Casella Waste Systems, Inc. F1Q09 (Qtr End 07/31/08) Earnings Call Transcript

Sep. 4.08 | About: Casella Waste (CWST)

Casella Waste Systems, Inc. (NASDAQ:CWST)

F1Q09 Earnings Call

September 04, 2008 10:00 am ET


Joseph Fusco

John Casella - Chairman and Chief Executive Officer

Paul Larkin - Chief Operating Officer

Jim Bohlig - Chief Development Officer

Richard Norris - Retired Chief Financial Officer


Bill Fisher - Raymond James

Analyst for Leone Young - Citi

Eric Prouty - Canaccord

Corey Greendale - First Analysis

David Feinberg - Goldman Sachs

Scott Levine - J.P. Morgan


Welcome to the Casella Waste Systems first quarter fiscal year 2009 financial results conference call. (Operator Instructions) At this time I would like to turn the call over to Joe Fusco.

Joseph Fusco

We're joined by John Casella, our Chairman and Chief Executive Officer of Casella Waste Systems; Paul Larkin, our Chief Operating Officer; Jim Bohlig our Chief Development Officer and Richard Norris who although he has retired as our Chief Financial Officer remains with us as sort of a third base coach I guess.

Today we’ll be discussing our fiscal year 2009 first quarter results. These results were released yesterday afternoon. Along with a brief review of these results and an update on the company's activities and business environment, we’ll answer 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 web site at

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

John Casella

A little housekeeping first; this quarter we appointed Paul Massaro, our Director of Finances, Principle Accounting Officer. Richard, as Joe said has continued in this consulting role during our search for his replacement and we’ll go though the numbers as usual. With respect to the CFO search we recently made a decision to switch search firms and engage Spencer Stewart as our new firm. We expect to have the search completed by calendar year end.

After Richard’s summary, Paul will go through the operating summary and as usual Jim will give an update on development activity. Before we get into the quarter, I wanted to briefly discuss Maine Energy, our one waste energy facility. As you might have seen last week we issued a press release that discussed the potential sale of Maine Energy to a local development firm or other interested parties.

We believe that Maine Energy is not core to our portfolio and does not fit with our long term strategy. Unlike the divestitures from last year however, Maine Energy is the high performing asset. The sale of Maine Energy at the right price would be used to de-lever the balance sheet. At this time, it’s too early to disclose any financial specifics and this potential transaction is not in our plan or our guidance for fiscal ’09.

From an overview prospective, I couldn’t be more pleased with the financial performance in the first quarter, both from an operating prospective in terms of rethinking every aspect of the model but also from a resource transformation perspective in terms of the efforts of the recycling team that add additional processing capacity to our footprint. Our efforts to improve the asset performance and build incremental value through research transformation programs have helped to offset negative headwinds from the sluggish northeast economy and a very rapid increase in diesel prices throughout the quarter.

As part of the new extension agreement, from a development standpoint with the town of Southbridge in June we received $2.2 million of cash related to previously paid closure and post closure funds resulting in a net benefit of $800,000 to EBITDA during the quarter. Including this benefit, EBITDA for the quarter was up $1.3 million and operating income for the quarter was up $1.7 million over the previous year.

Well this quarter represented a solid start to fiscal ’09. The economy remains quite weak in the northeast. Solid waste lines continue to decline and landfill pricing particularly in the western region remains a challenge especially with the substantial fuel oil surcharges that are currently being passed on to the market. The volumes declines are being driven by a combination of slow economic activity, continued construction weakness, energy pressures on landfill as they receive long haul tonnages and the early impact of increased sustainable practices by businesses.

Despite these factors we believe that our revenue EBITDA and free cash flow guidance is sound and achievable. As Paul will layout we are focusing our attention on managing operating costs and other factors that we can directly control to achieve our fiscal year targets. Our core focus remains the same; maximized shareholder returns by improving our return on net assets and generating positive free cash flow. We continue to execute well against these goals.

We improved our return on net asset by 20 basis points over the last year. Free cash flow was up year-over-year mainly due to working capital but continues to track well against plan and our guidance for the year. As we laid out last quarter, our strategy for ‘09 is quite similar to last year. It focuses on improving performance of our base operations and selectively pursuing growth opportunities in high return resource transformation opportunities.

During fiscal year ‘09 our plan focused on improving the performance of base operations by rethinking the model to increase operating efficiencies and linking sustainable solutions with core offerings, completing the landfill permitting work and rationally ramping tonnages to expand its facilities and improving our asset mix in deploying capital to meet emerging customer and market needs.

With the current weakness in volumes in upstate New York we have chosen to be conservative with our strategy to fill the hakes in Ontario facilities. Our landfill pricing was firm in our central region however where we internalized 80% of our volumes. Landfill pricing and volumes were up in the Western region where we rely more heavily on third party long haul tonnages.

Our sales team continues to work the direction of Bill Hanley on third party transfer stations, broadening our market activity to expand the sources of volumes to increase the volume flow to our facilities as the appropriate returns. As we stated last quarter we expected the take above three years to ramp the new facilities and even with the current sluggish economy we are confident that we can achieve that target.

A little bit more about how we are rethinking every aspect of the model and I think that really goes to the efforts that Paul is making with the entire operating team to really rethink every aspect of the business. It goes to our oil filtration system where we have been able to reduce our oil consumption, it goes to the next generation of hybrid trucks to reduce our overall fuel consumption by 35% or 40%, its understanding what aspects of innovation and technology can have positive impacts on how we operate our business everyday.

I think our continued focus on operating efficiencies and reducing costs is especially important in light of the economic conditions. Paul’s efforts on the collection side of our business to manage operating cost, to market demand are mainly offsetting volume weaknesses. It is important to execute well at what we control and that’s our cost structure and we are doing that quite successfully.

In addition we are working higher to further differentiate ourselves in the market by linking sustainable programs to core offerings, while consumers might not pay more today for sustainable programs. At competitive prices, many are choosing solutions that reduce their impact on the environment. Our challenge has always been to tie the economic model to the sustainability model for nothing is sustainable unless the economic model works.

Our sales force is working with our existing customers and new customers to create value through programs like our zero sort recycling and waste audits. Sean and our recycling team are executing on every opportunity to add processing capacity to our franchise, a critically important component, because we believe as we move from waste management to resource management we’re going to see more material process and less disposed of overtime.

Also as we said, that’s going to happen over a 5, 10, 15 year period of time, but clearly its our view that processing capability is an important factor from a value creation standpoint as we transform the industry and as we move from waste management to resource management.

We are also gaining market share by differentiating our service offerings as really a prime goal of our sales team, so it’s really rethinking how we approach our customer base, again reinventing ourselves in terms of how we approach our customers, to help to create value for them at the same time that we’re creating value for our stakeholders.

Our investments and high return projects that create sustainable solutions in an economic model that creates real value force from traditional waste streams are moving forward very well. We made great progress from our landfill gas to energy prospective, our processing additions adding processing capability and even progress in terms of waste liquid fuels.

The Pine Tree landfill gas to energy plant came online in Q1. The Highland landfill gas to energy plant is constructed and came online August 30 and will ramp during the second quarter. The Clinton County landfill gas to energy plant is constructed and will come online late in the second quarter and will begin to ramp. The Camden zerosort recycle conversion was completed in Q1 and the facility is online.

The Hartford Connecticut zerosort conversion was completed in late August. I might add that the Connecticut Resource Recovery Authority invested roughly $3 million to convert that facility and that we had just rebuilt the dual stream facility about a year and a half to two years ago, but they put in the capital necessary to convert that to a zerosort facility. The Philadelphia zerosort conversion is under way and the Boston zerosort conversion is also underway as we speak and we expect those to be completed by the end of the calendar year.

We also will begin recycling operations in Detroit on October 1 as we were awarded that contract and we were just named Preferred Vendor in Toledo, Ohio where we are negotiating a contract to design and operate their recycling facility. With that I’ll turn it over to Richard who will take you through the numbers.

Richard Norris

For the quarter ended July 31, 2008 revenue increased $9.4 million to $157.9 million or 6.3%. Internal growth for the quarter reflects higher pricing across hauling and transportation operations in the solid waste segment; however, landfill prices again showed a net decrease. C&D prices while down from last year on average did show some seasonal firming from the fourth quarter.

The Pine Tree and the closure projects dampened prices by 51 basis points. Hauling and transfer volumes were down in the quarter while landfill volumes were flat overall. MSW volumes were essentially flat, but C&D was down offset by some bulk projects especially at Ontario.

Our closure projects of Worcester and Colebrook which are not included in our landfill statistics benefited from another large volume increase at Worcester at good margins, although the pricing was down slightly. At FCR average commodity prices continued to reflect year-over-year increases and volumes were also up.

Surcharges were up significantly in the quarter driven by the large hike we suffered in fuel prices; however, we did not fully recoup the total fuel and lubricants price increase. The increase from some surcharges amounted to 1.9% as a percentage of total company revenue, 2.5% as a percentage of solid waste revenue. The fuel increase also had a significant impact on margins. As the fuel prices remained unchanged, EBITDA margins would have been higher by 60 basis points or 90 basis points for the solid waste segment.

Revenue for the quarter breaks down as follows, and since we revised the prior period amounts to reflect the discontinued operations and reclassification I’ll give you both the current and prior year quarters. First, for the quarter ended 07/31/07, solid waste revenue amends to $111.4 million, FCR $29.3 million and other $7.8 million for total of $148.5 million. For the quarter ended 07/31/08, solid waste revenue was $113.9 million, FCR $35.2 million and other $8.8 million for a total of $157.9 million.

Gross margins were down year-over-year 90 basis points. Since transfer and hauling volumes were down, most operating costs were lower as a percentage of revenues including third party disposal costs. A portion, some $800,000 of the $2.2 million cash payment received from the town of Southbridge in the quarter relating to the new agreement was credited to cost of operations as the return of monies previously given to the town for closure and post-closure costs.

The two main factors offsetting these favorable variances were fuel prices and purchase materials. As already mentioned fuel prices were up substantially in the quarter and of course significant margin decline. The higher value of commodities year-over-year and consequently the higher payments to municipalities drove purchase materials at FCR higher. So as a percentage of revenue these costs are up 169 basis points.

Purchase material prices were up 33.2% year-over-year. The higher volume of major accounts also drove higher transportation costs. General administration expenses were down in the quarter 30 basis points as a percentage of revenue. Most categories of expenses were down as a percentage of revenue, but they were partially offset by higher bad debt expense, the main factor being a $300,000 credit received last year from a bad debt recovery. The latter also accounted for large part of the year-over-year increase in the dollar amount.

EBITDA $35 million was up $1.3 million versus the prior year and breaks down as follows: Firstly, for the quarter ended 07/31/07, solid wastes was $27.0 million, FCR $5.9 million and other $900,000 for a total of $33.8 million. For the quarter ended 07/31/08, solid waste emerged to $28.4 million, FCR $6.6 million and other was a small loss of $58,000, for a total of $35 million.

Solid waste EBITDA was up from the prior year as margin’s increased by 70 basis points. Despite the large increase in fuel and transportation costs most of the other operating costs became low as a percentage of revenue assisted by the Southbridge credit. For FCR another solid quarter with EBITDA improving by just under $800,000 but margins down this quarter by 110 basis points to 18.9%.

Average selling prices were again up this quarter as were volumes. Total tons shipped including inter companies tons are up 1% although there was a change in mix. A major contributing factor to EBITDA was the commodity price increase. Average commodity prices increased 24.2% net of revenue share to $110 a ton. FCR’s margin’s however were adversely impacted by the higher prices paid for purchase materials mentioned previously.

In addition in the other segment the restated amounts for last year including income from assets under contractual obligation amounted to $740,000; $660,000 of which did not reoccur this year. If you recall in the second quarter last year, we reclassified that item from other income to cost of operations.

Depreciation and amortization expense was down some $400,000 year-over-year. Landfill amortization accounts for half the decrease arising mainly from lower volumes at Colebrook as it comes to the end of its life, partially offset by the higher volumes of Worcester. Depreciation was also down as certain assets came to the end of their useful lives.

Income taxes; the effect of income tax raid came in a little lower than forecast of 51%. We’re now expecting depreciation and amortization to come in at a lower level than when we gave guidance. That is to say it will be closer to the 12.5% range than the 13% number previously provided. That decrease stems mainly from the expectation of volume being switched between Pine Tree landfill which has a higher amortization rate and Juniper Ridge which carries a lower rate as we manage Pine Tree over its remaining life. The result would be higher pre-tax income and a decrease in the effective tax rate.

Discontinued operations; during the first quarter we completed the sale of Greenville and reported a loss from discontinuing the operation of $11,000 after tax, at the gain on sale of 228,000, which became a loss of 34,000 after taxes of 262,000. The taxes were so high because of the book write off of goodwill which was not deductible for tax perquisites. Net income for the quarter remains at $2.2 million or $0.08 per common share.

Now a couple of miscellaneous statistics; the average interest rate for the quarter decreased again to 7.28% including amortization of financing costs; net of these expenses it was 7%. Availability on the revolver as of July 31 was $154 million after taking into account $40 million of outstanding and at the end of the quarter our debt to EBITDA ratio calculated per the bank covenants was 4.4 times.

Finally, free cash flow showed a $2.6 million decrease from last year despite higher EBITDA to mainly to higher cash interests and a greater use of working capital. The increase in cash interest is simply due to timing of payments. The greater use of working capital sustains mainly from higher current assets and accounts receivable, the latter arising mostly from higher revenue. These two factors were not offset fully by higher payables and accruals, but we still do expect free cash flow for the year to be consistent with our guidance.

With that I’ll hand it over to you Paul.

Paul Larkin

We’re pleased with our performance again in the quarter despite the obvious economic headwind that John has already mentioned. Revenue for the first quarter was up 6.3% year-over-year, our solid waste revenue was up 2.2% as a percent of segment revenues with price up 2.8%, volume was down 1.5% and commodity price volume was up 0.9%. FCR revenue was up 20.3%, again as a percent of segment revenues with price up 12% and volume up 8.4%.

Our volume strategies of the two landfill closure projects and the Pine Tree landfill impacted solid waste price and volume statistics for the quarter. The Colebrook closure project was substantially finished during the first quarter. Excluding these impacts, solid waste pricing was up 3.3% year-over-year including the surcharges and solid waste volume was down 2.5% year-over-year.

During the quarter our standardized pricing programs of the hauling companies continues to yield positive results with the average revenue per new account up 13.5% year-over-year. Overall, our hauling revenue is flat year-over-year. We had an increase in our overall gross sales margin that delivered a positive net impact for the quarter. The improved gross margins are the results of our continued focus on assessing the profitability of our hauling accounts and our increased willingness to voluntarily walk away from unprofitable revenues.

Our turnover of customers was consistent year-over-year, however putting more emphasis on effectively identifying reasons for loss of customers. As an example we voluntarily turned 16.5% of the total loss of customers because they were unprofitable accounts and we could not obtain the appropriate pricing. We continue to expand our integrated resource optimization selling strategy that leverages our recycling infrastructure and our expertise.

We are pleased with the progress we’ve made specifically with our zerosort recycling program in Massachusetts. We rolled out the Worcester Curbside Recycling program on July 1. The program has been very well received and early indications point towards a higher recycling volume for the city. When the Boston’s Zerosort facility comes online later this year, it will give us an opportunity to market additional services to commercial and municipal customers in the competitive Boston market.

We maintained our landfill pricing and essential in North East regions while pricing eroded in the Western market. Part of the pricing decline was driven by negative mix issues with increased volumes of bud, but generally the market softened and the impacts of transportation to long haul landfills is weighing on pricing. The reorganization of our landfill sales group last quarter and the introduction of standardized pricing programs is helping us to better optimize tonnage flows and pricing in this environment. Solid waste internalization for the quarter was up year-over-year from 55.6% to 61.9%.

We have continued to see pockets of weakness in the roll off line of business during the first quarter. Roll off pulls were down 3.4% year-over-year with pull offs in the South East and Western markets. We are doing a better job of pricing the roll up business and net revenue for fall is up in most markets. The Dodge index toll construction wards were up 6.8% in the first quarter with strengthening in commercial contracts and continued significant weakness in residential contracts.

For the first quarter our operating costs were up $104.4 million, 90 basis points year-over-year as a percent of revenue due to significant margin pressures from diesel fuel and purchase materials. While our fuel, oil and environmental surcharge program recovered much of the increased MG cost during the quarter, diesel and oil costs were up 175 basis points as a percent of revenue year-over-year.

Excluding the impacts of the fuel and oil revenue and costs we actually expanded operating income by 60 basis points year-over-year. The main drivers of the margin expansion were the successful cost efficiency programs with improvements in direct labor, maintenance and risk management costs.

The roll over impacts in the improvements in our asset mix made last year and the execution of our Southbridge extension contract. Recycling purchase material cost continues to negative impact our margins although our revenue hedging programs eliminated most of the cash flow variability.

Our consistent focus on building our people has continued to yield very positive results. For the first quarter direct labor as a percentage of revenue was down 45 basis points year-over-year. Gains were achieved through flexing labor costs with volumes, productivity enhancements and improved risk management. We had another excellent quarter for our safety programs and the result in risk management cost. Worker’s compensation incidents are tracking down 9% and fleet accidents are tracking down 15% year-over-year. We are working hard with all our people to commute these very positive trends.

Also in the first quarter vehicle and container maintenance costs as a percent of revenue were down 40 basis points year-over-year. Inflation in a number of key areas were more than offset by gains realized by the implementation of our fleet maintenance software package which streamlines maintenance and operations as well as improves inventory productivity and warranty recovery and the continued success of our onboard oil refining system installed late in FY 2008. In total we did a very good job managing our controllable expenses.

As we laid out last quarter, we planned to take $2 million of additional annualize costs out of our operation during fiscal year 2009. We plan to accomplish this goal by focusing on two primary drivers; improving our operating margins by introducing standardized processes and programs across our operations and improving operating margins in key high impact market areas.

Last quarter we identified six high impact market areas within our hauling operations. We determined that each market had significant operating income upside and created detailed sales and operations plan to quickly improve our performance. These plans are very tactical in nature and strike a balance between top line growth and operating efficiency.

During the first quarter we execute specific operating tactics that are projected to yield $600,000 of estimated annualized savings and to be clear that $600,000 of projected savings is part of the $2 million program.

The main drivers to the savings were the reorganization of two divisions in the one market area in our western region with a consolidation of sales, administrative, customer service, maintenance and general operations, routing initiatives to reduce truck operating hours and free of time to grow our business in core markets and increasing customer container sizes on converting certain routes to automated equipment. We expect to drive additional savings throughout the remainder of the year by using these same tactics at other locations.

In summary we are pleased with our first quarter results. We see terrific opportunity throughout the year to continue to rely on our highly skilled and dedicated people and to leverage the sales and operational platforms that we put in place and with that I’ll turn it over to Jim.

James Bohlig

I’m going to quickly report on development activities. As you know they are principally aimed at staying in tune with the resource transformation recovery and renewable that John has highlighted earlier which we believe to be a fundamental part by future.

So waste volumes remain challenging as Paul and Richard has indicated, but alternatively the recycle shipped volumes continue to grow and we believe there’s this strategic initiative that we won’t be able to continue to grow our recycle volume sheds to match or exceed any pressures that we continue to see on the waste side.

Paul mentioned that the volumes have increased and pricing increased on a year-over-year basis for FCR from the recycling stand point and both of these exceed the adverse impact on the volume size with rentals. Oil pricing and security we believe remains as the principle strategic issue driving these rate recycle sheds and they’ve increased a number of opportunities, Hartford, Stratford, Detroit, Toledo, John has touched on them, has given us a number of additional opportunities to deploy our core competency and front end processing.

Zerosorting which is really our technology for single streamed technology is materially impacting the recovery and the volumes and we believe that this convenience will continue to drive that as a strategic issue. Energy pricing is continuing to support energy investment and energy projects returning higher returns in double digits and supporting rapid conversion to low emission landfill technology and landfill gas to energy and other conversion technologies.

Quickly in Southbridge, unlike Western New York, Massachusetts remains relatively rich in waste particularly because a large number of those tons are constrained by the higher fuel pricing and are leading to be relatively disposed off rather than sourced outside of the State. The Southbridge site assignment as you know was issued in June and we closed and made effective our site assignment and this community agreement with the town. We have recently settled with Southbridge, their appeal involvement in the appeal process and we are aggressively working through the appeal process with a few remaining parties outside of the issue of site assignment.

We are now in a position to take waste into the facility outside of Southbridge, albeit at the 180,000 tons. Incrementally as you know the development path of Southbridge has us going first to 300,000 and then 400,000 tons as we complete the landfill gas energy and other requirements of the side assignment after the completion of the DEP permit issues. There is a new site manager, a city manager and a new counsel and they seem to be well on their way to providing governance in a very positive way and we expect this fall to start the landfill gas energy facility as well as what they did for the rule to go up this month which is a key enabler for the project.

On the energy recovery front, John mentioned Highland is now producing power all three engines. We actually have gas for a fourth engine and once we get final permitting done there we will work to install the fourth engine. Clinton County will be producing power during the month of September and will materially add to the Q2 results and both of these projects are slightly ahead of schedule.

We have adequate gas at Juniper Ridge and we expect that will be a major project for 2010 as we look forward to harnessing that recovery as well. Pine Tree landfill gas is running with engine availabilities greater than 90%. We are having some adverse impacts due to hydrogen sulphite associated with the gas payment and we’re working on solving that and as I mentioned Southbridge is on target for development.

A multi fuel processing platform technology; as John has indicated we have convert Camden, Hartford, Philadelphia, we are schedule to do Boston in October. Detroit we will take over and have a plan to convert the single stream this fall as well and in Toledo we have been named their Preferred Vendor. These are all important platforms for us not only for their recycle shed but for the technology development that we feel is key to our future and other waste sheds.

FCR has done a great job again this quarter, both volume and pricings are up. I will note that I think that the commodity pricing from Q4 ’08 has already peaked and we are coming down slightly. This is somewhat inline with energy and I think commodities will continue to stay fairly closely limped to energy pricing.

Operating cost is up driven by fuel, labor and purchase material pricing as Richard indicated, but overall the business unit is a very, very important part of our future not only for recovery and managing our waste volume reductions but also for our sustainability in resource transformation strategies as John outlined.

Moving onto US GreenFiber, I believe that we are beginning to see close to the bottom of the housing market. While revenue declined 10% on year-over-year we are seeing signs that we are at the bottom. The unit has done a very good job despite the housing prices underway. EBITDA is actually up $1.4 million over Q1 ‘08.

This is primarily a reflection of a very aggressive G&A reduction program over $1.9 million, a goal of fiber replacement program that has allowed us to identify in excess 40% of our fiber from outside of the O&P channel. By the way we have a target to have that at 80% within twelve months and nearly a 100% certainly within 24 months. That will significantly de-link us from commodity pricing and should add a lot of stability to the overall unit.

While contractor was down 38% and manufacturer of homes was down 19%, a bright spot is the retail which is up 33% primarily reflecting housing renovation and energy recovery initiatives locally and we believe on a go forward basis that retail have early indications of double digit increases quarter-over-quarter as we go into the Q2 quarter and we believe that that will be sustained through this winter as almost every part of the country is being marginally or materially impacted by considerations associated with energy recovery and energy conservation. With that I’ll turn it back to John.

John Casella

We’d like to open it up for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Bill Fisher - Raymond James.

Bill Fisher – Raymond James

You talked about the zerosort and the new facilities on recycling FCR. I think you’re doing around 1 million tons of shipments annually. As you get all these on I realize they are over the next twelve months or so, but I mean what kind of capacity are you effectively adding in terms of maybe tons or however you want to look at it?

John Casella

Well in most cases when we take a facility from the dual streams to zerosort, we are looking at the potential of hauling the tonnage, but its again the situation Bill where you’re going to ramp that over a period of time, but in almost every case we will be doubling the capacity, so if we are handling 100,000 tons we would be able to handle 200,000 tons. So depending upon the original size of the facility, we would really look to double the capacity of the facility as we add the zerosort or single stream capacity to the facility and the technology to be able to do that.

I mean one of the powers of that whole process is we are really adding value to invested capital as already in place by better utilizing that asset on a 24 hour day basis as opposed to where recycling facilities have been historically a one shift operations, it just makes no sense.

So I think it really depends on the total capacity that the facility was originally designed for and then it will be ramped over a year period of time, but interestingly enough our upper mass facility, we are able to ramp that facility from above 3,000 tons a month to almost 9,000 tons a month in about a six months period of time. So that’s in the middle of a very large market obviously but that’s an example of how that facility ramped.

Bill Fisher – Raymond James

Okay, I guess the follow up related is I think you cited like six facilities or so. If you look at it over the next year and a half I mean would it be on the order of another 100,000; 200,000 tons to that million or what kind of delta?

John Casella

Well I think Bill Detroit is an example, it’s about a 50,000, 60,000 ton facility and we believe that’s not single streamed right now. We believe that that’s very single stream enabled or capable of being enabled and so that market could easily support and grow to 100,000 tons. We’ll see similar growths at Camden and in Philadelphia in terms of being able to reach into the New Jersey market. We are contemplating some additional single stream conversions in New Jersey as well.

As John I think really clearly outlined, the Boston single stream conversions will expect to see a significant material growth, so I would think that it’s not unreasonable to think in the order of 100,000 to 200,000 tons and the important metric here is that we think that growth should easily match any volume construction on the waste landfill side, particularly when you think of the free cash flow per ton available, that recycles have over waste so we actually see this as the positive development and a good step forward.


Your next question comes from Analyst for Leone Young - Citi.

Analyst for Leone Young – Citi

I know you are not disclosing the numbers specifically around Mane Energy but can you just give us a sense right now of the size of Mane Energy right now is as it stands either on a revenue basis or EBITDA basis?

John Casella

Now it’s really premature right now Elena to really get into any real financial disclosure. I think we tried to lay out where we are and how we see the facility with regard to our portfolio on a go forward basis, but it’s a bit premature to really talk about it in terms of its contribution.

I think it is fair to say though that it is a high performing asset and we would expect that in order for us to move forward it would have to be a significant delivering event for us and we’d obviously need to have a very fair value for the facility. I think that’s a very fair perspective in terms of how we view it. It’s a very high performing asset, we would continue to operate it if we were unable to be able to significantly de-lever our balance sheet.

Analyst for Leone Young – Citi

Okay all right and also Richard mentioned lower taxes obviously in the quarter. Should we be using them more like a 50% to 51% tax rate going forward or should we keep it at around 55%?

Richard Norris

The guidance respectively changed to 51% Elena as a result of the changes I said and the expected depreciation charge. So it’s 51% on a go forward basis.


Your next question comes from Eric Prouty - Canaccord.

Eric Prouty - Canaccord

May be a little more discussion around the oil; obviously while we are out watching in the market oil seems to have peaked. I mean do you feel like with some of the surcharges you pushed through or going to play catch up this quarter where we will even that out and then similarly may be a little discussion on the FCR side with plastics with any plan that you guys have made with hedging out or entering into contracts on the plastic recycling side?

Paul Larkin

Well I think that clearly as prices come down from an oil perspective your right, that will even out a bit as we go into the second quarter, particularly if there continues to be softness from an oil pricing stand point. There’s a lag going up and there’s a lag coming down and so that’s a fair statement here.

I think with regard to the overall perspective with regard to plastics, I think we are making progress with plastics. We’ve got a number of different opportunities that we are executing against. We are really not ready to begin to talk about those because we’re in the process right now of negotiating some contracts. We get those contracts completed, we are hopeful that we’ll have them done in the second quarter and we’ll be talking about those perhaps in December, but it will be a little bit premature.

As we have said over the last couple of quarters it’s one area where Sean, Jim and the entire team has been working really hard to try to find a solution for plastics and get ourselves tied into manufacturer, utilizer of that commodity so that we can close that loop and protect ourselves because that is the area from the commodity standpoint where we don’t have currently hedges in place.

So we’ve made a lot of progress, we’re not prepared to really discuss what we are doing from a contractual standpoint right now, but I think we’ll be in a position probably next quarter to give more specifics in terms of exactly how we have approached that issue.

John Casella

One thing I would add is that you do have to have a view about peak oil. If you believe in peak oil directionally oil pricing is going up, but as future peak oil is you’re going to have high volatility, so we’re not looking at this from an oil standpoint strictly on quarter-to-quarter, we are looking directionally where is oil and therefore where is plastics going to go and I think plastic pricing will continue to be fairly linked to oil and directionally it will continue to increase or probably will see volatility from quarter-to-quarter.

We continue to be driven by trying to accomplish the same strategy as John indicated that we’ve done in fiber which is to create affective budgeting derivative programs for purposes of stabilizing that quarter-over-quarter volatility and I think shortly we will probably be able to create some additional advantages for the company in that direction.

Eric Prouty - Canaccord

Excellent and then just I guess to get you to kind of reiterate and clarify some comments made earlier; I know in your earlier guidance from the previous quarter, you had guided to revenue and had been looking for kind of flat revenue, flat volumes from a recycling standpoint. I mean it sounds like your overall guidance remains the same yet there’s now a bit more of a shift where we might now expect recycling to grow a little bit more and to offset maybe some reduced growth on the solid waste out is that a fair comment?

John Casella

That’s a very fair comment. I think it’s very consistent with the whole resource transformation strategy Eric, that’s exactly like right. It’s what we anticipated several years ago and I think that the only thing that we are seeing is the validation of that prospective.


Your next question comes from Corey Greendale - First Analysis.

Corey Greendale - First Analysis

So the first question is looking at price and volume in the waste business combined it came in a bit lower than you are looking for in the full year guidance, so I was just wondering how you feel about the full year waste price and volume guidance at this point and the second part of that question is, investors are pretty use to hearing from the national public companies that they are just going to keep raising landfill price and if it pushes volumes away, well because we know we can fill that space later at a higher price. It doesn’t sound like that’s what you are seeing is particularly in the western region, so could you just speak to why the dynamic is different and what those national companies are talking about?

John Casella

I think that is the prospective, I think that it is affected by other independent though that our in given market areas. I think there’s a bit more competition in the western region; we’re not seeing that in the central region, we’re not seeing that in the Northeast where we have more competition from the national companies, but in places we have independence or you have other companies you have a bit of a disconnect from that overall strategy. I think for two thirds of our market area I think that’s absolutely true and we are not seeing the kind of pressure that we are in up state New York, that’s a different market with different folks with capacity in that market.

Corey Greendale - First Analysis

Okay and in terms of how you are feeling about the initial guidance for solid waste price and volume?

John Casella

I think we are still pretty confident that as we said we are likely to see an offset in terms of increased price and volume from the recycling component on the processing side and I think we have seen stabilization in the Northeast of the economy. I think for a period of time, about a year and a half ago we were seeing significant deterioration on a quarter-over-quarter basis. Over the last couple of quarters we’ve seen stabilization, so I think that we are cautiously optimistic in terms of where we are from a price and volume standpoint for the rest of the year.

Corey Greendale - First Analysis

And the other question if I could for Paul is, it sounds like you are finding some low hanging fruit in terms of improving operation; I’m trying to extrapolate from that how much of an opportunity there might be to apply similar things to the entire company, so is there anyway you can give a sense of what percent of the revenue base you’re working on now and whether these operations, these regions are really outliers and you are just getting them up to where some other areas are already operating or whether it make sense to look for that $2 million in saving and you’re looking at whether there could be a chance to go back to $10 million as you build it out to the entire company?

Paul Larkin

It, we are looking at the entire company I would say we’re focusing very hard on specific markets. Everything that we’ve seen in those specific markets and that its also a combination of two things, I think very disciplined and focused sales programs combined with driving operating efficiency in those six and yes, it is something that we feel we can take to all the markets in the footprint.

John Casella

Now I think it fair to saying that we think that there is considerably more opportunity in terms of the overall footprint of the business, but a lot of that has to do with not just simply looking at the legacy model and trying to take out costs but we think the legacy model and so I think its critically important. A lot of what Paul is doing is helping our culture rethink this model so that we use innovation and technology to help reduce our overhead and reduce our costs; its what the next generation of hybrid truck, what’s the next opportunity from a oil processing, what are the things that we can do and what are the impacts from an innovation technology standpoint that can help us and I think its very fair to say that some of the success that we have had from a cost standpoint is because our people are rethinking the model and we’re using innovation and technology to do that. So it’s not just staying in the legacy model and taking costs out, its really rethinking that model that’s critically important to that question Corey.


Your next question comes from David Feinberg - Goldman Sachs.

David Feinberg – Goldman Sachs

I wanted to ask some questions more generally about the industry and a little less specific on the quarter results. There’s been obviously a lot of news about consolidation whether it’s occurring or even some of the smaller players buying private companies.

I wanted to hear you folks playing in on a, what’s your thought in terms of consolidation in general? Would any of your market areas be impacted and I guess more explicitly, are there any opportunities as you begin to roll out some of these new initiatives you talked about, not only to dispose of assets like Mane Energy but also to acquire other assets?

John Casella

Well l think that clearly with the sequential activity from a merger acquisition stand point with regards to waste republic allies, the republic ally transaction as well as the waste ally transaction could present opportunities on a go forward basis in terms of assets that overlap with us. So I don’t think that there is any question but that would create significant opportunity for us from an overlap stand point in our existing solid waste franchise.

David Feinberg – Goldman Sachs

Do you believe that you are in a position to bid on those assets if and when they come to market?

John Casella

Currently we have $150 million of availability. I think that we will have to look at the size of that potential transaction, the potential overlap, the value creation, what it means in terms of executing against our strategy and creating value on a long term basis. We certainly have a capital structure that would allow us to grow up if in fact we can create significant value with those assets.

David Feinberg – Goldman Sachs

And if I can speak in one of the follow up related, in terms of the private companies coming to market we have seen one example, a relative large private company selling itself to a public company. Are you finding that there is any acceleration in terms of what this private company is trying to sell?

John Casella

I guess I’m not really sure what the question is David, what you are really trying to get at?

David Feinberg – Goldman Sachs

We picked up that given that its election year there is some concern about changes in the capital gains taxes and that may or may not be bringing private company owners to market. We are concerned about whether or not they sell in ‘08 or ‘09 or even ’10, what implication that might have for taxes and as a result that there might be more folks coming to market here in late ‘08 trying to sell their business before the end of the calendar year. I guess that’s explicitly what I’m trying to ask?

John Casella

Very good, now I understand the question. I think that there is a certainly those folks who are predisposed, who have already made a decision that they are going to sell their business would very likely be working very hard to get that done before year end. I don’t think that there is any question about that but I don’t think that that factor alone is going to be the cause.

I would think that it would only cause those folks who have already made a decision that they want to monetize their asset to really try to move that process forward and get it done before year end, but I don’t think that that would be the driving factor for someone.

David Feinberg – Goldman Sachs

I guess more explicitly is there a pipeline for Casella waste?

John Casella

There is a pipeline; we’re working on a number of opportunities. We continue to go small transactions where it’s a complete tuck into our operations and we book at any larger opportunities as they come up. I think that there is clearly a bit more activity there than we have seen over the last few years and of course we are looking more seriously at that ourselves at this point in time where can add processing capabilities consistent where we are trying to take the business as well as help to raise our internalization rates to our disposal facilities.

I think your point is well taken, I think that there is a bit more activity out there right now; we are beginning to see more activity from a sales standpoint, more people interesting in selling their business. I think that there is a bit more activity in that regard.


Your final question comes from Scott Levine - J.P. Morgan.

Scott Levine – J.P. Morgan

Giving what you’ve seen in the western region with regard to disposal price would you say that your plans for ramping aches in Ontario are consistent with what you expected maybe three to six months ago or maybe routing back a little bit; any real change there given what you’ve seen in the market so far and what your expectations are going forward?

John Casella

I think that it’s fair to say that there has been a little bit of a change, but I don’t think that there is a change in terms of our ability to ramp it over a three year period of time. I think maybe a little bit slower for the first year and I think that’s consistent with getting a fair return for that invested capital, so yes I think that probably there is bit of slowing in regards to the first year, but I still think that we’re very confident that we will be able to ramp it over the three year period of time that we had laid out.

Scott Levine – J.P. Morgan

Can you give a little bit more of a back end trajectory over a three year period?

John Casella

I think that’s fair; I think probably more in the second and third year as opposed to maybe being off slightly in the first year. I think that we need to be thoughtful in the market place and we need to be thoughtful in terms of how we approach it and as I said earlier there is one pocket where we have different dynamics from a competitor prospective.

Also the other thing that I think is also critically important to that equation Scott is we are also seeing now oil prices comeback and that’s another big factor in terms of those facilities because they are impacted by third party long haul transportation and so that’s another factor as oil prices come back. I think that also boards well from pricing there as well.

Scott Levine – J.P. Morgan

We see continued stability I guess in the diesel price complex then that would board well for pricing in New York specifically?

John Casella

Yes I think that’s very fair particularly if it stays at the $100 level and we don’t move ourselves back up to a $140.

Scott Levine – J.P. Morgan

I think Richard you mentioned the 51 basis point impact to your reported solid waste pricing due to the closure activities, did you give a volume impact number for that quarter and if you have the numbers for the last quarter normalized for closure activity in solid waste pricing volume, I’m just kind of looking to see what the trends were directionally quarter-on-quarter after normalizing for the Pine Tree closure in general?

Richard Norris

Yes I’m afraid I don’t have the last quarter numbers here. May be you could call Ned after the call and get that data from him, but the volume of the Pine Tree and the closure facilities was actually up in the quarter as you would expect and it was up about 96 basis points.

Scott Levine – J.P. Morgan

Okay so 96 basis points increase in volumes due to the closure activity?

Richard Norris

Yes the combination of Pine Tree and closure.

Scott Levine – J.P. Morgan

Pine Tree and closure and then 51 basis points hit the pricing?

Richard Norris

Correct yes.


And ladies and gentlemen that does conclude the question-and-answer session.

John Casella

Thanks. In conclusion our strategy is working well and we continue to work and execute very well against all aspects of that strategy. I’m extremely pleased with the first quarter results from a development stand point, from an operating prospective, from the execution of our plan to add processing capability. I think that we had am absolutely terrific first quarter and I look forward to the rest of the year.

I think we executed well against factors we control. Those efforts really mainly offset the negative head ward wins from sluggish North East economy and rapid increases that we received in diesel prices. We continue to be committed to increase in share holder returns and generating positive free cash flow.

Thank you for your attention this morning. Our next earnings release and conference call will be in early December when we’ll report on our second quarter fiscal year ’09 results. Thank you everyone. Thanks for your attention this morning and have a great day. Thanks.

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