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Executives

Joe Fusco – VP

John Casella – Chairman, CEO & Secretary

Paul Larkin – President & COO

John Quinn – SVP, CFO & Treasurer

Jim Bohlig – SVP, Chief Development Officer & President of Casella Renewables Group

Analysts

Bill Fisher – Raymond James

Eric Prouty – Canaccord

Corey Greendale – First Analysis

Jonathan Ellis – Merrill Lynch

Casella Waste Systems, Inc. (CWST) F3Q09 (Qtr End 01/31/09) Earnings Call Transcript March 5, 2009 10:00 AM ET

Operator

Good day everyone and welcome to today’s Casella Waste Systems Incorporated Q3 2009 conference call. Today’s call is being recorded. At this time I’d like to turn the call over to the Mr. Joe Fusco, please go ahead sir.

Joe Fusco

Thank you for joining us this morning and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems, Paul Larkin, our President and Chief Operating Officer, John Quinn our new Chief Financial Officer and Jim Bohlig, our Chief Development Officer. Today we’ll be discussing our third quarter fiscal year 2009 results. These results were released yesterday afternoon. Along with a brief review of these results and an update on the company’s activities and business environment, we’ll be answering your questions as well; but first as you know I must remind everyone that various remarks that we may make about the company’s future expectations, plans and prospects, constitute forward-looking statements for the purposes of the SEC’s Safe Harbor provisions.

Actual results may differ materially from those indicated by those forward-looking statements, as a result of various important factors including those discussed in our prospectus and other SEC filings. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and therefore, you should not rely on those forward-looking statements as representing our views as of any date subsequent to today. Also during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial table section of our earnings release, which was distributed yesterday afternoon and is available in the Investor Section of our website at www.casella.com.

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

John Casella

Thanks Joe. Good morning and welcome everyone to our fiscal third quarter conference call. First I would like to introduce the newest member of our senior management team John Quinn. John joined the company in early January as our Chief Financial Officer. He brings over 25 years of solid waste finance experience to the team. He is already making a strong contribution with his work on our senior debt refinancing. John will take us through the numbers and then Paul will run through an operating summary and Jim give an update on the development activity. First a little bit of an overview for the quarter. Third quarter is, I am sure you are aware was extremely challenging quarter. The recycling group faced unprecedented headwinds as global commodity markets collapsed in November. In addition, we began to experience negative revenue impacts in solid waste business as a widening recession weighed on economic activity across the Northeast. Even with this slowing, we are able to maintain our MSW landfill volumes year-over-year. However rollout poles in C&D landfill volumes were up significantly. Our team did rise to the occasion of these challenges, acted quickly with steps to improve operating performance and scale operations to lower market demands.

In the third quarter, EBITDA was down $4.7 million year-over-year there were a number of one-time gains and charges that occurred during the quarter and it is important to cut through the noise to understand the true operating performance for the quarter. John and Paul will spend time going through these issues, but I wanted to take a little bit of time on some high level points on the companies operating performance. Solid waste EBITDA was roughly flat year-over-year in a quarter. The integrated solid waste business continues to exhibit typical recession resistant qualities with pockets of weakness in more economically sensitive markets in lines of business. Overall our people did a great job of flexing cost to match the decreases and the disruption that we have seen from a revenue standpoint. As we began to experience the economic downturn in November and the commodity collapse in November and early December, we took a number of steps to help offset the revenue contraction. I want to emphasis that many of these actions are prior to the comprehensive 18 months effort to improve all aspects of our operating structure and daily business practices, which Paul will take through some of those details with more specificity.

We are focused on making intelligent choices, choices that reduce cost, improve asset utilization, and improve our services to our customers. These are choices that will strengthen the business today, as well as into the future. A little bit of a – again high level overview on some of those actions that we have taken. On the revenue front, we advanced two major pricing initiatives during the quarter. In December and January when we rolled out a solid waste price increase, to date we have experienced limited roll back and the price increase has yielded roughly 6 million of annualized benefit. With a deterioration of the recycling commodity revenues, we actively worked with the majority of our municipal and commercial customers to increase tipping fees and processing fees and restructure some contracts. This work has resulted in a 9.6 million annualized benefit with only a limited benefit in the third quarter. Also I want to point out that commodity pricing has begun to see some improvement. Not much of this has worked its way through our numbers because pricing was far below our floors over the past three months, however it is positive to see emerging markets stabilization. Three factors are emerging which could further help to rebound – help the rebound of the commodity pricing.

The Chinese economy is beginning to pick-up mills of manufacturing facilities that were idle are again taking orders and need materials. The global recession has resulted in less recycle commodities, which in turn is causing us a supply shortage, and we expect to see US in global stimulus packages will help drive demand for one of the lowest price commodities which is steel, as well as other metals. As – I am sure some of you are aware recycle steel is used primarily in rebar. On the cost side, we pursued strategies in both to offset temporary business issues and make long-term structural changes. Over the last four months of the fiscal year we’ve cut discretionary variable cost by 4 million. Since February 2008, we’ve reduced our workforce by roughly 9.1%, mainly as a result of reducing labor to match lower volumes, fleet optimization, and reorganizing nine operating divisions into four new market areas, all resulting in an estimated 10.5 million annualized benefit. We had expected further contraction as we complete our MERV [ph] conversions at our Boston and Philadelphia operations and in December we froze new hiring eliminated merit pay in our management performance bonuses, as well as impacting 401K.

Starting on March 15th, we plan to outsource our long-haul transportation in remark to MVI to the national transportation company, primarily moving a solid waste. Saw a great sustainability initiative; first from an economic standpoint where we will reduce our operating cost by about 750,000 per year and also importantly on a go-forward basis, we will reduce our ongoing capital fleet requirements. It also makes a positive environmental impact by eliminating 250,000 over the road miles, as well as 850 tons of carbon-dioxide. In addition to the benefits gained during the quarter from pricing in operating cost initiatives we reduced our capital expenditures by roughly $17 million from our projected fiscal plan – ’09 plan. The capital reductions are mainly as a result of our fleet routing optimization efforts, lower landfill volumes and expected for year-to-date, routing initiatives have improved assets utilization and will allow us to redeploy trucks instead of buying new equipment, and we expect to continue flexing capital to match volumes. As we laid out in the press release, we are maintaining our free cash flow guidance or $18 million to $14 million for the year. Year-to-date free cash flow is up $4.6 million over last year. And with that here is John to take you through the numbers.

John Quinn

Thank you John and good morning. Revenue for the quarter ended Q3 2009 decreased $19.7 million to $121.2 million or a decrease of 14% compared to the same quarter last year. Of the total revenue decline, the company’s FCR recycling operations accounted for $12.9 million of the decrease and the solid waste group at $7.3 million. Other revenue increase $4,000 mainly result of major accounts growth. The main driver of the revenue decrease was the dramatic fall in commodity prices. The FCR revenue fell 38.2% driven by a 30.8% decline in price and a 7.4% decrease in volume. At FCR, we saw a commodity price declines in October, but the drop accelerated in November when the market hit bottom for the quarter. Since that time we have seen prices stabilize and improve slightly. When considering this revenue decline it is important to look at it in conjunction with the cost of operations and I will come back to that discussion in a moment. The solid waste operations internal growth was negative 7.7%. Within the solid waste operations there is a small recycling component. As such pricing and volume within the solid waste group contributed 1.7% to the revenue decline. Solid waste volumes were lower by 8%. Lower solid waste volumes included reductions at our Pine Tree and other landfills that are in the closure phase and – at closure of our recycling facility, C&D recycling facility. Excluding these three items the drop in solid waste would have been a more modest 3.6%. Again within the solid waste group, landfill revenue declines contributed 1.2% to lower volumes and we continue to see the roll-off line of business – being impacted by the construction slow down.

Pricings, net of fuel recovery fees declined for the solid waste operations was favorable by 2% with all lines excluding the commodities reporting increases. Fuel and environmental surcharges were down $474,000 from the prior year accounting for a negative 0.5 impact to that reported price number. However, fuel for the quarter was lower by $2.2 million showing that the net impact of fuel recovery charges was positive overall. Revenue for the quarter breaks down as follows and since we have revised, our prior amounts reflect discontinued operations. I will give you both the current and prior quarters. The solid waste revenue for 2009 for the quarter, $91.5 million compared to $98.8 million for the prior year. FCR revenue was $20.9 million in 2009 and $33.7 million 2008. Other revenue was $8.8 million in 2009 and $8.4 million in 2008. Moving to the cost of operations, for Q3 2009, cost of operations was $85.5 million compared to $96.2 million last year, a reduction of 10.7 million or 11.1%. The decrease reflects the lower volumes noted in the revenue section in the lower cost of goods sold in the FCR business. The cost of purchase materials of $7 million lower year-over-year and direct labor was $1.3 million favorable. As mentioned previously, fuel was lower $2.2 million, reflecting the lower average price of diesel year-over-year, as well the volume declines.

Maintenance cost were $1 million favorable reflecting the lower volumes and our continued efforts on improving our maintenance programs. I would like to take a moment to explain a bit about the impact of the rapid decline in commodity prices on the FCR business during the quarter. I mentioned that the FCR revenue was lower by $12.9 million in the quarter. This decline was offset by lower cost of purchase materials of $6.5 million that I mentioned prior to the cost of operations; the net impact of these two items was a $6.1 million decline. We normally expect the impact on margin to be lower, but because we had inventory on hand or made purchase commitments from the municipalities and other suppliers for the portion of the materials, it took the balance of the quarter to adjust the market to the lower prices. During the quarter, we moved our customers to bring materials to our facilities, we used to pay them and we started instituting tip fees at many of our MERV’s. In addition, during the quarter, we were commissioning our new single sort of facilities in Philadelphia and Boston, and as a result incurred extra cost to the labor, transportation, and other. We expect the impact of the inventory adjustments, the cost of good sold, adjustment relative to our tip fees and the costs associated with the Philadelphia and Boston conversions were approximately $4 million, which we did not expect to see repeat in Q4.

G&A cost for the quarter was $13.9 million and were favorable $4.3 million or 23% compared to Q3 2009. The primary reason for the decline was a reduction in compensation associated with reduced bonus accruals and lower salaries and wages creating a variance of approximately $5 million. This was partially offset by an increase in the bad debt expense for the quarter totally $1 million. Moving to EBITDA. EBITDA for the quarter was $21.7 million compared to $26.4 million for the same quarter last year. I would like to note here that the EBITDA does not include the cost associated with the environmental charge we incur during the quarter, which has been called out separately in our 8-K filing last night, and which I will address in a moment. The EBITDA breakdown for the quarter by line of business was as follows. Solid waste group 2009 is $22.1 million compared to $18.7 million in 2008. FCR reported a small loss of $421 million of EBITDA line compared to a profit of $7.7 million in 2008 and other was $51,000 in 2009, $28,000 last year. The solid waste EBITDA was favorable year-over-year primarily due to the aforementioned bonus adjustments offset by imaginary restructuring charge last year. Without those adjustments solid waste results would have essentially been flat year-over-year.

FCR’s EBITDA was $8.2 million on favorable year-over-year, primarily due to the drop of the commodity prices and the result in cost adjusted to lower – the cost associated with adjusting the lower commodity prices as I described in the conference of operations. Depreciation and amortization expense is $2 million favorable or 10.5% favorable from $19 million in Q3 2008 to $17 million in 2009. This degree decreased primarily – is primarily attributable to lower overall volumes at Orlando’s and the closure of our Colebrook facility. During the quarter, we recorded an environmental remediation charge of $2.8 million related to a previously remediation project at one of our transfer stations. We do not expect a bulk of this charge to manifest itself in to cash until sometime in fiscal year 2011. On an after-tax basis, this equates to $0.07 per share. The effective tax rates on a year-to-date basis increased 7.9% as a result of our changed forecast for the year. Lower pre-tax income means a higher tax rate because of adding back the non-deductible item and because we are reporting the small loss the tax rate for the quarter is lower than in the prior two quarters. We expect the rates for the fiscal year to be in the $0.79 range, but the rate will be volatile because the small change in expected income can cause a larger swing in the rate. For Q3 2009, the company’s net loss was $3.8 million or $0.15 per share compared to a net loss of $4.6 million or $0.18 per share in the same quarter last year. The environmental remediation charge in this year had an impact of $0.07 per share.

Last year, we had a management restructuring charge in $1.2 million or $0.03 per share. Adjusting for these two items this year’s EPS would have been a loss of $0.08 per share compared to a loss of $0.15 per share last year. The average interest rate for the quarter was lower due to variable rates at 6.82% including the amortization of financing cost, net of these expenses it was 6.58%. Availability on the revolver at January 31, 2009 was a $142.3 million after taking into account $38.6 million of LC’s outstanding. At the end of the quarter, our total debt-to-EBITDA ratio calculated in accordance with the bank covenants was 4.76 times compared with our covenant of 5.25 and our senior funded debt-to-EBITDA ratio was 3.16 times compared to our covenant of 3.35. Free cash flow for the quarter was $238,000 compared to $505,000 in Q3 2008 a decrease of $267,000. Lower EBITDA of $4.7 million was offset by reduction in capital expenditures of $4.7 million, a favorable change in cash interest of $2.2 million related to lower rates and the timing of interest payments was largely offset by an unfavorable change of working capital all of which netted to the small decline. In yesterday’s press release we provided revised guidance for the year reflecting our Q3 performance and our expectations for the balance of the year. As many of you are aware, our bank facility becomes due in April 2010.

During the quarter we’ve met with almost every bank in our current revolver, as well as a number of banks who are not in our current facility. The feedback we have received from this group has been fairly consistent. What we are hearing is that the banks are open for business, but the term loan B markets are very tight. The bond markets are also active and dealers are getting completed including a number in our sector. We’ve internally launched a process and it is our intention to be in the market before the end of the current quarter. At this time based on the feedback we’ve been receiving from the banks we have met, we will be replacing our facility and issuing a secured bond. Until we go to market we are not prepared to discuss the relative size pricing our other details of the structure, however given the credit markets we expect that the new facility will bare higher interest rates and our interest expense and cash interest will rise by a material amounts. In conjunction with that new facility, we expect to reset our covenants to reflect the higher interest cost and other changes in our projected income and capital spending as determined at the time we launched the deal. And with that I would like to pass the call over to Paul Larkin with some comments on the operating performance of the company.

Paul Larkin

Thanks John. This was a very difficult quarter and we are really pleased with our teams’ ability to drive both growth and operating efficiencies in this rapidly changing economic environment. As John mentioned total company revenue decline 14% with FCR’s revenues down 38% year-over-year and solid waste revenue down 7.7% year-over-year. Highlights for the quarter include, solid wastes price including – excluding surcharges increasing 2.5%, and has now improved for four consecutive quarters, growth in solid waste price reflects 2.1% higher pricing at the hauling and transfer business and a 0.4% gain at the landfills. Given the dramatic changes year-over-year in both fuel and commodity pricing, we implemented a $6 million permanent annualized price increase this past December and January. The execution of this price increase was excellent as we actively worked with all of our customers. During the quarter landfill pricing was very strong in our central and Northeastern regions and down year-over-year in our Southeast and Western regions.

Growing economic weakness in New York and Massachusetts continued away on third party landfill pricing. Despite slight weakening and third party landfill pricing, the Western region had a strong operating performance in the quarter with operating income up 55%, excluding one-time benefits. Landfill volumes were down year-over-year with MSW volumes up slightly and C&D and bud volumes down significantly. Roll-off volumes remain challenging with the continued weakness in construction. We experienced a 19.4% decline year-over-year in poles with the greatest weaknesses in the Southeastern and Western markets. Despite the market challenges, we expanded net revenue per pole by 7% year-over-year. We continued to deliver on a number of sales and operating initiatives that are driving top line growth, improving our operating efficiencies, and our asset utilization. Excluding one-time benefit solid waste operating margins improved 227 basis points year-over-year or 1.9 million our third consecutive quarter of improvement. These strong year-over-year improvements were driven by our continued ability consistently execute against those pricing and operating initiatives. Direct labor cost for the quarter was down 100 basis points and we continue to do a great job of flexing our business while also driving possible new customer growth.

We expect to realize additional operating gains for the remainder of the quarter, throughout optimizations, rear-load to front-load conversions, and contain our upsizing. Our vehicle and container maintenance cost for the quarter were down 45 basis points as a percent of solid waste revenue, we continue to realize improvements from the implementation of our fleet maintenance software, which has streamlined our operations, improved our inventory productivity, and increased our warranty recovery rates. Improvements this quarter were mainly made in parts and repairs, while labor cost were up slightly year-over-year and we expect continued improvement going forward as we continue to drive down our fleet base consistent with our routing initiatives. We also had another excellent quarter for safety programs in the result and risk management costs. Workers comp instance were down 19.5% year-to-date and fleet accidents are down 15.3% year-to-date. During the quarter, we made great progress on our ongoing efforts and reviewing improving all aspects of our operating structure and processes. In particular, three programs had significant impacts.

In long-haul, as John mentioned, during the quarter we entered into a long-haul transportation outsourcing agreement with MBI. He gave you the details around that structure and we are currently analyzing additional lanes in Massachusetts, Maine, and New York. In fleet routing, last quarter we completed an extensive evaluation of a new fleet routing of software applicant within our Burlington and Montpelier markets. With the success in these test markets, we began a phase company-wide rollout. Our routing team is focused now with our five largest markets and we expect season implementations to be completed at the beginning of Q2 fiscal year 2010. We estimate that we will realize approximately 1.1 million of annualized cost savings in FY10 from hourly labor reductions, and reduced fleet requirements. Market area consolidations were our third impact for the quarter. During the third quarter we recognized, we reorganized non-operating divisions into four new market areas improving our performance and our customer service, while eliminating redundant positions.

The focus on this consolidation efforts are operational, packed office and management synergies. In total these consolidation efforts are expected to yield 1.4 million in annualized savings. In the third quarter, we yielded roughly 3.25 million of additional annualized savings bringing our year-to-date total to roughly 4.5 million well above our original 2.0 million target. In summary we are pleased with our execution against operational aspects that we can control, our team is doing a great job using the sale of an operational platforms that we have put in place, to drive performance in this uncertain economic environment. I will turn the call over to Jim a development update.

Jim Bohlig

Thanks Paul. First I will talk a little bit on our development activities and then add a little more color to FCR and US GreenFiber and we will turn it back to John. With regards to Southbridge, which is clearly the principal landfill development project underway, as you recall we have exceeded the sort of assignment issued in June of ’08 as is the standard at least of the expectation if you are in the development stages in New England, issuance of this is a very valuable thing that comes with almost a certainty of the landfill [ph] from the opposition. Their strategy rest upon an effort to try to delay the permit [ph] is obviously try and move forward and accelerate the process and so what is occurring here is exactly within the back drop of having developed over 65 million yards of landfill capacity in New England over the last six years, pretty much consistent with what we would expect and within that frame work, we had moved for a summary judgment of the appealing party is moving for a delay. We have now received a de novo on a summary judgment, which we requested, which was expected and we now enter into the heart of the adjudication, which we expect to have done on the appeal within the next three to five months.

Following that we will complete the solid waste permit modification application to the DEC and we are still targeting for late 2009 early 2010 calendar years to receive our initial permit as we remember the Southbridge facility initially goes to MSW and then has two incremental steps on its way up to 405,000 tons, which we expect to be in the market to be able to take that ways to within about 18 months. The road has been put off to bid and apparently a low bidder has been nominated by the city (inaudible) Southbridge and additionally the town is actively seeking an industrial part business candidate to fill up the industrial part, which is both good for us from an environmental standpoint, but more importantly indicates and eliminates the towns and tensions in terms of getting the road bill and continuing the vision that they and our self have created over the last 2.5 years. Moving on out of that – the landfill gas energy development, during these times when markets are volatile and businesses are flexing down the same is also true for development and so we are very much focused on continuing the development without the use of internal capital, I will talk to that in a second. First with regards to the resource optimization differentiation strategy, we are committed to have our landfill gas energy at every one of our landfills by 2010.

Last quarter we reported that Hyland and Clinton were completed ahead of schedule and we are actually expecting to bring a fourth engine on line at Clinton in the next three to four months. Both units are operating at power. We have introduced recirculation successfully and we will do so of other landfills, not only for the ability to reduce leachate cost, but more importantly recirculation effects in early re-composition of the ways and early generation of landfill gas and therefore a movement forward of the value of those gas when coupled to landfill gas unit. Our next target within the company is Juniper Ridge, I would like to take a second just to paint a picture of what we are doing there as because I think it will help to eliminate the opportunities which are coming down the pipe in a number of locations. Juniper Ridge is gassing now at a rate that would support Orlando gas energy, what we have done is to propose the University of Maine, which operates the main campus in a Orlando, about five miles from the State to actually run a pipeline and to produce a news landfill gas to complete substitute their 3.4 million gallons of number 6 bunker oil. The benefit of this to the overall state to the air shade and to the participants are as follows, we expect to produce about $1 million a year savings for the University of Maine. This will eliminate the use of 3.5 or 3.4 million gallons of numbers 6 bunker oil.

It will reduce the greenhouse gas foot print by about 65% and when – as the gas in function of the landfill increases we will then enter our Phase 2 project where we will produce a bill first of 10 megawatt coal generation facility used away – from that completed displaced their entire thermal plant and generate 10 megawatts of power of which they will buy about 80% at a significant discount over those markets. These kinds of opportunities are popping up really throughout a number of different geographical locations. Certainly, in our case it is true and I think they are going to be accelerating, in the case of Maine we expect to apply for access to some stimulus money and some of the university funding in exchange for events in these agendas, we think that makes a lot of sense for both the State, the University, and for the country. These kind of configurations exist at least three other locations that we are actively involved in and I think we will help to eliminate what we are doing in the developing area to advance our strategic differentiation strategy, we are at the same time flexing down and using as little or now internal CapEx, while we work through the external outage of the marketplace.

A note on our multi fuel process in platform Paul and John both talked about placing in operating during the quarter, Philadelphia and Boston multi-fuel processing platform, these are advanced residuals sort of platforms, which can effectively take evenly broader extreme they are just appear segregated single stream and pull-off recyclables and other valuable commodities. Both of these units were place in operation of Charleston facility, represents over 220,000 tons per year processing driver at Colebrook facility and the demonstration of that technology, we believe it differentiates us from all of our other competitors and hopefully supportive of that is that we are currently under long-term contract with the City of Boston have in response to our peer – appear to be the lowest bidder to the – on the extension to that contract, which I think signals a very good promise with regards to going forward.

During the last quarter we’ve had unprecedented volatility in tonnage, but the actual tonnage at the Charleston facility has significantly increased as local alternative processes and materials have – seen successive materials, we’ve been able to work this technology to enable our markets or a process in cost and except a higher volume and we have a facility and we expect that that will all go well for a post Q3 commodity market, which we are expecting is developing. Segue into FCR obviously this quarter is probably one of the worst quarters in the history of recycling, we’ve seen average commodity pricing grow from 1.30 to 1.40 ton in less than two or three weeks. Export markets shut down entirely on both the East and West Coast going from a $140 a ton to zero and OCC went from 130.40, Plastics reduced from $800 a pound – $800 dollars a ton to $200 ton. So as you can see, we have had huge disruptions. Now one of the purposes of these conference calls is not just to report, it is also to give you some inside on what’s going to go forward with this continuing attribute with regards to the business model.

During this quarter we have had a number of one time issues that are now essentially passed us they included the Zerosort facility and issues associated with the commodity markets. On a go forward basis the best way to look at this is from a net revenue standpoint. Net revenue is basically gross revenues less the revenue share with the customers less the effects of cost of purchases and tip fees that we received a combination of those taken together produce a number, which we call net revenue and during this quarter we have been able to shift that dramatically in a positive particularly with the cost of purchases in the tip fees that we’ve received from our customers. The effect of that once we worked through Q3, is that on a run rate basis we are off about $1 million of EBITDA on a net revenue basis. So, on a forward – moving forward, we expect to be closer to about $1 million of where were in our peak given the gross revenue swings that we’ve occurred and the effects of our actions that we have taken, I think that we have done a great job of mitigating not only price swings, but more importantly the volume swings.

I will remark to you that in most markets that we operated in, most facilities seized for 60 or 90 days to take any materials because it could not move it. They went first to storage and then they just stopped accepting materials. And one of the noteworthy productivity issues of FCR is that during this period of time we accepted all materials, our actual material flow increased, although the mix went from commercial and dual stream shifted more towards single stream and all of our warehouses that we did utilize for a few weeks are now empty and we are actually outsold, over sold on a go forward basis. The commodity markets appear to be strengthening, we are very cautious about what this means, but it is certainly directionally the right indicator and with that I will shift into FCR into US GreenFiber and talk a little bit about what’s going on there. Q3 ‘09 versus Q3 ’08, were actually our sales were down about 18% on a gross revenue basis, but EBITDA it was up by $250,000 and 8.6%. US GreenFiber has actually led the housing decline. They were early in that cycle they have done unprecedented jobs of restructuring they have had four restructurings during this period of time and we see them actually having a year-over-year increase in EBITDA of over $3 million representing not only the restructuring effects, but also the benefits of the steps that they have taken to lower their paper cost.

On a go-forward basis we think US GreenFiber will be positively impacted by the stimulus package, within that package is about $10 billion of energy recovery designated projects and within that we think about 15% of that will go to insulation, which is 1.5 billion, we think US GreenFiber shares – US GreenFiber shares about 5% they are at 75 to 100 million, which is almost a doubling of our business opportunity and we intend to go after that. The retail segment is growing very strongly in terms of insulation even though overall I think retail is pretty much following the housing market and we think that there is an opportunity to see beginnings of researching of US GreenFiber’s opportunity in this new market as the stimulus package comes through. With that I would like to return it back to John for his final comments.

John Casella

At this point in time operator we will open it up for questions.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) And we will take our first question today from Bill Fisher with Raymond James.

Bill Fisher – Raymond James

Good morning.

John Casella

Good morning Bill.

Bill Fisher – Raymond James

Yes just a couple of things. One, I am sure you are not – remove away [ph] through the April ’10 budget or anything, but just big picture looking at the CapEx line item, just wanted to touch on what areas you would be looking at to enhance free cash flow, I think, the growth CapEx it sounds you are reducing your fleet size and then the long-haul, just see if you could touch on some areas you will be looking at?

John Casella

Sure. I think it is fair to say from the actions that we have already taken where we have clearly flexed out capital and we will continue to do so as we have in the third quarter, some of which is reflective of volumes, some of which is reflective of the operating changes that Paul was doing referred to the capital requirements are pretty significant in terms of the fleet that we had in place with – outsourcing now with MBI that is going to reduce our CapEx. And then on a go-forward basis we will look at what the needs are and continue to flex out capital in all of those areas where we can. Obviously we are also flexing in capital in terms of utilization of vehicles. We are going to eliminate, will be able to eliminate some capital expenditures associated with that as well. And certainly, we are looking at development projects as certainly something that can be flexed as well.

Bill Fisher – Raymond James

Okay. And then maybe along the same thing, on cash flow for Paul, just on the collection operations, obviously you have done a lot on that front, but just wondering if you look at specific operations, I assume you have some that generate cash and some that don’t. Is there any further opportunity to look at markets and make changes in that fashion?

Paul Larkin

There is Bill. You know that that process has been ongoing for quite some time. The last 12 months we’ve really looked at where the operation is today and where do we think we can take it. With all the work that we have done and where we think we can take it ultimately leads us to a decision point. There's more work to still be done there because we are really achieving tremendous improvements on the operating side. So, the bar is moving a little bit.

John Casella

And more specifically, Bill I think that it is fair to say similar to what we did with Buffalo last year, we are looking at all of the asset base on the basis of capital necessary and the returns on that capital. And our position in those markets and we are doing that evaluation right now and we will look at monetizing any of those assets from a return on capital perspective would be better off with other folks, similar to what we did with the Buffalo assets last year.

Bill Fisher – Raymond James

Okay. Great. And last real quickly for Jim just on that bridge you did with FCR, the $1 million change in EBITDA, I mean would that imply if prices stayed flat sequentially, could you get around $5 million in EBITDA at FCR in Q4?

Jim Bohlig

Yes, that's about directionally in the order. It is about what we are thinking is possible based on where the pricing is forecast to go.

Bill Fisher – Raymond James

All right. Great. Thank you.

Operator

And we will take our next question from Eric Prouty with Canaccord.

Eric Prouty – Canaccord

Thanks, a lot. Just two questions on FCR, John maybe you could just give a little detail on volumes at FCR, what's driving volumes and what you expect going forward? And then second what was the impact during the quarter on some of the hedges the floors especially on your fiber-related material, and how is that going to impact the quarters going toward? Are those hedges–?

John Casella

I will give you a brief synopsis and then Jim can jump in as well, Eric. The volumes, as Jim said interestingly enough what we found during the period of time is we were able to take all of the material that was delivered to the facility and even as we raised our tip fees dramatically, we went from in most cases, no tip fee to $55 a ton tip fee and depending upon the specific facility anywhere from $40 to $55 a ton for the tip fee. And even in view of that, you might have thought that you would have a lot folks who would no longer be bringing their materials to the facility and it was quite to contrary we found volumes slightly increasing in those areas where we were increasing tip fees. I think so – and I also think that the other aspect is that we took all of the material at every one of our facilities from every commercial and municipal customer. There was no disruption in service for any of our customers and obviously we had the complexity of the retrofits going on in Philadelphia and Boston that also complicated the quarter results because of the additional costs of having to transport those materials to other faculties in order to process them as we were upgrading those facilities to the new processing equipment.

What was the second part of that question? Yes, I think it is another interesting question because you think as our commodity prices go up our margins go down. As our commodity prices go down our margins go up, and that’s really difficult for people to understand. You know part of what happens is that instead of us paying out hedges we are actually collection on those hedges now. So, arguably instead of paying out hundreds of thousands of dollars a month for the protection that we do have on that portion of our revenue stream that has risk mitigation attached to it, we are now collecting hundreds of thousands of dollars a month on those hedges.

Jim Bohlig

It is also true, also associated with our cost of purchases. We are actually buying materials in high markets and in lower markets we are not buying as many materials and we are actually incurring tip fee revenues associated with that material coming into be processed. The effects of that is to do with exactly what John just outlined which is to, in this kind of market, to see some incremental sequentially improving margins against say two quarters ago where the average commodity prices were $140 a ton.

Just a couple of comments, you asked about hedging, we are actually our hedging program is very robust. We received quite an assistance from that program, we are quite pleased with that. Of course all hedges have had terms to them. So they will run out in time. But right now, particularly in is serving us nicely by generating over $3 million of supporting revenue. From a tonnage standpoint, as I mentioned to you commercial tons were down 26%, dual stream tons were down by 22%, but single stream tons were up by 71%. And I would say that overall, if you were looking for a marker with regards to the resource optimization strategy, there wasn't a blank in the marketplace relative to what the municipalities and what the general public wants to do with regards to recycling them. New England if anything there was a strong working element with us, understanding commodity prices were deeply depressed almost every municipalities we went back to not only in New England but up and down the Eastern Seaboard were co-operative, co-operative and in many instances subsidized the business by providing a tip fee either because it was provided for in the contract or negotiating outside of the contract to provide support to this business because I think it indicates their philosophical support to resource recovery and more importantly recycling in the strategic point we are in at our research optimization strategy.

John Casella

I might just add to Eric. I don’t think that that’s necessary the case in Canada. I think that we have heard some anecdotal information that some of those facilities may have shut down that also created a positive for those of us form a supply and demand standpoint. Not necessarily consistent in Canada and possibly other areas of the country. I am not sure what happened on the West Coast, but as Jim said, throughout the Northeast and throughout our customer base of very, very positive feedback from our customers to be a partner in terms of figuring out on solutions for the disruption.

Eric Prouty – Canaccord

Great. Thank you.

Operator

And we will take our next question from Corey Greendale with First Analysis.

Corey Greendale – First Analysis

Hi, good morning.

John Casella

Hi, Corey, how are you?

Corey Greendale – First Analysis

I’m fine, how are you?

John Casella

Terrific.

Corey Greendale – First Analysis

Good. My first question is about the volumes. Can you talk about the month trend in the volumes and the negative 3.6% excluding the various facility closures, is that pretty representative of what you are now or is it more a negative real time?

John Casella

I think it’s representative of what we are seeing now. I think the biggest issue that we seen is the majority of that disruption is really in the C&D construction demolition side of the business as opposed to the normal solid waste. We are seeing disruptions from solid waste standpoint, but the real dramatic impact has really been on the construction demolition side. Roll off pulls, roll off business and the construction demolition volume going to the landfill.

Corey Greendale – First Analysis

Got it. And then on the price, the $6 million annual impact from the price increases, can you just say a little bit more about was that the entirety of the customer base that you went to or was is certain types of accounts? And could there be more opportunity for similar things if you rolled that out?

Jim Bohlig

I think one of the things that, one of the positive things of John's experience is 25 years in the business, we think that there is really fairly significant opportunity for us on a go forward basis from a pricing standpoint. Our environmental fee is lower. Our surcharge is lower than some of our competition. So, we believe that we have some real upsides from a pricing standpoint on a go forward. We need to be thoughtful in terms of how we go about doing that. We were thoughtful in terms of the customer base that we touch 6 million, in terms of those customers who were below certain threshold and I think that it is clear from our perspective that on a go forward basis we have two or three different areas were we think that we have opportunity from a pricing standpoint. And I think it’s fairly significant over time, but again as we really obviously go through that thoughtfully and particularly with the reality of the economic market that we are in now.

Corey Greendale – First Analysis

John, when you say significant opportunity you are talking more from a competitive standpoint or do you have significant numbers of customers who you think you are actually below water on?

John Casella

No. I think that it is, it is twofold. I think that we are, our environment fee is less than some of our competitors in the marketplace. I think that lends itself to an opportunity for us to improve margins on a go forward basis. So I think the way we are looking at it is we believe that we have similar opportunity to continue to improve margins on a go forward basis with pricing.

Corey Greendale – First Analysis

Okay. My next question was on the capital where – you are obviously doing a lot to improve the capital efficiency, at some point there is a trade off, with John Quinn's former employer there was a time when, when they were kind of highly levered in a downturn, and on the one hand we are getting some capital efficiencies on the other hand, in retrospect we are somewhat under-investing in the business. Can you talk a little bit with how we can see that balance and that you are not moving into an under-investing mode?

John Casella

I think that it is a very fair question. I think there are two factors that come into play here. I think we need to maintain the fleet and we need to be thoughtful in that regard. But sitting over the top of it is in our view maybe, that suite will get a little older at this point in time because one of the things that we are actively doing is really driving the hybrid technology. We are working with our partners, we are trying to understand what are the likely vehicles that we want to put in place. So what we really want to do is we have to be thoughtful there. We need to be – we are fortunate in terms of the work that Paul is doing and that we are rerouting – we are rerouting and we are really, we are really putting ourselves in a position from a utilization standpoint to minimize that CapEx on a go forward basis. But also from our perspective, we want to be in a position in a year or so where we are buying more trucks with hybrid technology and I think we are probably about a year away from seeing technology that’s going to allow us 35% to 45% fuel savings. So I think there is twofold there. We are through the programs that Paul is instituting, we are affecting that capital spend in a positive way on a go forward basis. And I also think that we want to be in a position a year from now or so where we are replacing out trucks with new technology as opposed to putting significant amount of vehicles in place now. Jim, do you have –

Jim Bohlig

No, I have nothing to add.

Corey Greendale – First Analysis

Thank you.

Operator

(Operator instructions) We will go to Jonathan Ellis with Merrill Lynch.

Jonathan Ellis – Merrill Lynch

Thanks and good morning guys. Want to kick off with a question regarding your guidance. And I know you probably updated guidance for the full year and obviously we can then back into what that implies for your fourth quarter. It looks like you are anticipating a fairly meaningful sequential decline in revenues by my calculation about $8 million, yet it looks like EBITDA should be increasing around $2 million sequentially. And I understand you have done a lot with both on the pricing side and on the cost savings side to help support EBITDA. But I guess my question is I would have thought given particularly the price increase and the fees that you have implemented that would lend a little bit more support to the top line. So, I am kind of surprised how dramatic the sequential decline is in revenues vis-à-vis EBITDA. Can you speak to that at all?

John Quinn

It is John Quinn speaking. We gave a fairly wide range in terms of the revenue. And I guess, we’d start by saying that we, our expectation is that we will come in somewhere in the middle of that range because we did that without a range there. We do see some volume declines continuing but notwithstanding that, we talked about the pricing that we did in Q3. So we are going to have that as a favorable impact. Fuel, diesel prices have continued to fall in the market. That will have a slight impact on revenue but it will actually drive the margin better as well. Jim spoke to the FCR revenue and the hedge impacts. As we move from buying [ph] materials to instituting tip fees, that can lower revenue but the tip fee comes through a (inaudible) margin. Similarly to the hedges as we move from being in a position where we are paying on a hedge to receiving it. Again, that flip is 100% margin as well. In addition, Paul has been working very hard on some of the structural changes taking out costs in terms of some of the headcount. We are going to see some of that impact coming through in the quarter. And then we also have just lower purchase material. So, we think the margin will improve slightly sequentially and year-over-year potentially. Sequentially, we also avoid some of those costs that we have at FCR associated with the precipitous drop in the commode prices.

Jonathan Ellis – Merrill Lynch

Okay. That’s very helpful. I appreciate that. Wanted to also talk just about the price increases that you put in place. And it looks like just from the data you provided earlier of breaking out landfill pricing versus collection pricing, it looks like if I am not mistaken, more of the price increases are concentrated in the collection side of the business, can you speak a little bit towards, you mentioned other opportunities from a pricing standpoint. Are those opportunities primarily on the collection side or do you also see opportunities on landfill side?

John Casella

I think it is fair to say Jonathan that the price increases have been more on the collection side, and I think that on a go forward basis, we are looking at those opportunities both from a collection and as well as from a disposal standpoint. But clearly, the existing price increase is more driven from a collection perspective.

Jonathan Ellis – Merrill Lynch

Okay.

John Casella

There's on a go forward basis, I think that we are more of a mindset that we are looking at the entire customer base across both collections as well as disposal and also look obviously at opportunities where we have opportunities from a tip fee perspective as well on the recycling side, additional opportunity.

Jonathan Ellis – Merrill Lynch

Okay. And just on the price increases with collection customers in particular, it looks like I think you alluded to this, you’ve done a pretty good job as surcharge fees have come down, trying to get some kind of core price recovery as those fees compress. Is most of the pricing that you are – both you have achieved in the last quarter and also what you think you can achieve going forward a function of trying to convert those surcharge fees into core prices or is it more so just going to customers and simply trying to get an increase off of a base price?

John Casella

I think the answer is yes. It is both frankly. We are going to take a look at where we are with respect to the market on fees, and core CPI continues to exist in the economy. We will continue to try to push through pricing on that front as well.

Jonathan Ellis – Merrill Lynch

Okay. Great. And just two more questions. First on the cost savings that you highlighted, can you help us understand perhaps how much of that is what we call sustainable cost savings versus how much is more volume related?

John Quinn

I think if you are talking specifically about the $10.5 million from a wage standpoint, I think that our sense is about $2.5 million to $3 million of that is permanent on a go forward basis – sorry about $2.5 million on a go forward basis of that $10 million.

Jonathan Ellis – Merrill Lynch

Okay. All right. That’s helpful. Thank you. Then my final question, is related to just given what you are trying to do from a capital structure standpoint now, and what you highlighted about would appears to be some more encouraging signs related to Greenfiber. Any thoughts over the next few years about potentially trying to monetize the Greenfiber investment?

John Casella

I think it’s fair to say that we’ve always had a perspective that at some point in time, the business model would be better served, Jonathan, as a building materials company. The challenge that we had obviously is the current market but on a go forward basis it’s clearly an opportunity for delivering as well.

Jonathan Ellis – Merrill Lynch

Okay. Great. Thanks guys.

John Casella

Thank you.

Operator

And gentlemen that does conclude today's question-and-answer session. I’ll turn things back to Mr. Casella for any additional or closing remarks.

John Casella

Thank you very much. In conclusion, I would like to clearly commend everyone in the organization. I think that we really truly have executed well against the factors that we can control. Paul and his team, Jim from the development standpoint, the addition of John in terms of the financial team. I think we have got a team well positioned and executing really well all the way down into the organization. We are working hard to offset the negative pressure from an economic standpoint. The operating programs that we talked about increasing revenue, reducing costs, reducing flexing CapEx that will ultimately improve productivity and asset utilization. I think it’s really important that the way we are approaching this process is to be in a position where we come out the other side of this as a improved, more efficient operation and one in which the efforts that we’ve taken during this period of time, really improves our overall margin performance on the other side. We are also making good progress on refinancing of the senior credit facility and have confidence that we will get this completed by the end of our fiscal year. I would like to thank you for your attention this morning. Our next earnings release and conference will be in late June, when we will report our fourth quarter and give our fiscal year results. Thank you very much everyone and have a great day.

Operator

Thank you sir and that does conclude today’s conference. Thank you for your participation. You may disconnect at this time.

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Source: Casella Waste Systems, Inc. F3Q09 (Qtr End 01/31/09) Earnings Call Transcript
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