Joseph S. Fusco - Vice President of Communications John W. Casella - Chairman, Chief Executive Officer, Secretary and Chairman of the Board of Casella Waste Management Inc Edmond R. Coletta - Chief Financial Officer, Senior Vice President and Treasurer Edwin D. Johnson - President and Chief Operating Officer.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division Scott Justin Levine - Imperial Capital, LLC, Research Division Michael E. Hoffman - Wunderlich Securities Inc., Research Division Corey Greendale - First Analysis Securities Corporation, Research Division Joe Box - KeyBanc Capital Markets Inc., Research Division.

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Second Quarter 2014 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce our host for today, Mr. Joe Fusco. Sir, please go ahead..

Thank you for joining us this morning, and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ed Johnson, our President and Chief Operating Officer; and Ned Coletta, our Senior Vice President and Chief Financial Officer. Today, we'll be discussing our second quarter fiscal year 2014 results.

These results were released yesterday afternoon. Along with a brief review of those results and an update on the company's business and activities, 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 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 Investors section of our website at ir.casella.com.

And now, I'll turn it over to John Casella who'll begin today's discussion..

sourcing incremental landfill volumes, improving collection route profitability, completing the multiyear Eastern region strategy and driving value with Customer Solutions.

We remain committed to these strategies throughout the remainder of fiscal year 2014 as we believe they are the main drivers to increase financial performance and improve shareholder returns. In addition, our management team remains focused on reducing risk throughout our business to improve financial stability.

Our success in the quarter was led by strong volumes at the landfills with tonnages up 122,000 tons year-over-year.

We believe that this improvement in volumes and financial performance is not the result of a broad-based improvement of the Northeast economically, but is more directly attributable to our actions over the last year, including the formation of a special waste sales team, the realignment of our landfill management structure in Western New York, several new additions to our landfill team and the tightening disposal market in select geographies.

Volumes were up at our Waste USA and Clinton County landfills as we sourced new special waste streams and benefited from the Moretown closure. In mid-November, we received a permit increase at our Waste USA landfill, which increased the annual limit from 370,000 tons a year to 600,000 tons a year.

Since the closure of the Moretown landfill, we've been running at an annualized run rate of roughly 475,000 to 500,000 tons per year. This new permit provides a great platform to further grow volumes at the site.

We added further value at Waste USA site in mid-November, when we sold a feed-in tariff for a 2.2 megawatt solar project for $2.3 million to a solar developer. We received 1/3 of this cash in November and expect to receive the remainder by next summer.

Volumes were up at our New Hampshire, Maine and Massachusetts landfills as we ramped tonnages to the new permit level at the Southbridge Landfill, redirected tonnages from Maine Energy to other sites, internalized the volumes from the BBI acquisition and benefited from the Wheelabrator closure of the Claremont incinerator on September 15.

We except -- expect this market area to further tighten as additional competitive capacity comes offline. As we've discussed for the last few quarters, the Massachusetts disposal capacity will continue to shrink over the next couple of years.

Volumes were modestly up in Western New York as we sourced several long-term customers and won more than our fair share of special waste and contract work throughout late summer and early fall. Through the first 6 months of our fiscal year, volume at our landfills were up 298,000 tons year-over-year.

We're tracking well against our goal to add over 500,000 tons of additional waste from fiscal year 2013 and believe that we should hit this target by early fiscal 2015. Moving ahead -- moving on. I will let Ed run through his game plan and successes on improving real profitability and operating efficiencies.

As we discussed last quarter, we reorganized our former Major Accounts group into a new business unit called Customer Solutions at the beginning of the fiscal year.

The Customer Solutions team is tasked with sourcing multi-location accounts, partnering with our local teams to bid municipalities and colleges and universities and develop a resource solution for industrial customers.

In conjunction with local hauling, recycling, organics and disposal teams, the Customer Solutions has had a number of big wins over the last couple of months, including, on the retail side, we reversed the negative revenue trends as we anniversary-ed the lost Oakleaf accounts and began to ramp up several large new customers.

On the municipal front, they worked with our local teams to renew and win several important new contracts this fall, most notably, early September, we were awarded a 10-year collection and disposal contract for the City of Concord, New Hampshire.

We expect to generate over $40 million of revenues over the life of the contract and internalize over 30,000 tons of MSW per year at our North Country landfill. On the industrial side, we're making great progress launching a new set of industrial recycling and logistic services.

This asset-light model is a key differentiator with high-end industrial customers that want help to manage their waste chains to meet zero waste, recycling or cost-reduction goals.

To accelerate this strategy, in early September, we completed the acquisition of A Greener Solution, an industrial recycling and resource solutions company focused on creating value from traditional waste streams. We've worked hard over the last several years to rationalize our assets, sharpen our strategic focus and reduce our risk exposures.

With the sale yesterday of our equity in GreenFiber, we made another step forward along this path. The sale ends a long journey with this non-core investment, which in recent years, GreenFiber was a drag to our earnings and required capital support from the parents. With that, I'll turn it over to Ned, who will take you through the numbers..

Thanks, John. Revenues in the second quarter were $132.3 million, up $15.5 million or 13.2% year-over-year. Solid waste revenues were up $11.4 million or 12.7% year-over-year with the increase mainly driven by higher disposal volumes, acquisition activity and higher collection pricing and volumes.

Revenues in the collection line of business were up $6.3 million year-over-year with price up 1.8% and volumes up 2%. Roll-off volumes were up 2.7% in the quarter. This was the second quarter in a row with positive volume growth after we had experienced a 2-year period with volume declines.

Our pricing programs in the commercial and residential lines of business remain on track in the quarter with positive 1.7% price. Revenues in the disposal line of business were up $5 million year-over-year or 15.4%. Excluding the divestiture of Maine Energy last year, disposal revenues were up $6.4 million.

Pricing was up 0.6% in the disposal line of business, with the increase mainly driven by waste mix shifts, with increases at the higher tipping fee landfills in Vermont, New Hampshire and Massachusetts.

As we discussed last quarter, pricing was negatively impacted in this quarter, again, by a mix shift at the Waste USA landfill where, historically, many third parties have paid us a grossed up tipping fee that included various taxes and district fees.

And recently, we've been working to change the terms of our third-party agreement to have them pay this rate on their own. In many cases, these fees are in excess of $20 per ton.

Landfill volumes were 1.1 million tons in the quarter, up 122,000 tons year-over-year, excluding the positive benefit of additional soils that we placed at the Worcester landfill in the quarter. The year-over-year gains were primarily driven by higher MSW tons and higher C&D tons, with MSW tons accounting for 68% of the increase.

As John mentioned, landfill tons were up 298,000 tons year-to-date through October. Further, landfill tons were up 44,000 tons sequentially from Q1 to Q2, and we expect the year-over-year gains to continue through the remainder of our fiscal year.

As we discussed last quarter, we received an approval in June to place an additional 200,000 tons of soil at the Worcester landfill closure project.

We expect this to be a one-time benefit in fiscal 2014, of roughly $5 million of revenues and $2.5 million of adjusted EBITDA, with the final grading, shaping and closure of this site to be completed in fiscal year 2015.

Recycling revenues were up 17.3% year-over-year with recycling commodity prices up 9.9% and volumes up 7.4% as we continue to leverage our industry-leading quality control processes and infrastructure to drive higher volumes to our facilities.

The year-over-year increase in recycling commodity prices was driven mainly by higher fiber prices, which were up 17.3%, partially offset by declines in containers down 6.5%.

We expect commodity prices to soften sequentially in our third quarter due to a normal increase in volumes during the holidays followed by lower demand during the Chinese New Year. Other revenues were up $2.7 million year-over-year, with organics revenues up $1.1 million on higher volumes and the ramp-up of a new biosolids processing facility.

In Customer Solutions, revenues were up $1.3 million. As John mentioned, Customer Solutions revenues were up as we fully anniversary-ed lost Oakleaf accounts and we began to ramp service levels to a number of newly won customers and we integrated the acquisition of A Greener Solutions during the quarter.

During the quarter, we recognized $7.1 million of revenues from the rollover impact of acquisitions, partially offset by $2.6 million reduction associated with divestitures. Adjusted EBITDA was $29.2 million in the second quarter, up $4.8 million from the same quarter last year.

Adjusted EBITDA was $27.5 million in the Solid Waste segment, up $4.5 million year-over-year on higher landfill volumes, the integration of the BBI acquisition and improved performance at several hauling operations.

Adjusted EBITDA was $900,000 in the Recycling segment, up $200,000 year-over-year with higher pricing and volumes partially offset by higher operating costs. Adjusted EBITDA was $800,000 in the Other segment, up $100,000 year-over-year with higher organics performance partially offset by higher corporate expenses.

Cost of operations was up $8.4 million year-over-year, or down 180 basis points as a percentage of revenues with the majority of the dollar increases resulting from higher solid waste and recycling volumes and the acquisition of BBI operations.

While cost of operations was down as a percentage of revenues, due to improved operating efficiencies and increased leverage of fixed costs on higher revenues.

G&A costs were up $2.5 million year-over-year with the increase mainly driven by higher incentive compensation accruals, higher bad debt expense primarily related to 2 disposal accounts, and higher labor costs as we've added several key administrative and sales positions to drive performance.

D&A costs were up $1.1 million year-over-year, largely due to higher landfill amortization on higher volumes and higher amortization associated with the BBI acquisition. Our leverage and liquidity improved again this quarter, with total debt at $511.6 million.

Total debt to bank EBITDA at 5.06x, down from 5.20x last quarter and true availability to our tightest covenant at $58.1 million. We remained focused on our goal to bring leverage below 4x and we expect to achieve this goal through a combination of EBITDA growth and debt reduction.

Given our solid performance year-to-date and better visibility into remainder of our fiscal year, we've increased our revenue, adjusted EBITDA and CapEx guidance ranges for fiscal 2014. The new ranges are listed in our earnings release.

At this point, we are maintaining our original fiscal year '14 free cash flow guidance range of positive $4 million to positive $8 million. And this is due to higher than planned capital expenditures and a negative change in working capital that was due to higher than planned revenues year-to-date and the -- and timing differences for AR and AP.

Capital expenditures are up from plan given our higher run rate of landfill tons through the first 6 months and the necessity to begin building landfill cells this winter, more new customer wins than expected and additional investment in the fleet. And with that, I'll hand it over to Ed. Thank you..

Thanks, Ned. Good morning, everyone. Well, we continue to make progress and we're pretty pleased with where we are at the midpoint of our fiscal year.

It's been 1 full year now since we implemented our new management structure, and I think it's fair to say that we're very happy with the culture and management team that we now have in place and that we continue to stay focused on the important fundamentals of our core business.

Our financial results are showing improvement now in both the disposal and collection lines of business. We continue to grow our recycling volumes and we are implementing numerous initiatives that will provide us avenues for growth, both of revenue and profit, within our Northeast footprint.

Our prospects have never looked better but we need to continue to work hard and work smart as we strive to reach our potential. I mentioned last quarter that there are a few fundamental things that I look at to make sure we are making progress and that the trends are healthy.

Starting with the collection side of the business, it's all about winning business on the street, getting price and improving efficiency. We continue to successfully manage price in our commercial and residential lines of business, ahead of cost increases.

Last quarter, I talked about our roll-off line of business, which is primarily job or project based and it's priced on a zone basis, depending on how far the customer is from the disposal facility or our yard. Therefore, price is affected by mix. But overall, our roll-off pricing was strong in the quarter and provided -- and is positive for the year.

The next place I look for fundamental business health is our net new business. We continued to see positive net new business across the footprint for residential and commercial waste and recycling services through the quarter. I mentioned last quarter that our monthly net new business had been negative through last March and turned positive in April.

And has continued positive since then, meaning that we are now winning on the street. The third place I stay focused on is the efficiency of our operations. Our internal drive to improve collection efficiency revolves around all of the factors that determine route profitability.

Things like route optimization, equipment optimization, individual customer pricing, route density and driver incentives. We have ongoing initiatives in all of these areas and are now starting to see results. Second quarter route profitability improved by about 8% over the same quarter last year.

As we all know, the health of the landfill side of the business is volume-dependent. As John mentioned, we continue to be successful in getting tonnage to the landfills. Pricing on the disposal side is stabilized overall, but this is really a story of 2 halves.

Our Eastern landfills, which are operating at or near capacity, are starting to work price up. In our Western landfills, which are still operating below capacity, we cannot push price. I'll comment on more on this in a minute.

My current assessment of the company is that we now are very comfortable that we have the right people in place, a hardworking and talented management team properly motivated and working collaboratively for success.

Our focus now is on developing our ability to profitably grow our business around this team and provide them with the tools that they need to make our operations more efficient and our services more compelling in the market. There is plenty of opportunity in our existing footprint using our existing assets.

So with those brief comments on our current progress, I want to give you my views on the rest of the year and what I see going forward. We've had a great start to the year and are pleased with how our seasonally strong quarters have played out.

Year-to-date, our adjusted EBITDA is ahead of last year by $9.2 million and we've raised our guidance to reflect that. The midpoint is roughly $9 million above our fiscal 2013 results. Many of you may be thinking that if we're running at that pace now, why can't we count on staying ahead through the rest of the year.

As you can imagine, there are a lot of moving pieces in our forecasting, but the simple answer is the risk related to seasonality. Over the past 3 years, our third quarters have come in short of our expectations as the seasonality was greater than we expected and some of the drivers for our current success may increase the seasonal effect.

So we don't want to get ahead of ourselves and be disappointed. Remember also that we acquired BBI a year ago and immediately began internalizing those volumes. We closed our Maine Energy burn plant at the end of December last year, reaping the benefits at our North Country landfill, and we received the permit increase at Southbridge.

So those items are all in the comps going forward. The longer strategic picture is starting to get very interesting, and I really want to share with you what we are seeing in our future.

On the collection side, we have put together a great team anchored by strong divisional management teams that are focused on how to grow their markets and our profitability at the local level.

Supporting those local teams, our Customer Solutions group has evolved into a powerful resource to help expand their ability to attract and service higher-end customers as well as providing new revenue sources from existing customers by developing solutions to all of their waste and production byproduct needs.

Using a SWAT team concept, Customer Solutions allows us to up our game with more sophisticated customers and we are starting to show results.

From an operation standpoint, we have clearly identified opportunities that can be realized from incremental improvements in our fleet and in our logistics management and should be on the road to additional improvements and efficiencies.

This gives us confidence that we're going to see continued improvement and financial performance from our collection activities in fiscal '15 and fiscal '16. The landfill side, which is a big driver to profit and cash flow, is where it's really getting interesting.

The long-term strategy in our Eastern landfills is clearly coming together as capacity is coming out of the market from Massachusetts to Vermont. We started the ball rolling with the closure of Maine Energy last year, taking out 300,000 tons of annual capacity.

Over the summer, the Claremont, New Hampshire facility announced it was closing, eliminating another 70,000 tons of capacity. And the South Hadley, Massachusetts landfill announced it was closing in March of 2014, eliminating about 100,000 tons of capacity.

We anticipate that 6 other Massachusetts landfills will close in the next 3 years, and there is significant financial pressure on other small-sized waste energy plants that, like Maine Energy, have difficulty surviving in a low-energy rate market. So the Eastern market looks very promising.

Our Western landfills operate in a market with excess capacity and this is where the economic downturn hurt us the most, but the market is destined to change as New York City moves closer to their plan of managing their 13,000 tons per day of residential waste.

We believe a good portion of this waste will remain in the state, using up capacity in Western New York. About 800,000 tons per year or 2,000 tons per day has already been awarded and is expected to begin movement in early 2015.

To be clear, I'm not saying that we're going to get any of this volume directly, but the market will benefit as the facilities receiving those tons will have to push out other volume to make room and the market dynamics will improve dramatically.

In addition, as the Massachusetts and Connecticut markets begin facing capacity shortages, our ability to capture volume from those markets to move west will rise quickly. The perfect storm would be the opening up of drilling in New York, where we are perfectly placed to receive drill cuttings along our southern tier chain of landfills.

Summing up the quarter, we're very happy with where we are and the prospects continue to be exciting. I'd like to turn it back to the operator now to start the Q&A..

[Operator Instructions] Our first question comes from the line Al Kaschalk from Wedbush Securities..

I have a -- maybe a broader question and I know there's a lot of moving pieces here but let me start. If I look at the EBITDA margins for the quarter, I believe it is in the 22% range, and I hear about capacity coming out and your pricing comment.

Why are we not seeing maybe a shorter term lift in margin performance given the seasonally strong periods?.

I think, Al, it's Ned. I think the biggest reason here is some of the new revenue streams coming online are lower margin revenue streams as well. Our brokerage business has been doing very well. We've ramped on some new customers through Customer Solutions during the quarter and our Organics business that are lower margin.

We saw some revenue expansion as well from our Recycling business. Overall, if you look at our Solid Waste business in the quarter, our Eastern region margins were up roughly 400 basis points year-over-year to right around 25%. And our Western region margins were generally in line year-over-year, right around 27%.

So it's more of just a mix of our asset mix and our businesses and where some of the revenue growth is coming from year-over-year but our 2 Solid Waste segments are north of 25% and improving..

And then, if I look at the pricing side, which markets are you maybe excited about the outlook for price versus maybe not so inclined to see price increase shorter term? And I view that obviously in the context of the landfill commentary that Ed made on the Eastern and Western components.

But if you could talk about maybe where pricing is, you're -- I won't say happy with, we're never happy with just some price, but where are the pricing trends a bit more favorable shorter term and where is there some work to do? And maybe explain why there's still more work to do..

On the landfill side, it's all about capacity supply and demand. So in the Eastern region, there is now -- we're now starting to see the capacity come out of the market that we predicted years ago. It's just now starting to happen. So as that capacity comes out of the market, we anticipate there's going to be an opportunity to work our price up.

And we're already, really starting to do that. In the Western markets, we still are under capacity. There's too much capacity in the market.

When the various events that I mentioned, particularly the New York City waste starts flooding into the upstate market, then the capacity starts being used up, but we're not at a position yet where I expect to see much price movement there. On the collection side of the business, it really comes down to a market-by-market analysis.

Where we're in markets where we have a lot of competition, like the urban markets, pricing is a little more difficult to get in those markets. But most of our markets are small towns where we're the significant player in the market. And I think we have more opportunity for price in those markets..

If I may just add one little touch and follow-up here. If I look at that 500,000 ton goal and you think about the next -- I don't know if you're at around 300,000 now.

But where -- what areas or what regions do you expect that incremental or anticipate that incremental volume to come? And may provide us with a little bit of a lead-in into that pricing dynamic?.

I think it's going to come across the board, Al. I think that we're anticipating that we're going to continue to see improvement in the Western region. Keep in mind, too, that over the last year, we obviously have to be at market in order to attract the tons.

So the first 300,000 tons, as we attracted that additional tonnage on a year-over-year basis, we're doing that obviously at market rates. As we continue to move tons to our facilities, begin to maximize price on a go-forward basis. Initially, we had to be competitive in the market to attract those tons.

We've attracted a significant portion of that tonnage and now, it's really -- it is -- it becomes more important in terms of where we're going from a price standpoint. But I think we're going to see more activity, as Ed said, with the changes in the marketplace that's happening because of New York City.

And the dramatic changes in the Eastern region, in Massachusetts, there's significant capacity still to come out of that market. And I think there's going to be continued pressure not only from the standpoint of landfill capacity coming out but also the smaller waste-to-energy facilities, I think are -- also we believe are also at risk.

So, I think we're going to see more activity in the East and likely to see more activity and opportunity from a price standpoint in the West as well because of New York City..

Al, let me follow on John's points with a couple of details. We lost roughly 450,000 tons in Western New York from fiscal '11 to fiscal '13 and it was one of the main negative drivers to our business model.

As we've been growing volumes this year and executing against our plan, we're seeing strong volume growth in Massachusetts, Maine, New Hampshire and Vermont and some volume growth in Western New York. But we predict we're going to get back around 100,000 tons at Western New York.

So there's a lot of upside still in that Western New York market as we can source additional tons to those landfills and get the operating leverage. As you know, the last ton in the gate has a 80%, 85% margin at the landfill, so there's a lot of incremental benefit as we further execute that plan..

And our next question comes from the line of Scott Levine with Imperial Capital..

So on your last call, you'd indicated that most of the improvement that you'd seen was a function of internal initiatives. You hadn't seen much improvement in the external backdrop and the macro backdrop generally.

And I can appreciate that you changed, maybe a little more conservative with the guidance assumptions this year, but if you could comment on whether you've seen any additional help from the market environment improving and if so, what your expectations would be in terms of what that impact would look like as you move into your seasonally slower part of the year and whether you are any more confident or optimistic that you're getting more tailwinds and benefits from the operating environment in general..

Well, I think it's safe to say that we've -- it's a positive environment. We're not seeing a huge uptick in the economy, but there is some and that's reflected in our roll-off pulls. There's more roll-off activity and as you know, that's tied to temporary work primarily. So it's job-related, project-related and those are starting to loosen up.

So we are getting some tailwind from that. The biggest benefits that we're getting financially though for the quarter are internal initiatives and things that are happening at the macro level for the market like tonnage coming out of the, capacity coming out of the markets..

Got you. And maybe turning to the EBITDA, obviously, has been a big upside versus our expectations here for the quarter.

I guess the free cash flow, maybe help us understand, it sounds like negative working capital [indiscernible] why you're not bringing the guidance up with the CapEx moving? But maybe a little bit more color on expectations there and expectations in 2014 and what some of the drivers might be to get the free cash flow up in line with EBITDA?.

Thanks, Scott, we did not revise free cash flow in this quarter as we stated because of higher expectations for CapEx, and we are going to be building some cells this winter that we did not plan to build during the year with our initial volume expectations, most notably up at Waste USA landfill and we have some additional work we need to do in Massachusetts as well.

So that increases our capital expenditures for the fiscal year.

But if you kind of flashback to April, we were tight against covenants in April and we were very aggressive with our working capital management at that point in time and we've reverted to a more normal business cycle today, which has caused our working capital to be negative through the fiscal year.

We'll look at this each quarter and manage as well as we can. But we had some historically low days sales outstanding in the month of April and historically high days payable outstanding and we've reverted to a more normalized business cycle today..

Got you. That makes sense. One last one, if I may. The SG&A, up a little bit here in the quarter, think you touched on that a little bit.

Can you help us understand maybe your thoughts on that and maybe as a percent of sales or an absolute dollar based, what kind of run rate we could expect going forward?.

Give me a second here. So the main drivers as we discussed on G&A being up were incentive compensation, that's one of the larger pieces of it.

We did not have any accruals last year for incentive compensation for our management team, or very low accruals for specific operating units, and this year we're trending towards earning some incentive compensation. So those accruals are up.

As I stated, there are a couple of customers we wrote off bad debt on and we have hired several new people to our landfill sales, special waste team and some new managers throughout the company to help drive growth.

As we look through the remainder of the fiscal year, our G&A, we're looking at roughly 12.5% of revenues for the forecast for the year, is generally where we're tracking today..

And our next question comes from the line of Michael Hoffman from Wunderlich Securities..

Happy belated birthday there, John. Or maybe you're just celebrating anniversaries of a birthday, I guess, at this point..

I think that's great, Michael..

To beat the free cash flow dead horse a bit more. When the business, the typical operating leverage for volumes, pretty significant and tends to be self-funding of incremental capital needs. So with leaving a little bit of excess.

So, the struggle would be, this is a levered company who's now successfully reoriented the direction and scope of margins and EBITDA, but the cash isn't keeping pace and -- from a directionality. So that's kind of digging deeper around philosophically why that's not happening at this juncture.

When, and when do we start to see it happen? And then the second piece, if you could just clarify for me, historically, you've calculated the free cash, including the benefit of asset sales.

So where was GreenFiber in your original guidance? Was that ever thought of being part of that $4 million to $8 million and if it wasn't, then doesn't it go up by $3.5 million, anyway?.

I'll take the second question first, Michael, regarding GreenFiber. You are right, we have traditionally included asset sales in our definition of free cash flow.

And it's in items like selling trucks and idle pieces of property and whatnot and we've traditionally tried to not capture one-time larger sales through that line item, something that would not reoccur. And furthermore, if you look at what we've done with GreenFiber over time, it's an unconsolidated entity.

It was an equity method investment and we've made investments in this investment over the years and we have not shown negative outflows to free cash flow, and we just have not run it through that calculation, which we really look at as a measure of operating performance or more core business. So we disclosed the transaction yesterday.

We have not worked through all of the accounting. But I suspect, while it is going to be a cash benefit, we are going to pay down debt. I suspect we're not going to gross up free cash flow from that sale..

Okay, but if you did file a historic way, so it's frozen.

Put another way, it's not in the $4 million to $8 million?.

It's not in the $4 million to $8 million, yes..

So that's a net positive, then. That's one. So let's go back to the other one, which is sort of the higher level philosophical.

Why and when does your free cash start to track pace-wise with arguably very nice improvements and what appears to be sustainable improvements in both total dollars as well as margin and the corresponding operating leverage?.

Well -- I'm sorry, we're just deciding around the table who's going to answer a question. When you look through our fiscal year plan and you step back, we started the year in a very conservative place.

We're not coming off of that from a CapEx standpoint, but as we've improved our operating results throughout the year, and Ed's been out on the street working with local teams to identify areas and investments that could yield nice results for us going forward in the right return profile.

We've decided to invest also in a number of fleet improvements that were not part of our plan. We've sourced new long-term customers multiyear contracts that we've decided to put assets on the ground to service those customers and we've begun growing again.

And I think our original fiscal year plan, really, we're still in a very defensive mode back in the March and April timeframe, and we were not looking at some of these growth opportunities.

And we're still being conservative with capital, but there's some of that there as well, investment for the future along with just replacement of landfill airspace and that's where some of the variance comes from as well..

Okay, but, so if I hear all of that, I....

I also think that as time goes on and we begin to leverage price from a disposal standpoint, it's also going to contribute disportionately to free cash generation as well, Michael..

Right, and, so that's I guess, that's a little -- and I'm thrilled to death you made this progress, but if we relied solely on the sustained growth of this EBITDA, then the working down of the leverage is torturously slow and you need the offsetting free cash flow to help this.

And I'm trying to understand how that starts to scale; based on what you just said, it doesn't appear it will and I'm hoping that's not the case.

So and I am perfectly comfortable with the idea that there was overarching conservatism, but help us to understand that there is, in fact, out here, in a reasonable timeframe like you did last spring about this improving second half that the free cash starts to track?.

I think it is. If you look through our net cash provided by operating activity and you see how negative our working capital is year-to-date. And as I stated earlier, I don't want to get too much in the weeds, we were pretty aggressive at April 30. We were up against covenants.

We sought an amendment to our credit facility after that point in time and got a lot more headroom and we've worked down leverage. But if you step back in time to April, we managed the heck out of working capital and now that we're in a more normalized business set of practices, you can't do that in every period.

It's not the way to manage your vendors and work with your customers effectively.

So we probably have gone more negative than we originally intended on working capital for the year and as we look through the rest of the remainder of the year, we're not assuming a big improvement from where we ended up in Q2 but we'll continue to actively manage that area..

Okay, so, again, what I'm hearing is you overreached one way, you overreached the other way and you are going to find a middle ground. So by definition, we probably see a little help here or at least get up into the higher end of this. But the second piece still remains the operating leverage issue, which is just that.

Let's say your working capital does -- there's this in and out and it settles out. The operating leverage should more than finance the incremental capital. You should have some residual cash and that doesn't appear to be happening yet..

And I think that's a timing question, though, because as you're growing your business and you're investing capital, you don't get that cash that same period. So I think as we invest and we haven't done our budget for next year. We don't know where we are for next year.

But as we go through our seasonal slow time, the things that we're investing in are going to benefit us down the road..

Okay, all right..

I've got some numbers in front of me and I was just kind of put in perspective this working capital thing that Ned's talking about. And you talk about the EBITDA margin. Well, the EBITDA margin in the fourth quarter, which was our year end, is the lowest for the year. It was about 17.8%.

Our cash flow, because of what we did to manage aggressively on the working capital, went to a positive $4.4 million for the first time of the year. I mean, we were negative $12 million last year. So the change in cash flow was pretty dramatic from last year to this year overall. And last year's was boosted in the fourth quarter.

So we need to stay somewhat conservative in the way we're going to look at how we're going to end up our year on cash flow when you have that big working capital swing to deal with..

I hear. I guess from a standpoint of the market, it's going to need to see a combination of both the EBITDA as well as the cash to get comfortable about the sustained trend of lowering the leverage..

Well, you know I'm a big believer in cash flow. So....

I get that. So to that end, back to the displacement issue, the first side of this volume hits the spring of '15, the New York City stuff. The second half, probably hits the midyear to second half of '15. That's the known sort of 3,000 tons that are out there. It's all going into that sort of upper northwest corner in New York.

And it appears that virtually all of it is displacing existing volume, that these are full sites that are getting it.

So as you think about that, as that pushes out and starts finding homes, how much stuff is in the way before it gets to you that you end up in that beneficiary of the actual tonnage -- forget price, let alone what it might do to price..

There is -- in our view, and this is kind of crystal ball stuff, there isn't much in the way. I mean when that volume is going to a burn plant, you know those burn plants are full. They just lower price to stay full because they're producing electricity and that's their main focus.

So when that volume goes to a burn plant, they have to push out other ways and then there is just a domino effect because there is excess capacity, but ours is really the biggest excess capacity sitting in the far western footprint of New York..

And our next question comes from the line of Corey Greendale from First Analysis..

Speaking of beating the dead horse, so I just want to make sure I understand the dynamic on free cash flow. So looking at what you just reported, it looks like the free cash flow has improved in the first 6 months of the year by about $11 million from last year.

Looking at the CapEx guidance, looks like your CapEx will be about flat in the back half of the year versus the back half of last year.

And given the working capital dynamics you're talking about, is there any reason to think that free cash flow wouldn't be up year-over-year in the back half of the year versus the back half of 2013?.

We expect it to be up in the back half of the year..

Actually, it looks like it should be up commensurately with EBITDA for fiscal '14.

Does that sound right to you?.

Yes, we typically invest less in capital in the second half of the year, as you know, and our second quarter, we have $15 million of cash interest payments whereas in our first quarter, we have $2 million.

So the second quarter is a big negative cash quarter for us, where we're investing in a lot of CapEx early in our fiscal year, we have big interest payments, so we do expect it sequentially to improve..

Sounds like free cash flow should be up at least [indiscernible] with EBITDA for the year and if you get some reversal of that working capital dynamic you talked about, maybe even more than EBITDA? Does that sound reasonable?.

Yes..

Then on the improvement in landfill volume so far, is there any way you can give us a sense of this the 300,000 tons that you've gotten this year so far, how much of that is kind of event-driven versus more recurring kinds of stuff?.

The vast majority of that would be reoccurring, Corey. There is -- we've seen an increase in special waste as well because of the efforts that we've had, but the vast majority of that is reoccurring waste. MSW from closures, from the Moretown facility, from the Massachusetts facility and the Claremont incinerator.

We also have, in the next year, I believe in '14, we're going to see 2 additional facilities, in addition to the South Hadley facility come offline in Massachusetts. So we're going to see that dynamic into '14 and '15 and obviously, we'll see that dynamic in '14 and '15 with New York City in the West..

Corey, I said in my prepared comments that 68% of the increase year-over-year was MSW volumes. These are contracted or new streams we're bringing in..

So in other words, to get -- I do realize there's some seasonality, but to get to the 500,000 goal for the year, so, a bunch of that is already in place, because some of the recurring stuff will still be there in the back half..

That's correct, that's correct..

Got it, and then, with the moving pieces with some of the new expansion permits. Can you just help a little bit? And if this is -- if you'd rather take this offline, that's fine, but help a little bit with the volume trend going forward.

How many -- do we still have a couple more quarters potentially of this kind of mid-single-digit volume improvement before you get back to a more normalized level or how long does that last?.

As Ed mentioned, we start to comp several of the larger volume gains in the third quarter. Southbridge, as you know, we began to ramp last year in the third quarter as we received the permit. We begin to internalize the BBI tons in the third quarter of last year and the Maine Energy ships were completed during the third quarter as well.

So looking out to our third and fourth quarters, we have gains in our model currently of landfill volumes, but they're not at the same double-digit type gains and tonnages. They're kind of mid-single-digit gains. And that's why we're just comping some of those areas. We have also not forecasted material volume gains in Western New York.

And there's a lot of ability, as Ed discussed, to further grow in that market. So as we develop solutions and bring in more tons there, we can have another level of growth. But across the Eastern part of our franchise, we start to comp some of those larger gains..

Okay, so, can you give us a sense within your guidance, what you think volume looks like in the back half of the year?.

Volume percentages or volume -- maybe we can take it offline. I don't think I have the percentage numbers in front of me, Corey..

But it sounds like the guidance assumes maybe sub-5% core volume growth?.

Yes..

And then last, a question for John. Just over the past several years, as we've talked about U.S. GreenFiber, I think that your thinking was it makes sense to wait until you have a full housing recovery and then you can get more value for it.

I think it makes a ton of sense that you're focusing on the core business and getting rid of kind of drags on your time and capital, but can you just elaborate a little more? It seems like there's been some sort of mentality shift that you were willing to sell it now and just, what led to that mentality shift?.

Yes, I mean, I think that's a very fair perspective.

I mean, I think if you look at what we've done over the last year, we really cleaned up the portfolio, derisked our asset base and we do have -- there's no question with the sale of Maine Energy, with the sale of the Biofuels facility, that moving GreenFiber at this point, the housing market has begun to recover, it recovered over the summer and we were able to sell the business into that.

To wait for the full recovery just didn't make sense. It was an opportunity for us to move the business out and move on.

And I think that -- so that probably does represent a bit of a change because obviously, we didn't wait for the complete recovery of the housing market, but certainly the market is recovered enough for us to exit the business at this point and focus on the core business and continue to drive risk out of our model and get to much more stability from a financial standpoint.

As you know, we were in a position where it was a drag for the last year and we were putting money in. So it just makes sense to move past it at this point, take advantage of the fact that the market had improved and move on and get back to more financial stability..

And our next question comes from the line of Joe Box from KeyBanc Capital..

With the collection business being kind of generally similar on the yield front from the last couple of quarters, it looks like most of the sequential step-up in yield came from disposal.

Can you just maybe give us a feel for how much the disposal gains came from mix shift versus actual price, which could potentially be more sustainable?.

Well, a lot of it did come from mix shift where we drove more tons to higher-priced landfills. So from a statistical standpoint, some of that occurred and we're driving pricing, as Ed said, across the Eastern part of our business. In Western New York, pricing was sluggish and even down in some cases.

And pricing at a landfill in our -- many of our markets is a T&D rate. So if you're reaching a little further to transport waste, your disposal rate is a little bit lower and it doesn't signify that you're dropping price at the gate. It just signifies you're reaching into different markets to source waste.

So there's a little bit of that going on in Western New York and then out in our Eastern part of our franchise, we have positive price and some positive mix shifts and more MSW that's at a higher rate..

Understood. And I guess relative to the Waste USA landfill and the capacity addition there, I know there's been a lot of talk about supply coming offline.

John, did you say that, that facility was operating at 470,000 tons run rate in the quarter or was that kind of post quarter? And maybe how should we think about the cadence or timing to ramp that up to the 600,000 tons?.

I think it was 450 and that kind of run rate the end of the quarter. Really, I think that we really haven't given any indication of what we think it's going to -- how long it's going to take us to get to 600,000 tons, but obviously, we've gone from 370 to approximately 450 run rate.

I think that there are significant opportunities there, but I wouldn't project exactly how long it's going to take to get to 600,000 tons..

Fair enough. And just lastly, on the recycling side. I know last quarter, you guys saw some migration toward your facilities because of some of your processing capabilities. Just curious.

Have your peers kind of figured out how to get around the Green Fence requirement, and have they kind of brought some of those volumes back internally?.

Yes. I think that's kind of a mixed -- there's a mixed answer to that. Some have, some haven't. So we're still getting the benefit of some volumes there, but I think over time, we expect that the peers will fix the problems. And we have other -- there are other facilities that are in the market as well.

So I think over time, we'll lose the benefit that we had there from a volume standpoint..

And our next question comes from the line of Roger Chan [ph] from Whippoorwill [ph]..

I was wondering on the New York City long-term plan, if we could get a little more specific on the upside from that?.

Well, that's a tough one because there are things -- all the things that we've laid out are happening in the market outside of us. So we know the trend is on a macro level. The trend is very positive in the next few, 3, 4 years. How it affects price and how it affects our particular landfills.

I mean, the incremental volumes are very high margin and those landfills are not operating at capacity..

I guess I wanted to sort of -- given how Provant has basically been awarded the contract and it's been signed, right?.

That's 1 piece of the contract..

Right, and Progressive just talked yesterday or 2 days ago about how they've been selected and they're in the final stages of wrapping that contract up, right? So I think Michael, in one of his notes, suggested that there could be another 3,000 to 4,000 tons a day coming into that region and that would probably amount to 1 million a year.

I just wanted to put it in context of your capacity and the volumes that you lost and what the EBITDA impact had been in the past? I mean there's 1 million tons coming into that region and you expect a certain market share of that and then put that in context with you losing 250k from 2011 to 2012 and that was a $13 million negative EBITDA impact.

It will be helpful to you to get a sense of how you look at what that potential upside could be..

Yes. So you ramp back to fiscal year '11 volume rates. As I stated earlier, a lot of the gains we had in volumes year-to-date have not been in Western New York. If you're able to ramp back another 250,000 to 300,000 tons to get the fiscal '11 run rate, it would be another $10 million adjusted EBITDA to our business..

So if you got a quarter of that volume starting 2015, 2016, you would gain another $10 million in EBITDA?.

Yes..

And can you give me a sense of like your share in that market? Like how conservative is it to say we gained 25% of that?.

Well, I think asking about share isn't the question. It's asking where is the excess capacity? Well, we have a large share of the excess capacity in that market. So as I said, the burn plants, they're full. They're just going to have to push out other ways. I don't know where Progressive is on their site, but I would imagine that they're fairly full.

So....

So what is your share of the excess capacity because that would indicate what percentage of the displaced volume you would get, right?.

It's a very high percentage. The excess capacity is highly in our landfills..

And we have no further questions in the queue at this time..

Thank you, everyone, for your attention this morning. Our next earnings release and conference call will be in early March when we will report our third quarter fiscal 2014 results. Thanks, everyone. Have a great day..

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