Casella Waste Systems Inc (CWST) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Casella Waste Systems fiscal third-quarter 2012 earnings 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. As a reminder, today's conference is being recorded.

I would now like to introduce our host for today, Mr. Joe Fusco. Sir, please go ahead.

Thank you for joining us this morning, and welcome. Our group 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 Ned Coletta, our Vice President of Finance and Investor Relations. Today we'll be discussing our third-quarter fiscal-year 2012 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 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 www.IR.Casella.com.

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

Thanks, Joe. Good morning, and welcome to our fiscal-year 2012 third-quarter conference call. Our goal today is to discuss our third-quarter results, discuss our outlook through the remainder of the year, and to update you on our mid-term strategy. I will start with a brief strategic summary, and Ed Johnson will take us through the numbers.

The third quarter was an interesting quarter, with several important strategic developments and improvements in the core fundamentals of the operating business, partially offset by the continued stagnant economic environment, and lower energy and commodity prices. Most of the core fundamentals of the business were positive in the quarter. Higher year-over-year collection pricing, higher landfill volumes across all categories of waste, higher recycling of volumes driven by continued customer adoption of our Zero-Sort Recycling services.

These positive operating results were muted by negative macroeconomic factors. With a sharp drop in natural gas prices in the late Fall, energy prices were down over $30 per megawatt hour year-over-year in December and in January at Maine Energy. This decline in energy pricing negatively impacted operating income by $1.4 million year-over-year. In addition, recycling commodity prices also declined last quarter. With commodity prices down 13% year-over-year, and down 25% from our second to third quarter, while our hedging strategies worked as expected and absorbed much of the pricing pressure, the lower prices negatively impacted operating income by $700,000 year-over-year. Commodity prices have rebounded from the December lows, but we expect negative year-over-year comparisons for the next couple quarters.

As a result of these macro headwinds, we reduced our fiscal 2012 guidance. Over the past several weeks, we've been working with our management team to complete our budgeting process for fiscal 2013. Our primary goal remains the same -- generate free cash flow of roughly $20 million next year. The sharp decline in energy prices, lower commodity revenue, and continued flatness in the regional economy make it harder, but not unrealistic, to reach our free cash flow objective.

To meet our free cash flow objective, we are focused in the following areas -- sell additional resource solutions to existing and new customers; develop water treatment and waste solidification at our landfills located in the Marcellus Shale; continue to drive intelligent pricing in the collection line of business through our customer profitability tool; and manage capital allocation. On top of this operating focus, we are working to find strategic solutions for Maine Energy, GreenFiber, and RecycleBank, all non-core assets that are not contributing to results.

Looking to next year and beyond, our strategy remains consistent, and is focused on executing in the following areas -- improving pricing and profitability of our customer relationships; improving our cost structure and service performance; harvesting value from our landfills; reducing our cost of capital by refinancing the expensive second-lien notes in July of 2012; expanding our service offerings to provide economic and environmental solutions to our customers.

On the landfill development front, we made excellent progress during the quarter. First, on February 8, the Massachusetts DEP issued a permit to increase the annual limit at the Southbridge Landfill to 300,000 tons per year of MSW, from the previous annual limit of 180,000 tons per year. We have begun to ramp up tonnages to the site, and we believe that by this Spring we will have the site operating at an annualized run rate of 300,000 tons per year. As we have discussed in the past, Massachusetts is a net exporter of waste, and our additional in-market capacity at Southbridge will cut off transportation costs to long-haul or rail sites.

This positive news at Southbridge was further strengthened on February 22 when the Massachusetts Supreme Judicial Court reissued an opinion dismissing an appeal filed by several 10-citizen groups contesting the facility's 2008 site assignment. The appeal was dismissed on its merits, and the court went further by stating that their decision brings final resolution to the case. Also, in early January, we completed the interconnect to the newly constructed 1.6 megawatt per hour landfill gas-to-energy facility at Southbridge, and we began selling electricity.

On January 17, by referendum, the citizens of Bethlehem, New Hampshire voted by a wide margin to approve a zoning change, and a resultant settlement of ongoing litigation. The zoning change and the settlement agreement allowed an expansion of approximately 1.5 million tons at our North Country Landfill, nearly doubling the remaining airspace at the facility. As part of the settlement, we added several community benefits, including a host community fee, and free residential pickup of waste and recyclables. We are very excited to put 20 years of litigation behind us, and build an ongoing, mutually beneficial relationship with the town of Bethlehem.

And on January 31, the Maine DEP issued a public benefit determination for a 9.3 million cubic yard expansion at the Jupiter Ridge Landfill, enabling us to move forward with the next steps in the permitting process. This expansion more than doubles the remaining airspace at the facility. This permitting success is the culmination of years of hard work by the team, and will enable us to generate additional cash flows from our investments at each site. Southbridge Landfill will have the most immediate benefit, with tonnages ramping up at the site through the Winter and into the Springtime.

Before I pass the call over to Ed to run through additional details on the numbers for the quarter, I wanted to briefly discuss Maine Energy and our game plan to improve financial performance. Maine Energy is weighing heavily on our financial performance today, and with energy prices projected to remain at historic lows, we expect that this pressure will continue into the foreseeable future. Therefore, we're looking for strategic alternatives that benefit both our shareholders as well as the communities that we serve.

And with that, I'll turn it over to Ed who will take us through the details on the numbers.

Thank you, John. Good morning, everyone. On a consolidated basis, revenue was up $3 million for the quarter, as compared to the same quarter last year. Operating costs were up $4.5 million, and SG&A declined by about $900,000. Adjusted EBITDA for the quarter came in at $22.2 million, slightly below last year. These numbers came in below our expectations for the quarter, so I'd like to take the time this morning to walk through each line of business, and not only provide a clear picture of what is happening currently, but a basis for how to view things going forward.

Our shortfall is primarily in the landfills. Volumes coming into our landfills were up 13.5% this quarter versus the comparative quarter, with third-party volumes up 16.8%, and internal volumes down 1.8%. The third-party increase includes about 4% for McKean, which we did not acquire until Q4 last year; another 4% from Southbridge, where we were allowed to begin ramping volumes during the quarter while our permit expansion to 300,000 tons per year was in the public appeal phase; and about 5% from Chemung, where we received a permit expansion late in the second quarter. The remainder was due to a great effort by our landfill sales team in a very difficult environment to reach farther to capture volumes.

My comment about the difficult environment in which our landfill sales team is operating refers to a continuing shortage of government-funded contaminated soil or other special materials that we historically have received in the landfills. We mentioned this on the last call. Our team has done a great job replacing this volume, and then some. However, most of this volume has been brought in on a T&D basis, transportation and disposal, as a package to the customer. As a result, even though our pricing at the landfills has remained stable, escalating transportation costs exceeded our original budget by about $800,000 in the quarter. Although we achieved comparatively strong volumes, which were close to our expectations for the quarter, the EBITDA contribution from the landfill line of business fell short, as we were hit with some unexpected costs.

Operationally, our landfills experienced a follow-on effect from the heavy rains from Hurricane Irene and Tropical Storm Lee that we did not foresee. The accumulated water absorbed by the landfills last Summer has kept our leachate treatment cost well above normal, particularly the trucking of that leachate from the site to a treatment facility.

In addition, when coupled with a warmer-than-normal Winter, it created odor issues, which caused us to expend significant additional labor and operating costs to mitigate, and we are still working on this at several of the sites. We pride ourselves as having the lowest-emission landfills in the industry, so we had to accelerate our deployment of gas wells and infrastructure, expand our daily cover activities, clay cap areas of gas leakage, and increase pumping and flaring. The extra leachate transportation and disposal costs, and other odor-remediation costs totaled about $1 million in the quarter.

Looking at just the quarter compared to last year, landfill revenue was up $3.7 million, and operating costs were up about $4.3 million, squeezing margins. Our expectations had been for landfill revenue to be up on the increased volume permits at Chemung and Southbridge with minimal cost increase, expanding margins. I will walk through the specifics on how this affected our guidance in a moment.

The strategic picture remains strong, as we still believe that our landfills are perfectly located, both to take advantage of the direct and indirect benefits of the Marcellus Shale drilling activity in Pennsylvania, and in New York at some time in the future, and in other markets where disposal supply is on the decline. Southbridge is on track to benefit from an additional 105,000 ton-per-year increase in its permit scheduled to occur about a year from now, and we still anticipate this volume will eventually be filled internally after the expiration of our put-or-pay agreement in Peabody at the end of calendar 2014.

Our recycling segment is continuing to perform very well operationally. Volumes at our material-recovery facilities increased 13.3% this quarter as compared to the third quarter last year due to the continuing trend of expanding participation resulting from our Zero-Sort offerings. As most of you know, there has been a negative swing in pricing, but our volume gains have offset that. We have seen some seasonal uptick in price, and expect that trend to continue over the Spring and Summer. EBITDA contribution from the recycling line of business is projected to come in slightly ahead of our original forecast for the full fiscal year.

Many of you may question whether our tremendous success in growing recycling tons is cannibalizing our landfill volumes. It is interesting to note that our MSW volumes in our landfills this quarter increased by 10% over last year, and most of this volume came from our own trucks.

Collection operations continue to progress as planned. Collection pricing rose 2.1%, and our volume was down 1.4%. We have talked in the past about the pricing initiatives and tools that we put in place about a year ago that allowed us to make pricing a core process in the Company, and manage yield intelligently by identifying price opportunities in our low- to negative-margin customers. We've been very successful in implementing this program, and have brought margin percentages up in all collection lines of business. We have lost some revenue from lower-margin customers that would not absorb a necessary price adjustment to less sophisticated competitors. This is not only the right thing for us to do financially, but strategically it raises pricing in a market over time as the competition eventually suffers the margin erosion and is forced to push price.

Maine Energy, our refuse-derived fuel plant, has been performing well operationally all year, and was on budget until December, when power prices failed to seasonally pick up. Maine Energy sells power on the spot market. Unusually warm weather, coupled with falling natural gas prices, the primary fuel source for power generation in the Northeast, caused the financial contribution from Maine Energy to deviate from plan. Both revenue and EBITDA contribution from Maine Energy are down $1.3 million this quarter versus last year's third quarter. Ironically, our landfill gas-to-energy operations did not hurt our earnings as significantly in the quarter, as power pricing was partially offset by the sale of renewable energy credits at those qualified facilities.

With that overview of how each of our business lines performed in the quarter, I can walk through the guidance changes for the full fiscal year. We previously guided to between $105 million and $110 million in EBITDA, and $2.7 million in free cash flow. At the time we released our earnings for the second quarter at the end of November, we were forecasting to be in about the mid-range of that guidance, and were fairly confident that we had secured a significant asbestos job that could have pushed us into the high end of the guidance, so we kept our guidance unchanged. In late January, our asbestos customer informed us that the EPA had pulled funding for the job, so that opportunity disappeared.

With the $1.8 million in extra landfill costs in Q3, expected to be followed by an additional $1 million in the fourth quarter, and the power pricing shortfall of $1.3 million at Maine Energy for December and January expected to be an additional $2 million shortfall for the three months that follow, we have a $6 million negative swing in our EBITDA expectation. Accordingly, we have brought our guidance down to a range of $100 million and $103 million in EBITDA, and with some tightening of CapEx, our free cash flow number is forecast to come in between $0 million and $3 million.

US GreenFiber, our 50% joint venture with Louisiana-Pacific that produces cellulose insulation from recycled paper products, took an impairment charge to write off its goodwill balances in their December 31 year-end financial statements. Our half of this charge amounted to $5.1 million, and is included in the loss on equity method investments figure of $6.4 million. This write-off caused us to focus on our investment in the stock of GreenFiber, and after analysis, we determined it would be appropriate to write down this investment by an additional $10.7 million, which is shown as a separate line item on our income statement. GreenFiber does not affect our EBITDA figures, but did result in $0.60 per share in additional loss on a GAAP basis.

On the finance side, we continue to work toward the refinancing of our relatively expensive second-lien notes. You may have seen our press release back in January regarding the remarketing of $21.4 million of our Maine revenue bonds to a fixed-rate, unsecured bond that released our supporting letter of credit, and effectively freed up that amount on our revolver availability. We continue to work on other financing instruments that will lower our ultimate cost of funds as we prepare to take advantage of our call opportunity that comes up on July 15. We have a forward-starting interest-rate swap already in place to secure the cash interest savings on $150 million of the projected refinancing.

On another note, the current guidance levels put us very close to our total funded debt-to-EBITDA bank covenant that is scheduled to ratchet down for the fourth quarter. We have a great relationship with our banks, and we've begun proactive talks to amend our bank agreements to reflect the current position of the Company, and the economic environment in which we operate. That concludes our overview of the quarter.

I'd like to now turn it back to the operator to open the lines for any questions you might have on the quarter, or our strategy going forward.

Thank you, sir. (Operator Instructions)

Scott Levine, JPMorgan.

Hi, good morning, guys. First question with regard to the sensitivity on the commodity side. It sounded like, frankly, the guidance revision was driven by the landfill costs and then Maine Energy here. But I don't know if you can or have provided maybe general rules of thumb on maybe EBITDA sensitivity to fluctuations in commodity costs, both on the recycled fiber side or just for the basket as a whole, and then also for electricity prices at Maine Energy?

Well, as you know, Scott, we operate a slightly different model than most of our competitors, in that we share both the upside and downside swings of commodities with a lot of our customers. So, we're kind of naturally hedged on about 50% of our commodity sales. And so, the big swings don't affect us as much, but they do affect us some. The way we're looking at things going forward, you know that OCC prices bounce back a little bit in February. The Chinese mills have returned to the market after the new year downtime, and are buying at a rapid rate now. As we enter the low-generation months, we believe that prices will further rebound. Plastics pricing has remained strong, with demand buoyed by the mild Winter and increasing construction demand. So, I'm not sure if that quite answers your question. One other piece that you may know is, on every $1 of swing, we only swing about $0.35 on the bottom line.

Got it. Is your -- basically you're seeing improved commodity behavior in the markets, and your guidance, as you've reset it, reflects conservative assumptions in your mind?

Yes.

Okay. And then, turning to solid waste pricing, it sounds like the total metric wasn't exactly in line with what we were looking for, but it sounds like the collection pricing is behaving generally in line with your expectations. Maybe an update on whether the pricing in general in the market is tracking in accordance to your plans?

We are tracking at about 2.6%, collection price year-to-date, and we remain comfortable with that full-year guidance that we are about where we thought we would be. The collection being up 2.1% in the quarter as a percentage of revenues year-over-year, it is down from 3.4% in Q2, but Q2 benefited from higher price roll-off work coming from the storms. So, we are pleased with our performance there, and we think we're track on the full year.

Got it. One last one, if I may. I think, as you pointed out, Ed, GreenFiber isn't captured in your EBITDA guidance. Is there any change? Obviously, you've heard a lot of encouraging news about -- hopeful news about the housing market, but is there any change in the outlook you guys would have or point to in that business in particular?

Well, I think there is some encouraging things at GreenFiber. Obviously, they had a tough year with -- really due more not so much to construction, but the fact that we had a very warm Winter. So, they had a difficult retail season, which then gets them into the impairment bucket as far as their auditors requiring them to evaluate their goodwill position.

The other thing, too, is the management team there has done a tremendous job of right-sizing the business. They have taken the right actions in terms of taking capacity out while the market begins to improve. They're developing additional products that they're going to be introducing into the marketplace as well. I think they clearly have done a great job in terms of managing the difficulty of the reality of the marketplace, and there are some bright things that lead into the future. But certainly, it's still an opportunity for us at some point in time, as it's non-core.

Understood. Thanks, John. Thanks, Ed.

Corey Greendale, First Analysis.

Hi, good morning. I'll ask my complicated question first, just in case you want to look into it while I'm asking other questions. But I realize tax treatment is always less than clear, but, Ed, I was wondering if you could take a stab at what EPS would have been excluding the US GreenFiber write-down?

I mentioned that was a $0.60 after-tax swing per share.

Okay.

So, the $0.92 would have been $0.32.

Okay. Good. Thank you. Sorry if I missed that. The second question is -- on special waste, it sounds like it's mostly market dynamics, but I was wondering if you could speak to whether you think there's any competitive issues going on there versus just the lack of volume in the market?

I think it's really the lack of volume in the market. I think it's a function of where we are economically. It's a function of both state, federal, municipal budgets, in terms of being able to move forward with the normal clean-up work that we would see in the marketplace. I really don't think it's a function of the competitive marketplace, as much as it is just the macroeconomic view and the budget constraints that both state and federal government are wrestling with right now, Corey.

Okay. And given all the moving pieces, I was hoping you might be able to speak to underlying collection volume trends, whether you think it's getting better or worse, whether you think fiscal 2013 is flat, positive, or just what your thoughts are on that?

I think that clearly things continue to be stable, and moving in a slightly positive direction. I think that we're beginning to see a bit more activity than we have. We're seeing more from a permitting standpoint. We're seeing a bit more activity in terms of development projects. There's just been a couple of large development projects announced. So, I think we're beginning to see signs. It's not really impacted us to-date, but I think things are certainly, I believe, slightly positive in terms of what we're seeing from a potential development standpoint going out into next year.

Okay, and just one last quick one. On Southbridge, and congratulations about getting that done, by the way. You talked before about your thoughts on what the EBITDA contribution is from that, but now that it's actually done, can you just remind us and give us your updated thoughts on what the incremental annualized EBITDA contribution is as you get up to the 300,000 tons?

Yes, Corey, it's Ned. We expect the facility to contribute around $3.5 million to $4 million of additional EBITDA from this next step up. And then as you're aware, after we operate one year at the 300,000-ton level, we will have the ability to permit to the 405,000-ton level, which will give us another step up in EBITDA on the next 125,000 tons.

Yes, and that step up actually goes back to the January interconnect with the landfill gas-to-energy project. So, we're in that year process from January -- starting January this year, once we operate for that year, after the landfill gas-to-energy facility was online, which happened in January. So, it would be next January when we'll be able to apply for that step up to pick up the additional 100,000 tons.

Okay. And from where we stand now, you think you'd get that $3.5 million to $4 million incremental, that first incremental step up by late Spring on an annualized basis?

Yes.

Okay, perfect. Thank you.

You're welcome.

Michael Hoffman, Wunderlich.

Hi, good morning. Can we just follow up on your comment $1 equals $0.35? Where is the $0.35 hitting, EBIT or EBITDA?

EBITDA.

EBITDA, okay. And then, asset sales -- so, there's a different message here than from the past. It sounds like it's a when, not an if. So, can you talk a little bit about how quickly the win can happen on a Maine or a GreenFiber or a RecycleBank, and what are the barriers to the win?

Sure. I think, clearly, Michael, we're focused on those three non-core assets. And I think we'll have some real specifics in terms of timing on the fourth-quarter call. But we have been working on those issues for a number of months now. And I think that we'll be able to get some real specifics on the fourth-quarter call. But they're near-term events, not long-term events.

So, near-term means in the calendar 2012?

I think -- we'll give you the specifics on the fourth-quarter call, but our goal would be to get as much of that done in calendar 2012.

Okay. Then the [Facebook] IPO, does that have an impact on your ability to get RecycleBank sold sooner or later?

I think a positive IPO there in that space certainly should be helpful.

Okay. Can you talk about the thoughts about the balance sheet and the overall strategy towards moving the leverage ratio? At this juncture, it's coming from cash from ops. It looks like you'd add to that from asset sales. What's the timing of a bogey on the leverage ratio getting below 3%, or 3 times, I mean?

Michael, honestly, our main focus right now is the refi of the second-lien notes, because that helps our cash flow tremendously. And as John mentioned, our primary target next year is to get free cash flow to $20 million. And with that step, I think it opens the door for us to more rapidly address the balance-sheet issue. But until we get those steps done, we've got to do those steps first.

Okay. Then on the opportunity to participate in shale plays, what are you hearing in the state of New York about a timing of finally getting a set of regs that can define whether drilling happens or not?

It's a great question. I think we've -- there's been some communication over the last month or so from the Commissioner of DEC, Joe Martens. And they got, I believe, somewhere in the vicinity of 15,000, 20,000 comments. His best guess was, it was going to take them probably about 8 to 12 months to get through those comments and have the response out on the street relative to the regulations that they're going to put in place. But it certainly seems that they're moving forward, and it certainly seems as though it's not a matter of whether, it's just a matter of when. I think they're thoughtfully going through those comments, and they're going to put thoughtful regulations in place. But it certainly looks at this point in time that timing could be 8 to 12 months, maybe a little bit longer than that.

So, this is a calendar-2013 contribution?

I would say that's correct, Michael.

Okay. How do frame what's happening in Pennsylvania versus McKean at this point in shale? How do you characterize what's happening there?

I think it's fair to say that with the price of natural gas, some of the drilling has stopped. There's still an awful lot of activity there, because there's a lot of drilling that has to happen in order to protect the existing leases that are in place. So, there's still significant amount of activity. In our coupling of the water treatment, which we're going to bring online in probably the Summer of this year, bundling the water treatment, along with the drill cuttings and solidification, which we're in permitting for right now, we believe that we'll be able to capture our fair share of the activity that's there. But clearly, with natural gas pricing where it is now, the amount of drilling has -- some folks have moved rigs. But there's still a tremendous amount of activity there, and I think we'll begin to see that activity in the next year in New York as well.

Okay. It's my understanding that Montreal is facing about a 200,000 annual landfill shortage. So, how are your assets positioned to be able to absorb any of that, if they can?

We have the capability at some of our facilities to handle Canadian waste. That is, that would be a net positive for us.

Okay. And then lastly, on Maine Energy specifically, if I'm correct, there's a little bit of a bundling of what's going on with the landfill, as well as Maine before you can make that move and --?

Yes, I think there's a very fair perspective. There's a lot of interaction in terms of Maine Energy, with streams from Maine Energy going to the disposal facility. So, strategically, we really need to look at what's right for the total system, and what's right for the communities. But the facility does have impacts on other facilities. So, when you look at it, you have to look at it as a whole operation as opposed to just the waste-to-energy plant in isolation.

So, clearly, the permit expansion you got helps that, but what has to happen? Is there discussion with the state, or is it local, or --?

There's other permitting activity that we need to go through there that we're in the process of moving as we speak. There's additional permitting that we need to do at those facilities. That's an ongoing process, and something that's in the works at this point.

Okay. All right, great. Thank you.

You're quite welcome.

Al Kaschalk, Wedbush Securities.

Good morning, guys. Just on Maine Energy, it sounds like the way you're framing this is that it's an asset up for sale now or exploring strategic alternatives versus in the past, but don't get too excited because of the nature of the permitting process and other things that are just going to take some time for realizing. I guess the question in all that noise is -- is 2012 calendar year a reasonable time to get something done there?

I think it is, yes. I think it is.

Okay.

Yes.

All right. And then, back to the core business for a second. My question is this -- it sounds like, operationally, all the comments are positive for the most part, ex some of the commodities and recycling noise. But yet, I wonder if it's driving at the margin level that you have internally or set for expectations? And with additional volume coming on, and the struggles to maybe, in certain markets, being competitive, do you feel like you're making steps forward operationally on the margin, trying to get it back towards -- more in line with industry levels?

Al, it's Paul. Our progress over the last year has been substantial on the pricing front, as we mentioned. We're comfortable on the full-year basis that while there's pockets of resistance there on a market-by-market basis, that we've been very successful with the pricing initiative that we've undertaken. When you look back over the last couple of years with our direct labor, our direct operating costs as a whole in the collection line of business, we have improved nicely over that period of time. When we look at the quarter's results, truthfully they're not where we want them to be.

We are improved. We improved slightly over last year on the cost of ops. But we see a continued opportunity there, I guess is my point. And we're going to remain pretty vigilant in getting that returning, in key markets. Many are performing right where we need them to be, but there are a few and they're higher-volume facilities that we know we can do better, so that's our focus here in the last couple of months of this year and then into FY 2013.

Thanks, Paul. So, do you -- if we assume the pricing level and the new -- you're getting price. Is this a question now of competition in the market that you need to defend volumes? Therefore, there may be some price? Or is it a question that it's just the higher-priced waste isn't there in the market today, and it's not giving maybe some added benefit to the recovery story that's underway?

I think that when you look at the special waste, Al, it just really is a very high impact in terms of profitability at the disposal facilities. That, I think, is the driver in terms of the overall performance from a landfill perspective. That waste is very accretive to the landfill model, and it's fundamentally just gone away.

Right. Then my final question, and it's touched on special waste. Is there waste volume originating from government-type entities, or is it industry, or what's the -- what have you seen historically? And then going forward, it's a tough model to live on, with not only you, but others, to be dependent on government entities to drive some of that volume. Is that fair?

I think it's fair, but I think that the reality is, a lot of that clean-up work, where you're getting special-waste soils and asbestos and other, is somewhat driven, and has been historically, from a government perspective. Some of it is driven from a private-sector standpoint. But I think that there's a certain amount of that, that clearly has been -- clearly is driven from a state and a municipal government perspective, and it's always been that way. So, I think that it will not improve until we really get our act together in Washington, obviously, and begin to wrestle with the overall fundamental deficits that we have.

I think it also speaks to our strategy that we mentioned earlier around oil and gas. We recognize that may not always be there, special waste, going forward. And our -- the positive -- we received a very positive response thus far regarding both the water treatment, the fortification on the drill cuttings into our Pennsylvania site. But then as we mentioned earlier, when New York does come online, we're well positioned for that. So, we are thinking past this decline in [bud] volumes in other ways to attract material into our sites.

Excellent. Thank you, guys.

You're welcome.

John Zaro, Bourgeon Capital.

A couple questions. One, and they're interrelated, I'm assuming now that we have come to more of a conclusion that these three assets are not really long-term assets for you, that while they have declined somewhat in value relative to what they're worth to Casella, and that they don't fit, and obviously in the very short term they're hurting you guys, that because of what's happened in the markets on the private-equity side, that they're worth more to people on the outside. And as a secondary to that, I'm assuming that you have had some interest from the outside on some of these assets, you've only been working on them for a couple of months.

That's a fair perspective, John. There is interest in the assets. And as I said before, we're working on that, and we'll be able to bring some clarity to it, obviously, on the fourth-quarter call. But you're absolutely right -- there is interest.

Okay, that's it. Great. Great job on the operations side.

Thank you.

Michael Hoffman, Wunderlich.

Quick follow-up on special waste, and then the assets. Am I wrong in that there was a ton of federal stimulus money that flooded New England? And so, some of this special-waste activity got pulled forward, if you will, from -- if there was a normal diet of it, it got pulled into the current period when that money was available. We've kind of done things early, and we've got to work through that dip?

I would -- without -- I don't know as we've analyzed that, Michael, but without doing any analytical work, I think that there's probably some truth to that.

Okay. Well, we did look at it, and it looked like New England got, just because they're all Democratic states, they got a lot of money, so --.

Well, not all of them.

Well, not all of them. That's true. Okay. The other one is -- can you make Maine Energy a discontinued op, and get it out of the day-to-day numbers so that this is -- it doesn't make the problem go away, but at least clears up the financials.

I think the best thing for us to do is to try to execute our plan in terms of the strategic options that we have in front of us, and then that issue will take care of itself.

Okay. All right. Great, thanks.

All right.

Thank you. And I see no further questions in the queue at this time. I'd like to turn the conference over to management for any final remarks.

I'd just like to thank everyone for your attention this morning, and look forward to our fourth-quarter call, which is mid-June. Thank you very much. Have a great day, everyone.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a good day.