Casella Waste Systems Inc (CWST) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems, Incorporated third-quarter 2013 conference call. At this time, all participants are in listen-only mode. Later we will conduct the question-and-answer session, and instructions will be given at that time. (Operator Instructions). As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference, Mr. Joe Fusco. You may 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 President and Chief Operating Officer; and Ned Coletta, our Senior Vice President and Chief Financial Officer.

Today we will be discussing our fiscal year 2013 third-quarter results. These results were released yesterday afternoon. Along with a brief review of those results and an update on the Company's activities and business environment, we will be answering your questions as well.

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

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

Also, during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the Financial Tables section of our earnings release, which was distributed yesterday afternoon and is also available in the Investors section of our website, 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 2013 third-quarter conference call. Our goal today is to discuss our third-quarter results and to update you on the mid-term strategy.

I will start with a brief overview. Ned will take us through the numbers, and then Ed will provide an overview of his game plan to improve operating performance in his new role.

As we stated in our press release yesterday afternoon, our third quarter was disappointing with results coming in below our expectations. We continue to see the same recessionary trends in the business and the weak regional economy that have plagued us all fiscal year -- lower landfill tons, especially in Western New York; historically low landfill special waste tons -- the jobs were just not out there to bid this year -- lower collection volumes; and recycling pricing at levels 20% below the 10-year average.

Offsetting these challenges, we made progress in the quarter on several important fronts, including improved pricing in the collection line of business; successfully early integrating the BBI acquisition; permanent closure of Maine Energy, and significant progress ramping the new annual permit limit at the Southbridge landfill.

What is particularly frustrating is the operating and economic environment remains unpredictable, difficult and stagnant, canceling out the impact of the hard work we have been aggressively doing to put the Company in a position to succeed.

I plan to run through my comments quickly to leave adequate time for Ed to share his thoughts on what he has learned during his first 90 days on the job. Ed has been quite busy as he has visited all of our operations to meet with the local teams to learn what's working and what's not at each division. Ed will get into the details, but at a high level, certain actions we have taken over the last few years have had unintended consequences and negatively impacted performance. We have a strong asset base, and I believe our operating results should be better, even in this tough economy.

On the strategic development front, we continue to make great progress this quarter with three accomplishments that we believe position us well for the future. We completed the BBI acquisition on December 6; worked through the integration of their business in the third quarter; and as previously disclosed, it will take us over a year to fully recognize all of the G&A operational and internalization synergies. We tucked one of their hauling companies into our hauling operations in the quarter, and we recognized significant internalization benefits to our North Country landfill.

On December 31, we permanently closed the Maine Energy facility, and on January 2 we began transferring waste through our newly-constructed transfer station in Westbrook, Maine, to other disposal facilities, including our North Country and Southbridge landfills. The transition has been going according to plan, and we expect to have the demolition completed in the fall.

We still continue to work with Maine DEP to modify our permit at the Jupiter Ridge landfill to allow us to take MSW directly to the landfill.

On January 18, Massachusetts DEP increased the annual permit limit at our Southbridge landfill to 405,000 tons per year to MSW. We have begun to ramp the tonnage to the site, and given the scarcity of disposal capacity in Massachusetts market, we expect to have tonnages ramped to the newly-permitted annual level by the summer of 2013. The Massachusetts disposal market remains robust through the winter months and has remained robust through the winter months due to our leadership in shutting down Maine Energy and directing tons to Southbridge and back into the market. We expect the market to further tighten this summer and gate rate pricing to improve further.

Coming back to the operating results and the challenges that we face during the year, I believe there are several key strategic strategies necessary to improve profitability and cash flow over the next several quarters.

The first step, taken back in early December, we named Ed as President and Chief Operating Officer and Ned in the role of CFO. This new leadership team is driving the necessary cultural and structural changes in the business that we need to succeed and get back to profitability.

We furthered these steps yesterday by strengthening our management team in the Western region with a new regional vice president. We have reorganized our landfill management and sales structure in the New York State to attract additional volumes to our sites, and we're adding additional resources to make that happen. We are actively driving decision-making and accountability to the local level, and we're focused on reducing our cost of service at the collection companies with an emphasis on route profitability.

And with that, here is Ned with the numbers.

Thanks, John. Moving on to the quarter, revenues in the third quarter were $115 million, up $400,000 or 0.4% year over year. Solid waste revenues were up $2 million or 2.2% year over year with the increase mainly driven by higher pricing and acquisition activity. Revenues in the collection line of business were up $2.6 million year over year or 5.3% with price up 1.9% and volumes down 3.6%. Volume weakness was most pronounced in the roll off line of business. Roll off pricing was up 0.5%, and volumes were down 8.1%, due to the challenging construction market, lower work associated with drilling sledges and a tough comparison to the third quarter last year when we saw increased demand for roll off services with Hurricane Irene and Tropical Storm Lee cleanup.

Despite this weakness, our pricing programs in the commercial and residential lines of business remained on track with positive 2.3% pricing in the quarter. Excluding the divestiture of Maine Energy, the closure of the Worcester landfill and acquisition of BBI transfers stations, revenues in the disposal line of business declined $0.5 million year over year.

Price was up 3.3% on higher special waste pricing in the disposal line of business, while MSW and C&D tipping fees were down roughly 1.7% year over year.

Disposal tons declined 226,000 tons or roughly 20% year over year with MSW tons down 11,000 tons with the closure of Maine Energy and special waste tons down 214,000 tons year over year or 43%. The decline in special waste volumes was mainly driven by a regulatory delay in assessing additional interface at the Worcester landfill closure project and a decline in drill cuttings in western New York.

During the quarter, we acquired $4 million of revenues and divested $1.5 million of revenues.

Recycling revenues declined $1 million or 8.9% year over year with a drop in recycling commodity pricing driving most of the decline. Pricing for most classes of commodities were down year over a year with fibers down 11.4% and mixed containers down 31.5%.

Recycling shipped tons were up 7.6% year over year on the continued adoption of our Zero-Sort Recycling offerings.

Major accounts revenues declined $600,000 year over year, mainly because of lost Oakleaf accounts.

Adjusted EBITDA for the quarter was $19.7 million, down $2.5 million from the same quarter last year. This was driven in a few areas. Adjusted EBITDA was down $2.1 million in the disposal line of business with the decline driven by lower performance of the Western New York landfills and the delay at the Worcester landfill. We partially offset these declines with higher volumes at the Stockbridge and North Country landfills as we shifted tons from the Maine Energy closed project and internalized tonnages from BBI to these sites.

In addition, adjusted EBITDA was down $800,000 in the recycling line of business due to lower commodity pricing.

Offsetting this, adjusted EBITDA was up $500,000 in the collection line of business, mainly driven by strong pricing and the BBI acquisition.

Our cost of operations was up $2.8 million year over year with higher operating costs associated with the newly-acquired BBI operations; higher hauling and disposal costs; higher labor costs on lower productivity; and higher fuel costs driving the increase. Excluding severance and reorg costs, G&A costs were up $500,000 year over year in the third quarter. The increase in G&A costs is primarily driven by additional overhead associated with the BBI acquisition and higher bad debt expense. As stipulated in our purchase and sale agreement with the sellers of BBI, we planned to begin the consolidation of BBI overhead in early March.

Depreciation and amortization costs were down $800,000 year over year, largely due to the lower depreciation at Maine Energy and lower landfill amortization on tonnage decline.

There are a few unusual items in the income statement that I'd like to run through quickly. We recognized a $1.6 million severance and reorganization charge during the quarter. This was associated with both the closure of Maine Energy and other realignment activities in the business.

We also recognized $800,000 of expenses during the quarter related to the divestiture of Maine Energy and acquisition of BBI. These charges included $353,000 non-cash loss on the divestiture of Maine Energy.

On November 8, we completed the mandatory redemption of the remaining $72.7 million of second-lien notes, and you will see the final $5.9 million loss on debt extinguishment in the quarter.

Our income tax provision is a bit weird. We actually had a $5 million benefit in the quarter, and this is due to a reduction of the valuation allowance. The valuation allowance decreased based on the recognition of additional reversing temporary differences related to the $5.2 million deferred tax liability recorded through goodwill as part of the BBI acquisition. This is an interesting circumstance, but it caused us to recognize the benefit within the quarter.

Moving on to the remainder of the year, our ability -- I'd like to make a few comments on forecasting. Our ability to accurately forecast our business has been less than stellar over the last several quarters. While a number of factors have caused us to miss our numbers, we want to be in a position going forward to meet or exceed our plans.

As such, we've challenged our operating teams to be more conservative in their forecasting approach. Given this conservative approach and the weakness we experienced in the third quarter, and our updated visibility in our fourth quarter, we recast our forecast for the remainder of the year in three areas.

We reduced our adjusted EBITDA forecast in the disposal line of business by $2.8 million due to lower-than-anticipated landfill volumes, the lack of volumes we had previously expected from Hurricane Sandy, and an unfavorable shift in mix, and the delay at Worcester landfill.

In the collection line of business, we reduced our adjusted EBITDA forecast by $3.4 million, largely due to lower volumes. And in the processing line of business, we reduced our adjusted EBITDA forecast by $2.6 million due to weaker-than-expected operating performance and the delayed ramp-up of the new water processing facility.

On the positive side, over the last few weeks, we have begun to source new customers and streams of waste to the landfills, which gives me and the team confidence that the volume declines we've experienced for the last 18 months have reversed, and the third quarter is the bottom for the landfill line of business.

And with that, I'll pass it over to Ed.

Thanks, Ned, and good morning, everyone. My discussion today is going to be a lot more detailed than normal for a call like this. With the financial performance where it is, I think it's very important to explain the changes we have been making both at the tactical level and the strategic level.

Since my appointment as Chief Operating Officer, I've spent most of the last three months on the road visiting each of our collection and landfill operations and spending quality time with our local management teams. As much as I thought I knew the operations from my CFO position, I learned a great deal, and I feel I have a much better understanding of what is working, what is not working and the changes we need to make.

The exciting part for me is that I am now a lot more confident that we have a bright future and that we are not years away, but months away from seeing a positive turn in our results.

As John and Ned have discussed, we brought our guidance down this year. Obviously, my focus is next year, and we wanted to bring the guidance down to a level where we can meet or exceed guidance on a go-forward basis.

Having said that, we are doing the things now that will build momentum going into fiscal 2014. Our goals are to reach profitability as quickly as possible and to build a Company that can produce consistent improvement and financial results and generate significant free cash flow.

Over the past three or four years, we have made numerous changes in the way we run our business, including the centralization of various business processes; building a customer care center; centralizing our marketing efforts and even centralizing some of our core activities such as routing.

At the same time, we suffered an economic decline that reduced or eliminated several profit drivers for the Company such as housing, construction and energy prices. The intention of our centralization efforts was to reduce overall headcount and, therefore, costs and introduce a higher level of consistency and professionalism with each of the processes. Financial pressures brought about by the economic issues, coupled with what I believe were flaws in some of our thinking, resulted in some pretty significant unintended consequences, and my immediate task has been to reverse or eliminate some of these.

Just as a side note, clearly the economic environment has stabilized, and we've made the strategic moves such as the sale and closure of Maine Energy to adjust our business to the new economic realities. I'll return to the strategic picture in a few minutes.

I am a strong believer that the waste business is a local market business, at least on the collection side. Each market has a unique customer base with unique needs; the local political and business environments are unique; and efficient collection operations require an in-depth local logistical knowledge. Our customer relationships for the most part are established and maintained at the local level where the service is provided, even if the location being serviced is part of a national account.

The management team's skill set needs to fit their market, and they need to have some tactical flexibility as to how to build their business within it. They need to be empowered to control any decision-making that affects a core function of their operation such as sales, customer service, fleet maintenance, routing, dispatch -- anything that affects the customer and the quality and efficiency of the service we provide to that customer. They also need to be clearly accountable for their financial results, independent of any perceived Company goal that clouds that accountability.

So let's look at the current performance levels, and then we can get into what is driving that performance and the changes we're making.

EBITDA contribution from our collection line of business this quarter is relatively flat for the prior two years on higher revenue, up 7.1% from the third quarter last year. Cost of sales has increased as a percentage of revenue from 74.1% to 74.8%, and EBIT contribution has declined about 8% after declining a similar 8% the year before.

My site visits and some detailed analysis provide a clear path to understanding and reversing this decline, so let me go through some of the key points affecting the third-quarter numbers and how we are addressing them.

First of all, we have several divisions where we enjoy significant market share, and they continue to do quite well. Our attention needs to be focused on the divisions that are underperforming. We have been transitioning our fleet to C&G, and due to the need to build fueling capability at particular sites, we concentrate on converting two or three sites per year and redistributing their existing fleet to other locations. The numbers reflect that we have suffered implementation and fleet selection issues in the two sites that we added this year, and I believe this is a result of a one size fits all approach that I'll speak to more in a few minutes.

We achieved price growth of 1.9% for the collection line of business, so our yield management system is still operating effectively. The commercial and residential price improvement came in at 2.3%. However, the roll off line of business pricing came in at only 0.5%. A deeper dive into route profitability reveals that many of our locations are losing money on roll off routes. And I've found that this is driven by an understanding at the divisions that we need to feed volume into certain landfills, and profitability on the collection side is being overridden by that need. This is a fundamentally flawed approach that clouds accountability for profit at the division level and drives pricing down in a market. So we are reversing that thinking.

If you recall, roll off pricing was negative in the second quarter, so we are already seeing some movement.

As stipulated in our agreement with the sellers, the operational synergies from the BBI acquisition have not yet been realized. The three divisions affected by the acquisition show temporary margin decline in this quarter as they absorb the assimilation costs without the routing and facility synergies. We are starting to get the landfill volumes, which I'll talk about later, but the operational benefits will come into play over the next six to 12 months.

So the action plan on the collection line of business is pretty simple. First and foremost, we're establishing clear P&L responsibility and authority at the local level and making clear that anything affecting the customer or the provision of service to that customer is under the decision-making authority of the division manager and his team. Last summer we eliminated centralized routing and centralized transportation departments, which deal with the long haul trucking between transfer stations and disposal sites, and push them back into the field.

Secondly, we are replacing the one-size-fits-all approach with a local market-centric approach. This affects equipment selection, marketing, and market offerings, customer care, even cash collection activities. Every action that we take from corporate or a region should begin with the question of how that action affects each individual market and tailored accordingly.

Third, we are establishing internal disposal rates that reflect true market rates for each division and removing any confusion away from making profit on the collection line of business versus a perceived goal of filling a landfill.

Fourth, over the next 90 days, we will focus on scrubbing our routes to improve performance as the routes are the basic building blocks of collection line of business profitability. We have introduced route profitability tools and focused management on improving financial performance by route. Managing your route profitability is the fundamental way to constantly and steadily improve financial performance in a collection operation. Route profitability identifies which routes are below target margin and leads to the evaluation of equipment, routing, operating cost per hour, route density issues -- everything that leads to profitability improvement, including pricing of specific customers.

And finally, every divisional team is developing a three-year market plan. As you can imagine, the threats and opportunities vary widely by market, and our intent is to get each management team focused on the long-term development of our business and their market and tie key performance indicators to track the progress of that development.

Okay, that's the hauling side. As you know, our key strategic assets are our landfills, and on a consolidated basis, the landfill line of business has historically generated over 50% of our adjusted EBITDA. We have struggled for volume in the landfills, particularly in the western region, and as I mentioned above, the landfill volume issue has even affected some of the decision-making in the hauling companies and led to deteriorating roll off pricing in some markets. Strategically, we have a lot going on and we're excited about our prospects, but let me go through current performance.

Overall landfill tonnage is down 22.7% this quarter as compared to the third quarter last year. The big drivers are contaminated soil jobs, primarily driven by a regulatory delay and the approval of additional capacity at the Worcester landfill, and drill cuttings. MSW volumes have been fairly stable and are actually up slightly year over last year.

If we break it down by waste shed, we can isolate the problem and see where our strategies are working and where we need to make some changes.

First and foremost, the Eastern region disposal strategy is working great, and we're really pleased with what we're seeing. On the one hand, the Worcester landfill closure project where we've been bringing in contaminated soils that we cannot bring into Southbridge or elsewhere has been delayed by regulatory proceedings, and this by itself represents a $1.2 million negative EBITDA swing this quarter versus last year. But excluding that, the contribution from the eastern sites led by Southbridge improved 22%. The Southbridge site received an annual tonnage increase as planned this quarter and has been ramping nicely to those levels as the Massachusetts market appears to be tightening.

Similarly, the BBI tons started flowing into our North Country site in December, and the tons from the closure of MERC, which happened to be scheduled at the end of December, are now flowing through our new Westbrook transfer station and are being distributed between North Country, Southbridge, and to specific third-party sites to satisfy certain market issues for us.

Our overall strategy for the Eastern waste shed is working exactly as planned. Before I move on, let me say that it's nice to see these long-term plans start coming together and particularly to see these high volumes in the winter months where most tons have been historically hard to get.

As a reminder, the Southbridge and North Country sites were difficult to get up and operating and faced long legal challenges to their very existence, all of which came to conclusion in our favor last year, and we now stand with no opposition to the permits.

The management at each of those sites, specifically [John Pareis] and Kevin Roy, deserve our gratitude and congratulations for a job well done as these sites become the jewel assets we originally had envisioned.

Likewise, the Eastern region team deserves our thanks for the timely closure of MERC, the expedited building of the Westbrook transfer station and their continuing work on the Juniper Ridge landfill permit modification that is currently in progress.

Moving west, our WasteUSA landfill in Vermont and our Clinton County landfill across the state line in northern New York continue to perform well with stable volumes and contribution to EBITDA. Capacity is tightening throughout this region as well, so these sites should continue to improve for us going forward.

Our four landfills in western New York, which are Ontario County, Chemung County, Hyland, and Hakes operate as an integrated waste shed as they receive the bulk of their tons on a long-haul basis, and we generally can move tons between them to meet our needs.

When the recession hit in '08, we suffered large declines in C&D and contaminated soil volumes into these sites. In '09 and 2010, we offset a large part of this decline with drill cuttings. This regional market has an abundance of capacity and has been very challenging over the past 18 months to get tons into these sites. The Western landfill suffered a combined loss and EBITDA year over year of about $900,000 in the quarter.

We have looked at all strategic solutions, including selling some of our capacity or taking some capacity off-line through temporary closure of one or more sites. Selling a site does not solve the capacity issue, unless it is sold to someone outside the region with waste to bring in, and with an abundance of capacity available, that's a tough sell. Temporarily closing a site hurts us financially as each of the sites continues to produce positive EBITDA and cash flow.

The solution to our problem here is to bring volume from new sources outside the market. Over the past few months, we've been adding resources and focusing our efforts, and we are already starting to see some results from procuring new waste sources.

In addition, we announced internally this morning some significant structural and personnel changes in the Western region. We are pleased to announce that Randy Jensen has joined the Company and will be taking over as Regional Vice President of our Western Region starting next Monday. Randy has 20 years of experience in the waste business, most recently as an area president for Republic and comes highly recommended. We look forward to working with Randy, and welcome him to the team.

Larry Shilling, the current Regional VP, will become Vice President of Landfill Marketing and Development for the Western Region, to focus his talents on sourcing volumes to the landfills and developing relationships with and solutions for waste producers and handlers in the East. Landfill sales and special waste technical resources will report to Larry.

In addition, Larry will drive our service offerings in the oil and gas industry. It is our belief and our recent experience that by freeing Larry and his team to focus solely on the macro landfill volume issue, we can reverse the downward tonnage trend in the West.

I haven't talked about the recycling side of the business. Volumes continue to grow as the cultural and political support for sustainability drive demand for our Zero-Sort solution. Obviously, the financial contribution from recycling fluctuates with commodity prices, which we still believe will trend higher over time due to resource shortages worldwide, but our business continues to grow, and we plan to add capacity as the facilities near their limits. The next logical step for us is to build a MERC in Lewiston, Maine, and free up capacity in our Charlestown plant. Operations continue to go well.

Well, I hope this gives you a flavor of how I see where we are as a Company and the reasoning behind some of the moves we're making to get us back on track and closer to profitability and significant free cash flow.

That concludes our prepared remarks, and I'd like to now turn it back to the operator to open up the lines for questions.

(Operator Instructions). Michael Hoffman, Wunderlich Securities.

Thank you very much for taking the time to answer my questions. Ed, thank you for the detail and the candor, all of you, in that things aren't as good as they should be. You cut as low as you can, and now, let's go from here. Can you set some goals that we can target as we get through the fourth quarter and into fiscal 2014? Things that you are comfortable about that are very achievable. What should we see differently when we're doing this again in June when we are doing the fourth-quarter call?

Well, without getting into too much detail goal targets, I think when we have the next call we're going to be focused on next year, and that's the time to really get into more specifics. Our focus right now is to get more volumes into the landfills in the western region. That is the number one driver of our financial success, and so that's why we are restructuring around it. Bringing in new resources and really changing our focus to build the relationships in the Eastern market where the handlers of waste and the producers of waste are. And that's the kind of volume -- that is the target for us to bring volume into the market. So that's our primary focus.

Our focus going forward is we've got to get this Company to profitability and get it to significant free cash flow. So we're going to make those moves necessary to get us there, and the biggest driver, again, is volumes into the Western landfills. And hopefully we will have things to talk about for the next quarter.

So will you be positive free cash flow in the fourth quarter? You may be negative for the year, but will you be positive in the fourth quarter?

That's a tough question to answer. I don't know if I want to tag that target for me. I think if we have the normal seasonal turn up, we could get the free cash flow. But I don't want to throw it out there and then disappoint --

Yes. I'm not holding you at a number, but we all have to agree that time is of an essence here. We've been having the same conversations -- it feels like Groundhog Day.

We certainly understand that, and we share the frustration. We're --

So as we -- so the message and when you give guidance on 2014, again, not looking for the numbers, you will be a positive free cash flow company in 2014?

Yes.

And not -- something substantive, something that's more like 4%, 5% of revenues, not 1% or 2%. I mean this is real, but the idea that probably 10% is the right place to be over time -- 10%.

Well, I don't think I'm ready to set that target. But yes, that's the goal.

Okay. Which then correspondingly, if you are free cash flow positive in middle single digits, that would correlate to profitable earnings.

It does.

Good point.

Again, that's the goal.

All right. So the intention is that's the message for guidance on 2014 is you will be profitable and you will generate free cash flow substantially?

Boy, you are really putting me in a box. I --

Well, I mean -- at some level, we put a lot of investors into this theme. So I want to --

Well, no, I certainly understand, and that is the goal. We're focused on building this going into next year and making the changes now that are going to get us there. And certainly the next call I hope to be providing guidance that everybody is good to be happy with.

Okay. And so I'm going to keep on some of these for a second since there's not that many of us who cover this, anyway. We just spent about $50 million in capital spending, but why shouldn't that number be less in 2014? Not stupidly less, but more like $40 million to $45 million instead of $50 million to $55 million?

Well, I think it probably will be. We are looking at things that we have -- we have made some strategic investments over the past year and the year before that haven't shown -- that were kind of outside the core, trying to drive volume or fee catalysts into the core business. And now I think we are at the point where we need to just focus our CapEx on the core business.

Okay. That's good news.

At what point -- see, I don't think that the economy ever helped you out here. I think structurally this economy in the world and the geographies you live in isn't going to get good enough to be the driver of volumes. You have to find it, which means that you've got to use creative marketing to get it, which is supposedly, I guess, a euphemism for price, and there's a lot of people that are going after that same thing.

So at what point in your plan do you recognize that those four Western landfills don't cut it? What comfort are you giving the market that having said you have evaluated sales and options, when does that come back on the table? What do you have to see that tells you that, okay, we've got to sell them?

Well, first of all, all strategic options are on the table. I don't want people to think we don't look at that. It's just nothing that is -- that we've seen makes that work for us. And the real issue is, are we running our business the best way we can, and are we getting our share of volume from outside the market? And I can tell you, we're not.

And the real great learning experience for us, I think, was Hurricane Sandy. Here we had a large amount of volume show up on East Coast. We tried to react to it as fast as we could, and what we learned is we really didn't have the long-term relationships with the right players in those markets to really access a meaningful amount of that waste.

So we're understanding now that we've got to put the resources toward building those relationships, and we have been doing that over the past few months, and we are going to continue to do it. And the restructuring is really designed to help us add resources to doing that.

Okay. Last question and I will get off and let somebody else.

What I hear about this plan is CapEx would come in to be focused on regular operations, so does then things like G&A probably tightens up more as a percentage of the business. And correspondingly, if your route rationalization really drives productivity, then I will see a COGS impact pretty quickly.

I believe so.

Okay. Thank you very much.

Corey Greendale, First Analysis.

This is David Warner for Corey. Can you talk a little bit about the third-quarter impact from BBI integration costs, whether you expect that to be accretive in Q4 and your ramp to that $4.9 million goal that you cited for next year as a run rate? Thanks.

Yes, David. This is Ned. The BBI business is seasonal, much like Casella's business where there are summer months, and late spring and into the fall are their strongest periods of the year. And as we laid out in our initial guidance on the acquisition, it will take us until the second full year of operations to fully recognize the various internalization benefits and the operational and G&A synergies. We expect that to ultimately produce right around $5 million of EBITDA from the business. And after -- in the first full year of operations, we expect the business to produce around $3.5 million of adjusted EBITDA.

So coming into next quarter, we should expect that to pick up to a run rate of somewhere in the neighborhood of $600,000, $700,000 of benefit, and we are seeing the internalization to North Country today. We've seen very little operational or G&A synergies, as Ed laid out. Because we had a 90-day true-up period we needed to make it through, which expires next week, and then we can begin to rationalize on additional assets and routes together, and that benefit will start to come in.

Okay. And then just to follow up, to dovetail on the last question, can you talk about the progress of GreenerU, and just more generally, your ability to plan some of the lost C&D and drilling volumes with industrial customers or universities, or any other alternative streams? Thanks.

Well, that's a good question, and I don't want to get too lengthy on my answer, but that's something else we have restructured a little bit internally to improve our success in areas like GreenerU and the industrials line of business. We formed a group -- the problem in the past is we identified a bunch of things that GreenerU and the industrials could go after, but we really were trying to run that out of corporate. And so now we have restructured things so corporate is more of a support group, and we pushed it down into the local markets. We don't have a material contribution from those two initiatives yet, but we certainly like the prospects of it, and we think we are going to do well with it going forward, especially under the new structure.

And just one real quick follow-up. I am sorry if you said it, but did you receive any Sandy volumes in Q3, and does the guidance assume no Sandy volumes going forward? Is that correct?

We received some limited volume, very small, and it came by truck that was really sourced from another company and just coming into our landfill. But no, there aren't any meaningful Sandy volumes in our numbers or our forecast.

There's nothing in the forecast as well.

(Operator Instructions). John Zaro, BCM.

I'm still not -- having been a shareholder on and off through this whole process, I'm still not sure how you guys are ever going to get us back to where we were before when you all admit that the economy has changed and the world is different and it is going to be tougher. I don't understand. Why do you think that the Northeast is actually going to ever get that profitable? All of those four sites are ever going to be profitable enough, no matter what you do? I mean you had this -- have you had this battle down there with the Seneca landfill and things like that? I just don't understand why, when you look at the return of dollars to shareholders, you've tried four different plans. We had this plan last year where you guys laid out all these things for increased EBITDA. That's almost now disappeared because of the economy and other factors out there.

So we're back to where we were before, and the stock price is down and you diluted us. So I guess the question is, what is the end game here if you guys keep doing this plan as opposed to there must be countless people who want to buy those four landfills? There must be countless people that want to buy you guys and make it more efficient.

Your whole eastern section, as you pointed out in the call, is incredibly attractive. It is incredibly well-run. It is incredibly profitable. The other part just can't be. There's -- you said it yourself on the call, it is too competitive.

Well, the simple analysis of our Western landfills -- first of all, there is overcapacity in the market. There's four landfills that we have in the West that work as one, basically, and it's all about long-haul volumes. So yes, there is overcapacity in the market.

We looked at all the options. We've looked at shutting some down temporarily to take capacity out of the market, kind of like we did with MERC in the East. It didn't make economic sense. It hurt us to do that.

We looked at selling a landfill or two outside the market, and we couldn't sell it in the market because it doesn't solve the problem for the rest of it. We've looked at selling them outside the market and --

Why not just sell them all?

Well, who is the buyer? I mean --

I don't know. But have you looked to see if there is a buyer? This is the issue. Okay. We've been through all these restructurings and all these things that I realize that, Ed, you have not been there, but these are endless programs that we have gone through and endless restructurings of looking to solve a problem that is sitting there and gets bigger and bigger since 2008. And I just don't understand --

They get bigger by comparison, but the --

Right. But I don't understand what the issue is. What point is it for us to try and see if it's going to make it when at the end of the day, I mean, you thought -- John thought the Company was worth a ton of money last year, but decided to dilute all of us at $4.25. So we're trying to get the stock price to go up, not to have an experiment to see if it's going to work. And if this experiment doesn't work again, we're going to be in worse shape than where we were before because then everyone is going to know it didn't work.

John, it is Ned. Can I intercede for a second?

Yes.

Everything is a relative basis. But the Western landfills we are talking about are still some of the most profitable assets in the Company. They ended this quarter with around 37% EBITDA margins. It's a relativity issue where we lost around 350,000 tons to these sites, and they are not running at full. And that last ton through the gate comes in at very high margin.

But they may not run -- (multiple speakers). But we have already had this discussion for the last two years. They may not run back there.

I think we talked about some important structural changes we made today. We brought in a very seasoned leader who is with one of the more successful waste companies in the industry. We've restructured our landfill sales efforts. And Ed and John are spending a lot of time over the last couple of weeks working with the landfill sales teams, working with the local teams to source additional volumes. And we have turned a corner there. We are sourcing volumes.

We went through a drought period. We were getting the least amount of special ways that we have done in the eight years I've been with the Company. And things were not as well structured as they should have been on the sales side. And it is an area that John and Ed are bringing leadership to. We expect Randy to bring additional leadership to this area, and it's not a massive number of tons we're talking about. It's just a lot of leverage at those sites we lost.

So the problem, while it is big in a financial sense, in the sense of attracting these volumes, we are talking about 350,000, 400,000 tons we're running full, and we can swing the pendulum the other direction.

So the --

I'm not disagreeing with it. But you guys are a public company, and you are supposed to be returning money to shareholders and increasing shareholder value. And you guys have been going the opposite way for six years on these various plans. That's my only point.

So maybe what you ought to think about doing is, how can I get the highest return to the shareholders going forward? And I don't think the highest return going forward is to try and fix what, even you admit, is going to be difficult to fix. And the economy is not going to change that much. I mean Michael is right. The economy is not going to change that much. It is what it is.

And if we go into another recession, you guys will then say, oh well, the economy has slowed down again, and it's going to be terrible. We already know that. That's a given.

Let me make a couple of comments here. First of all, no, the economy is not going to get better. We're not betting on that. But when I look back at what we've done as a Company last year, year before, to try to fix this issue out West, it was really more shooting for a strategic solution. We looked -- we made a big bet on drill cuttings, for example, and the drill cuttings have now gone away.

I think the changes we're making today and also on the collection side -- we're making changes in the fundamental management. The blocking and tackling I don't think we've done as well as we can do, and that is our best hope for bringing in new volumes. And I think --

But why isn't your best hope trying to get the most value out of the Company? Because if you spend three and a half years trying to turn the Company around, as opposed to people wanting the assets because they can use them and integrate them in a better manner because they are bigger and it's just the very nature -- what you experienced in Sandy is what the problem is for you guys. You're not big enough. And you can't get big enough fast enough because you don't have the money in order to move forward.

I mean it's -- look at that. I mean I don't understand why you can't see that.

Well, all strategic options are on the table, John. I mean, we are stockholders, too.

Well, if all these strategic options are on the table, I think that -- if we really all believe that all strategic options were on the table, the stock wouldn't be $4.25. Right? Seriously. John thinks is worth $12, maybe $15. If all strategic options were on the table, it would not be $4.25.

I don't think that, John. I think we are all completely aligned in terms of trying to create as much shareholder value as we can, and I think all of the options are on the table. But I don't think that anything has changed in terms of our beliefs as to whether or not we can access the 350,000 tons that gives us the leverage to those four facilities.

I think that when you look back at what we've been able to do in terms of refinancing the balance sheet, taking out Maine Energy, getting the Southbridge facility, you know, a number of years ago we were struggling with the Eastern region. It's fixed now, and we are moving on.

We fixed the Maine Energy issue this past year. We have got that facility sold. We shut it down. We built the Westbrook transfer station. We're moving tons to our facility. So I don't think that there's any disconnect in terms of our ability to create value and understanding the only way that we create value to all of our stakeholders is to execute this plan --

John --

And to do that --

The disconnect --

To do it in short order.

Wait, John. The disconnect is -- I am 100% in agreement with you. You have done all that, and your stock as $4.25.

Look at the other waste companies. That's not what happened to them. So that's the point. It's not -- you're taking this as if you're a bad guy or you're not doing the right thing. You are totally doing the right thing. It's just the world has changed, and it's getting bigger.

So all I care about is, if you are telling me that you are willing to sell the Company and get the highest value for the Company, that's great. But you have to be open to doing that as opposed to saying, we are just going to work away at this. Because working away at it and all these various plans and bringing in different people, the stock has gone down every year since. Okay?

And that is the economy's problem. That's your problem. That's my problem. That is every shareholder's problem, and that is not going to change.

I don't think that -- I think that we're -- there's alignment. Our effort is to create as much shareholder value as we can. And I believe --

Great. And then I think --

I believe --

And I think you ought to put something out there that says that you are looking at strategic alternatives. Because if you think --

That's not where we are. We just laid out for you what we need to do, and that is to generate the 350,000 tons of waste into those facilities so that they can create the kind of value that we think is inherent in this franchise. And at that point in time, then there's -- I think that's a bit longer term. And I think we understand that we have a very limited amount of time to get this done. We need to get it done as quickly as we can, and I think we are completely aligned on that. It's not a two-year play --

Well, I think if we were completely aligned -- I think if everyone really thought that that was true, it wouldn't be $4.23, down $0.50. I mean that's -- it is what it is.

I mean we are all main shareholders, John, and we're aligned in terms of trying to create as much value for all of our shareholders.

Okay. As long as you are willing to sell the Company if people come in with offers, great. Okay. Thanks.

Thanks, John.

You're welcome. Thank you.

Thank you and I'm not showing any further questions in the queue. I'd like to turn the call back over to management for any further remarks.

Thank you, folks. Appreciate everyone's participation today. Look forward to you all being on our call in June for the fourth quarter. Thanks.

Bye.

Ladies and gentlemen, thanks for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.