Casella Waste Systems Inc (CWST) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems fourth-quarter 2013 financial results conference call. At this time all participants are in a 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 conference being recorded. I would like to hand the conference over to Joseph Fusco. Sir, please go ahead.

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'll be discussing our fourth-quarter and fiscal year 2013 results. These results were released yesterday afternoon.

Along with a brief review of those results and an update on the Company's activities and the business environment, we'll 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 at IR.Casella.com.

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

Thanks, Joe. Good morning and welcome to our fiscal year 2013 fourth-quarter conference call. Our goal today is to discuss the fourth-quarter results, discuss guidance for fiscal year 2014, and to update you on our midterm strategy. I'll start with a brief overview, Ned will take you through the numbers, then Ed will provide an update on the steps that have been taken over the last three months to improve operating performance in the business.

As we stated in our press release yesterday afternoon, we are quite pleased with where the business exited our fourth quarter and the excellent progress we're making against the midterm business strategies. Our results in April were the strongest we've had in over 12 months and helped us to achieve our objectives for the fiscal year.

In early March, we announced a comprehensive plan to improve operating performance of the business. The plan focused on management attention in four key areas we have effectively called [hair on fire] initiatives — placing the right people rightly in the right roles; sourcing incremental volumes to the landfills; improving collection, route profitability; and completing the multiyear Eastern region strategy.

During the first two months of our fourth quarter, our business continued to lag year over year as we worked through the various leadership changes and our efforts began to take hold. However, in April we reached a tipping point. It is our belief February and March we hit bottom, and in April we reached a tipping point with adjusted EBITDA up $1.1 million year over year on increased landfill volumes, improve performance at our hauling companies, and continued success with our Eastern region strategy.

More importantly, we're seeing same positive volume and operating trends continue through May and into June. We believe that this dramatic improvement in financial performance is directly attributable to our focused efforts over the last six months, and we expect to further these efforts into fiscal 2014.

Ed plans to run through a number of details regarding each strategy, but I'll first touch on some high-level points regarding our game plan and wins. As previously discussed, we firmly believe as a management team that the waste business is a local market business, and our success is highly dependent on strength and leadership capabilities of our local operating teams. As such, we have worked hard since late December to ensure we have the right leaders in the right roles throughout the organization, and that we are establishing the right incentive compensation to align individual objectives and create long-term shareholder value.

To accomplish this we worked extensively with the local and regional teams to evaluate leadership technical skills across a number of key roles to further evaluate the balance of skills across the teams. As part of the process we replaced roughly 20% of our operating managers across the business and are confident today we have the right leaders in the right roles to succeed in fiscal year 2014.

On the landfill front, we've made excellent progress. It's an area where at this point I have a real opportunity to spend a great deal of time and passion, rolled up my sleeves, and gotten involved in helping realign the landfill management structure; and more importantly, have been out on the road actively finding and contracting new volumes.

We set a goal to increase landfill tons by 500,000 tons this year and believe that getting capacity utilization back to the 2011 levels will add over $12 million of adjusted EBITDA. We have a number of areas that we are pushing to source additional tons to our landfills, most notably working with out-of-market strategic partners to source waste from areas where we don't operate today, getting a real strategy from concept to reality, sourcing tons from Canadian markets, and approaching special waste and remediation segments with a strong technical team.

Excluding the tonnage contribution from the Worcester landfill last year, landfill tons were up 125,000 tons year over year for the two-month period of April and May. This contrasts to February and March, when tonnages were down 40,000 tons year over year.

We had a big number of wins in April, and we expect the majority of these jobs to continue into the summer months, or in certain cases, for a multiyear contracted period. In addition, our progress pipeline is quite robust, ending our highest waste generation months.

On the Eastern region, we continue to make great progress towards improving profitability and cash flows for our underperforming Eastern region. Over the past year we've accomplished a number of significant goals that improve the asset mix and integration of this market, including increasing the permitted Southbridge to 405,000 tons; December 31 closing Maine Energy and transferring waste through the newly constructed Westbrook transfer station; completed the BBI acquisition; and successfully were able to have a settlement — negotiate a settlement and zoning change with the town of Bethlehem on the expansion of that facility.

We expect to further improve operating performance of the Eastern region over the next two years through anticipated divestiture of low-margin business — C&D business — and the expiration of the high out-of-market Ogden put or pay contract. To date we've improved adjusted EBITDA margins from roughly 15% last year to be on track to be north of 21% for this year.

With that, here is Ned with the numbers.

Thanks, John. Before running through the quarter, I wanted to discuss the amendment that we received to our senior secured credit facility on June 25. To be clear, we were in compliance with all of our debt covenants on April 30, and we were projecting to be in compliance going forward.

However, we sought this amendment to increase our liquidity and headroom against covenants going forward. On April 30, our total debt to EBITDA was 5.37 times against our 5.50 covenant, which gave us roughly $11.5 million of true availability or liquidity.

As part of the amendment, we loosened the total debt to EBITDA covenant to 5.85 times for April 30, which gave us roughly $44 million of liquidity. In addition, we loosened the interest coverage covenant in future quarters.

In recognition of this additional flexibility, we agreed to tighten our senior debt to EBITDA covenant, reduce the amount of CapEx we can incur in a given fiscal year, and we added a new pricing level to the grid for total debt to EBITDA greater than or equal to 5.5 times. The amendment was filed as an attachment to the 8-K yesterday afternoon.

Moving on to the quarter. Revenues in the fourth quarter were $108.7 million, up $2.3 million or 2.2% year over year. Solid waste revenues were up $3.2 million or 3% year over year, with the increase mainly driven by acquisition activity, higher organic volumes, higher collection and energy pricing.

Revenues in the collection line of business were up $3.8 million year over year, with price up 1.5% and volumes down 2.3%. Volume weakness was most pronounced in the rolloff line of business. Rolloff pricing was down negative 0.7%, and volumes were down 6.4% due to continued challenges in the construction market across the Northeast, lower work associated with drilling sledges, and the loss of permanent rolloff accounts in the major accounts segment. We saw rolloff both rebound strongly in April, with pulls up over 1,000 pulls year over year, after being down in both February and March.

Our pricing programs in the commercial and residential lines of business remained on track, with positive 2.2% pricing in the quarter. Revenues in the disposal line of business were down $600,000 year over year, excluding the closure of the Worcester landfill, the divestiture of Maine Energy, and the acquisition of BBI transfer stations.

Pricing was slightly down in the disposal line of business, with lower MSW pricing due to mix and higher priced special waste streams. As John previously discussed, the fourth quarter was a story of two halves, with landfill funds down roughly 40,000 tons year over year in February and March, and then up 58,000 tons year over year in April as our sales efforts began to yield new work.

Recycling revenues declined $500,000 or 5% year over year, with the drop in recycling commodity prices driving the decline. Pricing for most classes of commodities were down year over year, with fibers down 15% and mixed containers down 22%. We expect commodity prices to remain soft in fiscal 2014 until China loosens its Green Fence regulations.

Recycling shipped tons were up 14.6% year over year on continued adoption of our Zero-Sort recycling offerings.

As you will note in our filings, we have renamed our major accounts group to the customer resource solutions group as an effort to broaden the scope from only traditional multi-site customers to other high-end customer groups, such as industrial, municipalities, and ecologists. The customer solutions groups' revenues were down $400,000 year over year, mainly because of lost Oakleaf accounts.

During the quarter, we acquired $5.3 million of revenues and we divested $1.8 million of revenues. Adjusted EBITDA was $19.4 million in the fourth quarter, down $600,000 from the same quarter last year. Adjusted EBITDA was down $300,000 in the collection line of business, with higher pricing and the BBI acquisitions offset by higher volumes in the rolloff line of business.

Adjusted EBITDA was down $2 million in the disposal line of business, with the decline primarily driven by lower performance in the Western New York and Pennsylvania landfills. We partially offset these landfill declines with higher volumes at the Southbridge and North country landfills as we ramped tons to both sites. Adjusted EBITDA was down $600,000 in recycling line of business due to lower commodity pricing, partially offset by the higher volumes.

We exited the fiscal year on a strong note, with adjusted EBITDA up $1.1 million year over year in the month of April after being down both in February and March. This same positive year-over-year trend continued into May.

Cost of operations was up $3.4 million year over year in the quarter, with the majority of the dollar increases resulting from the newly-acquired BBI operations, while the percentage of revenue increases were mainly driven by lower operating cost leverage across the business.

General and administrative costs were down $300,000 year over year, excluding the $700,000 of legal and consulting costs that we incurred during the fourth quarter as part of the New York State tax matter settlement. Depreciation and amortization costs were down $800,000 year over year, largely due to the lower depreciation at Maine Energy, partially offset by higher landfill amortization and higher D&A associated with BBI.

There are a few unusual items in the income statement this quarter that I'd like to run through quickly. Item 1 — we recorded a $3.7 million loss from discontinued operations related to the planned sale of our only construction demo processing business. We reclassified this negative cash flow business as held for sale during the quarter as we work toward finalizing a sale.

The tax provision in the fourth quarter excludes the $800,000 expense that was recognized during the quarter to satisfy all alleged actual or potential tax deficiencies in New York State as part of the settlement agreement. We paid the cash taxes in May.

Yesterday afternoon we announced revenue, adjusted EBITDA, and free cash flow guidance for our fiscal year 2014. For this year's plan, we approached the budgeting process in a slightly different manner, and you could say a more conservative manner then past periods, with the most notable change being our risk yield on newer cyclical business that was not under contract or had a high probability of being under contract.

We believe that we introduced further conservatism into the process this year by delinking incentive compensation goals from the budget. Incentive compensation targets now are based on adding economic value added, or core EVA, year over year — not to budget goals.

Our plan for the fiscal year assumes economic activity remains soft with limited GDP growth in the Northeast. We have assumed that landfill volumes decline an additional 100,000 tons year over year on conservative, project-based assumptions; and we've assumed that recycling commodity prices decline another 3% as the Chinese Green Fence remains in effect.

One item to note for the budget year — we have recast our operating segments for fiscal 2014 to better reflect the day-to-day management of our business. The most significant change is the move of our organics group from the Eastern region to the other segment. The organics group had $35.3 million of revenues for the fiscal year ended April 30, 2013. So that revenue will now move from the solid waste group into the other segment going forward.

And with that, I'll hand it over to Ed. Thank you.

Thanks, Ned. Good morning, everyone. As Ned has walked through the results for you and we finished the year pretty much as expected, so I thought I would spend my time talking about the significant progress we've been making behind the scenes to structure and position ourselves for success going into fiscal 2014. John mentioned that we had a strong April, so we are cautiously optimistic that the things we are putting into place are starting to produce results.

On the last quarterly call in March, I went into quite a bit of detail about what I had learned from visiting all of our sites and talked about some of the immediate changes and new strategies we are putting into place. Without repeating the history and reasoning that I went into before, I thought I would just list the changes, and we can certainly going to the detail if you have questions at the end.

First and foremost, we have successfully changed the culture of the business from corporate centric to local market centric, empowering and supporting local management teams to control any decision-making that affects a core function of their operations, 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.

Consistent with our change from a corporate centric management structure to local management empowerment, we've had to make some changes in personnel. Over the past few quarters we have replaced 6 collection managers, 2 landfill managers, and various lower-level managers. And we are really happy with the new talent we've been able to recruit to the Company.

We've also established Randy Jensen as the new Regional Vice President for the Western region, who is proving to be a great addition to the team; and moved our former Regional Vice President, Larry Shilling, into a new position to focus on landfill marketing and development.

Under Larry, along with our landfill sales team, we've established a new team to focus on special waste. This team consists of 2 new technical staff and 1 new dedicated sales position focused specifically on identifying new special waste sources and providing expedited permitting capability to authorize our landfills to take that waste.

We've introduced a new incentive plan at all levels of the Company, based on improvement of economic value added. For those of you not familiar with EVA plans, they incorporate the cost of capital employed into the measurement of performance, and this is considered the best measure of creating shareholder value that can be deployed at any level of the Company.

We've introduced a new sales commission program that allows flexibility at the local level. Every market is different. We have growth markets and we have retention markets that require different types of sales activities, and we want local management to have the flexibility within a framework to incentivize their sales staff to do the things that create the most value for the division.

We've implemented route profitability tools and focused our collection management teams on improving route profitability using a three-step approach — continual logistical routing for efficiency, analysis of off-route customer anomalies that affect profitability, and on-route marketing programs designed to increase density.

We formed a new support group at the corporate office that we call Casella Customer Solutions. This group incorporates the staff that handles our municipal bids, colleges and universities, national accounts, and industrial solutions under one umbrella. The big difference here is the way the group functions. It's bottom-up versus top-down. Opportunities are identified and pursued at the local level, and this group is brought in as the specialists that can help present the best solutions to the customer in the most professional manner possible.

These changes may seem pretty simple, but they are already making a significant difference. As we mentioned, April was a very strong month, and we have started the new fiscal year strongly as well.

Two months don't make a trend, but we do believe we now have the right people in the right places. We have the right incentive plan, and we're properly focused on the main needle movers to our financial performance — that's disposal volumes at the landfills and route profitability.

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). Corey Greendale, First Analysis.

Congratulations on the progress. I've got a couple questions for you. So when you look at the better trends in April, May, June, can you break out for us what the drivers are; how much of that is the economy; and whether — how much of it is each of the initiatives you're working on, like how much was incremental volumes coming into the Western New York landfills? Just some more detail on the drivers would be helpful.

I'm not sure we can break it out in detail for you, or that it would be appropriate to do that until we announce the first quarter. But the main drivers are we are having success on the disposal side. We are starting to bring in new volumes into the landfills, and we are having success on the route profitability initiative, where we're taking trucks off the road and decreasing route days.

Okay. And then kind of in light of those trends, it's hard not to come away with the impression that the guidance is potentially conservative; and certainly, I understand the perspective of referring to beat as opposed to missed numbers. But can you just give a sense of how much — how conservative you think the guidance is and where the upside might come from?

That is a tough question to answer 50 days into the fiscal year, Corey. We approached budgeting in a much different fashion this year. And you know, the guidance we laid out bookends our budget. And we thought it was prudent to stick with that guidance as we get into the fiscal year.

And if we overachieve, like we have done so in — early in the fiscal year, we'll be able to be more constructive and have those conversations. But I think as we sit here today, as I laid out in my comments, we actually put together a budget that has landfill tons going down 100,000 tons year over year. We have recycling pricing coming down, which should hit EBITDA as well. And we had a pretty lackluster kind of forecast for collection volumes and other volumes through the business.

So, you know, we just — given some of the stresses we've had over the last 18 months, we don't want to get ahead of ourselves. We've got a very good plan as a management team. We're all very well aligned and will continue to execute against it.

What is your commodity price assumption in the guidance, and how does it compare to what you're seeing right now?

Yes, so we have assumed that commodity prices come down about 3% to 4% through the year. We saw some rebound from last October, where we hit a low. And in fact, in March we had reached an average commodity price per ton a little bit north of $110 a ton. And with the Chinese Green Fence in place, we're kind of down into the mid to high 90s right now, say $96 a ton in the month of June.

Our guidance for the year had us right around $100 a ton for the full year. $100 per ton on average. So we're sitting a little below today, but generally we believe that the markets will begin to rebound in the late summer to fall as the Chinese reenter the market.

Okay. And then also hoping you could elaborate on the CapEx guidance that it's coming down a fair amount? I assume part of it is because you are parking trucks. But can you just give a little bit more detail on the drivers of the decrease and what you think we should be thinking about as kind of the go-forward CapEx, if this level is not sustainably low?

You know, in theory, it's not really coming down that much, Corey. Because if you look at last year and you look at the composition of our CapEx for fiscal 2013, we had roughly $41 million of maintenance capital and $12 million of growth capital. We really are not investing in much growth capital for fiscal 2014. There will be some containers, some new accounts, and various items like that that are $1 million to $2 million in our budget.

But besides that, we're sticking to just investing in the core assets and maintaining those assets. So you know, our guidance of $42 million to $44 million is very much consistent on what we spent on maintenance in fiscal 2013.

Okay, thank you.

Al Kaschalk, Wedbush Securities.

I'm going to drill a little bit further on this landfill volume tone, and then maybe overall volumes in the business. I think I heard 100,000 decline you're budgeting for 2014. Can you put some of those pieces together? I know you may have dispersed them throughout some of the various prepared remarks, but it seems to me that that number should be going the other way as opposed to up. And I'm wondering if it's more a function of pushing away some business that may be — is it profitability oriented, or is it still economic challenges in the regions?

No, I think it's simply our approach to the budget and the forecast this year, and that over the past few years we have included a certain block of what we call goal tons into the landfill. They are event-based. And certainly, the Western landfills in New York are pretty dependent on those goal tons.

And that puts some exposure to us. I mean, if the goal tons don't materialize, then we are going to be short of our forecast.

So what we decided to do this year is only put in tons that we have high visibility on; and of course, when you do that, the tons farther out — like third and fourth quarter — we don't have a lot of visibility on. So we reduced the volumes there. And as the year progresses, then we can increase our visibility on whether we're going to get those goal tons or not.

So if you do not pick up incremental, or shall we say, shadow business — in other words, that's in the pipeline but not closed, and execute on everything you have in the pipeline, should volumes be down only 100,000, then?

I think the point is — we might be confusing matters; I apologize. Corey had asked the question, is our budget conservative? And probably we really aren't going to answer that in certain ways, because we put out guidance just yesterday.

However, reading through that commentary, we do have tonnages down 100,000 tons year over year in our budget. So if we are able to gain 100,000 tons, that would be upside to our current budget — or gain 200,000 tons would be significant upside to the budget.

Let me just clarify this. The reason you have got a 100,000 volume decline on the budget is a function of a change in the way you are guiding? Or is it a change because of the various things you're moving around with the business, that the capability of the system and the forward calendar suggests still softness in the economy?

Because across — I would argue across the industry that everyone is seeing a net tick up in volume, but they don't have a lot of the moving parts that you do. So I think there's two parts. One, it sounds like there's a change in the budgeting or the forecasting, which would dictate speculative work you are not incorporating in as a function — versus the business is just worsened than it has in the year-ago period.

That's exactly right. It is a change in methodology of budgeting and forecasting versus a change in view of the business environment or our ability to get tons.

Okay, so I think all of us should be on record here, right, that your ability to hit — to be no worse than 100,000 down would be — you didn't get any further closure on some things in the pipeline versus just the economy softening further.

Exactly.

And then secondly, Ed, I don't know if it's possible, but I would like to hear maybe some of this discussion about route profitability and how that translates to margin performance for the business — and whether this is still to be seen coming through the business, or if you've got a lot of the lower-margin business out of the way and 20%, 21% EBITDA margin is what we should be thinking about going forward.

I can talk quite a bit on that subject, but I'm limited by time. You know, part of the route profitability program — I talked about there were three stages. The first stage was to go out and reroute the customers that we have. This is a process that in most companies, good general managers are focused on their routing, the efficiency of their routes on a regular basis.

Over the past four or five years, Casella had centralized a lot of those functions and taken them off the plate of the local management, and then ran into problems where it just wasn't focused on a weekly basis like it should be. What we've done is pushed it all back out to the field. We've asked everybody, okay, take a fresh look. Reroute all your trucks now is step one to this route profitability initiative. And we were pretty surprised at how many route days we were able to eliminate just on that basis.

Now, the second step, which has not happened yet, is to evaluate the anomalies on those routes. Are there customers based on a philosophy in the past that seek volume growth? We reached farther for certain customers. And are there customers on those routes that are making the route less profitable?

And we need to address that, then. We need to go to those customers, figure out whether it's a price increase, or what to do to remedy that situation. And then the third step, which we have really not done yet, is to market on-route to increase the density once we have the routes where we want them.

Now, I say we haven't started those second two phases, but in the companywide, there are many divisions where their routes are very well designed. And they're not getting much of a benefit yet. So we're already marketing on-route in those divisions to increase density.

Coupled with all that, we introduced this economic value-added incentive plan, which puts a real incentive on the plate of the general manager to take a truck off the road. If you can reroute enough, reduce enough route days to eliminate one truck, you've eliminated the driver and the cost of the vehicle — the repairs, the maintenance, the capital costs.

It has a significant effect on EVA for that division and should tie to their incentive, but it also has a really good effect on our margins. Quantifying that is a case-by-case basis. You have to look at the individual divisions and how much savings there is. But that is the whole plan, and it's going well.

Are you able to think about or share with us how much margin could come from this exercise/program over a reasonable period of time?

I would hate to throw a number out there, because it all depends on what we find.

Thank you.

Joe Box, KeyBanc Capital Markets.

Hey guys, this is Andy filling in for Joe. Good morning. I wanted to just quickly touch on the SG&A. It looks like as a percent of revenues, you kind of finished out the year around 12.8%. I know you guys had talked about previously kind of a goal around 12%. I'm just curious if that is something you are targeting in FY 2014, or how you're kind of thinking about SG&A relative to your guidance?

Yes, the fiscal year 2013 — we discussed one unique item that ran through G&A in the year, which was roughly $700,000 of legal expenses we spent to settle the New York State tax matter that had been ongoing for a number of years. That was money well spent and reduced our risk exposure.

There also — as we have discussed in previous quarters where we had some additional G&A in the numbers associated with our acquisition of BBI, which we've mainly taken out through various synergies to date. So going forward, our goal is to get down less than 12%, and we continue to strive towards that goal. And you'll see us talk about that again in the future.

For us it's probably a little bit more of a leverage issue today, where higher revenues will help with that goal. We've done quite a bit to restructure our business and take various costs out, and I wouldn't say we have a G&A cost problem today or low-hanging fruit to achieve. It's more of we won't need to grow G&A as we grow as a business, and we could hold the dollar number flat while we grow revenues.

Sure, that makes sense. And just kind of switching gears, I wanted to kind of piggyback on, you know, you talked about the commodity pricing side of things. But on the volume side of recycling, your guidance kind of talks about flat volumes, and yet you guys have kind of talked about continued modest positive growth from expanded Zero-Sort offerings. Just trying to kind of reconcile those two statements and try to get a grasp of where volume could go this year to combat the pricing you talked about.

On the one hand, at the residential level and the commercial level, the actual collection level, recycling activity is continuing to increase. So you have, particularly in the Eastern markets, say, Massachusetts, there is a lot of room for improved recycling rates at the municipal level and at the commercial level. So we expect the market to keep growing.

The reason we stayed flat on our forecast is because there's additional capacity coming online for processing recyclables. So until the market absorbs that capacity, as — it hasn't come on yet. So as it comes on, until the market absorbs it, we don't want to continue to think that we're going to be getting increased volumes even though we're pretty well positioned in the market.

Thanks. And then lastly, Ned, I just wanted to touch on — if you could — I think I missed it in the prepared remarks, but if you could just give us the bank-calculated debt to EBITDA again for Q4 and confirm that that new covenant was 5.85 times?

Yes, so the calculated covenant was 5.37 times for total debt to EBITDA for the quarter ended April 30. And in the 8-K we filed yesterday, we had the full text of the amendment, you can see the levels for each of the amended covenants.

I just wanted to kind of get your perspective there. You know, in conjunction with the free cash flow guidance you gave -- that you guys put out. Is there still a focus, then, in the near term on some debt paydown? Or was this sort of new covenant meant to give you guys a little more time? How are you kind of thinking about that as you go forward?

Great question. This liquidity issue is really in response to a number of questions we had on the debt side of the business, which is — we were running generally close to covenants, and we had a step down in our previous covenant package on April 30 from 5.75 times to 5.50.

It's not an indication that as a management team or a company we're deviating strategy and we plan to incur more indebtedness. On the contrary, we would love to pay down more debt and do it more quickly. It's just a matter of gaining liquidity and having more room to alleviate any stress in the marketplace on the debt side.

That sounds good. Thanks, guys.

Thank you.

Brian Butler, Wunderlich Securities.

First one, just to touch back on the landfill guidance or the landfill volume guidance, and you talked about the pipeline — kind of those project pipeline being pulled out. Can you give a little color where the pipeline stands today versus where it was a year ago?

I would say the pipeline is generally stronger, but it's — we have new resources in the landfill sales side. So we're building the pipeline as best we can, but the visibility still on third and fourth quarter is pretty cloudy.

And do you have the data for what that project work was in fiscal year 2013 — what level of volumes that was?

Special waste volumes are about 40%, aren't they?

Yes, 40%. But that's not the answer to the question, though. Historically —

Yes, I don't have it in front of me. We would have to go to our database, our CRM database, and just take a snapshot last year entering the summer months, where our pipeline was. And then the second part to that question is one of the things we're tracking very particularly this year is anything that's in our pipeline — is it included in the budget or not included in the budget?

And as I'm looking at a list of pipeline contracts, most of them are not included in the budget this year. So the risk profile is different. And I would hazard to guess if I looked at a similar list last year and we put that together, most of those items were in the budget last year. And that's the point we're trying to make, that it's just a difference in risk profile to our guidance of — we're still looking to achieve as many of those tons as possible, which would give the upside to the year.

Right, great. Okay. That makes good sense. And when you think about looking — going after, I think John said, 500,000 of incremental tons, mostly, I'm guessing, on the Western region, can you also give a little color on what kind of growth opportunities from a landfill perspective or landfill volume perspective do you have in the Eastern market, where you have the higher utilization? I mean, is there still good growth opportunities there for volumes?

Yes, there is, Brian. There is significant opportunity there. It's also — we're also running very close to our permitted Southbridge. So it's an opportunity to improve pricing in the Eastern region as well.

And of course, I think that the market is certainly favorable in terms of some capacity coming out of the market. Not only our capacity, but there is other capacity that's come out of the market as well in terms of Moorestown. So there's positive opportunity, both from a volume standpoint, but also from our pricing standpoint, too, to begin to move pricing at the disposal facilities in the Eastern region in particular.

Just to be clear, is any of that kind of opportunity on the price of the volume side in the Eastern region, is that in the current guidance? Or is that really more upside from where we are today?

I would characterize it as more upside than being in the plan itself.

Okay, great. I wanted to touch on — I think you mentioned that you had lost a couple — or you lost some volume to the Oakleaf for — sorry, lost some accounts on the Oakleaf. Is there any continued headwind on that going forward through 2014 of accounts rolling off and being lost to Oakleaf?

No, we have already felt the full impact of the Oakleaf transaction with Waste Management. So no, there's no further impact from that at all in 2014.

Okay. And then last question is on the discontinued ops, what booked value on the assets are out there for that part of the business?

Yes, so as part of that charge that we took that you see on the disco line — $3.3 million of the $3.7 million in the quarter was a write-down of assets.

Okay. Did you write them down to zero?

Near to zero. I think to less than $100,000.

Okay, that's all the questions I had. Thanks.

Thanks, Brian.

Sam McGovern, Credit Suisse.

Hey guys, thanks for taking my questions. On the credit facility side, I just wanted to double check — that pro forma for the amendment, you said the availability was $44 million at April 30. Is that right?

Roughly $44 million. It was — our new tightest covenant is the total debt to EBITDA covenant of 5.85 times. And we came in at 5.37 times, which — I'm looking for some calculations. Our bank covenant EBITDA was $93 million for the quarter ended April 30. And from a true availability standpoint, that put us at roughly $44 million of liquidity for Q4 with the new covenant package.

Got it. And so what do you think of as sort of a comfortable range for liquidity? Because I think you said on an actual basis, you only had $11.5 million of liquidity at April 30, which seems pretty low.

Yes. So we typically try to keep availability on the revolver north of $50 million is generally a management goal. It ended the year at $69 million, so we were within that standard.

But for true kind of liquidity or availability, $25 million would be kind of a bare, minimum. We feel more comfortable with where we are today at $44 million.

Got it. I know during the quarter you guys did a bunch of revenue bonds to help improve liquidity. Is there more to do on that, or have you guys used up the availability right now?

No, great point. This is an excellent mechanism for solid waste companies to better match the tenor of our assets to the tenor of our debt. We did two bonds in the quarter, a Vermont bond and a New Hampshire bond, and they have maturity dates — 23 years on the Vermont, and I believe 16 years on the New Hampshire bond that are well out into the future.

And we were able to — you know, both of them are within IRS solid waste tax exempt standards. So we're able to yield very good interest rates on each bond.

And the New Hampshire bond in particular has a drawdown structure which allows us to draw down an additional $5.5 million on that bond within the current indenture. So you'll expect to see that in the coming months for us to at least do that $5.5 million.

And then going forward as a company, we'll try and do some more of these bonds going forward in other states and on other projects, because they are very good matching of our asset lives to debt life.

Got it. And then in terms of your definition of free cash flow, I knew your guidance is sort of $4 million to $8 million dollars. Is that going to be a decent proxy for the improvement of the cash balance or the liquidity on a go-forward basis? Or are there other line items below your definition of free cash flow that could cause that to sort of tighten up a little bit more?

You know, we try to match our definition of free cash flow to changes in debt balance. But you're right, there are some additional items that might fall below that line, one of which would be money spent on acquisitions or other kind of investments. And as a management team, we do have a goal to pay down debt and to produce real free cash flow.

That would be our goal, and generally, that definition does match. In the last fiscal year, you know, our free cash flow was roughly negative $12 million, and our debt went up right around $15 million. So it was up a little bit more, and that was around some of the acquisition activity during the year.

Got it. So on the acquisition front, since you are below your liquidity target of $50 million, and you're up $44 million. Do you have the appetite to do cash-based acquisitions? Or would you guys — how would you guys sort of look to do acquisitions if there are any in the pipeline?

I think we're going to continue to look at the tuck-in type of acquisitions, which are highly accretive. But I think we'd tend to be conservative. This is a good year for us to focus on our knitting, and really get the margins back to where they belong, and get the disposal volumes in, and that remains our main focus.

Got it. Thanks, guys, and I'll pass it along.

Thank you, and I see no additional questions on the phone lines.

Very good. Thank you, everyone, for joining us and look forward to joining us at our second-quarter conference call in early September. Thank you, everyone, and have a terrific day. Thanks.

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