Casella Waste Systems Inc (CWST) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to Casella Waste Systems' first-quarter 2013 earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions following at that time. (Operator Instructions) As a reminder this conference is being recorded.

Now I'll turn the conference over to Joe Fusco. Please begin.

Thank you for joining us this morning and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; 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 fiscal year 2013 first-quarter results. These results were released yesterday afternoon. Along with a brief review of these results and an update on the Company's activities and business environment, we'll be answering your questions as well a little later.

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 tables section of our earnings release, which was distributed yesterday afternoon and is also available in the investors section of our website at ir.casella.com. And now I'll turn it over to John Casella, who will begin today's discussion. John?

Thanks, Joe. Good morning, everyone, and welcome to our fiscal year 2013 first-quarter conference call. Our goal today is to discuss our first-quarter results and to update you on our mid-term strategy. I will start with a brief overview, and then Ed Johnson will take us through the numbers.

Our first quarter was quite challenging. We faced, and continue to face, significant headwinds from significantly lower recycling commodity prices decline in special waste volumes at our western New York landfills and the weak roll-off collection environment. Despite these headwinds, our core solid waste operating assets continued to perform well in this stagnant economic environment. Furthermore, the steps we have taken to realign operations and reduce our cost structure positions us well to maintaining operating performance in this tough environment and to provide positive operating leverage as cyclical revenues return.

Recycling prices fell 24% year over year in the quarter with all classes of commodities down. This drop in recycling commodity prices negatively impacted adjusted EBITDA by $2 million year over year in the first quarter. Prices fell further into August with fiber prices down $10 to $15 per ton sequentially from July. The yellow sheet was released late yesterday and showed further weakening of fiber pricing from August to September with prices down another $15 to $20 per ton. This weakness in fiber prices is mostly directly related to robust inventories at domestic mills and the slow Chinese economy. On a positive note, plastic prices were up in August and metal prices have stabilized. Given the current weakness and forecasted uncertainty for commodity pricing, we reduced our recycling business forecast for the remainder of our fiscal year to roughly 15% below our first-quarter pricing. This reduction is reflected in the guidance that we issued.

Special waste volumes at our western New York landfill were down on lower drilling activity in the Marcellus shale and less infrastructure work by state and local governments, which translate to lower contaminated soils and sludges. For the quarter, these high-margin volumes were down roughly 40% year over year in our Western Region, or about 97,000 tons. The loss of these high-margin tons translated to get $2.6 million lower adjusted EBITDA on a year-over-year basis. Roughly half of the special waste volume decline was related to lower drilling activity, which is directly attributable to low natural gas prices. Drillers have moved rigs to areas in Southwest PA, Ohio, or out West where they can drill wet gas to take advantage of higher prices for butane, propane and other oil-derived products. We do not expect to rebound -- drilling to rebound in Northern PA where there is dry gas until drillers can lock in natural gas prices above roughly $3.90 an MMBtu.

Given this weakness in drilling activity and the lack of special waste being generated from other traditional sources, we reduced our forecast for the remainder of fiscal year to track the volumes that we've sourced in our first quarter. I don't want my comments regarding the loss of drill cutting volumes -- drilling volumes to paint an incorrect picture that our western New York landfills are overly dependent on the emerging waste stream, however, we talk about these volumes because they serve to offset the recession-driven loss of construction demolition debris volumes that we've been experiencing beginning in 2008. And now without these volumes, our western New York landfills are running below their annual capacity limits and margins have suffered.

Ed will get into the details on the collection line of business, but I wanted to take -- make a few high level comments. Our roll-off line of business was challenged in the quarter with volumes down 5% and price down 0.5% year over year. Roll-off volumes were down year over year because of a pull forward of construction work into our fourth quarter with the early spring in the Northeast, pressure from low construction activity and a tough comparison to the first quarter of last year when we saw significantly increased demand from the flooding that we experienced in the Northeast. This weakness in the roll-off line of business partially offsets gains we had in residential and commercial lines of business where we continued to drive positive pricing with 1.7% price for the quarter for residential and commercial. Despite these pronounced headwinds, I believe that we're executing well against factors that we can control in this challenging economic environment, such as flexing our cost structure to lower revenues, driving intelligent pricing in our collection business and delivering great service in a differentiated product to customers.

I think it's important to walk everyone through our strategic rationale around the realignment that we announced on August 10. The realignment was focused on two main goals, executing against the multi-year strategy to streamline operations, improve our divisional level -- improve our focus at the divisional level and reduce overhead costs. And two, permanently reducing our cost structure by roughly $6.5 million annually. This process began in earnest 36 months ago with our vision to centralize our back-office functions to a shared service center. We centralized customer care first with a goal to improve customer service, sales performance, operating accountability and cost structure. We then centralized other services such as collections, cash applications, accounts payable and certain accounting functions to reduce overhead and to improve execution.

With these steps, we removed a number of back-office functions from the divisions and began to reposition the focus of our Division Management teams. We wanted our Division Management teams focused on adding and retaining customers, managing pricing in their markets and operating safe and efficient businesses. To further this goal, we spent the last nine months upgrading a number of our Division Managers to improve leadership, skill sets and accountability at the local divisional level. With these leadership changes at the local level, and the steps that we took to change the focus of our local teams, we now have redundancies in central -- in certain centralized functions such as pricing, routing, transportation and ops. We permanently eliminated these centralized functions to reduce our overhead and to more clearly define the spirit of responsibility with our local operating teams.

In addition to the changes that we made to streamline operations support functions at the local level, we reduced corporate overhead staff to match organizational needs and to reduce costs. An example of this reduction in the permits compliance engineering and legal overhead that's no longer needed as we near the end of 8 to 10 year landfill permitting and expansion work. And for the first time in the history of the Company, we're not in litigation on a permit and we're not moving to -- we're as I said, not in any litigation from a permit standpoint for the first time in the history of the Company. So it obviously made a great deal of sense to rethink the overhead that's been associated with that activity over the last 8 to 10 years. The last element of our realignment was to enhance certain aspects of our sales group to better facilitate customer service and retention pricing growth and the sales support of our strategic growth initiatives.

Looking forward, the steps we took to realign our business positions us well to leverage lower permitted cost structure as cyclical revenues return. However, we cannot run our business today with any certainty about the timing of an economic recovery, we need to execute our near-term operating plan, increase free cash flow and reduce leverage. We have put this challenge to our team and I believe that we're doing a good job executing against a number of tactics and strategies within our control including selling the Maine Energy to the city of Biddeford for ultimate closure. We expect this transaction to be completed by December 2012. Growing our residential and commercial customer accounts by operating differentiated resource solutions with residential customer accounts up 6% and commercial accounts up 1%. Increasing our recycling volumes through the introduction of Zero-Sort services to our customers, we experienced strong recycling growth last year and tonnages are up 9.1% in our first quarter. Ramping volumes at the Southbridge landfill to newly expanded annual permit level of 300,000 tons this year, we are attracting to receive our next step up in this permit to 405,000 tons late in the third quarter of fiscal '13. And with that, I'll turn it over to Ed, who will take you through the numbers.

Thank you, John, good morning, everyone. As John mentioned a few weeks ago, we announced some significant overhead cost cuts and a realignment of some of our Management and sales activities. We also announced the downward revision to our guidance net of the cost savings resulting from lower special waste tons into our landfills and lower commodity prices. With everything that's going on in the numbers, I thought it would be good to go into a little more detail on the quarter and the related guidance revisions than I usually do.

Consolidated revenue for the first quarter came in at $121.2 million as compared to $127.2 million in the first quarter last year. The $6 million decline is primarily resulting from less disposal revenue, down $3.2 million; recycling commodity prices, down $2.5 million; and brokered revenue down $1.2 million, offset by revenue growth in other areas. Disposal revenue was affected by several factors. An early spring, which pulled normal spring roll-off work into April, special waste primarily from government-funded projects and drill cuttings. Overall, disposal tonnages were down 3.6% or 42,000 tons.

I think it's meaningful to look at each region separately to reflect how our long-term strategy is playing out. In the Eastern Region, where we operate the Southbridge landfill in Massachusetts, Juniper Ridge and the Maine Energy burn plant in Maine, and have a landfill closure project in Worcester, our tonnage was up 30%, or 114,000 tons, and revenue was up 13.1%, or $1.6 million. This is primarily due to the volume increase to our permit for Southbridge that we received in Q3 of last fiscal year, and our success in securing contaminated soil loads for the closure project in Worcester. An additional 105,000-ton permit increase for Southbridge is on track for late third quarter this fiscal year and the pending sale and closure of Maine Energy as that goes through on schedule should make it easy to fill a good part of that increase. Our strategy remains secure in the eastern market, as we are not only taking capacity out of the market with Maine Energy, there are still 7 of 16 landfills scheduled to close in this market over the next few years.

In the Western Region, which encompasses upstate New York, Vermont and northern New Hampshire, we have eight landfills. The Vermont and New Hampshire sites were affected by the early spring, but the New York sites were the ones most affected by the shortage of special waste and drill cuttings. Western Region tonnage was down 20%, or 156,000 tons in total, and the resulting revenue decline was just under $5 million. 50,000 tons of the decline were drill cuttings, 47,000 tons were other special waste, and 23,000 were C&D, part of the early spring phenomenon. Our original guidance for the year was already muted due to these trends, but we did believe that our pipeline of potential special waste tonnages would materialize and offset the early year shortages. June and July results however, took away that confidence. Our restated guidance reflects the current position with no recovery.

Our collection line of business continues to perform well. Overall, revenue declined slightly as compared to last year, about $0.5 million as negative volume of $1.8 million, or 1.7%, was partially offset by positive price of $541,000, or 1%, and revenue from acquisitions of about $800,000. The $1.8 million in volume decline includes $1 million from the expiration of a contract in the Eastern Region. The remainder relates to the early spring phenomenon that I mentioned, reducing comparative temporary roll-off volumes and to net losses incurred in the first half of last year when we were implementing our customer profitability tools and new core process pricing programs. You will remember that a good portion of those customers were identified as underwater and when increased their price, some chose to move on.

Our pricing process continues to perform well. The commercial and residential pricing improved 1.7% for the quarter, pretty much on target. The temporary roll-off pricing however, is on a dynamic pricing model, so when volumes dropped in May, zone pricing was reduced to capture more market share. That is what brought pricing down overall to 1% and we don't expect that to be a trend.

The second big change in our guidance has to do with commodity prices. Recycling revenue for the quarter was down $2.5 million from the prior year, all on price. Tonnages through our facilities were up 9.1%, so we've been having great success in capturing the volumes as the waste disposal market continues to shift from the consumption model, landfills and burn plants, to the more sustainable resource model. As a result of the lower tonnages and lower commodity prices, we lowered our forecast for EBITDA by about $7 million for the full year, this was partially offset by what we were picking up in cost cuts. The cost cuts and realignment were somewhat independent of the revenue shortfall, but admittedly accelerated from when these actions would have taken place.

We've been systematically reducing our overhead costs over the past few years. Centralizing administrative processes, such as customer care, cash applications, collections, payables and various other accounting functions to our shared service center or into our regions. This not only reduced headcount and cut administrative costs, it improved the effectiveness and efficiency of these activities. Earlier this month, we took the last and most significant of these steps, reducing additional headcount and streamlining sales in certain operational support functions. This permanently took out roughly $6.5 million in annual costs with a partial year savings of $4 million for fiscal '13.

Landfill operations are designed for permitted volumes and operating costs are substantially fixed, so incremental tonnage has a dramatic effect on cost of ops percentages for the Company as a whole. Cost of ops declined $430,000 as compared to the first quarter last year, but as the revenue decline is driven by landfill volumes and commodity prices, rose from 67% to 70% as a percentage of revenue. G&A expense declined $883,000, or 5.5%, and this is before the recent headcount reductions. Depreciation and amortization declined $1.2 million, or 7.9%, and this is directly related to the lower amortization of air space at the landfills resulting from the volume declines.

I thought I would take some time to talk about where we are from my perspective. We have certainly had our share of challenges, driven by economic circumstances outside of our control, but I couldn't be happier with our successes as they bode well for the future and particularly the recent cost cuts. The positive changes we've made to the business are permanent, and they have not only cushioned the economic headwinds, they provide profit leverage in any kind of recovery scenario.

They include -- implementing a systematic and sustainable approach to yielding price from the collection line of business; divesting all non integrated recycling operations outside the footprint in 2011 for top dollar, focusing our attention to the more sustainable fully integrated business and reducing leverage; refinancing our bank facilities and sub notes, paying off term loan B notes, pushing out maturities and realizing an excess of $10 million in cash interest savings; completion of the long and costly process to get clear permits to all of our landfills, as Jon mentioned for the first time, we currently stand with no legal challenges to our permits; centralizing administrative processes, realigning operational and sales activities to get them closer to the market and greatly improving operational efficiency and effectiveness; and we're on the verge of divesting non-core waste-to-energy operations that require ongoing capital improvements, saving in excess of $5 million in annual cash investment and taking 260,000 tons of disposal capacity out of the market.

These are permanent improvements. So what's left on the plate? We continue to work on the refinancing of our most expensive debt, our second lien notes, and are working to find either a cost justifiable way to take them out this year, or arrange for the replacement next July when they are callable at par. This is a dramatic game changer to our balance sheet and cash flows. We look forward to the expiration of the Haverhill put or pay contract in December of 2014. This contract is currently a $30 per ton out of market disposal cost on 86,000 tons per year for the hauling divisions, and by internalizing the waste in to Southbridge, this represents a total $5 million cash and EBITDA swing exclusive of the operational savings from not having to manage around this agreement.

We continue to work to monetize our two remaining non-core investments, GreenFiber and RecycleBank. GreenFiber is showing signs of improvement. Housing starts are trending up. Management has been a great job of reducing cost and taking out capacity, and new products are coming online. Neither of these investments contribute to our EBITDA or cash flows. We continue to shift our fleet to CNG, this will drive fuel and maintenance cost savings and a green differentiation in most of our markets where we are competing with local or regional competitors who cannot make the conversion.

One final comment on Maine Energy. We've announced that we have signed a purchase and sales agreement and are working diligently on permits modifications at the Juniper Ridge landfill. Things are going well, and we have a lot of political support for what we are trying to do, particularly from the town of Biddeford and the other local municipalities. However, the plan, including the decommissioning of the plant, is very complex. Various related expenses are being incurred, which are separated on our income statement for the quarter, the timing of events and the shutdown sequence and the timing of the cost of facilities and equipment to handle the waste going forward keep moving on us. This is why we dropped of the free cash flow guidance in the quarterly release. We'll reinstate the guidance once things become more stabilized in the process.

That concludes our overview of the quarter and guidance for 2013. 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.

(Operator Instructions)

Michael Hoffman of Wunderlich Securities.

Could you talk a little bit about the capital spending in the quarter? It was up year-over-year, seems -- and just help us understand how that flows through to the guidance on capital spending for the year? Where are we timing-wise?

Yes, I'd be happy to. That's a good question, because it is a little different than in prior years. And the reason is because -- or it appears different; the reason is because of the early Spring, and the ability to get into the landfill construction a little earlier than we have in the past. So, our CapEx for the quarter was $16.4 million compared to $14.8 million last year, but our full-year target is almost 20% less for the year this year than it was last year, of course, excluding anything that might happen around Maine Energy. But we came in at $50.7 million -- or we came in at $59.2 million last year, we're going to be around $50.7 million this year.

Okay. And so, some of that seasonal spending that -- (multiple speakers)

It's just an opportunity to move that construction up, Michael, because of the warm weather. So, it's just a timing issue.

Right, because normally that's in the second quarter, so that -- for some of that, so we would just even that out more is what I'm hearing -- the 1Q and 2Q capital spending?

Yes. I mean, actually, we're -- the way we do our forecast is we put the bulk of the remaining in the second quarter, but it never works out that way. It usually pushes into the third, but --

Okay. And then with regards to next steps at Maine Energy, you got your purchase and sale agreement; have you submitted your permit requests already to the state of Maine?

I believe they have gone in, yes.

Okay.

If they have not, Michael, they are prepared, and will be going in very shortly.

And once that's submitted, what's the -- I'm assuming it's fairly bureaucratic. What's the process look like?

I think that process is at least probably a 90-day process.

Okay.

And as you know, it's difficult to predict because when you get into that process, it can certainly, in a lot of cases it'll take longer, but I think we do have the support obviously of the communities for what we're trying to get done. So, it's likely that we should go through the process in an orderly fashion.

And what's plan B if it just takes longer and longer, but you've come up against closing dates and decommissioning dates?

Well, I think that plan B is -- there is really no plan B. I think that at this point in time, we're fully expecting to get through the process. I think we always have the opportunity to shut the facility down at any point, so -- or to sell the facility. So, I mean, those options are certainly on the table to, if for whatever reason it didn't go through, we could potentially sell the facility to someone else or shut the facility down.

Well, maybe I didn't ask it very clearly. Let's say this process just takes longer for the state to approve the Juniper modification --?

We'll just keep operating -- keep operating the facility.

Okay, so, that's what the plan B is. It stays open until we get an approval. Okay.

Absolutely. And for some reason if something happened, we could sell the facility to someone else, for that matter, as well. But we would continue to operate the facility through the period of time that it takes to get through the process.

Okay. And then just on a mechanical question -- if you get this permit mod, does that allow the auditor to let you treat this as discontinued ops at that point?

No. It doesn't work out that way, because there is -- in GAAP, you have to consider what happens to the revenue. And since we would still control most of the tons that now go into Maine Energy, and we would reallocate those to other facilities, hopefully Juniper Ridge, they won't allow disc-ops treatment.

Okay. And then lastly on the balance sheet and the second lien, can you walk us through a little bit of the thought process of your decision-making process, what are the triggers that are saying -- we can't do it right now, but we would, a refinancing?

Well, a few comments on that, because I've been asked that quite a bit. We talked about on the last call, our disappointment really that the market had moved, and we were looking at a significant negative NPV transaction to refinance the second lien notes. But I -- maybe I didn't make it clear then, but I need to make it clear now that we always had the option to do it. I mean, the markets were there; there wasn't any issue except the economics of it for us. So, we continue to look at ways to either get it closer, get it to something that -- that's not such a hit for us to take now, or just have it all arranged to take care of it next July when those notes are callable at par.

Okay. And then in the context of that negative economic analysis, what are we looking at as far as the cost aspect of that now versus waiting until July?

The big hurdle is the $10 million call premium, and being able to recapture as much of that in interest savings as we can for the rest of the year.

Okay. Thank you.

Scott Levine of JPMorgan.

So, it sounds, from an internal perspective, pricing has been a strategic priority of yours over the last year or so. And although the pricing metric you guys post is a bit lower than we expected on a total company basis, the comments suggest that throughout the non-cyclical portions of your business, that you're achieving the types of increases that you're targeting. I was hoping you could provide maybe a little bit more color on how your pricing initiatives are tracking according to plan? And if we continue to see the type of challenging macro environment you guys are guiding to and seeing right now, do you see risk that some of those pricing targets end up coming down going forward? Or is it really more a function of internal initiatives on your part, and the environment is accommodating at this point?

Just -- I was hesitant to get into too much detail, because it gets a little complicated, but if you recall when we put in this pricing initiative originally, our long-term goal was to spread the price increases evenly through 12 months of the year. So that we were managing as a core process our customer profitability, and picking every month who we were going to raise. Well, when we initiated the program, we had not had price for -- we had not gotten price in the two years prior, so we had some pent up adjustments to make. We had some underwater customers that either were going to flush out or be raised. So, we didn't really spread it evenly last year, as much as we are this year. And so, in the first quarter of last year, we had more price increase activity than normal. And now we're trying -- instead of increasing those customers again in that first quarter, we're spreading them a little bit more for the year to get to our long-term strategy there.

Okay.

So, then to answer your question about where we are on plan, the 1.7% for the commercial and residential was very close to plan. So, we're pretty happy with the process and how it's working. The only thing that went off plan was the temporary roll-off, which is, as I said, priced dynamically based on the demand in the market as those prices change depending on whether our equipment is being utilized or not. So, when May fell off, we had to lower price to get the boxes out.

That makes perfect sense. It sounds like the majority of the business, particularly the non-cyclical portion, is performing close to where you expect it to be?

Yes.

Okay. And then, not to get ahead of ourselves here; you just announced a restructuring program, but say these headwinds continue, and it looks like from our calculation your leverage is -- your debt-to-EBITDA is pushing 5 times here. If the environment remains challenging, commodities continue to fall off, it sounds like the refi and the second liens like a longer-term event than initially conceived. Do you have additional capacity to manage and flex down costs or manage free cash flow, or does your strategy and your decision on your course of action with some of these alternatives to delever change depending on how the operating environment flexes? Or do you have enough flexibility in your operating strategy to mitigate against some of the headwinds that we're seeing intensify the last few months or so?

Well, that's a good question. Yes, we do have some flexibility. The main thing that we're focused on right now is getting through the Maine Energy divestiture. That has a pretty significant effect on our numbers. And the other thing is the -- which is longer term, the put-or-pay contract coming off in Peabody, which really distorts our numbers. And with those two events, which are on schedule, we don't see any real long-term issues here. But if we continue to have headwinds, then yes, we will start taking a look at certain operations where we could cut costs. And in this case, I'm not talking about headcount, I'm talking about reducing our exposure in certain areas of the business.

Understood. One last one, and John as well, you mentioned GreenFiber is doing a bit better. We have seen pretty strong improvement in some of the building products areas. Maybe talk about the willingness to sell that business timing-wise and/or when we could expect to see volumes improve. I know you've talked about some of the management aspects and the EBITDA trends, but is that one -- that's one I think you've talked about considering a divestiture once the market is coming back. Is it coming back as a leading indicator suggests that the markets that it serves are improving?

I think it's a fair question. There's no question that the housing market is improving, albeit slightly, but it's certainly improving, and it seems as though it's going to continue to improve on a go-forward basis. At least that's certainly what all of the projections are at this point in time. As Ed said before, the management team has done a good job of right-sizing the business for the revenues. They also introduced a new product called [Orcotherm] into the marketplace as well this month, which is a pretty exciting product that is being rolled out in 260 Home Depot stores. So, they -- not only have they done the right thing from a cost standpoint in terms of right-sizing the business, but they've continued to innovate by putting new products in the market.

We're seeing that OSB and engineered wood is beginning to move. And usually that's a three-year -- excuse me, three-month lag from an insulation standpoint when you really begin to see insulation. So, I think there's a possibility that it could be monetized this year. But I think, again, it simply depends on whether or not that housing market continues to improve, and we continue to see things really come off the bottom as they've started to over the last couple of months.

Understood, thanks a lot.

Bill Fisher of Raymond James.

Could you just touch on some of the factors that might drive the landfill volumes up or down sequentially in the October quarter, whether you have any seasonality expansions, projects, or just something that -- factors to think about on that front?

Well, the one thing we do at the end of the year, we're going to be expanding the permit at Southbridge, and we don't think that we're going to be in a position -- based on where we are with regard to the existing permit expansion to the 300,000 tons, we're confident that we won't have any difficulty filling that facility once we get that permit to expand. So, that's one factor that would be at the end of the fiscal year, probably in the third or fourth quarter. And other activity -- usually we begin to see real activity before Winter, in terms of volumes. We usually see second-quarter volumes usually are strong. So, from a seasonal standpoint, second quarter is normally strong from a volume perspective.

Okay, great. And just following up on the other questions on the refinancing, basically if you have the -- if you can get the Juniper changed, the Southbridge expansion, the cost saves, just kind of walk through -- it seems like you're April quarter might have a lot better free cash metrics to it, and you'd only be a quarter away from saving $10 million on the call premium. So, is it weighted to make it better off to just to wait until all those factors are in place?

Well, my view of it, and some investors have even reached this conclusion, that basically because of the economic headwinds, our whole plan on cash flow is -- and because of Maine Energy and the complications with it, our whole plan on cash flow just really got pushed a year from where it was a year ago. We were expecting the big cash flow this year. Now that's not going to happen, so -- but we've now got things built in that really are independent of economic situations that spike the cash flows next year. So, I think you're right on what you're saying.

Okay. Great, thank you.

Corey Greendale of First Analysis.

Hi, good morning, this is actually David Warner for Corey. I noticed that you put in your fuel surcharge price component in this quarter's numbers. Could you just give an update as to how that program is working, what's been the recent impact of fuel surcharges? And how do you expect that component of price to trend in the next few quarters?

Hi. This is Ned, David. We put the component back into our statistics for the quarter, after removing it for a year. If you look back to last year, in the March/April timeframe, we had decided that our fuel, oil and environmental recovery fees had reached a very high percentage, it was upwards of 20% when fuel was in high $3.90, $4 a gallon. And we really instated that program back in 2004, when diesel, if you can imagine, was $1.25 a gallon. So, it really has become a bit decoupled in certain ways, and we wanted to put that into permanent price, so our customers could better understand what the true cost structure was.

We reset our index where diesel started at $4.09 a gallon. So, we really haven't gone above the threshold that much, but anything above $4.09 a gallon diesel, we start to float with the fuel recovery fee again. There are some customers who have fixed fuel recovery fees, typically some municipal or larger contracts. So, we put the statistic back in this quarter, so we could have our investors start tracking it again as it's floating again and we're one year past when we rolled it into permanent price.

Al Kaschalk with Wedbush Securities.

Just want to follow up here on two questions, and drill down on one in particular. It seems like the business in general is struggling to spit off or generate free cash flow. And to the questions earlier about -- I forget where the covenant is on the debt-to-EBITDA, but it seems like we're pushing hard to those levels. And the items that are in the pipeline to generate proceeds to pay down debt don't seem to be meaningful. And so, I guess the question is -- is how much room and timeframe on that room do we have on the covenant?

Well, as you know, back in April, we worked closely with our banks to reset covenants. And then, of course, we come into this year, and we ended up, because of market conditions, having to push the second lien refi, which had an effect. And we've also experienced the shortage in the commodity prices and the tonnage. So, we work closely with our banks. Right now, our forecast, the low end of our forecast would put us very close to our interest coverage covenant. But the banks are aware of that, and we're working very closely with them, so I'm not overly concerned about it. And we work with them on a monthly basis, so --

Are you able to share with us what that ratio is? I'm sorry if I should have that, but I don't recall.

Yes. For this quarter, Al, we'll have this in our Q, which will be filed later today, our total debt-to-EBITDA covenant will come at 4.96 times against a covenant requirement of 5.25 times max. And the senior funded covenant will come in at 2.95 times against a 3.25 times max. And interest coverage will come at 2.35 times against a 2.15 times minimum.

Okay. All right, and then, so the cost cuts, one could argue maybe timing, but have you done enough? And hear me out on this, please. If you look at the contribution on EBITDA margins on the disposal and recycling side of your businesses, those are generating I would say 90% of the EBITDA you posted in the quarter. And the balance of revenue, call it $80 million, is generating very little, if not maybe even breakeven. So, are there more -- in the vernacular that you've used, like non-core assets there that need to be shed, or is it a dynamic where volumes and pricing just aren't getting to the level where they need to be?

I think it's a little bit of both. I think we have some assets that we're reviewing currently, Al. And I think that clearly we'll continue to review those assets that are not performing at a level that is -- that we expect. And so, I think that there's a possibility that there could be more assets that we will take a hard look at. So, I think it's a combination of both.

Is the collection business specifically healthy?

Yes, it is. I think we have other ancillary businesses that we're looking at that, on a go-forward basis, just probably will not make sense.

And so, they give you a soft (inaudible) then specify healthy, what are you defining as healthy for the business plan, John?

Well, it's something that's above our cost of capital, returns that are above our cost of capital. We've got some facilities that we -- some assets that we're looking at on the basis of return, Ed's doing those reviews. And certainly that's really the basis that we're looking at those assets.

All right. Again, just back to the debt-on-EBITDA calc, obviously there's (inaudible) and the denominator here seems to be a struggle to drive to the upper end. And again, I appreciate the headwinds that you have, but it just seems like there's a component here that we're missing in terms of driving that dollar level higher.

Yes, I think there's a couple things that affect that ratio, and when you, and I'm sure you have looked at our return on net assets, and that's the thing I'm looking at right now throughout the footprint, or our asset pool. You see things like Southbridge where we have a lot of money invested, but the real profitability of Southbridge starts clicking in when the permits increase. So, that's happening now. Southbridge looks a lot healthier than it did a year ago, and it's going to look a lot healthier next year than it does now. We have some other assets which aren't in that situation where they're producing just a minimal return on our asset investment, and those are the ones we're focused on right now.

Thanks, Ed, for the color. I guess the question is, right -- is it the market -- as you get the permit expansion, is there any guarantee that you get the volume? And if you don't get the volume and we're still in -- or you've got to compete for the volume, pardon me --

Well, that's the nice thing about where Southbridge is, because not only is it a market that has shrinking capacity, we have not had much problem filling the volume that we just got in the increase. But it's also on a market where we're taking out capacity with Maine Energy. So, some of that waste will end up in Southbridge with the permit increase. And then we have a put-or-pay expiring in December of 2014, which is the real homerun, because that allows us to internalize the volume into Southbridge. And at that point, we'll actually have to push some waste out into the market.

Okay. But it's -- okay. Thank you very much.

Thanks, Al.

John Zaro of Bourgeon Capital.

My concern, and it's sort of along I guess everyone's concern, is that you've had so many successes of trying to clean up parts of the Company, including selling the energy business a couple of years ago. But we're still kind of in the same place because, A, the economy has not recovered, and we still have this big fear of this debt overhang, which troubles some analysts and many investors. So, I guess the question is -- isn't it just sort of better to get some of this stuff out of the way? In other words, if you wait, and I realize that this is sort of a toss-up, but if you wait until next year and the economy is worse and/or rates are worse, your debt cost of refinancing could be substantially higher.

I think that's a very good --

I mean substantially higher, where it's historically all-time records. And the market hasn't moved that far away from where you were going to price it in June. I mean --

I think that's a real factor in the analysis, in terms of whether or not you go forward and do that refinancing now. There's market risk in terms of where the market goes is a big factor, John. I think that's exactly right. That's why we continue to work on it now to try to find the right formula in terms of refinancing the balance sheet. That's why we said we continue to work on that now, because market risk is significant. No one knows where the market's going to be in the next 12 months. And certainly the markets are fairly good right now, so that is indeed a factor.

Yes, I mean, because I sort of scratch my head every once in a while when you guys say -- well, the market moved away from us. It really -- I mean, yes, it may have moved 25 basis points, but it hasn't really moved, and it's trading at record lows.

Yes, it wasn't just that the market moved away, but our credit rating went down as well, and it put us into a different bucket.

But that bucket has a huge market need for product.

Yes.

So, there's always demand for that. And I guess, the other thing is too is that, and I sort of am reminded of the fact that we looked at -- we theoretically have already looked at all these different properties. And what has two years ago we talked about what are the returns on capital, and what projects weren't earning returns out of capital? So, again, I go back to the fact of maybe it is just time to say -- well, you know what, let's just sell some of this crap and move on, because we're still sitting at $4.74. (multiple speakers) [Air rights] maybe worth $10 and the rest of it may be worth $5 or $6, but the fact of the matter is, the world is different dramatically.

John, I totally agree with you. But these aren't like things you just call somebody and sell tomorrow. These are things that require a significant lead time to get the right buyer. And to do the right analysis to make sure we're doing the right thing. So, we are working on that diligently now.

Okay. And then the other thing is, did you move the date of the close of Maine to December from November for anything other than it gave you more flexibility?

No. I think that we're of the mindset that we'll go through that process, the facility will continue to operate until we get through the process. I think that it took us a little bit longer to get the purchase and sales agreement done. But with that done, I think we're in the process now, and other than that, John, there was no other reason why we moved it other than just the ordinary process of going through and getting negotiations done. The facility will continue to operate until we get done what we need to have done from a permit standpoint. So --

My understanding is that the way the agreement is written is that you guys have the choice of whether you want to close it, whether you get that permit or not. Is that --?

No, we would continue to operate the facility if we didn't get that permit.

So, you wouldn't close it earlier? (multiple speakers)

It is our choice. And I think that we have the capability to bring that waste to other facilities, which is one of the reasons why it's a good thing to be taking capacity out of the marketplace. But we'll continue to operate the facility until we are able to get done what we need to have done from a permitting standpoint. And I think at this point in time, we're of the mindset that we should be able to get through that process, but we do have other options because of the amount of capacity that we have.

Okay. Great, thanks.

You're welcome.

(Operator Instructions)

Michael Hoffman of Wunderlich Securities.

There seems to be some concern that the EBITDA can't improve if nothing gets better. So, bear with me if I walk through this waterfall of events, but it's one of -- it's fiscal '13s 101; in '14 fiscal, things that are known are the incremental rollover of the first permit expansion at Southbridge, then the new permit expansion, that's got to be somewhere in the $3 million to $5 million of the incremental EBITDA in cash. There's clearly Maine Energy; I know you're not talking about it, but you've talked about impacts to EBITDA on an annual basis of greater than $3 million, so there's something at least in that range. There's $6 million to $8 million. And then the refi, if it was done next July, would at least be $6 million to $8 million of cash.

So, right there, you're talking about $17 million, $20 million cash improvement in '14, and those are all known. And then in '15, you get the follow-on rollover at Southbridge of the last permit mod, the increments from the refi, and the put-or-pay. Again, I get another $7 million of EBITDA, plus another $2 million to $4 million of free cash from the rollover. Am I right about those, those are all there, just time has to go by?

Yes, the only hesitation I have there is make sure you know that the put-or-pay expires in December of '14. So, we don't get the full benefit in fiscal '15; the full benefit goes to fiscal '16.

Okay, fair enough. So, then I got to carry on into '16. So, I got three years of high visibility on incremental improvements of EBITDA, and all you really have to do is show up and fog a mirror?

Yes and --

That's a fair perspective.

Okay, so, this isn't any -- it's not dire unless the bottom falls out of the world.

Yes, and I'd like to point out also, we've reduced our forecast to current realities, but we're not sitting on our hands as far as finding new sources of special waste, and finding other solutions in our market. We just aren't in the position to promise something that hasn't materialized. So, we have a pretty full pipeline of things we're working on, and should any of those materialize, then we've got some upside. But I think your analysis of just going through what's already on the books, what's going to happen, just the timing issue is a very good one.

Okay. Thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn the call over to management for any closing remarks.

Thank you, all, for attending this morning. Our next earnings release and conference call will be in early December when we'll report our second quarter fiscal-year 2013 results. Thank you, everyone, and have a great day.

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