Casella Waste Systems, Inc.
Q2 2015 Earnings Call Transcript

Published: 30 Jul 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems, Incorporated Q2 2015 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session [Operator Instructions]. As a reminder, this conference call is being recorded. I’d now like to introduce your host for today’s conference, Mr. Joe Fusco. You may begin, sir.

[Joe Fusco:]

Thank you for joining us this morning and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; 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 2015 second quarter results. These results were released yesterday afternoon. Along with a brief review of those results and an update on our company's activities and business environment, we'll be answering your questions as well. But, first, as you know, I must remind everyone that various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements for the purposes of the SEC's Safe Harbor provisions. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our prospectus and other SEC filings. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. And, therefore, you should not rely on those forward-looking statements as representing our views as of any date subsequent to today. Also, during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial tables section of our earnings release, which was distributed yesterday afternoon and is also available in the Investors section of our website at ir.casella.com. And with that, I'll turn it over to John Casella, who'll begin today's discussion.

[John Casella:]

Thanks, Joe, and good morning, everyone, and welcome to our second quarter 2015 conference call. We’re very pleased with our second results. As you saw in yesterday’s press release, our revenues for the second quarter of 2015 were $143.7 million, up 4.7%, from the same quarter last year, adjusted EBITDA was $30.7 million, up 8.4%, from the same quarter last year, and free cash flow was $18.3 million. We also increased our 2015 revenue and free cash flow guidance ranges, and reaffirmed our adjusted EBITDA range. Ned will go into the numbers in more detail in a moment, but these strong results reflect our continued execution against the key management strategies we are committed to follow despite ongoing headwinds from a lower recycling commodity prices and lower energy prices. I would also like to note that the third quarter is off to a solid start driven by continued positive pricing and volume trends. Two and a half years ago, we laid out a comprehensive strategy to improve our financial and operating performance. We diligently follow that plan. And as our results demonstrate, we continue to execute well against it. Pursuant to that plan, we have refocused the company while simplifying our business structure, we have reduced risk exposure by either divesting or closing operations that did not fit within the strategy, and we refocus management intention and capital resources on our core operations and strategic business initiatives. Going forward, we plan to continue to focus on increasing landfill returns, driving additional profitability at our collection operations, creating incremental value through resource solutions and reducing financial and operating risk while improving our balance sheet. We are confident that this focus on our core operations will drive improved performance and increase free cash flow. As the Northeast disposal markets continue to tighten due to the permanent closure of disposal sites, we further improve profitability and returns at the landfill during the quarter through higher pricing and increased volumes. We have had great success sourcing incremental tons to our landfills with volumes up 46,000 tons year-over-year in the second quarter. Furthermore since the fiscal year 2013, we’ve also increased annual volumes by 716,000 tons while increasing average price per ton by 2.5%. We have driven higher volumes to our landfills through our focused landfill sales strategy, building our special waste capabilities, as well as our asset – landfill asset positioning. The average price per ton at our landfill continues to improve as we advance price increase and improve the mix of customers and materials at key sights. We expect these trends to continue for the next several years as disposal capacity constraints become more acute across our footprint. We continue to concentrate on core blocking and tackling in our hauling line of business, namely focus on pricing program, throughout optimization, fleet standardization, which Ed will discuss in more detail. We have continued to advance hauling price increases in the residential and commercial lines of business in a number of markets with only limited price rollbacks. In the second quarter, residential and commercial collection price was up 4.3% among the strongest that we have experienced in the last 10 years. We expect these positive trends to continue. As part of our comprehensive hauling strategy, we developed a plan designed to simply our fleet and target truck replacement to maximize returns. We in the second year of a five year plan and believe that this plan will reduce our operating costs to lower maintenance costs, improve our capital efficiency, and improve our service levels to decrease downtime. We differentiated ourselves in the marketplace by offering value-added resource solutions. These solutions range from our customer solutions group, which provides professional services to large industrial customer to our organic business that is a leader in organics processing and disposal in the Northeast to our market leading recycling business. Our Customer Solutions group continued its growth through the second quarter with revenues up 1.5% year-over-year and growth in the multisite retail business. More importantly operating income for this group was up $700,000 year-over-year as we gained operating leverage and scaled revenues on lower overhead costs. Our team continues to expand existing relationships while also winning new business. Lower recycling commodity prices remain one of the largest challenges and opportunities facing the Solid waste industry today. Prices were down 15% year-over-year in the second quarter due to lower global demand for recycling commodities, a stronger U.S. dollar with lower oil prices. The company has taken steps to earn a 15% return on its recycling infrastructure investments throughout all market cycles. As such we’ve implemented higher tip fees at our recycling facilities. Last quarter, we discussed our new sustainability recycling, our SRA fee, that is similar to a fuel surcharge where it floats inversely to changes in recycling commodity prices. The implementation of the SRA fee is going very well with the fee rolled out to roughly 65% of our collection markets with minimal rollbacks. When fully implemented, we expect the SRA fee to offset over two thirds of the negative financial impacts associated with lower recycling commodity prices. We expect to recoup the remaining one third through third party recycling customers as contracts come up for renewal. I’d to thank our team for their ongoing efforts to implement the SRA fee, educate our customers about its importance and ensuring that we continue to offer value added recycling services and invest in the necessary recycling infrastructure. We continue to make progress in improving our balance sheet and reducing our operational and financial risk. We simplified our business by divesting and closing underperforming and non-core operations. In addition, we do not have any significant debt maturities until 2019 and we paid down $18.7 million of debt in the second quarter reducing our financial leverage. We are well positioned for the future and we are committed to a disciplined capital investment strategy with free cash flows primarily used to repay debt. In addition, we will also consider select tuck-in acquisitions and growth investments within our core operation. We continue to execute extremely well against the strategic plan that we laid out two and a half years ago to improve the financial and operating performance. We are now at a point where much of our time and focus is devoted to operational blocking and tackling, a focus on pricing strategies at the local level, improving our operational efficiencies and disciplined capital allocation. We believe these actions will further improve the company’s performance and allow us to continue to delever the balance sheet going forward. Over the last two months, we refreshed our multiyear plan to ensure that our strategic focus is on driving the highest returns for our shareholders. We presented this plan to our board and expect to announce the plan in our multiyear financial targets at the Jefferies conference in August 11. This event will be webcast and we will make our presentation public. Ned and I will be available to discuss the plan and our targets after this event. As such, we expect that many of you have questions regarding this plan. However, this call is going to be focused on our second quarter results. Likewise, we will also not be discussing on this call the proxy contest of JCP Investment Management. As indicated, it plans to conduct in connection with our 2015 annual meeting, we will not be addressing any questions concerning the proxy contest. With that, I’ll turn it over to Ned to walk us through the financials.

[Ned Coletta:]

Thanks, John. Revenues in the second quarter 2015 were $143.7 million, up $6.4 million or up 4.7% year-over-year. Solid waste revenues were up $6.6 million or up 6.5% year-over-year with increase mainly driven by higher disposal volumes, higher collection pricing and disposal pricing partially offset by lower fuel surcharges on lower diesel prices, lower energy pricing in the landfill gas energy business and the sale of the C.A.R.E.S water treatment business in our first quarter. Revenues in the collection line of business were up $2.3 million year-over-year with prices up 3.7% and volumes up 1.1%. Our pricing programs in the commercial and residential lines of business has strengthened with pricing up 4.3% year-over-year in the second quarter with particular strength in the commercial line of business. Roll off calls were up 5.2% year-over-year as we experienced positive construction trends across many of our markets especially in our eastern region. Revenues in the disposal line of business were up $5.9 million year-over-year. Roughly 58% of this growth came from higher revenues at the transfer stations and in the transportation business driven by several new transfer station and T&D contract initiated over the last year. With transportation and disposal contracts or as we say T&D contracts, we typically sub contract the majority of transportation work and as such revenues have grossed up to cover the increased cost of transporting of customer waste from a transfer station to a landfill. Total cash flow has improved from these additional tons to our landfills although these additional pass through cost compress total company adjusted EBITDA margins by roughly 40 basis points. We increased disposal pricing by 1.2% year-over-year in the second quarter with landfill prices up 2.5% in the eastern region as we capitalize on the tightening disposal markets. We increased our average price per ton at the landfills by 4.9% as we cycled out lower price customers and improved our customer and waste mix at the sites. We expect these positive pricing trend to continue through 2015. Our total landfill tons were roughly 1.2 million tons in the second quarter, up 46,000 tons year-over-year. As John said, on the last 12 months basis, landfill tons were up by roughly 716,000 tons per year since our fiscal year 2013 with adjusted EBITDA up roughly $15.8 million during the same period. Recycling revenues were down $500,000 year-over-year with the decrease driven by lower commodity volumes, down 15.2% year-over-year on lower fiber, plastics and metals pricing partially offset by higher recycling volumes. Recycling volumes were up 10.9% in the period on new processing capacity and new contracts. All remaining revenues were up roughly $300,000 year-over-year driven by volume growth in the customer solutions and organics businesses. During the second quarter, we recognized roughly $350,000 of revenues from the rollover impact of acquisitions net of divestitures. Adjusted EBITDA was $30.7 million in the second quarter and margins improved 75 basis points to 21.4%. So with revenues up $6.4 million and adjusted EBITDA $2.4 million, that gave us a follow-through impact of roughly 37%. However, excluding the gross-ups revenues and transportation cost from the new T&D contracts, we have flow-through of roughly 66% during the quarter on the remainder of the business. Solid waste adjusted EBITDA was $30 million in the quarter, up $3.5 million year-over-year. This correlates to a flow through benefit of roughly 53%. Hauling adjusted EBITDA was up $2.8 million year-over-year with margins expanding 365 basis points. Disposal adjusted EBITDA was up $1.3 million year-over-year partially offset by lower performance in energy and processing. Solid waste adjusted EBITDA margins were 27.8%, up 165 basis points year-over-year reflecting strong pricing coupled with cost efficiencies. Lower fuel cost benefited margins by roughly 85 basis points while increased intercompany recycling tipping fees were 80 basis points headwind. Recycling adjusted EBITDA was $900,000 which was flat year-over-year with higher tipping fees and volumes offsetting lower commodity pricing. If you exclude the $900,000 of higher intercompany tipping fees to our own hauling and transfer operations, recycling adjusted EBITDA was close to breakeven or down $900,000 year-over-year. Adjusted EBITDA was negative $200,000 in the other segment, down $1.1 million year-over-year. This decline was primarily driven by higher G&A costs, partially offset by gains in the customer solutions business. Cost of ops was down 210 basis points year-over-year and Ed will run through some details on that in a moment. G&A costs were up 120 basis points year-over-year as a percentage of revenues primarily due to a Europe with their timing differences in various expenses as we changed our fiscal year-end and hiking cost due to professional fees we had incurred in responding to the proxy solicitation that JCP Investments has indicated plans in conduct in connection with our 2015 annual meeting. During the second quarter, we sold several underperforming collection hauling routes for $870,000 in total consideration and recognizing $675,000 gain. Free cash flow was $18.3 million in the second quarter, which was higher than expected, primarily due to the timing of capital expenditures, which the company expects to normalize through the remainder of this year. Free cash flow was $10.8 million year-to-date through the second quarter. As John said, during the second quarter, we repaid $18.7 million of debt and brought total debt to EBITDA to 5.08 times. This is down 0.35 times sequentially from the first quarter and something we are very excited about. As reported in our press release yesterday afternoon, we increased our 2015 guidance ranges for free cash flow and revenues, while we reaffirmed our adjusted EBITDA guidance range. We increased revenue guidance to $525 million to $535 million to reflect the change in disposal revenue mix were as I mentioned earlier we are generating higher revenues from our transfer stations in new TMD contracts, we expect free cash flow to be positive for the remainder of 2015 with cash flows lower during the third quarter, due to the semi-annual cash interest payment on the senior subordinated notes. Year-to-date consistent with our strategy of reducing financial and operational risk by focusing on our core businesses we have generated roughly $3.8 million of net cash proceeds from the sale of non-core businesses and assets. We plan to redeploy roughly 2.5 million of these proceeds to support two new long term municipal and hauling contract that we recently won. As such, we are increasing our free cash flow range guidance range for 2015 by a $1 dollar on either end. Further, as we noted in a press release, we recovered roughly $550,000 in property insurance settlement for several pieces of equipment that were lost a fire. As such, when you factor in the capital expenditures for the new municipal contracts and CapEx to replace the equipment lost to fire, we expect our CapEx to come in at the high-end of the previously announced range of $45 million to $48 million. And with that I would hand it over to Ed.

[Ed Johnson:]

Thanks Ned and good morning everyone. Well as you can tell by the tone we are very happy with the quarter, not only because we hit our numbers, but because of a success and position in the company where we wanted to be. We have spent the last few years reducing the risk profile of our business and focusing on fundamentals. A couple of years ago, we set a goal to transition the company to a business model that could provide steady improvement and financial results. And our execution this quarter increases our confidence that we've accomplished them. From an operational standpoint the key metrics I focused on last quarter show additional positive momentum in Q2. Big picture, cost of ops as a percentage of revenue improved 210 basis points year-over-year. Collection operations, disposal and even our recycling operations have contributed to this improvement and performance. Collection operations accounted for 42% of our revenue for the quarter and cost of ops as a percentage of revenue improved 330 basis points as compared to the second quarter last year. This improvement continues to be driven primarily by disposal cost savings, lower fuel cost, and our ability to get price. The pricing dynamics have certainly improved for us. Our collection operations generated 3.7% in price growth for the quarter. The strongest by far, since I've been at the company and I wanted to take the opportunity to point out how great a job our local market management teams had done to get us on the right track here. If you know the business, price only becomes possible when you provide great service and stay on good terms with your customers. And you have to ask for it. The teams have done a great job and I congratulate and thank them. On the last call, I mentioned there are some basic operating metrics we are improving and I'm happy to say that the trend continues. We have improved our net revenue per hour for commercial services almost 7%, while our variable cost per hour has dropped about 7%. So, our margins are substantially better than this time last year. Similarly, the residential net revenue per hour is up almost 6% compared to an increase of less than 1% in variable cost per hour. The residential line is where our fleet plan and related automation efforts will have the most effect. We improved our list per hour on the residential line of business by 3.7% as a result of equipment we put into service late last year. We have experienced some manufacturer delays on our budgeted fleet additions this year, but if these trucks come in during the third quarter I expect the efficiency improvements to continue. Our disposal line of business consisting of our network of landfills and transfer stations accounted for about 31% of our revenue for the quarter and the market dynamics continue to develop on our favor. I mentioned last quarter that the industry computes price and volume on disposal activities on a customer by customer basis, by disposal site. So if you lose a customer at a lower price and pick up another customer at a higher price, it all gets captured as volume changes. Under this scenario, we reported volume up 13.9% and price improvement of 120 basis points. Looking at the more meaningful total tonnage and overall average price per ton received at the landfills, our volume is up 46,000 tons or 4%, and we improved average price per ton by a significant 4.9%. As expected, the Eastern region led the charge with 6.2% in average price, but we were very pleased to achieve 4.1% in the Western landfills. Overall, without some of the internal changes that we have made, the cost of ops on our recycling business as you would expect would be up 380 basis points, due to lower commodity prices. We have talked about our strategy to change the business model for recycling over the past two quarters. John mentioned the SRA fee we are passing through to our hauling customers, we are charging tipping fees to third-party haulers and we are targeting long term to get a 15% return on our recycling facility investment. Internally, we have increased inner company tipping fees to our own hauling divisions, which by the way provided a $900,000 headwind in collection that we easily outperformed. As this is how we pass through the cost of recycling to the team that has passed to recover price from the street. As a result of these changes and the recycling line of business revenue was showing higher from tipping fees and direct costs are lower due to the elimination of material purchases and rebates. So, cost of ops as a percentage of revenue improved by 230 basis points as compared to the prior year. This is all working even better than we planned, but we still have wood to chop to get to the returns we are targeting. Customer Solutions, which includes our industrial services line is continuing to make progress and manage to reduce our cost of ops percentage by about 120 basis points from the prior year. The Solutions team is completing a back office transition to streamline billing and support processes, which should allow us to advantage of a significant backlog of higher margin work. With gross margin improving in all of our lines of business, operationally we feel pretty good about the quarter, so enough said. I’d like to now turn it back to the operator to facilitate the question-and-answer session.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Corey Greendale from First Analysis. Your question, please, sir.

[Corey Greendale:]

Hi, good morning.

[John Casella:]

Good morning.

[Ned Coletta:]

Good morning, Corey.

[Corey Greendale:]

So I guess I have more than a couple of questions, but it will ask two and then get back in the queue, if they aren’t answered. So maybe I will start with – the restructuring that you are doing for the recycling business and the new fee, can you just talk a little bit more about the structure and basically I’m trying to understand is kind of a modeling purposes, what – how does it flow through the P&L and what happens if commodity prices go up, do you get less of the benefit as it goes up or how does that work?

[John Casella:]

Sure. So we – Corey as you know percentage of volumes coming to our recycling facilities are coming from our own truck, say, 50% of those volumes, and we want to actively manage rebates and tipping fee structures both the third-party customers and intercompany as Ed described. So during the last quarter we reduced rebates and increased tipping fees to our intercompany business, but we need to have a way to actively flex that to our customer on the street, both our residential and commercial customer to off take as much of that risk as possible to earn an adequate return in all markets. So we introduced the sustainability recycling adjustment fee, which is almost like a fuel surcharge and it goes on to residential or commercial customer’s hauling bill. And as commodity prices fall, it’s the fee that increases and as commodity prices go up, it’s a fee that decreases. And that’s the mechanics of how the fee works in the business.

[Corey Greendale:]

Okay. And then a follow-up, maybe I will try to do this as a two part question, on the free cash flow, I think that you were able to hold some underperforming routes. Can you just talk a little bit more about – are there buyers out there for things like that or might there be more opportunities for still underperforming routes? And on the other side of free cash flow, your maintenance CapEx is at the movement anywhere running well below the 9% of revenue that I think of its kind of common in the industry. Can you just talk about kind of the long term prospects or where do you think maintenance CapEx goes?

[Ed Johnson:]

Hey, Corey, this is Ed. I will talk about the underperforming routes. So when we are stretching our footprint to get to a market where we don’t have lot of density, those end up being low margin performing routes and there were always other haulers in the market where our customers would be – would provide them with a lot more density. So there would be higher margin incremental customers to them. And so, there is always a buyer for your customer. That’s something pretty standard in the industry. It’s all about density in the market and when we are stretching our footprint from a division to get to a market to service just a handful of customers that ends up being incrementally negative to us.

[John Casella:]

And in regards to your question on CapEx, I think you have to think about our business of just how our revenue split, it’s a little bit different in every waste company. So luckily 70% of our revenues are in core solid waste, collection, transfer, landfill, and 30% are allocated to recycling organics business and then the customer solutions business. All three of those business units are less capital intense, especially organics in the customer solutions business. Recycling does have some capital, but once again it’s lower overall when you integrate solid waste strategy. So when we look at our platform, we’ve been running in a 0.5% to 9% roughly and we expect to continue to run an 8.5% to 9% of revenues into the future on replacement CapEx. However, the solid waste business is a little bit higher and that average comes down because of the lower capital requirements in customer solutions and organics.

[Corey Greendale:]

All right, thanks. I will jump back in the queue.

[John Casella:]

Thanks, Corey.

[Operator:]

Thank you. Our next question comes from Scott Levine from Imperial Capital. Your question, please.

[Scott Levine:]

Hey, good morning, guys.

[John Casella:]

Good morning, Scott

[Ned Coletta:]

Good morning, Scott

[Scott Levine:]

So, maybe looking for a little bit more color on the thought process behind the guidance revision where you have taken the revenue up $5 million, but the EBITDA is staying put. I think I understand your comments regarding contract mix and the team T&D contracts, but is there some certain cost items that are coming up that were budgeted for and/or how would you assess your conviction level regarding that EBITDA guidance and maybe should we be favoring the higher-end of the range based on what you see transpired here through the spring into summer?

[Ned Coletta:]

We left the guidance range alone at this point Scott. There’s been a lot of moving pieces since we first adopted our budget back in November, with diesel dropping in price, which is due to the tailwind, but – and that’s a headwind in the recycling business. And where fit today, we feel confident with our plan and our guidance ranges, but there is no movement off the midpoint per se where we left the range intact. With those T&D contracts, revenues have grossed up, but we are still going to see EBITDA at the landfills, we just have a little bit of margin compression with that flow through at the transportation cost.

[Scott Levine:]

Got it. So effectively is the cost coming up basically one for one with the revenue upside there that’s effectively causing you to keep the EBITDA range where it is?

[Ned Coletta:]

Yeah, let me give you an example. Let’s say, you have a contract with someone at $75 a ton to transport, dispose of their waste. Even if I hire a subcontract hauler for $25 a ton to transport that waste from a transfer station to a landfill and the waste hits the landfill at $50 a ton. So you just had to pass-through that $25 a ton of cost to the third-party customer on the T&D contract. Of course we would love it if all contracts were just showing up at the landfill. But sometimes you know we need to provide the service to a customer they want and that’s part of the service we do provide. And we’ve had a couple of new contracts that come up, customers have wanted us to handle the hauling aspect as well.

[Scott Levine:]

Got it. And with regard to the pricing side, you mentioned in your prepared comments, I think, John, the effect of the tightening capacity within the market, is it something, which you could expect to affect your eastern regional, but more here in the near-term? Can you reveal of a more regional color in terms of disposal pricing trends that are in the market and for you guys specifically east versus west.

[John Casella:]

Yeah. I think that there is no question that the market is a bit tighter in the east as evidenced by what we’ve been able to put up in terms of pricing numbers. So the pricing numbers are a couple of hundred basis points higher in the east than they are in the west. But interestingly enough, I think we are at the beginning stages of the three or four year period of time where we’re going to continue to see that kind of activity from a market standpoint. The disposal capacity is going to continue to tighten over the next few years. We also have the Department of Sanitation contracts which are going to affect the western region landfills as well in a very positive manner. The other thing that’s happened recently is the closure of Tullytown in 2017, that’s another big factor and it’s a very large facility that is closing in 2017 which will also positively at least in our view positively impact the Western New York market dynamics from a disposal standpoint for us.

[Scott Levine:]

Got it. Last one if I may, the new municipal contracts that I think you said were an additional $2.5 million of CapEx or there [indiscernible]. Can you drop out how much annual EBITDA is having a move over there a couple of million bucks beginning in 2016 I think you said, give a little bit more color there.

[Ned Coletta:]

Let’s surpass the EBITDA number, Scott. Give me a second.

[Scott Levine:]

Yeah. I don’t know…

[Ned Coletta:]

It’s roughly on an annualized basis between two contracts, they will be about $800,000 of EBITDA but they role in second half of this year and we’ll give some limited benefit second half of this year and then we’ll role them in probably next year and once the five year contract, once a ten year contract.

[Scott Levine:]

Got it. Great. Thank you.

[Ned Coletta:]

Thank you.

[Operator:]

Thank you. Our next question comes from Al Kaschalk from Wedbush Securities, your question please.

[Al Kaschalk:]

Good morning guys.

[Ned Coletta:]

Good morning, Al.

[John Casella:]

Good morning, Al.

[Al Kaschalk:]

I wanted to press a little bit on the pricing. They already have to see the collection pricing number and I think disposal as well. Help me appreciate the end market dynamics. How much of that was asking for versus maybe some market dynamics where there is increased volume and therefore you don’t have as many competitors nipping the contracts having to roll that back or?

[John Casella:]

I think that it’s a combination of all three, Al. I think that there is a little bit better economic activity. We have the constraint in the market from a disposal standpoint in terms of – there is a million and a half tons that have already come out, seven facilities have already closed in the northeast market. And then I think that there is no question that the work that Ed has done with the teams in the field from a pricing standpoint is beginning to really take hold. So I think it’s a combination of all three of those issues and certainly we are seeing a little bit of a benefit from little slightly better economic activity as well. The other thing that you have to keep in mind to with regard to the success that we’ve had from the SRA fee, we are in the northeast and the northeast has had a propensity to have much more recycling activity than other areas of the country. So I think that there is a higher visibility in terms of recycling being a value added service and I think that the industry really has an opportunity at this point in time to really get a return in the entire industry as an opportunity to get an appropriate return because recycling is a value added service that our customers want.

[Al Kaschalk:]

So, John, I appreciate that color. Does that mean of the 2.2 you reported in the quarter I think I had my number right almost 3.7 if we get, but included in that is the SRA fee. So on a go forward basis, should we look for a similar level of price at least for the next couple of quarters when you do a year-over-year comp or are we going to?

[John Casella:]

Yeah. Couple of comments there, Al. One is the SRA by my numbers and Ned, correct me if I am wrong, but it was less than 1% of the 3.7% that we got on the collection side.

[Ned Coletta:]

60 basis points.

[John Casella:]

Okay, 60 basis points. So most of it is core price improvement. And secondly, the SRA is only rolled out – we’ve only rolled out 65% of it.

[Ned Coletta:]

And that was rolled out in the last several months, so we didn’t start rolling that out until April. So we obviously only have gotten a few months of benefit from the SRA fee. So I think that we should continue to see pretty robust pricing on a go forward basis as we continue to get the benefit of the SRA fee and continue to move our pricing programs.

[John Casella:]

Al, all combined right now, will get about 40% of the benefit of the SRA in total in calendar 2015 and about 6% in calendar 2016 because this is being rolled out in a very rational manner market-by-market. So the roll over impact of this fee will take the next year to fully come into numbers and besides that as Ed said, our core pricing programs are working very well as well.

[Al Kaschalk:]

That’s good to hear and I guess the message, the takeaway is that, we should expect core pricing to remain firm if not better to what you just reported.

[John Casella:]

I think firm is a fair perspective. I don’t know if it’s going to be better but I think certainly it’s going to be firm.

[Al Kaschalk:]

One follow-up and I appreciate. Talk a little bit about the asset disposition here. I know that’s sort of the strategic review in terms of what you’re going or have ongoing but this was – was this in the east, was this in the west region?

[John Casella:]

It was in the west region, it was small hauling operation that we had in the western region that as Ed said where customers that we were stretching to get to from a division and just made no sense. It makes much more sense to have somebody else identify their routes, so we were able to get a fair price for the revenue and it just makes sense for us to sell it.

[Al Kaschalk:]

Okay. Thank you guys.

[Ed Johnson:]

Thank you, Al.

[John Casella:]

Thanks, Al.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from Michael Hoffman from Stifel, your question please.

[Michael Hoffman:]

Thanks, John, Ed and Ned for taking my questions.

[John Casella:]

Good morning.

[Ed Johnson:]

Morning, Michael.

[Michael Hoffman:]

So just sort of I’m clear I got this right. The solid waste margins net of puts and takes from recycling fuel is up 80 basis points approximately, is that correct?

[Ned Coletta:]

If you net out recycling in fuel with the puts and takes it’s up roughly 160 basis points.

[Michael Hoffman:]

Okay. That’s the moving cost issue around, but the pure underlying garbage business before you moved cost out of recycling into collection, it’s an 80 basis point improvement.

[Ned Coletta:]

No, it’s a 160 basis points. It’s a pure solid waste. If there is no fuel tailwind and there is no recycling headwind, it was up 160 basis points.

[Michael Hoffman:]

Okay. So why aren’t we seeing more free cash flow operating leverage and the $1 million increases from operations that’s an asset sale, so that’s not recurring. So why isn’t there more cash conversion out of the business?

[Ned Coletta:]

First of all, we did not move the EBITDA range and we are tracking well to our budget for the year. And then as we read out earlier, we reallocated dollars from the asset sale to two new municipal contracts, which will give us a nice growth profile over the next year and frankly, we are seeing a decent flow-through in the solid waste business as well. If you, you know, we talked about that one T&D contract that had a margin on impact, but you know flow-through including that to the EBITDA line was roughly 53% and if you exclude that follow-through was 90% because we’re doing a lot of cost reductions and we’re getting good price. So I think we’re on plan for the year and we’re getting flow-through. Over the next couple of years, we’ll see acceleration of free cash flow as we start to pay down our most expensive debt with our free cash flow in the period we paid down $18.7 million of debt, we took out 0.35 times of leverage and we’re heading in the right direction.

[Michael Hoffman:]

Okay. I get all that, but all things being equal that level of operating leverage of the solid waste should have everything else happening as well should have produced more cash conversion to the model. It doesn’t appear that’s happening.

[Ed Johnson:]

Well that maybe your perspective Michael. I think that Ned just laid out for you what we were generating and bringing and flowing through and subtleties in terms of some of the things from a transportation standpoint, so I think that we did get the flow-through.

[Michael Hoffman:]

Okay. When you look at recycling business why I mean, I have this sense of way you’re talking about it that you’re not pushing to change from a commodity-based model to a process fee model or is that also going on in parallel?

[Ed Johnson:]

We’ve had a processing fee model for 20 years. The problem that we’ve had is we’ve never been able to get the kind of returns that we should because other players from an industry perspective are using as the lost leader and no one in the industry was really working in a manner to get a return on the invested capital and I think that so we’ve always had a model where we have our processing fees and we share above the processing fees and we charge a tip fee below. Now the difference is that you know with the industry of a mindset that we need to get a return on that invested capital from a recycling standpoint we’ll incorporate that return as part of that processing costs and we’ll flow then on the basis of where commodity prices are and we hopefully as an industry we should all be in a position where every company can get a return on investments from a recycling standpoint. You know, after all, it’s a value-added service that our customers are looking for particularly in the Northeast you know some of the states that we operate in you know recycling is mandatory. It’s part of you know what has to be done, so I think this is a really big change. I think there’s obviously great leadership from the leader in terms of waste management and I think that I think the entire industry for the first time in my career has got an opportunity to get a real return on recycling assets and we should because as I said it’s a value-added service that we’re providing to our customers and I think it represents a big opportunity for Casella. We’ve made that investment now it’s a matter of executing and getting the returns on that investment that we’ve already made.

[Michael Hoffman:]

Okay. And then you made a comment in your prepared remarks John, unfortunately I was writing away and I missed what you were saying, you said something about an announcement coming at a conference shortly, what was that? I missed it completely.

[Ed Johnson:]

Well go ahead.

[John Casella:]

We had discussed previously, I think with yourself Michael and several of the other analysts and investors that we’re refreshing our multi-year model and we’re going to fix some guide [indiscernible] for the street on where we expect to bring the business over the next three years and lay out our refreshed strategy, refreshed multi-year targets and we thought it was good time to have in the mid-August.

[Ed Johnson:]

Yeah, basically put out some targets so people can have a better understanding of where we’re going to take the business Michael.

[Michael Hoffman:]

Okay. Fine, so then I also appreciate John that the proxy comment, I just – the question I have at a high level is why go through a fight, why not try and find a common ground so you don’t incur the expense and the distraction?

[Ed Johnson:]

I think that we already addressed whether we were going to answer any questions or not Michael. We’re not going to answer any questions about the proxy contest.

[Michael Hoffman:]

Okay. Thank you very much.

[Ed Johnson:]

You’re welcome.

[Operator:]

Thank you. And we have a follow-up question from Corey Greendale from First Analysis, your question please.

[Ed Johnson:]

Hey, Corey.

[Corey Greendale:]

Hi, can I have a quick follow-up?

[Ed Johnson:]

Sure.

[Corey Greendale:]

So, the first question I realized this is going to be perhaps a little hard to pass, but what I’m interested in is the growth in tonnage that you are seeing at the landfill, some of the international companies are seeing strong growth also and you know they’re more supposed to be to the entire country not just to the Northeast dynamics. So, it’ll be helpful to understand how much of the growth is just kind of economic versus changes in market dynamics versus your sales efforts.

[Ned Coletta:]

I think over the last two years about two-thirds of the growth we’ve seen has been gaining market share as competitor sites have reached the end of light so we’ve had excess capacity and we’ve been able to meet market needs with our capacity. Over the last year, and that that was more centric to our Eastern segment. Over the last year it’s probably a bit more if it’s pure economic growth we’re seeing with some of the volume gains we’ve seen. We’ve seen a little bit more growth in the western region, which is very healthy and we’re seeing …

[Ed Johnson:]

You might want to go through the dynamics on C&D in terms of where we were to where we are now because it’s still not very significant.

[Ned Coletta:]

Yeah, I mean that’s a great point John. So, if you flashback pre-recession back 2007, 2008 to and you take a delta from there to 2011, the depth of the slowdown in the Northeast, we lost you know $30 million to $35 million of revenues from the construction and demo slowdown, we’ve seen somewhere between $7 million and $9 million of that comeback over the last since 2011 so we really have only gained back about 20% there. So, we’re seeing some nice trends and we feel good about it but the market’s not overheated in the Northeast whatsoever.

[Corey Greendale:]

Okay. That sounds fine. And my other question is just following local press reports I think there’s discussion on going about expansion at Southbridge and whether that’s going to get approved, can you just address that question and you know what’s the likelihood of risk around expansion there?

[Ed Johnson:]

Well, I mean I think that as you know most expansion is going to happen at existing facilities, but you know permitting is always a challenge and there’s always risk associated with it but we’ve got a pretty good track record of getting through those issues and you know we expect to get through it at Southbridge as well as you know all of our facilities.

[Corey Greendale:]

And how much capacity do you have in Southbridge now in the absence of getting the approval?

[Ed Johnson:]

I think we have several years of capacity right now so, you know, from a timing standpoint we know we’ve been in that process for a number of years at this point in time. So, I think that, you know, we’re - we’ve got a couple of years of capacity and we believe we’ll get through that that issue.

[Ned Coletta:]

And just a general comment about the Northeast, typically we don’t permit life-of-site in the Northeast, we don’t permit 10 years, we might permit five or six years at a time, so this is more routine for us to you know constantly be in a permitting cycle to expand airspace at facilities, which is more normal course of business than abnormal for us.

[Corey Greendale:]

Great, I appreciate it, thank you.

[Ned Coletta:]

Thank you, Corey.

[Operator:]

Thank you. I am not showing any other questions at the time. I like to hand the call over to John Casella for any closing remarks.

[John Casella:]

Thank you. Thanks everyone for your attention this morning. We look forward to discussing our third quarter earnings call with you in late October. Thank you, have a great day everyone.

[Operator:]

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes the program, you may now disconnect. Everyone have a wonderful day.