Casella Waste Systems, Inc. (CWST) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Inc. Third Quarter 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 call is being recorded. I’d now like to turn the conference over to your host for today, Mr. Joe Fusco. Sir, you may begin.

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 third quarter results. These results were released earlier this morning. Along with a brief review of those results and an update on the company's activities and business environment, we'll be answering your questions later 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 earlier this morning 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.

Thanks, Joe. Good morning, everyone, and welcome to our third quarter 2015 conference call. We’re very pleased with our third quarter results. Ned as usual will go through the numbers in detail and Ed will take through operations. First, I’d like to recognize that these strong results are a testament to management’s commitment and continued execution against our key strategies, all despite ongoing headwinds from the lower recycling commodity prices and lower energy pricing. I’d also like to note that the fourth quarter is off to a solid start driven by continued positive pricing and volume trends. Almost three years ago, we laid out a comprehensive strategy to improve our financial and operating performance. We have diligently followed and executed against that plan as our results demonstrate. 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 have refocused management intention and capital resources on our core operations and strategic business initiatives. Going forward, we plan to continue to focus on: one, increasing landfill returns; two, driving additional profitability through our collection operations; three, incremental value through resource solutions; and four, reducing financial and operational risks while improving our balance sheet. We are confident that our focus on our core operations will continue to drive improved performance and increase free cash flow enabling us to continue to de-lever our balance sheet. In mid-August, we further described our multi-year plan by announcing financial targets for fiscal year 2018 including adjusted EBITDA target of $122 million to $132 million, free cash flow target of $30 million to $40 million, and total debt to EBITDA target of 3.25 times to 3.75 times. This plan is focused on driving pricing, volumes and operating efficiencies through our current asset base and does not include any acquisitions or new development projects in order to contemplate the recovery of recycling commodity prices, energy prices or the construction market to help drive the achievement of these financial targets. We believe that this plan is conservative and achievable, and our execution over the last three years clearly demonstrates our ability to execute. As the Northeast disposal market continues to tighten due to permanent closure of various competitive disposal facilities, we further advanced our landfill strategy during the quarter with higher pricing and increased volumes. We have had great success sourcing incremental tons to our landfills with annual landfill volumes up by 720,000 tons since fiscal year 2013, while at the same time we have increased average price per ton by 3.5%. We have driven higher volumes to our landfills through our focused landfill sales strategy, building our special waste capabilities, as well as our landfill asset positioning. The average price per ton at our landfills continues to improve as we advance price increases and improve the mix of customers and materials at key sites. We expect these positive 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 focused on pricing programs, route optimization, fleet standardization, which Ed will discuss in much more detail. The disposal capacity constraints in the Northeast markets are also providing a positive backdrop for us to advance pricing increase in the collection line of business. With disposal pricing increasing above CPI haulers across our market are experiencing higher inflation on disposal costs which is the largest cost line for the hauler and as such haulers are in turn advancing pricing to customers to offset this inflationary pressure. Within the context of this rapidly improving marketplace, we have continued to advance falling price increases in the residential and commercial lines of business with only limited price rollback. In the third quarter, combined residential and commercial collection pricing was up 5.2%, the strongest pricing execution that we’ve experienced in the last 10 years. We expect these positive trends to continue. As part of our comprehensive hauling strategy, we’ve developed a plan designed to simply our fleet, target truck replacement to maximize returns. We are in the second year of our five year fleet plan and we believe that this plan will reduce operating expenses through lower maintenance costs, improve our capital efficiency, and improve our service levels to decrease downtime. We differentiate 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 customers to our organic business that is the leader in organics processing and disposal in the Northeast to our market leading recycling business. Our Customer Solutions group continued to improve margins and returns through the third quarter with revenues down 1.1% year-over-year on the clients in past due commodity pricing offsetting growth in the multi-location retail line of business and adjusted EBITDA margins are up on lower overhead costs. Lower recycling commodity prices remain one of the largest challenges and opportunities facing the solid waste industry today. Prices were down another 10.4% year-over-year in the third quarter due to the continued lower global demand for recycling commodities, a stronger U.S. dollar and lower oil prices. We have taken steps to earn an appropriate return on our recycling infrastructure investments through all market cycles. Given the substantial decline in recycling commodity prices over the last two years, this effort has included implementation of higher tipping fees at our recycling facilities. Another critical step that we have taken is the introduction of our new sustainability recycling adjustment fee. The SRA fee is similar to a fuel surcharge where it floats inversely to the changes in recycling commodity prices. The implementation of the SRA fee has gone very well with the fee rolled out to roughly 80% of our collection markets with minimal rollbacks. When fully implemented, we expect the SRA fee to offset over two-thirds of the negative impact 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 and educate our customers about its importance. It was an absolute team effort where the marketing team, our customer care team really did a great job in explaining the fee, explaining how it work to our customers thereby minimizing the impact. We continue to make progress improving our balance sheet and reducing operational and financial risk. We have 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 in early September we repurchased and permanently retired $9.7 million of our 7.75% senior subordinated notes or debt with the highest interest rate. Since the first quarter, we have reduced our total debt net of restricted cash by $19.9 million and reduced our leverage roughly by half a turn. We are well positioned for the future and have 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 operations, but as I said, the majority other than small tuck-in acquisition of free cash flow will be used to repay debt. And with that, I’ll turn it over to Ned.

Thanks, John. Revenues in the third quarter 2015 were $146.2 million, up $4.3 million or 3% year-over-year. Solid waste revenues were up $5.4 million or up 5% year-over-year with the increase mainly driven by higher disposal volumes, mainly with the change in mix, higher collection and disposal pricing partially offset by lower processing price and volumes, lower fuel surcharges on lower diesel prices, lower energy pricing in the landfill gas energy business and the sale earlier this year of the C.A.R.E.S water treatment business. Revenues in the collection line of business were up $2.9 million year-over-year with prices up 4.3% and volumes up 1%. Our pricing programs in the commercial and residential lines of business strengthened again this quarter with pricing up 5.2% year-over-year with particular strength in the commercial line of business. We also advanced stronger pricing in the roll-off line of business with pricing up 2.3% in the quarter as we tested elasticity in select markets with strong volume trends. Revenues in the disposal line of business were up $3.6 million year-over-year, roughly 50% of the increase came from a shift from inter-company to third-party volumes and the remainder mostly came from higher revenues at the transfer stations and in the transportation business driven by several new transportation and disposal contracts initiated over the last year. As we talked about last quarter, with T&D contracts, we typically subcontract the majority of the transportation work and as such revenues have rose up to cover the increased costs of transporting a customer’s waste from a transfer station to a landfill. With these contracts, total cash flows improved with additional funds for our landfills although these additional pass through costs slightly compressed our adjusted EBITDA margins during the period. We increased third-party reported disposal pricing by 1.2% year-over-year in the third quarter. With disposal prices up roughly 2.3% in the Eastern region as we continue to capitalize on tightening disposal markets. We increased our average price per ton at the landfills by 3.3% as we cycled out lower-priced customers and improved our customer mix and waste mix at the sites. We expect these positive pricing trends to continue through 2015 into 2016. On a last 12-month basis, landfill volumes were up by roughly 720,000 tons per year since our fiscal year 2013 with this gain driving adjusted EBITDA gains of $15.6 million during the same period. Recycling revenues were down $600,000 year-over-year with the decrease driven by lower commodity pricing, down 10.4% on lower fiber, plastics and metals pricing, partially offset by higher recycling volumes in the period. Recycling volumes were up 5.9% on new contract and continued organic growth. Other revenues were down $520,000 year-over-year, driven by lower volumes in organics, and customer solutions lines of business. During the third quarter, we recognized $130,000 of revenues from the rollover impact of acquisitions net divestitures. Adjusted EBITDA was $33.1 million in the third quarter and margins improved 100 basis points to 22.7%. So, with revenues up $4.3 million and adjusted EBITDA up $2.4 million that gave us the flow through impact of 56% in the quarter. Solid waste adjusted EBITDA was $31 million, up $2.7 million year-over-year after neutralizing for any changes in allocation of inter-company management fees. This correlates to a flow through benefit of roughly 50% in the period. Hauling adjusted EBITDA was up $3.3 million year-over-year with margins expanding 435 basis points. Disposal adjusted EBITDA was up slightly year-over-year with higher pricing offset slightly by higher operating costs at several sites. Solid waste adjusted EBITDA margins were 28.1%, up 110 basis points year-over-year, reflecting the strong pricing coupled with cost efficiencies and fuel benefits partially offset by higher inter-company recycling tipping fees. Recycling adjusted EBITDA was $1.5 million, slightly up year-over-year with higher tipping fees to both third-party and inter-company customers offsetting lower commodity pricing with the average commodity revenue per ton down 17.4% year-over-year. Adjusted EBITDA was $600,000 in other segment, down $300,000 year-over-year. The decline was primarily driven by higher overhead costs, partially offset by gains in the customer solutions business. Cost of operations as a percentage of revenue was down 100 basis points year-over-year, which Ed will run through in more detail. General administrative costs were up slightly year-over-year, but down 20 basis points as a percentage of revenue. This improvement was made despite spending roughly $500,000 of cost during the third quarter responding to the proxy solicitation from JCP investments. During the third quarter, we recorded a $345,000 loss on debt extinguishment in relation to our repurchase on the open market and permanent retirement of 9.7 million of our senior subordinated notes. As we have previously described, our ABL Revolver allows us to pay down seen junior debt as long as we maintain a minimum threshold availability on the Revolver. Paying down the 7.75% senior sub notes was a great capital allocation decision because the interest cost on the senior sub notes is currently 5.25% higher than the interest cost on the Revolver, enabling us to accelerate free cash flow generation and debt repayment. Free cash flow was $760,000 in the third quarter and $11.6 million year-to-date. As expected, free cash flow was down sequentially from the second to third quarter due to the semi-annual $15 million cash interest payment on the senior sub notes in August and higher capital expenditures during the third quarter as we work to complete landfill construction projects. We remain on track to generate $15 million to $19 million of free cash flow for 2015, and we expect free cash flow to ramp up in the fourth quarter, with cash interest down sequentially. On September 30, our total-debt-EBITDA was 4.98 times, down from 5.43 times on March 31. We remain focused on further reducing leverage and as we laid out in our multiyear plan announced in mid-August, we are targeting a leveraged level of 3.25 time to 3.75 times by the end of 2018. In late August, we completed a small solid waste tax exempt bond offering in Maine for $15 million. The bond has a tender of 20 years and we sold an initial 10 years term rate bond for 5.25% fixed interest. With solid waste tax exempt bond you can only use the bond proceeds for qualified capital expenditures. As such, on September 30 we held roughly $4.5 million of restricted cash from the offering. Netting this restricting restricted cash, which will be used to pay for qualified capital expenditures over the next several quarters against our September 30 debt balances our net leverage was actually 4.94 times at the end of September. And with that I will hand it over to Ed.

Thanks, Ned. Good morning everyone from an operational standpoint I was really happy with the quarter, of course it could have been better if we hit on all cylinders, but we did have success in most areas and there is still plenty of room for upside. I was particularly happy with some of the key operating metrics I saw. So at the big picture level cost of ops as a percentage of revenue improved 100 basis points year-over-year and was sequentially 50 basis points better than the second quarter. I want to point out that last year’s calendar third quarter was really a breakout quarter for us, particularly at the landfills. So beating the numbers this year shows continued progress in the fundamentals. Collection operations accounted for 43% of revenue for the quarter and cost of ops as a percent of revenue improved 435 basis points over the third quarter last year. This improvement continues to be driven primarily by this disposal cost savings, lower fuel costs, and our ability to get price. Net fuel savings is 160 basis points of this number. The pricing environment following years of market resistance in the Northeast continues to be strong. Our collection operations generated 4.3% in price growth for the quarter exceeding the 3.7% last quarter and setting a new high level mark. Again, I want to thank our local market management teams for a job well done. Hitting price is only possible when you provide great service and stay focused on meeting your customer needs. That includes the need to educate the customer on changing dynamics such as the drop in commodity prices that devalue the recyclable offset to service and the introduction of our floating SRA fee to make up for that decline. The teams have done a great job and I congratulate and thank them. Getting to those key operating metrics, I’m happy to say that the positive trends continue. We have improved our net revenue per hour for commercial services 11.5% as compared to calendar 2014 Q3. While our variable cost per hour has dropped 3.6%, our margins are obviously improving in this line of business. Similarly, the residential net revenue per hour is up 12.4% as compared to an increase in variable cost per hour of 6.2%. These numbers are higher on both sides due to the increased tipping fee for recyclables being passed through to the customers on the revenue line, a strategy that has been very successful in shifting commodity risk to the ultimate beneficiary, the customer. Last quarter I disclosed that our list per hour had improved by 3.7% in the residential line of business as a result of improved automation relating to equipment we put into service late last year. But we had experienced some manufacture delays on our budgeted fleet additions this year. Now that some of those structures started coming in, the improvement in list per hour was 8.1% in the third quarter year-over-year. We are making some good progress and I expect that to continue through next year as we continue to modernize our fleet. Our disposal line-of-business, consisting of our network of landfills and transfer stations, accounted for about 30% of our revenue for the quarter and the market dynamics continue to develop in our favor. As Ned mentioned, we reported 120 basis points in price improvement from disposal on our price/volume report in the press release. The average price per ton figures, which are more reflective of our strategy to move out lower price customers and to work towards a higher valued mix of materials improved 3.5%. As you may recall, our focus last year was to get the volume and now our focus is to maximize price for the aerospace. Our recycling operations continue to produce results that might be surprising to most of you based on what’s going on in the commodity markets. Because of our strategic initiative to change the risk profile of that business and past commodity risk through to the collection companies in the form of tipping fees so that it can be passed on to the customer. Our recycling line of business increased its net revenue contribution and achieved 120 basis point improvement in cost of ops as a percentage of revenue year-over-year. Customer solutions, which includes our brokerage services and our rapidly growing industrial services offering also made progress during the quarter. As a reminder, these are lower margin business as we are generally getting a spread on a high volume of materials and third-party services that have minimal capital requirements and overhead costs. This group also benefits our other operations within the footprint as any margin on services provided internally has passed through. The focus here is EBITDA contribution, which continue to improve this quarter. With those comments, I’d like to turn it back to John for some closing comments.

Thanks, Ed. We continue to execute extremely well against the strategic plan that we laid out nearly three years ago to improve our financial and operating performance. We are devoted to operational blocking and tackling with a focus on pricing strategies at the local level, improving our operational efficiency and a disciplined capital allocation. We believe these actions will future improve the company’s performances and allow us to continue to delever the balance sheet going forward. However, as I said last quarter, this call is about our third quarter results and we do not plan to discuss on this call the proxy contest that JCP Investment Management is conducting in connection with our 2015 annual meeting. We will not be addressing any questions concerning the proxy contest. And with that, I will turn it over to the operator to open it up for questions.

[Operator Instructions] And our first question comes from the line of Corey Greendale of First Analysis. Your line is open, please go ahead.

Good morning, everyone.

Good morning.

Good morning, Corey.

Hey, Corey.

First of all, just so we understand kind of where things are flowing, the SRAC, is that showing up in solid waste price?

It actually get booked in the collection line of business, so it is showing up in that price line. And what we are doing Corey is each month we are flexing tipping fees in the recycling business to both third parties and intercompany customers to reflect current market pricing of recycling commodities, so then that flows through intercompany as a higher cost line with lower commodity prices and as such we put the SRAC on collection customers to be able to dynamically flex our pricing to residential and commercial customers.

So I understand that dynamic. Do you have – can you give us a sense of how much of the solid waste price growth in the quarter was from the SRAC?

In solid waste – in collection – I’d have to look at solid waste for a second, but in the collection line of business, it was roughly 1.2% of the 4.3%.

Okay.

And I’d have to – I’d have to figure our solid waste at historical back fee on that.

Hey, that sound better. Start to assume that that 1.2% could go up because you still have some part of the customer base to go and I don’t know if you have the whole 80% that you did implemented on it in fall that was done at the very beginning of the quarter.

No, it cycled in through the quarter, so we continue to ramp in. At the beginning of the quarter, we started about 60% or a little bit below than we ramped up about 80% at the end of the quarter and the remaining customers will roll on in early 2016.

Okay. So that’s – so you expect 100% of your customers will have – so that’s 100% of the ones where you think it’s possible?

It will never be on 100% of our collection customer base. It will get implemented on our 60% of our collection customers, it will never be implemented on roll up C&D customers. And there are certain municipal contracts that we can’t just put the fee on. When we look to contract resets, we will discuss that with our customers in those cases on municipal contracts.

And then when you look at 2015, you reaffirmed the guidance, so I know you are on track, but I think that some things are going better than you would have expected at the beginning of the year and that’s something aren’t going as well and they are offsetting each other, is that – can you just talk about what’s going better than expected and what isn’t going as well as you expected?

Sure. I mean we put together this guidance all the way back in June of 2014 and we are still tracking to the EBITDA guidance. We raised our free cash flow guidance as you know. So we are getting better at forecasting our business long range, but there has been quite a bit of volatility behind the scenes in the last 12 months to 18 months where recycling is substantially off from where we expected it to be when we budgeted this year, but we are making up for that through the SRA fee in lower fuel prices. We’ve also done better from a pricing standpoint at our landfills in the eastern region and that’s making up for some of the issues Ed talked about earlier where we had expected to have trucks in Q1 and they are still trickling in today. So some of the productivity and maintenance savings in our collection line of business are a little slower coming in. Health care cost continue to be high. We continue to see inflation at very fast paces there. We’ve done a lot on John has been shepherding an effort to restructure what we are doing with health care. We will be rolling to a new provider into next year to help bring down our costs and there’s some great leadership there to bring that down. But it’s been a year where there has been some moving pieces, but we’ve been able to stay on track to our guidance and make dynamic changes to get there.

And part of why I’m asking, you somewhat answered this. You are getting really nice EBITDA margin improvement in the collection business. So in light of that, I was wondering about your confidence level in being able to get the 80 basis points to 120 basis points of improvement after 2015 going into 2018, you said like maintenance isn’t where you wanted to be, but can you just comment on confidence level in that particular guidance?

Yeah, actually when you get down into the details, I have a lot of activity based around automation of the fleet, especially around residential customers and the trucks haven’t come in. So now they are just starting to come in, we are rolling into another year of improvement next year and I’m pretty confident in hitting those targets.

Okay. And I just have a couple of quick disposal questions. Similar question on your targets for price in the eastern region disposal, I think that has this year not been – not been between [indiscernible] 50 basis points a year, you are expected to get. I know a bunch of capacity has come out of the system, so what is it that will drive greater increases there than we’ve seen already?

Well, if you look at the eastern region pricing, Corey, it’s actually the past few quarters it’s been about 6%. So the eastern region pricing has been well above the 350 basis points that we have in the plan on a go-forward basis. So we are pretty confident that we’ll be able to maintain that and also in the plan we didn’t put any significant pricing on the western region in the plan, we just kept up with inflation and so we’re a little bit above that in the western region. So we think that the plan is relatively speaking pretty conservative.

Okay. I thought you said 250 basis points and I must have misread. And the other quick question is I know in your geographies expansions are never easy and there are being discussions this local [indiscernible] and that just comes with the territory but can you just count a little bit, there continue to be – we’re seeing some headlines locally about the expansion at Ontario and Southbridge just confidence level and ultimately we’ll be able to get the expansions you’re looking for.

I think that we always have – it’s always difficult to get through the process in the northeast from a permitting standpoint and I think ultimately we’ll get through that permitting. In some cases though you can see delays and issues that we’ve got to be even more proactive than what we’ve been historically and that the regulatory agencies are seeing budget pressures. It’s taking longer to get through the process so we’ve got to be more aggressive but we’ve had success in the past, we’ve been able to get through that and we expect that we’ll be able to get through it as we go into the future. But it is something that we’ve got to stay very diligent on and it’s difficult to get through that process. As part of the getting through that process is part of the barriers to entry obviously.

Thanks, Corey.

Thank you. Our next question comes from the line of Tyler Brown of Raymond James. Your line is open. Please go ahead.

Hi, good morning guys.

Good morning, Tyler.

Good morning, Tyler.

Hey, nice quarter, it’s nice to see the focus attention to detail really is starting to payoff here. But, Ned, just a real specific question about your yield metrics, so when we see your collection yields, does that include both rollbacks and the impact of churn or is that just on the – just including rollbacks and not churn?

No, it has both impacts in it. It’s a true net price number.

Okay, great. Very helpful. And then just if we could maybe drive down a little more on the construct of your business model here, so I know that the northeast has quite a bit of what’s call it that subscription business in the residential line up there. So if you were to break your model down, how much of your business do you think is calling in that open or subscription market versus having some pricing restrictor on it maybe either CPI or regulated return?

You guys ask me this question offline this quarter. I got to find my data so I can give you the same response. It’s a complex question, hold-on a second, Tyler. So in the collection line of business, we said roughly 91% open market and roughly 9% is restricted markets. We only have about 9% of our collection revenues in municipal contracts today and then there are no franchise or restricted markets in the northeast.

Okay, that’s very helpful. Thank you. And then this was my big picture question, I appreciate that I’m sure you’re going through the budget process right now into 2016. So I’m not asking for specific details, but can you give us what the big puts and takes are to think about in 2016? I’m thinking on the put side, you’ve got internal growth, you got the SRAC continuing to rollout, you got landfill maybe incremental landfill volumes in the west but on the puts or on the take side maybe you got landfill, gas, maybe recycling but can you just give us maybe the big buckets to think about as we look to 2016?

Yes. As we look at our 2016 plan, as you said, we have not completed budget nor have we guided to next year but it’s a major moving pieces that we laid out in the multi-year plan where on the landfill price side we plan to continue to execute into next year in the eastern region as capacity further tightens. In the western region, the gains on the landfill side, we expect to be lumpy over the next several years and as we’ve said previously 2016, our forward look there is for volumes to be relatively flat into 2016 and then larger gains into 2017 and 2018 as the New York City contracts roll into New York State. The collection line of business, as Ed said, our pricing programs are very robust right now. We don’t see any lightening up there. We’ll have the roll over impact of the SRA fee into 2016. We will yield about $2 million of benefit in 2015 and about $3 million of benefit in 2016. Ed mentioned on the hauling side, the fleet programs will continue to roll into next year so a lot of focus in the hauling business. And then the recycling side of business, we have a couple of contracts that are under water right now. We talked about before we dropped about $7.5 million to $8 million of adjusted EBITDA in the recycling business from 2012 to 2015. About two-thirds of that is going to come back through the SRA fee and one-thirds with contract resets in the recycling business and we expect to have some progress there as well in 2016.

Okay, that’s very helpful. And then just maybe my last one here but what is temporary rollout as a percentage of your book?

It’s about between 15% and 18% of our collection revenues today.

Okay. Are you seeing anything I don’t know if you have maybe calls per day or anything – any indication of how that’s tracking?

Ed, do you want to?

Yes. It’s improved dramatically this year over last year, so it’s tracking very well. Of course we are a very seasonal business so this is the right quarter to ask that because we’ve just gone through our stronger two quarters on roll off calls.

Yeah, I think that has improved but I think if you look at it in context of where rollout was back before collapse, we are still way lower than the performance at that point in time. So that point in time construction demolition revenue was probably $30 million plus, we are probably back now at $7 million, $8 million. So it’s improved as Ed said but not anywhere near where it was before the economic collapse.

Yes. I totally appreciate that. I was just saying if there is any maybe chinks in the armor so to speak if things are deteriorating but it doesn’t sound like it. I’m going to past it on. Thank you.

Thanks, Tyler.

Thank you. Our next question comes from the line of Joe Box of KeyBanc Capital Markets, your line open. Please go ahead.

Hey, good morning guys. It’s Sean on for Joe.

Hi, Sean.

A quick question, if you could help me understand the step down in Solid Waste Internalization particularly in the western region, is that a mix issue, a large contract, any clarity there would be helpful.

We made a decision this last year to contract with several third parties. There was a small landfill coming online in New York State, new capacity and also we’ve talked a bit about the burn plants and some of what in the winter months have go out and they are a bit starve for volumes. So we have two contracts we enter into this year to take some of that capacity out of the marketplace to further our pricing programs during the year. so we have a little bit less internalization and that’s why I said earlier where our mix at our landfills, the reason our disposal stat, revenue stats up a little bit and that we see a shift from some intercompany tons going to our landfills and a little bit more third party tonnage coming to our landfills.

Gotcha.

They really enabled us to – may have lost a bit of volume but it enabled us to move price.

Okay, understood, understood. And then I know that you guys alluded to this earlier, but I’m wondering on a consolidated basis if you could help us bridge the total EBITDA margin expansion by order of magnitude, would you say first it was price then it was increased volume and then it was cost, just any order there would be helpful.

I’m not sure if I’m prepared to answer that on this call. I probably would need to look at some real details, Sean, maybe you can start call up afterwards.

Okay, sure. Thank you. And then skipping through to the price obviously we’ve discussed this quite a bit, but I’m wondering how aggressive you feel you’ve been, I understand that the market is improving to support your efforts but do you feel there is plenty of sealing left and maybe we can see some incremental pricing gains at a higher greater momentum than we’ve seen thus far?

So the answer to that, the way I view it, if you go back just a few years we were getting very little prize in the market, there was a lot of resistance. Things have changed, our service levels have changed, the economy has changed a little bit, and the regulation relating to recycling has changed. So there is a lot of visibility in our markets and we’ve been able to develop our pricing programs with quite a bit of momentum and I still think there is a bit of room before - because we went so many years with low price and cost increasing that now we have that opportunity to catch up to where we should have been had pricing been appropriate the whole time. So I think we have a couple more years of good momentum here.

Okay got you. And then lastly from me, I really think you haven’t put together your 2016 budget, but can you help us understand this year’s level of CapEx on a sustainability basis, you had 7.5% of revenues year-to-date and how long can this go on considering the need for cell development et cetera as you hopefully capture some of this greater volume in the Eastern region?

So for calendar 2015 we plan to be around 8.7% to 9% of revenues by year-end, for CapEx. As we look into future, there is a slide I put into the latest investor deck that shows our CapEx broken down by our integrate solid waste business hauling, transfer, and landfill gas energy versus our resource businesses, recycling, organics, and customer solutions. And what’s really interesting if you look at that slide, we’re tracking about 11% of revenues in the integrated solid waste business, and we’re tracking at about 4% of revenues for CapEx in the resource businesses. About 75% of our revenues today are integrated solid waste and we’re roughly 25.2% adjusted EBITDA margins in that line of business. In the resource businesses, we have much lower capital requirements. A great example of that are organics or biosolids business. This is a business that has roughly 13% EBITDA margins, but requires year-in, year-out about 4% of revenues for CapEx. So a business that brings down our overall margins, but brings up our returns in our cash flows. It is a great business to be in, but we have a little bit of a different mix in some of our peers, so when you look at our overall CapEx at about 9% seems a little bit below, but when you get into the components of it we’re tracking 11% in solid waste and we’re right where we should be.

Okay great. Thank you very much. That’s all from me.

Thank you.

Thank you. Our next question comes from the line of Scott Levine of Imperial Capital. Your line is open. Please go ahead.

Hi good morning guys.

Hey, Scott.

Good morning Scott

So, I was just looking for a little bit more clarity, I guess Ned you mentioned I think in your formulating and intermediate term plan there that you are banking on flattish volumes in 2016 and that we see maybe some more acceleration in the outer years as New York City has more impact in the Western region, did I hear that right and I guess I’m just trying to reconcile some of the macro trends, which seem pretty healthy with maybe the outlook preliminarily for next year and then whether on an underlying basis there isn’t any reason to expect underlying volume growth rates to hold or maybe even improve as we go forward?

I think your perspective is our right one Scott and that is that from a practical standpoint the impact in the Western region is likely to be 2017 and after we’re going to see a little bit of that in 2016, but the second contract is being left from the Department of sanitation is likely to be a 2017 event. So we’re going to see the Western region tighten up more towards the 2017 and 2018 timeframe.

And from a macro standpoint is there any noteworthy difference between your two main operating regions as one performing materially better?

No. The Eastern region is performing better from a price standpoint particularly on disposal and as a function of the supply and demand differences between the East disposal facilities versus the West. And I think that’s the primary difference.

And what’s interesting about that is our Eastern region is coming off a much lower base. So just a couple of years ago we had 15% EBITDA margins in the Eastern region and if you look at where we sit this quarter, for the last 12 months basis we are up to roughly - in the Eastern region we’re up to roughly 23%. So, we’ve had a dramatic improvement there. The Western business, the Western region especially Vermont, far Eastern New York has a very highly integrated business that performs in the 28%, 29% range and then out into New York State we had some margin deterioration a few years ago, as landfill volumes declined, as volumes have come back in we’ve seen that market rates back up and we’re in the 26%, 27% margin range in that business today.

Got it. One more, if I may on customer solutions, I don’t know if you touched on the profitability, I know that’s been a fugues kind of reaching that over the last couple quarters but [indiscernible] what you see there and might we see potential for acceleration in earnings improvement in that business line.

Yeah, I think that we’re pretty confident that that business continues to move in the right direction. Revenues were flat for the quarter, but EBIT contribution was improving. So, I think that we’re, Paul and the group have done a good job in terms of the overall sales efforts, the cycle in terms of moving revenues in is a little bit longer than what we saw in the first quarter, but still making great strides there in terms of the industrial side of the business in particular, as well as some great activity on the college and university side as well as the municipal side.

Got it, great thank you.

Thanks, Scott.

Thank you. Our next question comes from the line of Tony Bancroft of Gabelli Capital, your line is open, please go ahead.

Good morning, gentlemen.

Good morning, Tony.

Just a big picture, I’ve heard the argument, what do you say to the argument that the disposal constraints in New England aren’t as dire as you say I mean we’ve discussed this in the past, but haulers actually have other options of disposal capacity in that region. Is there I mean I’m just alluding to what you’ve talked about in the past and the constraints and closures, but is there something else that you could tangibly point to saying “Hey, no this is a real thing, and this will continue.”

I’ll take that Tony. I think there’s a couple of things that are impacting the disposal market in the Northeast. Obviously, the 2.5 million tons of capacity coming out of the market was six or seven facilities that have already closed and 1.5 million ton already out of the market and another 1 million tons that’s going to happen over the next year or so. The other thing that’s changed too is that there’s been real consolidation in the rail served activity. A lot of those businesses now have been consolidated into one company, which we think is going to change the dynamics in terms of some of the disposal capacity that historically has impacted the marketplace. The other thing that we’ve done is we have worked with additional capacity, pushing additional tons to the waste energy facilities in the wintertime and running our facilities harder in the summertime at a higher price, so that’s another dynamic that’s changed in the marketplace over the last year. So, we’re actually moving tons to those facilities in the winter time and that’s proven to be very beneficial both to them as well as to us. Unfortunately, we’re able to move higher tonnage in the summertime when we have a higher price point. So, I think that that trend’s going to continue over the next few years. We don’t see anything from a capacity coming online that is not already in the conversation or in the investor presentations that we’ve done. We’ve put the new capacity that’s come online in place as well. So, I think that we’re pretty confident that the trends are going to continue into the future with regard to the disposal capacity supply and demand quotient that we’ve identified and there’s a couple of other factors, as we said, I think when we saw you last and the other thing that is happened is that Tullytown facility is going to close in 2017 and that’s another factor that six months ago wasn’t even in the equation. So, I think that there is at least from our perspective anyway all of the - and there is another effort from a rail standpoint in the Kentucky facility where they’re no longer going to take slots by rail, so it’s a big run facility in Kentucky. So, there’s a number of things that continue to happen that support the perspective of the supply and demand issue in the Northeast. So, I think we’re pretty confident.

That’s great thank you.

Thanks, Tony.

Thank you. Our next question comes from the line of Brian Chan of Bank of America. Your line is open, please go ahead.

Hi guys, thanks for taking my call here.

Hey, Brian.

Hi how are you? Just in terms of the capital structure here and your guidance of EBITDA and leverage in 2018 at least according to my math I’m getting - applies about $85 million worth of debt pay down, so one I guess is that math correct and two, can you give us like a sense of cadence of what should that be like towards the latter end or is that kind of like evenly throughout the next couple of years, also like how much of that is like cash flow generations versus self assets, and then finally and I know those are lot of questions, but they’re all kind of related whether you’re expecting that to mostly come from the senior sub notes?

You, great questions. So, you are right that the model does suggest between $80 million to $100 million of debt repayment over the next three years that that’s what the leverage in the EBITDA statistics suggest, up from a cadence standpoint, it will increase as we go through the next several years. We expect free cash flow to ramp up from where we are today’s $15 million to $19 million up to the $30 million to $40 million in the last year, so you will see an increased cadence and that increased cadence has a lot to do with debt repayment too as our cash interest costs goes down in each period. What we contemplated when we looked at this model was in each year we do plan to be retiring senior subordinated notes and we do plan to have a refinancing ahead of 2018 as well if that senior subordinated debt that’s due in 2019. So, our model contemplates both of those, the model does not contemplate any asset sales during that period to pay down debt though, it’s all operating cash flows.

Okay. Thank you very much, appreciate it.

Thank you.

Thank you. Our next question comes from the line of Al Kaschalk of Wedbush Securities, your line is open, please go ahead.

Good morning everybody. Just a couple of loose ends to tie up in my side, given the number of questions. On the comment about slot volume in 2016, how should we think about in that type of environment your ability to drive price and I assume you meant that the volume was more landfill than collection, but can you just help maybe give us some thoughts on how price will come into an environment where volumes may not be growing?

Hey, Al, if you look at the disposal market, particularly and in Upstate New York although this really applies everywhere, you have now a substantial amount of tonnage planning to come in from New York City to the upstate market. Well the landfills [indiscernible] who are going to get those tons they’ve got to plan for that. So, as bids come up for transfer station, some of the longer-term bids we’re seeing them already react where they’re not putting in low numbers, they’re putting in either a high number or not bidding. So that’s where your price pressure comes before the volume starts growing.

Hey Al, just to clarify my comment as we said earlier, we have not completed budgeting for next year and that was just a comment in relation to New York State, in the Eastern part of our franchise we are hitting permit limits at the majority of our sites, so we are quite advancing price increases and we do expect to see positive collection volumes into the next year as we see continued favorable economic trends across our market.

And I think the other thing that’s important too Al is that in our financial target model we didn’t incorporate price in the western region, so I think there is an opportunity there, we just incorporated keeping up with inflation in the western region from a price standpoint, we’re a little bit ahead of that. So, we think that that’s the appropriate way to model that in terms of looking at our targets for 2018. I think our view is that there could be opportunity there from a price standpoint in the western region.

Okay. Just to be clear though, if you’re seeing I don’t know as you said bids but awards does this imply that near-term we should see that in numbers or potentially see that in numbers on terms of the pricing aspect, just want to - I’m not necessarily saying you’re guiding to [indiscernible] but more of the market dynamics are actually seeing these contracts come on at higher price points therefore …

Yeah, I think it is too early to tell at this point in time. I think the preliminary view that we have and what we’ve seen recently in the marketplace is higher pricing from some of the bids that we’ve just seen, so it’s early innings Al in terms of that perspective, but it’s certainly what we’ve seen in the last month.

Right. And then my follow-up would be just to ask a question on productivity, sorry I’m not trying to pick on Ed today, but how should we think about as these trucks come on, the automation some of those further items you’re doing from an operational standpoint from a margin perspective in terms of the solid waste side of business?

When I dig down into the details of what’s happening now and the last nine months, you look at some of the benefits that we have gotten through automation like the as we re-route and get more efficient on the routes but then you look at something like vehicle maintenance because these trucks haven’t come in on schedule, our vehicle maintenance numbers were very high this year. So, of course that’s going to reverse automatically when we get rid of some of these older trucks that are breaking down.

Okay. Thank you, good luck.

Thanks, Al.

Thanks, Al.

Thank you. Our next question comes from the line of Michael Hoffman of Stifel, your line is open, please go ahead.

Thank you, John, Ed and Ned for taking my question. Ned, I just want to be reminded out of the $15 million to $19 million, it’s still $4 million or $5 million as asset sales this year; I just want to make sure I didn’t miss that.

So we had $5 million roughly of asset sales, but had to be pay $1.5 million to our joint venture partner at C.A.R.E.S, so it’s $5.3 million less $1.5 million, so a little bit less than $4 million.

Okay. And I’d take that out of the 11 that’s the underlying operating number, okay. And then guidance, I’m trying to reconcile where we are year-to-date at 406 million of revs and $78 million of EBITDA and where the guidance is because it’s a fairly steep revenue decline relative to normal seasonal patterns for the fourth quarter and candidly the street estimates are too high to come in at a midpoint, so should you be actually in fact raising guidance or is there something we need to keep in mind that’s you thinking about as we’re now on a calendar cycle of October, November, December instead of November, December, January?

Yeah. So, it really depends on our visibility of one or two T&D contracts at the landfills that we have and we’re right at the upper end of the revenue guidance or maybe even a little bit above it, so your perspective is right there where we’re hitting the upper end of that our visibility on one of these jobs is not sure if it’s hitting in late this year into next year, so we just left the guidance number alone.

Okay. And then the nature of the guidance where it sits and what’s left in the year, it’s a 15% almost 16% revenue dip sequentially, but it’s only 4.5% margin dip, so again that’s just you started with a set of numbers, you stayed with them and maybe they needed to be repositioned, but they’re going to air towards the upper end, is that how I’m supposed to think about this?

We’re going to be at the upper end of revenues that is correct.

Okay. And I just wanted to clarify, John, you said $8 million or $9 million of construction revenues but Ned you said 15% of collection, 15% of collection will be $40 million. So I just want to make sure I understood.

Yes, let me say that a little bit differently. So John said if I want to clarify, so if you flashback to 2007 or 2008 and you fast forward to 2011 or 2012, we dropped about $35 million of construction and demo revenues during that period, both from a collection and landfill standpoint. And if you look at what we’ve gained back from that valley in late 2011, early 2012 we’ve gained back about $8 million or $9 million from that floor. So it wasn’t absolute dollars. John was talking about, he is talking about changes in revenues across that period.

Okay. So it’s about a $40 million business, is then the right way to think about it?

Yes.

Just under.

Okay, fair enough. And then Ed, on your price side, I realized this may a challenge in that given as a company you weren’t pushing as hard on price but how would you frame your ability to retain what you’re going to the market with given the positive macro-environment versus the competitive issues. Are there, is basically – is everybody else pretty much full too so that’s helping you retain more of what you’re going to the market with and what’s your thoughts about how sustainable that is?

As you know, the northeast is fairly highly regulated even on the trucking side. So a lot of our competition has suffered the same challenges we have because a lot of our competition are smaller haulers. So say four or five years ago when we tried to push price, we saw an immediate reaction where we start losing a few customers here and there. Now, we are pushing price in a much bigger way and we are not seeing that kind of a reaction because for two reasons. One, the customers are in slightly better economic times so it’s a little less of a focus to them. But the second is that the competitors really can’t take that business.

And the other thing that’s happening Michael is that from a competitor standpoint, haulers are feeling inflation from a disposal standpoint, they are feeling inflation from a recycling standpoint and those are big line items from a cost standpoint. So the whole dynamic from a disposal standpoint is really driving real inflation to all of the haulers both on the disposal side as well as on the recycling side. So that being said, this is very different environment than it was five or six years ago where there was overcapacity where they could just simply shop. It’s becoming obviously much tighter and therefore they’re seeing a lot more inflation that they’ve got to go back to their customers offset.

Okay. So a combination of their cost inflations rising pretty hard plus the volume in the markets keeping them full means that your go-to-market price you should be able to continue to retain more of that not less for a while.

We believe that to be the case.

Okay.

Yeah.

And then how would you frame the inning we are in and your region on the trend of volume of improving? Lags, lots of other parts of the country, where do you think you are before you hit okay we’ve kind of leveled out and this is going to be the annualized pace of change.

There is two factors to that, there is the economy and there is us as a company. And I think in both of those we are in fairly early innings.

So 18 months, 24 months before you hit a normalizing point or 12 months to 18 months, how do you think about that?

I’m thinking through the automation side on everything we are doing. We’re probably looking at 24 months.

Okay. And then John, if the New York City volume, it’s come in, it’s just when. If it doesn’t come until late 2017, so you are really not seeing a full year impact of it till 2018, how does that impact the three year plan? I think it’s page 11 in the presentation from December, how does that impact your thoughts about that plan?

I think that we purposely Michael put the majority of that into 2017 and 2018, so I don’t think that that will impact us all that much.

Okay. And then to that end, the low end of the plan from an EBITDA standpoint, it’s about 200 basis points improvement in EBIT margins. How do I think about the flow of that? Is that – am I looking at 2016 flat with a little bit of upward bias because of the volume scenario in the western region and then it starts to pick up and its more charged in 2018, how do I think about the progression?

We didn’t guide to each year in the plan but as we said earlier we haven’t guided to 2016 but it’s generally ratably stepped through the collection activities, through the resource solutions activities, through our pricing activities at the landfill but the volume growth in the western region where we’re planning to bring in another 200,000 tons to 400,000 tons a year is showing up in 2017, a little bit in 2018 in the model. So you see a progression that does accelerate through the three years Michael as we continue to gain margin in the collection line of business each year. So we are looking at step up in each period but there is not so much back end loaded just the one initiative.

Okay. And then last question for me, what is the solid waste business EBIT margin and therefore what’s the resource EBIT margin?

Give me a second, I might need to answer offline. Let me circle back to you.

Okay. Thank you very much. John, I know you didn’t want to say us proxy question, all I want to ask is a logistics issue. Is there – we won’t know anything until 7 of November or is there a possibility you know something before. So what’s the new cycle is really what I was trying to understand.

We – I think initially said that we weren’t going to comment on the proxy contest Michael, so we are not going to comment on proxy contest.

Okay. I just want to understand the new cycle just in the sense of can you tell us early or you have to wait until 7 or 6?

The meeting is on the 6.

I meant the 6, sorry.

There is enough time to answer figure out the answer now?

No, we are not answering the question.

No, not that question. He is looking at the EBIT question.

Yeah, I got to refresh the model. I’ll call you back.

Okay, fair enough. Thank you.

Thanks.

Thank you. And our next question comes from the line of Tyler Brown of Raymond James. Your line is open. Please go ahead.

Hey guys, I know this call is long but I got a couple of lose things there. Now Ed, I’m certainly not the brightest bulb here but you did note that debt was down I think $10 million on the 7.75% but debt actually rose sequentially on the balance sheet. So did you effectively just swap out that 7.75% for the ABL?

Yes. So debt would have been down but we did a small municipal tax exempt bond offering where we are sitting on $4.5 million of restricted cash. So from 06/30/15 we had $529.9 million of debt and 09/30/15 we have $533.2 million netting that restricted cash we are at $528.7 million on 09/30/15 and it really comes down to just the timing of where we bought down the senior sub debt where we have been paying down revolver borrowings through Q2 and mechanically we went into the market to buy the sub debt in Q3.

Okay. And then is there any more opportunities on that muni side? I mean what were those main rates at? I assume there was sub 5 or something?

Yes, the main bond, we did a 10 year bond at 5.25%, the last – we did at New York in late December 2014 five year bond fixed at 3.75%. So it’s a great marketplace for us to buy down the cost of our capital and get long term fixed debt. What we’ve been doing is we’ve been structuring indentures that have a drawdown structure, so the main bond we just did is a $30 million indenture and in this first bond to be offered $15 million so there is another $15 million to do at a later point in time. In New York State, in December, we did a $40 million indenture and we first drew down $25 million, so there is another $15 million sitting on the shelf. So in the next number of quarters as we get more and more qualified capital expenditures, we will do more of those bonds.

Okay, great. That’s super helpful. And then my very last one here, I just want to go back to landfill CapEx for just a second. So if you are expecting those western landfill volumes maybe to start ramping more or like 2017, 2018 is 2016 a heavy year of sell development in front of that or is that something that you can do more coincidentally?

We would do that more coincidentally but I think that – we’ve got sell development that happens every year. So in some years we could have three or four projects and other years we may have one or two projects. So it just depends on the cycle, it could be a little bit lumpy in terms of depending upon how many sells we have to develop in a given year.

Okay, thanks guys. Appreciate it.

You’re welcome.

Thanks, Tyler.

Thank you. And I’m showing no additional questions in queue. I’d like to turn the conference back over to management for any closing remarks.

Thanks, operator. Thanks everybody for your attention this morning. We look forward to discussing our fourth quarter earnings and our 2016 guidance with you early March. Thanks, everyone. Have a great day.