about trying to push out some of the lower-priced volume as you've gotten better at utilization at your sites.

But I think if I recall correctly, you also mentioned that existing municipal contract that s lower priced, you brought in additional volumes under that contract this quarter. So can you just help us understand the rationale around doing that?

That was just a ramp of that contract. In other words, that contract ramped up over a period of time. It didn't start up at 600 or 700 tons per day. It ramped up over a two-quarter period of time. So that was the comment we made before, Jonathan.

I think the question with regard to volumes is I think that what we have said and what is very clear from our perspective is that our sales and marketing team a year and a half ago, maybe two years ago now, we put a dedicated team in place to market the disposal capacity. That team has done a terrific job of doing just that.

So we're getting in our view a disproportionate share of the opportunity that is out there. We also have the positive of the WSII IESI transaction that's happened over the last year as well.

And you know, our ability to push ourselves to the capacity of those -- of our facilities really speaks to our ability to push out all the lower-priced quartile customers and move the entire pricing for the facilities in a very positive direction.

Okay, that's helpful. Just two more quick questions if I may.

First, I appreciate the (inaudible) identifying what the scope of a potential price increase would be going forward across your entire customer base. But can you -- any way to quantify for us the percentage of your revenue right now that's not breakeven that is below -- that's at a loss where clearly there would be an opportunity to raise price?

I think it's a fairly small percentage. As I said to Corey earlier on the call, I think it's a fairly small percentage of the revenue base.

I would say under 10%, probably closer to 5%, if that. So it's a very small percentage of the revenue base that would be in our view not profitable.

So I think it's more a function of as Paul has gone through it, really understanding segment by segment, really dissecting it and putting the tools in place for our sales team to make sure that they truly do understand the profitability customer by customer. And I think that we are in a position with the work that we have done over the last year to be there at this point.

Okay, that's helpful. Just final question, FCR volumes. Any way -- I appreciate the color around the zero sort facilities. Any way to quantify the actual volume increase or volume benefit this quarter from those zero sort facilities that were brought online over the summer?

I would think that it would be really difficult because I think that the issue for those three facilities -- all three of those facilities really came up and became operational. So if anything, we had drags from moving tons to different facilities, as Jim said earlier. So I would think that the net benefit really won't be seen until -- we will begin to feel the benefit of those three facilities and the efficiency of the facilities in the third quarter.

Al Kaschalk, Wedbush Securities.

Hey guys, good job on the quarter. It's actually Kevin in for Al.

Most of my questions have been answered, but just two quick follow-ups. I know on the call you guys had mentioned collection yield being somewhat positive and landfill pricing being negative. Is there any way to quantify -- specifically quantify those?

Yes, we've got that in the press release where we lay out the yield numbers in the press release.

Okay and I guess the last question I have is on the new landfill contract, any comments on the overall waste or anticipated waste mix from these contracts? Is it mostly MSW, is there more commercial? Any comments on that would be appreciated.

Are you talking about the large contracts that came on last year? If you are, that's all MSW.

Okay. Now just reflecting on the comment in the press release about new landfill contracts, are we sourcing new landfill contracts? It seems like --

I think it's both, as Ed said, the vast majority of the new contracts that have been put in place has been MSW, but we are also sourcing the special waste as well.

Okay, all right, appreciate you guys, good quarter.

Thank you, I'm showing no further questions at this time.

Great, operator. Just in conclusion, I think that it's fair to say that we are happy with the execution against the factors that we can control.

We've done an excellent job in offsetting negative economic pressures with the operating programs that improve productivity and asset utilization. As I said repeatedly, the sales team is doing a great job in sourcing new contracts and streams of materials for the landfills.

And with our sites running near capacity, we've begun to roll out lower price tonnages and raising spot prices which really should begin to benefit us for the second half of the year. We've laid out the plan to de-lever the balance sheet over the next two years.

Our team certainly knows what we need to accomplish and I'm confident that we will meet this challenge as we've met other strategic goals over the past few years. Thanks for your attention this morning. Our next earnings release and conference call will be in early March when we will report our third-quarter fiscal 2010 results. Have a great day, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all now disconnect. Thank you and have a nice day.