Casella Waste Systems Inc (CWST) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Inc. Q4 2011 earnings release conference. At this time, all participants are in a listen-only mode. Later we'll have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference may be recorded.

I would now like to turn the conference over to your host for today, Mr. Joe Fusco. Sir, you may begin.

Thank you for joining us this morning and welcome. Our group for today's discussion includes John Casella, our Chairman and Chief Executive Officer, Paul Larkin, our President and Chief Operating Officer, Ed Johnson, our Senior Vice President and Chief Financial Officer, and Ned Coletta, our Vice President of Finance and Investor Relations. Today we'll be discussing our fourth-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'll be answering your questions a little later 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 changed 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 with that, I'll turn it over to John Casella, who will begin today's discussion.

Thanks, Joe. Good morning and welcome to our fiscal year 2011 fourth-quarter conference call. Our role today is to discuss our fourth-quarter results, introduce our guidance for fiscal year 2012 and update you on our mid-term strategy. I will start with a brief strategic summary. Ed Johnson will take us through the numbers and guidance and Paul will run through an operating summary.

I don't need to rehash history with this group, but I would like to step back for a minute and discuss where we were about 2 years ago, the road map that we laid out for the street, where we stand today and our next step on this same road map. As you might remember, amidst a credit market collapse, the commodity market collapse and the deepening recession during the fall of 2008 into the spring of 2009, we needed to refinance our $525 million senior credit facilities. While the bank market and term loan market were almost nonexistent, we were still successful in getting the balance sheet refinanced. However, it came at a high cost, roughly $20 million more in interest costs. Beyond these external market factors, we ended up in this tough position in the spring because, the spring of 2009, because we had levered up the balance sheet to develop over 70 million tons of landfill capacity across the northeast, key recycling facilities and clean energy assets. Strategically developing this landfill capacity and our industry-leading resource recovery assets is extremely important over the long run, however, our timing was horrible. We had invested hundreds of millions of dollars in these assets, levered up the balance sheet to make these investments, and just as we began to harvest value from these assets, the economy ground to a halt in the fall of 2008.

In the fall of '09, we introduced the comprehensive strategy to the street to delever our balance sheet and improve our operating performance of the business. The strategy focused in 4 key areas, divesting of non-core assets and opportunistically refinancing debt, harvesting value from the landfills, improving pricing and profitability of our customers, improving our cost structure and service performance. Fiscal year 2011 was a transformational year for Casella and the cost of this transition in both financial and in management times showed up acutely in our operating numbers for the last 6 months. While our team executed extremely well against several of these strategies, we've just begun to get traction in several other areas, including our pricing program.

As part of the strategy, in December 2009, we set a 2-year goal to pay down debt and reduce leverage by selling up to $75 million of non-core assets. To date, we have sold $147 million of that, that's well ahead of our planned time line. This includes the sale of our non-integrated recycling facilities outside of our northeast footprint in early March for roughly $134 million, or 9 times-- 9.6 times EBITDA multiple. We used 100% of the net proceeds from these divestitures to repay debt, including full repayment of our $128 million term loan B, reducing our annual interest expense by roughly $9 million per year. Shortly after the announced sale of the recycling facilities, we successfully refinanced our senior subordinated notes and our senior secured credit facility. With these refinancings, we reduced our interest expense by another $3.5 million per year and moved out our maturities 5 to 8 years and positioned ourselves to call our second -- our expenses second lien notes in July. We anticipate saving another $10 million per year in interest from the July 2012 refinancing of the second lien notes.

The divestitures and the refinancing has strengthened our balance sheet and credit profile, reduced our cash interest costs by roughly $12.5 million per year and positioned us well for the future. We have been asked by many of our shareholders what we plan to do next regarding asset sales. As we previously discussed, we have several other non-core assets that can be sold at the right time to further delever the balance sheet, most notably Greenfiber and RecycleBank. However, with the state of the housing market and general economy, we have no plans or pressing needs to sell any of these assets until the market recovers in the next year or so.

We've also been asked by many of our shareholders if we plan to issue equity. Our answer is no. Our stock is extremely undervalued and we don't have a great use of proceeds, and while our leverage is still not at our long-term targeted level, we do not have any moving maturities that would force us to issue equity. One thing that you can expect to see us do over the next year or so is to reinvigorate our tuck-in acquisition program. We shut down those efforts over 3 years ago, and we recently put together a team and we've started to rebuild the pipeline. Those are important to really improve the density of our business, improve operating efficiencies.

We continue to make great progress on the landfill development efforts, and we expect Southbridge, Chemung and the McKean landfills to contribute $3.5 million to $4.5 million of total incremental adjusted EBITDA in fiscal year 2012 and over $12 million as the sites are ramped up over the next couple of years. As everyone recognizes, the landfill development and permitting process is hard to time. However, we continue to make great progress on these important projects. At Southbridge, we just installed a small landfill gas-to-energy facility. Once we complete the interconnect late summer or early fall, we'd be in a position to expand the annual permit from 181,000 tons to 300,000 tons, and then the following year, the site will ramp to 400,000 tons. At Chemung, we're awaiting for final DEC approval to a minor modification that will take the landfill from 120,000 tons per year to 200,000 tons per year. We expect to have this approval by our second quarter.

The acquisition of the McKean landfill out of bankruptcy court in mid-February for $0.5 million in cash and the assumption of closure liabilities was a huge success for our team. We attempted to buy this facility when it was privatized back in 2003 and 2004, were outbid. McKean facility is in great shape and we believe the previous owners had invested over $30 million. The site has a permit for 1,000 tons per day by truck and 5,000 tons per day by rail. McKean is just west of the Marcellus Shale drilling activity and provides us additional capacity to meet the needs of our drilling customers.

While Ed and I focused our efforts over the past year on divesting non-core assets and refinancing the balance sheet, Paul and his team undertook the challenge to change how we're organized internally, what our division teams spend their time doing and break down the cultural barriers to pricing. Like many organizations, our Managers have been under tremendous pressure during the recession to save customers and improve performance. However, we believe that this stress was exacerbated by the balance sheet issues we faced in 2008 and 2009 and our Managers retreated to a defensive position, focused on saving customers, and quite frankly, have been afraid to push through any price increases. We did everything right from an analytical perspective over the year. We built excellent customer profitability tool to help our Managers more effectively price, but given the guidance on where they could achieve price, we realigned our sales commission structure to focus on customer profitability. We re-indexed our fuel and oil recovery fees into the base pricing on a higher percentage of our customers, and we recently introduced price growth as an element of our Managers incentive compensation for 2012. While we have not yet achieved the results we expect from price, we will.

Ed has worked through these same cultural and organizational issues in the past and after completing the refinancing in March, he focused nearly 100% of his time to work with Paul hand in hand to address these issues. They are helping our lower performing divisions to develop strategies to achieve their pricing goals in holding these teams accountable. Ed and Paul have my backing and the Board's backing to solve the problem, either through coaching or replacement of those who do not have the necessary skills for us to achieve our goal. While the implementation of these changes was painful, we believe that we have substantially overcome the cultural hurdles. As an indication, collection pricing has improved from slightly negative in January to positive 1.7% in April. While this is still under our targeted level, it's a solid start to 2012.

Of nearly equal importance is our focus to improve our cost structure and service performance through operating efficiency programs and reorganization of our operating units. Over the past year, we've built out our shared service center, centralized all of our customer care, centralized our cash applications, centralized our collection efforts, the main goal of our shared service center are to improve customer service, improve our sales performance, reduce back office functions at our division and reduce costs. We have been successful in achieving these goals, and in fiscal 2012, our focus will shift to consolidation of the back office functions, such as accounts payable and accounting into our customer care and shared service center. With the steps we are taking in fiscal 2012, we have targeted roughly $1.3 million of annualized savings.

In conclusion, I'd like to be clear. We're not introducing a new set of strategies that are going to take another year or two to achieve. We're on the same path that we have been on for the last 18 months. We've done hard work to change how we do business. We have substantially overcome the internal cultural hurdles and during physical year 2012, Senior Management team expects positive results from these actions. With that, I'll turn it over to Ed to take you through the numbers.

Thank you, John. Good morning, everyone. A lot happened this quarter. I think you're going to need a bit of a map to figure this out, so let me walk you through it. The nonintegrated FCR locations that were divested during the quarter have been treated as discontinued operations. An after-tax gain on this divestiture of $43.7 million is in the disc ops numbers. One of our other minor divestitures, Trilogy Glass, was treated as a disc op as well, whereas the sale of our Cape assets in the first quarter was not. Revenue for the quarter came in at $109.6 million as compared to $112.7 million in the fourth quarter of last year, a $3.1 million decline. $1.8 million of the decline comes from the divestiture of the Cape assets, $1.1 million from the expiration of a favorable power sales contract we had at Merck, and $2.6 million in volume declines due primarily to extended winter weather, partially offset by pricing gains and collections operations and commodity sales.

Tonnage at the landfills was down 11.4% or 122,000 tons. 75% of this shortfall was from special waste, primarily contaminated soils not making it to the landfills due to weather, the remainder being the delay in seasonal pickup of roll-off activity. Cost of operations for the quarter was $79.9 million, up $3.5 million from last year. The higher operating costs, particularly as a percentage of sales, has to do with revenue mix as the incremental tons lost at the landfills are very high margin tons. Paul will go into a little more detail on the cost of ops and what we anticipate going forward.

G&A expense reflects the one-time $3.5 million in bonuses the Board awarded after the successful divestiture of FCR. Unfortunately, we cannot put this against the $43.7 million gain on the transaction in disc ops where it belongs. Without the bonuses, the G&A expense is right in line with last year. Depreciation and amortization of $13.5 million is down $800,000 from last year's number due to the lower landfill volumes.

With the divestiture behind us, we took a good look at our balance sheet to see if we should take any write-downs on our remaining assets. As part of our original plans for the Southbridge landfill, we had constructed a large specialized building to process C&D waste. Due to court challenges on the site assignment of that building, coupled with market conditions, the facility was never opened. We had evaluation done and took a charge for impairment of $3.7 million in the quarter. Nothing else in our asset review indicated any impairment in value.

At the same time, we were required to assess the fair market value of the McKean landfill assets that we acquired out of bankruptcy. As you may recall, that was a $500,000 cash purchase price on the assumption of closure liabilities. The fair market value exceeded purchase price by about $3 million, and we were required to take a book -- to book a bargain purchase gain.

The tax provision under GAAP is always difficult to explain, and this quarter is no exception with a negative provision or benefit of $26.4 million compared to a pretax loss of $21.9 million. This has to do with our ability to use net operating loss carry-forwards. The pretax gain on the divestiture was $75.3 million, and this had a tax provision of $31.6 million booked against it. The NOL, which was created from continuing ops in prior years, was used to offset a good portion of that tax. The NOL was not previously recognized and it had a substantial valuation allowance against it, so we reversed the valuation allowance and take the credit in continuing ops.

Taking out all the unusual items, we reported adjusted EBITDA of $18.3 million and adjusted EBIT of $4.8 million. For the year, we reported adjusted EBITDA of $102.8 million and adjusted EBIT of $44.5 million.

I understand that everyone has their unique perspective on things, some of our stock holders have been in for a long time and others are fairly new to the picture, I wanted to make a few comments about where we are from my perspective. When I came on board a year ago, it was clear that John and I were going to have to spend the bulk of our time on the divestiture and refinancing of the Company, and clearly, we came away with a big win on that front and greatly reduced the risk profile of the Company. What is less apparent outside the Company is that at the same time, Paul was transitioning the way the Company functions. There was some pain to this transition, particularly our initial inability to get price, but I think we have an equally big win to talk about here that will bring significant benefits this coming year and on into the future. The economy and recent record-setting weather patterns have us behind where we would like to be from a financial performance standpoint, but the fundamentals of how we attack our markets are so much stronger. Simply put, we are just a better run Company now.

I'd like to highlight a few of the improvements. First and foremost, we have made pricing a core process. Price increases in this industry are typically done through mass mailing once a year per market, sometimes around the disposal increase or other annual event in the market. We have implemented integrated systems and processes that are part of our daily activity, with divisional controllers, feeding general managers and sales staff with accurate and up-to-date customer profitability reports. These reports are used to continually manage yield from the market, targeting price increases where customer profitability is inadequate, or has eroded to meet budgeted price goals on a monthly basis. We have changed the incentive programs for divisional management and sales personnel to be strictly aligned with creating shareholder value. Sales commission plans are now tied to improving profitability on a book of business. The sales force is no longer motivated to sell service at any price and then sell the general manager unaccepting it on a hope that future price increases will make that customer profitable.

We are taking as many administrative processes as possible out of the field so that the field personnel can be totally customer-focused and the administrative processes can be performed in a more professional, consistent and efficient manner. We have centralized customer care. Some might think this is inconsistent with our belief that this is a local market business and the customers need to be handled locally, but I think our customer care center has become one of our biggest strengths. When customers or perspective customers call the local operations, they don't know they are talking to someone in Rutland, but they do know they are talking to a very professional, well-trained representative, with direct access to their specific customer information, knowledge of the particular market and fluency in any marketing initiative that is going on at that time. Centralization has improved our customer satisfaction metrics, our close ratio on new business calls and our ability to explain and maintain price increases.

It has taken some time, but we are over the cultural hurdle. I talked about this over the past year, there is always an initial disconnect when the home office is pushing price and the local Management is playing defense. Corporate objectives are aligned through the Company and the tools discussed above are in place and accepted, reducing the fear factor inherent in raising price. Perhaps the most important changes is our management of risk and the incorporation of risk premiums in our decision making. Those of you that have been investors for a long time are well aware that risk has bitten us before. You cannot eliminate risk entirely, you wouldn't be in business. But I can assure you that every opportunity to evaluate -- every opportunity we evaluate now has an appropriate risk adjusted IRR hurdle.

So as I enter my second year, I feel pretty good about the tools we put in place and the amount of positive momentum we are building up. There are no more major structural changes to be made, so I'm looking forward to the year ahead, where we can exploit the hard work that the team has been doing this past year.

Now we've provided guidance for the coming year that reflects the current flat economic conditions and a bit more conservative view of seasonality. Headline numbers are $475 million to $487 million in revenue, and EBITDA of $105 million to $110 million. Below the line, we expect interest to remain stable and our equity and earnings from Greenfiber are not expected to improve due to the continuing poor housing market. While these numbers do not get us to what I will call our short-term financial goals, I want to be clear that Management's objective is to find a way to reach profitability by the end of fiscal 2012, and we remain very focused on reducing leverage to 3.5 or below. We've highlighted and continually update our Board on various strategic alternatives to get us there. We will not pursue anything that we feel harms shareholder value. The obvious and easiest solution is to sell stock to pay down debt, but as John mentioned, we are not sellers at these valuation levels and do not believe it would be in our shareholders' best interest.

The alternatives include acquisition possibilities, selected divestitures or other rationalization of certain assets, and overall game changers that are outside of our control, such as the expiration of the drilling moratorium in New York, where the Marcellus natural gas reserves sit, surrounded by our disposal facilities. Of course regardless of what we can get done in 2012, the picture changes dramatically in 2013, where we expect to call the second lien notes and save based on the current market approximately $10 million in cash interest costs. This will get us to profitability and boost free cash flow available for debt repayments. It should be an interesting year to follow the Company. And with that, I'd like to pass the call over to Paul Larkin for his comments on the operating performance of the Company.

Thanks, Ed. Good morning. Solid waste revenues were down 5% year over year, with the decline driven by the divestiture of the Cape Cod assets in Q1 of last year, lower solid waste volumes, mainly due to a delay in seasonal business, and lower energy prices, primarily at Maine Energy. Solid waste price was up 0.4% year over year, although the improvement was well below our expectations for the quarter. Our collections divisions delivered price improvement of 1.2% as a percent of collection revenues. And as discussed, we've begun to gain momentum with our pricing programs, with collection price rising throughout the spring from a negative 0.1% in January to 0.3% in February to 1.3% in March and then 1.7% in April. We are seeing general market acceptance of these increases with only limited pushback. Our progress has continued into both May and June and we're generally on track for our fiscal year 2012 pricing goals.

Disposal price was down 1.3% as a percentage of disposal revenues, with positive MSW pricing, offset by negative C&D and BUD pricing. We calculate landfill price as the change in average price per ton, so this metric includes price changes and mix changes. We are continuing to increase spot pricing at the landfills, but the rollover impact of higher price, expiring contracts and mix changes negatively impacted price. In our fiscal year 2012 plan, we have targeted a 2.5% price improvement for our collection businesses and flat pricing at the landfills. With the collection price increases completed this spring, we are on the right path to achieve our fiscal year goal with roughly 40% of the annual price increase complete.

In April, we re-indexed our fuel environmental recovery fees and rolled these existing fees into our base customer pricing. These fees had reached roughly 22% in April with the steep climb in diesel prices. Re-indexing the recovery fees allows us to increase the percent of customers on the program, to more fully recover fuel inflation and address competitors that have been focusing on these fees.

Energy prices were down $1.2 million year on year on the quarter. This negative impact was mainly the result of a long-term fixed price contract that we rolled off at Maine Energy in May 2010. We have planned for energy prices to rebound slightly in fiscal year 2012, as we anniversary this fixed price contract. Solid waste volumes were down 3.6% year over year with collection volume down 2.1% as a percent of collection revenue and landfill tonnage down 11.4%. Volumes were severely impacted by the record snowfalls this winter, followed by the record rainfalls across the northeast this spring. The National Weather Service recorded rainfalls for March, April and May that were the highest on record in 150 years, highlighting the challenges we faced this spring. At the landfills, lower C&D and special waste volumes made up 88% of the year-over-year decline, further illustrating how the record spring rainfalls impacted the seasonality of our business.

For the past several quarters, we have talked proudly about new special waste programs at the landfills. One of the largest is related to the Marcellus shale drilling activity in the Northern tier of Pennsylvania. Our McKean landfill is just west of the activity and gives us a great platform to expand our services in that market. If the moratorium on drilling is lifted in New York, our western landfills are extremely well positioned to capture more of that drill cutting material.

Recycling commodity prices were higher year over year and higher sequentially with net commodity price per ton up 15% year over year and 8% sequentially, with strength across all classes of commodities. Recycling ship volumes were down 5.1% year over year. During the first 9 months of the fiscal year, we received incremental volume at one of our Western Massachusetts recycling facilities from a New York market that was constructing a new MRF. When this facility came online over the winter, we stopped receiving that material. Volumes were up in the recycling business without that benefit.

Our cost of operations for the quarter was up $3.5 million year over year with margins compressed 520 basis points. Rising diesel prices resulted in $1.3 million higher fuel costs year over year. We did not recapture all of this impact for our fuel and oil recovery fee, and as discussed earlier, we have re-indexed that fee and expect to better offset any future inflationary pressure. Our third-party hauling costs were $1.2 million year over year as we grew major accounts brokerage business. Our cost of operations was negatively impacted during the quarter with lower productivity throughout the solid waste business, resulting in higher labor costs, and record rainfall resulted in millions of gallons of additional leachate at the landfills. In the recycling business, higher commodity prices resulted in $700,000 higher purchased material costs.

It was a tough operating quarter and we're disappointed with our results. We have, however, started to see operations return to normal in late May and into early June. Our preliminary May results look encouraging, with overall revenues up 4.1% year over year, including positive solid waste price and volume. Landfill volumes were slightly down, with positive MSW volumes offset by lower C&D and special waste. Roll off polls were up year over year and up significantly from April. And direct labor was down year over year in May, while we still felt the impacts from higher leachate costs in the month of May. Operator, at this time, we'd like to open the lines for questions.

(Operator Instructions) Bill Fisher from Raymond James. Your line is open.

Thank you. Good morning.

Good morning, Bill.

Good morning, Bill.

I had one question for Paul. You gave a lot of year-over-year cost data on the operating costs, do you have any sense -- I know the revenues were down sequentially at the landfills and whatnot, but I think the costs were up sequentially, $2.5 million was like fuel and leachate, do you have any handle on how much they were up sequentially?

The fuel was up $1.3 million, Bill.

That was sequential, though?

That is year over year, sorry, not sequential. I don't have sequential.

Okay, but would fuel and leachate maybe over time or something be the big variances, probably?

Given what we saw in -- yes, they would be.

Okay. Okay, and then you mentioned Marcellus in New York. We've been looking at some of the permit data in the counties and in Pennsylvania, it seems like they are up very, very strong looking into April and May, do you feel like you have more opportunity to grow it in the Pennsylvania -- pull in the Pennsylvania volumes either in McKean or north even this year, just from purely Pennsylvania?

We have Bill, taking material -- Marcellus shale drilling material into both Chemung, Hakes and Highland over the course of the last year. The pressure on moving that material is up a little bit with diesel prices rising, but we have done that. We are continuing to do that and we don't see it changing any time in the future. It has -- we have experienced some pressure though with the rise in diesel price.

Okay, and just one last one maybe for Ed. Do you have on a forecast, you mentioned I think $6 million cash taxes, any guess on what -- kind of how to look at the reported tax rate, though?

Well, that, that's very difficult because of the GAAP treatment when you're in, still in an NOL position, and we still do have a small NOL. So we will continue to book tax on our goodwill amortization, even though that doesn't make much sense, but that's the way gas treats the goodwill amortization, if you're in a loss position, and fully reserve our -- any new NOL that gets created. So it's pretty difficult to predict the tax provision.

Okay, and you mentioned you had a goal of being profitable. If you -- how much NOLs do you have left, if you are profitable a year from now?

I don't have that number in front of me. And the NOLs vary between state and federal as well, but that number will be in the K when we file it later this week.

Okay, great. Thank you.

Thank you. Michael Hoffman of Wunderlich Securities. Your line is open.

Hi, thank you very much. So Ed, in your prepared remarks, you reaffirmed that, I'm assuming it's a milestone, not an ending point, the 3.5 times, but didn't really talk about how quickly you would get there. Can -- are you prepared as a Company to provide a 12-month milestone of what's the move in the leverage ratio?

Well, we've got a couple things there. One is the relatively conservative guidance that we've put out there. And what that would do to our leverage ratio, which doesn't get us there, that it gets us to 4 to 1 basically. The other side is what we're working on, on the strategic side, where we continually evaluate different options that will not only bring the leverage down, but meet our other goal, is to get the Company into a profitable, on a GAAP basis situation. So we're trying to get the process, which will fix Bill's question on the tax provision as well, once you get a Company to profitability, everything becomes a lot cleaner in your P&L, your cash flows become stronger, obviously. And so that's a key goal of ours, as well as the leverage ratio. But to answer your question, the guidance gets us really the 4 to 1. The strategic moves, we would announce if and when they happen.

Okay. So to that end, following that point, I'm thinking what do you believe is your target EBITDA objective? And how should we think about that as where you are on a run rate basis by the end of the year 2012 going into the fiscal year 2013?

I'm confused about your comment about the target EBITDA.

Margin, margin. Not dollars, margin I'm talking. So you're -- I mean you're sitting here low 20% EBITDA margins. Clearly this -- shouldn't this be a 25% to 28% margin business? And if so, what's the milestones of giving us confidence you're on that track by year end if you're executing all of these plans?

Well, you're absolutely right that this should be a 25% plus EBITDA margin business. The reason that we are where we are is partially because we did not get price in the past year. So as costs went up and our price did not match it, this was part of the transition pain that we went through to get to where we are. Without getting price, you really erode your margin. Now moving forward, the model's a bit different and I think our ability to execute is much improved. So when you're talking 25% margins, that's a very feasible place for us to get to. I don't know if I can put a timeframe on it. I don't know if that's our run rate at the end of the year. But yes, certainly that's our target by the end of the year and then we can improve it from there. Certainly 25% is not the end, the end target for us long term.

Okay. So one of the things you shared, if you changed incentive compensation--?

The guidance implies 25%, right? Guidance implies 25% margin.

On a run rate basis, not on an absolute because guidance -- I mean the guidance is 22% based on mid-point of your revenue.

Right.

Okay. So your guidance is presuming you're going to be at 25% going into fiscal 2013?

Yes.

Is that I'm -- okay. And then you mentioned, John that you, and then Ed reaffirmed, the price is now part of an incentive comp system. Can you talk to us about how that works and why the incentives would be the right motivators to drive behavior?

I think, I think the transformational aspect of what Paul has done over the last year, is we've completely revamped the entire process, with the right tools, Michael. And I think the other thing that we've done is to overcome the issue of, quote, the cultural issue of being aggressive from a price perspective with regard to the entire team. And we've pushed price back to the division managers and basically have tied their incentive comp to that as well. So I think that we've got the right tools in place. They've got the right tools to go into the marketplace and do what's necessary, and it's also now something that we're doing every month as opposed to periodically throughout the course of the year. So the entire process has changed completely. So I think we're pretty confident that we'll get price.

And I think the other thing that's really important to understand is that we believe that this issue is just a function of moving management. In those areas where we've got terrific managers that are doing a great job, they've been able to get the price and see a little pushback in the marketplace. So we don't think we have an issue relative to our ability to get price. It's just a matter of getting the -- that team in a place with the right tools to understand what the costs were, have the accurate information, and then really institutionalize it from a process standpoint where people are doing it every month. And I think that's what Ed was referring to that you can't see that momentum because we haven't gotten the results. But it is our focus now. Having the refinancing behind us, it's senior management team's focus. Our single most important issue to execute on in the next 6 months is price.

Okay. And, Paul, the $2.5 million targeted price for 2012, what percentage of the total collection, I realize it's around collection, can you actually affect price on a realtime basis? I'm presuming that $2.5 million is actually greater on an absolute basis at that portion of the revenues you can drive pricing.

It is, Michael. I don't have that information in front of us. We can get it out there. There is in specific geographies, we are tied to municipal contracts where we don't have the flexibility to keep pace with the market and we're tied to a contract. I don't have those numbers off the top of my head. You are correct, the $2.5 million, when you look at the base that you can effect, is higher. It's not significantly higher, but it is higher.

Okay, and--?

And I would also say, too, that the municipal piece is a small piece of the business, so I don't think that it's all that material, but there are some obviously.

Okay. All right. And then lastly, just so I understand, so restarting the acquisition program, so one of the things I'm hearing, I just want to make sure I understand the message correctly, is that you will look to at reasonable prices -- so it's a delever by growing EBITDA through acquisitions--?

That's exactly right, Michael. It's looking at those small tuck-in acquisitions, fundamentally those opportunities to improve density and improve the performance of the operating division. So it's -- really that focus is really from an operating improvement, performance improvement. And then obviously Ed's perspective was much more strategic and perhaps larger opportunities. But from an operating standpoint, just reinvigorating the tuck-in acquisitions to improve density and operating performance.

Okay, and then lastly, this is a long view question, if you think about your July 2012, potential to refinance secondly your ongoing efforts to drive EBITDA to a 25% rate going into 2013, if you circle the number or range of a number on free cash are we off base thinking you ought to be talking about $25 million to $35 million in a fiscal 2013 timeframe versus the $2 million to $7 million you're talking about today?

Yes, I think that our perspective would probably be slightly lower than that $20 million to $30 million as opposed to $25 million to $35 million. But I think we've looked at it -- we look at it from that framework.

Okay. Thank you.

You're welcome.

Thank you. Al Kaschalk from Wedbush Securities. Your line is open.

Good morning, guys.

Good morning, Al.

Good morning.

Two kind of just clear up questions given some of the prior, first, on recycle volumes in terms of the guidance for fiscal 2012, I think they're implied it would be down 5% to 10%. And I was just wondering if that's -- I believe that's apples-to-apples basis, meaning on what's left, but could you help maybe support why that should be down versus up?

Yes, actually when you -- it's not down. It is down in terms of the guidance that we've given, but it's down because we had a one-time contract to take material from a competitor that was building a facility, our -- one of our Massachusetts facilities was taking a significant amount of tonnage from New York where there was a facility being built. So when you normalize and take that tonnage out as a one-time event, the actual volumes are going up, which is what should happen because of the implementation of Zero-Sort facilities. So that is the reason why on a year-over-year basis, Al, it's going down. But when you normalize that, actual volumes are going up.

Any way to imply or share what that range would be normalized?

It would be several percent increase, Al, year over year, in the last quarter our recycling volumes were down 7.8%. And without that, they were up a couple percent, 2%. And should be the same sort of rate in fiscal year 2012.

Excellent. And then just to kind of go around this implied guidance on an adjusted EBITDA margin and where you think you could end fiscal 2012 at, why shouldn't the implied guidance at the mid-point be even higher given getting price, volumes are up positively and you got mix from some of this incremental special waste that arguably has got to be better than legacy margins. So what are maybe am I missing, or B, why shouldn't we expect perhaps higher compensation for achieving what probably is higher internal margin targets than what you have communicated to the market?

Yes, I think one thing we took into consideration with our guidance is we just came off a difficult winter, difficult fourth quarter, and there is an increased sensitivity to seasonality in our view. Now, one of the things that we -- that's happened over time with the drill cuttings and other special waste going into the landfill, is the percentage of special waste has risen over time and with the drill cuttings being fairly new to the picture, we didn't realize how seasonal those drill cuttings were. So not only do the drilling operations get affected in the winter with snowfall, but the drilling operations also get affected in the spring with road bans with the muddy dirt roads they have to go over, they get shut down for that purpose as well. So with the new seasonality in there, we've adjusted our guidance accordingly.

And if I may just--?

And certainly, I think there's no question that our view is that we are somewhat conservative, I think that's the right place for us to be. But certainly as Ed said, we have adjusted from the seasonal perspective, but we're certainly trying to be thoughtful from a conservative perspective as well.

And then just one more, if I may. On special waste, industry's using a very different measure to what's special versus what's recurring. Can you help us with that in terms of either a volume number or what -- how do you think about special waste in terms of going forward and particularly in terms of the volume?

Special waste, Al, is really soils. It would be cleanup jobs from facilities where they have spills. They have oil petroleum contaminated soils, clean outs of lagoons, all kinds of different types of materials that are non-hazardous materials, but they're industrial clean out type of actions. And those -- that's some of the disconnect that we had in the fourth quarter because they just don't happen when you have the weather-related events in the spring with regard to the wet weather, you just can't do those kind of activities. But that's predominantly what we get from the special waste. It would be sludges, lagoon clean outs, contaminated soils, those kind of materials are the vast majority of the volume that comes in from a special waste standpoint.

Does that include storm waste?

What's that?

The recent storms, do you consider that special waste?

No, that would probably come in -- that would come in as C&D.

Great. Thank you, guys.

You're welcome.

Thank you.

Thank you. Scott Levine from JPMorgan. Your line is open.

Hi, good morning, guys.

Hello, good morning, Scott.

You talked a lot about some of the changes you've made culturally with regard to the new pricing initiatives and we can appreciate the amount of lifting done there, but could you comment maybe with regard to your expectations a lot of those factors are internal, can you talk about what you're seeing in terms of the market place receptivity and maybe how we should think about how ambitious or not the pricing guidance that's embedded within your financial target is from your point of view and how much risk there is maybe in achieving those from your vantage point?

I think we're really comfortable with the guidance that we gave out with regard to price, Scott. There's no question in our mind that it's a matter of execution as opposed to our ability to get it. As I said, those division managers that get it are on board that are executing are seeing very little pushback from a price perspective in the marketplace. There are some areas, but they're in the minority, where you have a bit more intensity from a competitive perspective. But on a general basis across the footprint, where we've executed, we've seen little, little pushback.

Okay, that's encouraging. And in follow-up--?

But it is by customer profitability, so it's not just going in and going across the board. It is now customer by customer and you're increasing customers on the basis of their profitability tool as opposed to across the board. That's why it's a bit more of a change in terms of the management team to get them to the point where they are really executing with the tools that they have, that strategy. But we're pretty comfortable, very comfortable with the guidance that we've given and our sense is that in some places, we should be exceeding that.

It doesn't sound like you consider external factors to be the -- an important risk or the more important variable here is really internal in execution and cultural change that you guys have implemented and would you agree with that characterization?

Yes, I would.

Okay, and then one follow-up question. I believe Al asked about special waste, the shale cuttings and work you're doing in those types of areas, do you consider those to be special waste or are those come in as C&D?

Those are special waste.

Okay. With regard to the major accounts initiatives, you mentioned that in the press release as well, can you give a little bit more color on what you're doing there? And I guess I can appreciate some of the comments you made in the release about the margin drag that that's expected to produce. But help us understand the reconciliation between that and the returns and the way you guys view that business.

Yes, I think the major accounts business is a unique business to understand, in that what we reported major accounts is the -- basically the brokerage side of the business. It's when we go to a national customer and sell a major account, a lot of that gets done by our trucks and our operations and that's at normal margins. But the -- what's left over, what's outside of our market that we're subbing out to third parties is a relatively low margin. So major accounts has a great positive effect on our business as a whole, but the piece of our footprint appears as a low margin business, although there's no capital required and the IRRs are really high on that portion of the business.

Got it.

So we've continued as a strategy to push major accounts activity.

It's the outsourced portion outside your footprint that dampens the reported margin.

Yes.

That's right.

Okay. One last one, then, and you guys already addressed what you've seen since the weather has improved dramatically, but it's only been a month or so, so would you characterize, I guess to reiterate the point, what you've seen since the weather has returned normal as being typical from a seasonal standpoint and maybe comparable to what you guys saw last year, and maybe any regional color would be helpful?

Yes, I think as Paul reflected in his remarks, May certainly looks encouraging with revenues up 4% year over year. MSW volumes were positive year over year in May as well, but C&D and special waste were off a bit. Roll off pulls are up dramatically. We do expect that we should see some benefit obviously from the flooding. That's going to create obviously some work to -- once people really begin to start tearing out and replacing walls and doing the things that are necessary to recover from the floods. So we're -- obviously saw roll off pulls were up significantly in May as well. So I think we're seeing things come back sequentially month over month. It seems like things are certainly a bit better and more normal than -- more reflective of a normal May.

Got it. Thanks, John.

Yes.

Thank you. Corey Greendale of First Analysis. Your line is open.

Hi, good morning.

Good morning, Corey.

I had a couple of questions about the guidance. The -- within the EBITDA guidance for the full year given that recycling revenue is expected to be down, is there anything you can do on the cost side or should we assume that recycling EBITDA will also be down in fiscal 2012?

Can you walk through that again, the--?

I guess much more simply, do you expect that EBITDA in the recycling segment will be down year over year in fiscal 2012?

Yes, slightly, because of the tons that we're not going to receive from that one-time event, it will be down slightly.

Okay. And then going back to the comments you were making about exiting the year--?

I mean I think certainly in that regard, certainly there's -- there may very well be -- there's several opportunities that we're working on now to bring in additional tons. There's several opportunities from a municipal perspective that we're working on. To the extent that we're able to have some success there, we could very well, could very well improve that stuff, but at least on a year-over-year basis, there was a big impact from the tons that we're no longer getting.

Okay. No, I understand, it's more I was just trying to clarify that if you look at the guidance for the entire Company that the improvement within the waste business is actually greater than implied there because you have a drag from the recycling business.

Yes.

Second question, you had mentioned exiting fiscal 2012, or a target for exiting fiscal 2012, at a 25% EBITDA margin run rate. I just want to clarify, does that mean that you think 25% EBITDA, and I realize you probably don't want to be pinned down too much on fiscal 2013 yet, but that you're looking at 25% as a reasonable target for fiscal 2013 as opposed to a 25% margin in Q4 of fiscal 2012, which is seasonally weak?

Yes, well, if you look-- as you break down our guidance for next year, the solid waste portion of the guidance is 25% to 26% margins. And the recycling brings it down a bit, major accounts brings it down overall to 22% to 23%. So we think by the time we get the business going into 2013, we're hopeful to be giving guidance for that year in the 25% plus range for our Company as a whole.

Okay, that helps. The other question I had, so it sounds like you've made a bunch of changes around the -- around how you go about pricing. And my question is, you talked about cultural change and cultural change is something that can take a while and people can respond to differently, so can you just talk about the internal reaction to the things you've done, how people have responded to reallocating administrative responsibilities, whether they think the changes you're making are good ones, and if you're seeing changes in turnover in the field as a result or anything, anything like that would be helpful?

That's actually a very astute question that I'm sure most people don't focus on. I've got -- I had experience with pricing initiatives in other companies that I've been with, and there's always a cultural pushback and it always takes time. Here we've done more than just introduce new pricing dynamics. We've changed the whole way the local management works and what they focus on day to day. And so it's been a very difficult change culturally over the year. We hit some ah-ha moments back in January/February, certainly when the salesmen figured out how their commission actually worked versus how they -- even though we had explained it to them when we put it in place in November/December, they-- it takes a little while to figure out how to works. There was pushback, certainly a lot of reservations on pushing price in the early months of putting -- pushing out the pricing tool. And there was some work that still had to be done to make sure the pricing tool was accurate and reliable. That's where the controllers in the divisions have taken a major role. But I really believe we're over that cultural hurdle. We--.

I think just to add a little bit to that, that there's no question that we've been through a really transformational year. Not only -- not only have we taken basically all of the backup customer care, there's real apprehension on the part of a division manager to say that customer care is going to be handled by the home office. That's been obviously going on for a year and a half now, but I think that culturally, we're clearly through that and anyone who had reservations about it historically are just delighted to see and feel what's happening from a customer care standpoint to their customers. Same thing -- the same thing with bringing in collections and bringing -- all of the things that we've done to transfer the business model from a shared service standpoint are very, very significant, very significant benefit to the business long term, but very, very big changes. So you're taking away a lot of the responsibilities that they've historically, division managers have had historically, and we're asking them now to get closer to their customers, to really understand the competitive nature of their marketplace and do different things. And it takes different skill sets to be able to do that. So obviously there's some folks who need to be in an operating role as opposed to division manager role. And those are the things that we have gone through from a cultural shift standpoint.

The other thing that we've done, too, is our sales force, we've been transforming our sales force as well where we're trying to retrain the sales force to be solution providers, to be able to provide solutions to all of the activities that we handle from a customer perspective whether it's Zero-Sort, whether it's organics, whether it's E-waste, et cetera, to be an overall solutions provider to our customer. So that transformation has been going -- ongoing as well. So I think there's been an awful lot of change and I think that the changes that have been made, while folks were apprehensive at the beginning of that process, we still have probably some that are somewhat apprehensive, but I think the vast majority of it were through.

Okay, I appreciate it. Thank you.

You're welcome.

Thank you. Jonathan Ellis from Bank of America. Your line is open.

Good morning. This is [Arnie] calling in for Jonathan. My first question is on your recycling guidance. Recognizing you have hedges in place in your recycling business, what OCC price is implied in your price guidance? And could you please provide some earnings sensitivity around that as well?

We actually look at commodity prices on a collective basis as opposed to specific, with regard to any one commodity. So we fundamentally have taken -- what's that, Ned? We fundamentally have taken the average price that we saw last year, and that's fundamentally where we are from a budget standpoint on a go-forward. We have not incorporated in any significant increases in commodities from where we were at the end of the year.

In fact, Arnie, we usually budget the year to have prices come down throughout the year.

Okay.

And our traditional makeup is to just -- we were at pretty high point on Q4 as an average basket of commodities, and we have this budget to come down throughout the year. So they start high in the beginning and will comp higher year over year, and by fourth quarter, we budget for them to be down year over year. And that's the methodology because we can't presuppose that they'll stay flat throughout the next year or rise.

Okay. That's helpful. And then going through your solid waste business, is your 1.5% to 2% pricing guidance a function of the pricing framework implemented so far, or is it contingent on further implementation?

Well, I think our guidance actually -- first of all, it breaks out in the solid waste area, it's a little higher than that. But our guidance is based on CPI and we've taken a very conservative view on CPI. So we're still trying to stay 50 basis points or better above CPI.

Okay. And in terms of your volume guidance, I mean where do you expect to see volume improvements by end markets for the full year 2012?

The volume guidance on the solid waste business is essentially flat to slightly up for the year.

Right.

And we expect to see improvements in landfill volumes year over year, however, collection volumes basically flat. And as we previously said, we expect recycling volumes to be down due to one contract, but generally up.

Okay. Thank you.

Thank you. Eric Prouty from Canaccord. Your line is open.

Thanks a lot. Guys, just a little more detail maybe on the acquisition strategy. If you guys maybe -- obviously you're trying to retain your cash, maybe you could discuss a little what kind of financial metrics or hurdles you're using when considering new acquisitions and if -- is this something we should expect when you mention tuck-ins, is this $5 million and under or could some of these grow larger in size?

No, really on the tuck-ins, the majority of those are much smaller. Some of that can be financed with seller notes as well. So the tuck-ins really are -- predominantly they'll be smaller than $5 million.

Okay.

And we don't expect that it's a big -- not necessarily a big needle mover, it's just going to help with density and help with efficiency.

Okay. Yes, it wouldn't necessitate either taking on additional debt or holding off on paying down debt, et cetera.

No. Again, don't want to give you the sense that we're going to be levering up to do acquisitions. That's not-- that wasn't the point. But we will do those those tuck-in acquisitions that are hugely accretive and really can take advantage of the overhead and infrastructure that we have in place. But, again, we don't think this is going to be a big needle mover. Because we still -- obviously our goal is still to get leverage reduced, so--.

Sure. No, that's good. And then secondly, now that you're kind of back concentrated in New England, are you seeing any changes in the competitive landscape up here? Is it easier with your now greater density of business competitively to hang on and win incremental business?

Yes, I mean I think that one of the dramatic reasons for all of the shift in change in transformation of the business model is to do just that. Transforming the entire sales force to be really going after and selling solutions to our customers that are across the board is a hell of a cultural transformation of the Company. Same thing with what we're doing and have done with regard to the divisional changes, by pulling back all of the back office services, by centralizing a lot of the back office functions, our management teams are now going to be able to get closer to their customers, understand their competition better and spend the majority of their time understanding what is moving in the marketplace from a revenue opportunity standpoint, where the competitors are, and do a better job in our view of selling the basket of solutions that we have for our customers from as I said the Zero-Sort to the organics.

We just opened the first digester in Massachusetts on a farm in Rutland, Mass to take assorted organics. Our customers there are folks like HP Hood, Canes, [Cayman] Foods. And so there's a whole array of services that we have trained our sales force and our division management teams over the last year and a half to really transform the business. We think that is the right thing for us to do. We understood the transformation in the industry a long time ago and we're well ahead in terms of changing the whole culture of the Company to provide solutions across the board to our customers, which should really result in higher revenues and higher margins.

Great. And finally, John, economically, we know the northeast continues to be tough, but I mean, at least we're starting to hear of as very, very early signs of C&D starting to lift it's head up again, just incredibly early signs, but are you guys seeing any changes from an economic standpoint of either businesses getting worse or anything getting better?

No. I mean I think that it's -- I would characterize it as stable. We're seeing significant uptick in roll-off pulls as I said earlier on the call, but I think that's related to the flood damage. It's at least in our mind anyway and what we have seen is that we're, we're just kind of stable, maybe slightly improving, but not much improvement from an economic perspective. Obviously we saw the uptick from a roll-off standpoint, but again, it's related to the flood damage as opposed to any real economic activity. But we're certainly not seeing -- I mean it's slightly positive, Eric. Certainly it is not -- we're not seeing anything negative. But we're not seeing any real, any real signs of economic activity. I think the other thing that we have, too, is we're going into May, and we still had a lot of rain in May as well, so we're really beginning to feel the seasonal uptick now as well. But I don't think that we're really seeing anything, any early signs from an economic perspective.

Great. Thanks a lot, guys.

You're welcome.

Thank you. I show no further questions in the queue and would like to turn the conference back to Mr. John Casella for closing remarks.

Thank you very much, Operator. Look forward to seeing everyone in early September on our conference call at that point in time. So thank you, everybody. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect at this time.