Casella Waste Systems, Inc. (CWST) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Inc. First Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to Joe Fusco. 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 will be discussing our 2016 first quarter results. These results were released yesterday afternoon. Along with a brief review of those results and an update on the Company’s activities and business environment, we will 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 available in the investor section of our website at ir.casella.com. And now I will turn it over to John Casella, who will begin today’s discussion.

Thanks, Joe. Good morning, everyone, and welcome to our first quarter 2016 conference call. We are very pleased, obviously, with our first-quarter results. As you saw in yesterday’s press release, our revenues for the quarter were $125.4 million, up 7.6% from last year. Adjusted EBITDA was $19.3 million, up 33.1% from last year. Normalized free cash flow was up $2 million from last year, and we also reaffirmed our 2016 guidance ranges. Ned will go deeper into the numbers in a moment, but first, I would like to recognize that these strong results are tangible evidence of our commitment and continued execution against our key strategies. We have established the process and discipline throughout the organization to focus time and capital resources on the key drivers of our business. The winter in the Northeast was quite mild this year, in contrast to the historically cold and snowy winter that we experienced in 2015. As you can imagine, with milder winter, our operational costs were lower year over year and more importantly, we saw economic and construction activity remained more consistent throughout the winter. While 2016 is off to a very strong start, we believe that it’s too early in the year to estimate how much of the typical spring ramp-up was pulled forward into the winter months versus the benefits of tightening disposal markets, economic growth in the Northeast and our strategic execution. In fact, these strong growth trends began to moderate slightly in April. Just over three years ago we laid out a comprehensive strategy to improve our financial and operating performance. 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 with this strategy, and we have refocused management attention and capital resources on our core operation 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 operational risks while improving our balance sheet. We are confident that our enhanced discipline and continued focus on key operating strategies will further drive improved performance and increase free cash flow, enabling us to continue to delever our balance sheet. As the Northeast disposal markets continue to tighten due the permanent closure of various competitor sites, we further advanced our landfill strategy during the first quarter with higher pricing and increased volumes. In the first quarter, we increased total landfill volumes by 152,000 tons year over year through our focused landfill strategy as well as our landfill asset positioning in the marketplace that allowed us to attract new customers and volumes. In addition, we increased our disposal pricing by 1.3%, with particular strength in the Eastern region where we increased price by 2.8% as we further capitalized on the tightening disposal markets across this market area. We expect these positive trends to continue for the next several years as the disposal capacity constraints become more acute across our footprint, and we remain focused on executing against our disposal strategy. However, we have forecasted landfill volumes to be down slightly for the remainder of the year due to our planned volume reduction at the Southbridge landfill as we push out low-price soils and other lower-price volumes to give us more time to complete permitting process for the next cells at the site. We’ve also seen natural gas drilling activity come almost to a halt in the Marcellus shale region. And, as such, we have reduced our volume forecast for this material through the remainder of the year. We continue to make excellent progress on our landfill permitting over the last several months. As we discussed in early March, we received our minor modification at our Highland landfill to expand the annual permit from 312,000 tons per year to 465,000 tons per year. Further, in late January, the Ontario landfill received the final permit for a $15.7 million-cubic-yard expansion which creates an additional 13 years of space at this site. We are currently building out a new cell at this important site, and we believe that we will be able to ramp special waste volumes and operations back to historic levels in 2017. We continue to make great progress on our second major strategy, improving the profitability of our hauling operations. Our focus here is on core blocking and tackling, namely a focus on pricing programs, route optimization, and fleet standardization, which Ed will discuss in greater detail. The disposal capacity constraints in the Northeast markets are also proving a positive backdrop for us to advance pricing increases in the collection line of business. Within the context of this rapidly improving marketplace, we have continued to advance hauling price increases in the residential and commercial lines of business, with only limited price rollbacks. In the first quarter, combined residential and commercial collection pricing was up 6.7%, the strongest pricing execution we’ve experienced in the last 10 years. We have forecasted positive pricing trends to continue through the remainder of 2016. However, we do expect pricing to slightly moderate from the levels we achieved in the first quarter. In addition, we advanced roll-off pricing 7.3% in the quarter, with our roll-off polls up 8.3% year over year, with over half of the increased polls coming from industrial customers and the remainder from temporary construction customers. This increased industrial activity is the result of both new industrial customers and services and higher industrial activity across the Northeast. As part of our comprehensive hauling strategy, we instituted a five-year plan in mid-2014 that we believe will reduce our operating costs through lower maintenance costs, improve our capital efficiency and improve our service levels through decrease downtime. And obviously you can begin to see that this quarter. Ed will comment in more detail. Moving to the third major strategy, creating incremental value through resource solutions, here 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 organic processing and disposal in the Northeast, to our market-leading recycling business. Our customer solutions group continued to improve margins and returns through the first quarter. Adjusted EBITDA margins improved by 90 basis points on continued operating and G&A leverage despite commodity pricing headwinds in much of the industrial services group. Lower recycling commodity prices remained to be one of the largest challenges and opportunities facing the solid waste industry today. The stagnant global economy, lower oil prices, the strong U.S. dollar weighted heavily on paper, OCC, plastics, and metal pricing throughout the first quarter with our average commodity revenue down about 20% down, price per ton down about 20% year-over-year. Despite the significant decline in commodity prices, we actually improved our operating income in the recycling business by $1.1 million year-over-year. This improvement was driven by the steps that we’ve taken to reshape our recycling business model to earn an appropriate return on our infrastructure investments through all market cycles and our continued efforts to reduce our variable processing costs. This effort has included the implementation of higher tipping fees at our recycling facilities and the introduction of our sustainability recycling adjustment fee or our SRA fees. The SRA fee is similar to a fuel surcharge where it flows inversely to changes in recycling commodity prices. The implementation of the SRA fee has gone very well with the fee now rolled out to all target collection markets with minimal rollbacks. Also we continue to make progress improving our balance sheet and reducing operational and financial risks. During the first quarter we repurchased and permanently retired $4.2 million of our senior subordinated notes demonstrating our continued commitment to reduce leverage and accelerate free cash flow generation by retiring our highest cost debt. In early April, we completed the acquisition of three transfer stations in Vermont from Advanced Disposal Services to further solidify our leading transfer station network in the Northeast. We are well positioned for the future and we are committed to a disciplined capital investment strategy with free cash flow primarily used to repay debt for in selected instances, we would consider small tuck-in acquisitions and growth investments within our core operations. And with that I will turn it over to Ned to take you through the numbers.

Thanks, John. Revenues in the first quarter of 2016 were $125.4 million, up $8.9 million year-over-year. Solid waste revenues were up $8.5 million or up 10.1% year-over-year in the first quarter, with the increase mainly driven by higher disposal and collection volumes, higher collection and disposal pricing, partially offset by lower processing volumes, lower fuel surcharges on lower diesel prices and lower energy pricing and volumes in the landfill gas to energy business. Revenues in the collection line of business were up $4.5 million year-over-year with prices up 6.7% and volumes up 2.3%. Our pricing programs in the commercial and residential lines of business continued to strengthen through the first quarter with pricing up 6.7% year-over-year in these lines of business. As John mentioned, we also advanced stronger pricing in the roll-off line of business with pricing up 7.3% in the first quarter. Revenues in the disposal line of business were up $4.5 million year-over-year with roughly 55% of this increase driven by strong volume growth at our landfills. We increased third-party reported disposal pricing by 1.3% year-over-year in the quarter with disposal pricing up 2.8% in the Eastern region as we continue to capitalize on the tightening disposal markets. As John mentioned, we expect these same positive pricing trends to continue through 2016 as we plan further pricing increases in key markets. Our total landfill volumes were 925,000 tons in the quarter, up 152,000 tons year-over-year or up 19.7%. A good bit of this increase was driven by strength in C&D volumes which were up 85,000 tons year-over-year with unseasonably warm winter weather driving strong construction activity in the Northeast. It’s not yet clear how much of the strength is due to continued improvement in building trends versus the full force from the normal spring construction ramp up. We continue to drive incremental value by maximizing landfill capacity utilization and over the last 12 months landfill volumes were up roughly 940,000 tons per year as compared to our fiscal year 2013 when we first launched this strategy. Recycling revenues were up $300,000 year-over-year in the first quarter with our average commodity revenue per ton down 20.4% year-over-year on lower fiber, plastics and metals pricing. The decrease in commodity prices was more than offset by higher tipping fees at our facilities and higher volumes. Recycling volumes were up 8.2% on new contracts and continued organic growth. Organics and customer solutions revenues were flat year-over-year in the quarter with higher multi-location brokerage revenues and higher industrial services revenues in the customer solutions business offsetting lower organics revenues. During the quarter, our revenues were roughly $300,000 lower for the divestiture of low margins hauling reps. Adjusted EBITDA was $19.3 million in the quarter up $4.8 million year-over-year with margins improving nearly 300 basis points to 15.4%. So with revenues up $8.9 million and adjusted EBITDA up $4.8 million that gave us a flow through impact of 54%. Solid waste adjusted EBITDA was $19.1 million in the quarter, up $5.2 million year-over-year after neutralizing for changes in allocation of management fees. This correlates to a flow-through benefit of over 60%. Hauling adjusted EBITDA was up $2.3 million year-over-year with margins expanding 200 basis points. Disposal adjusted EBITDA was up $3.9 million year-over-year. Solid waste adjusted EBITDA margins were 20.6% up 410 basis points year-over-year reflecting strong pricing coupled with cost efficiencies. Lower fuel costs benefited margins by roughly 90 basis points, while lower energy prices were 60 basis points headwind and increased intercompany recycling tipping fees were 75 basis points headwind. Increasing the intercompany recycling tipping fees is important to ensure that the full cost of recycling services are passed through to our collection and transfer customers. Recycling adjusted EBITDA was $200,000 in the quarter, up $1.1 million year-over-year. This is present on 3.5% lower variable operating costs per ton and higher tipping fees to both third party and intercompany customers. Cost of operations in the quarter was down 320 basis points year-over-year as a percentage of revenues. Ed will run through this in much more detail. General and administrative costs in the quarter were up $1.8 million year-over-year with incentive compensation accruals up at $1 million on better performance and professional services fees up $0.5 million mainly due to timing differences. Depreciation and amortization costs were up roughly $700,000 year-over-year largely due to higher landfill amortization on higher volumes. During the quarter, we continue to opportunistically repurchase on open markets and permanently retire our high cost 7.75% senior sub notes due in 2019. During the quarter, we repurchased an additional $4.2 million of the bonds at below par bringing our total repurchased amount of bonds to date to $18.9 million. As we have previously described, our ABL Revolver allows us to pay down junior debt as long as we maintain a minimum threshold availability on the revolver. Paying down the 7.75% senior sub-notes is a great capital allocation decision because the interest cost on the senior sub-notes is roughly 5% higher than the interest cost on the revolver enabling us to accelerate free cash flow generation and debt repayment. On March 31, 2016 our total debt to EBITDA was 4.64 times down from 5.43 times on March 31, 2015, or down 0.79 times in 12 months. We remain focused on further reducing leverage and as we laid out in the multiyear plan we announced in August, 2015, we are targeting leverage of 3.25 times to 3.75 times by the end of 2018. As expected, given operational and working capital seasonality of our business, normalized free cash flow was negative $8.3 million in the first quarter. This was actually up $2 million from the same period in 2015 on better operating results. Free cash flow is projected to be positive each quarter for the remainder of the year and we plan to allocate the majority of this cash to the permanent retirement of our senior subordinated notes. Further, we generally expect the same seasonal patterns to revenues, adjusted EBITDA and free cash flow that we experienced in calendar 2015, with our first quarter having the lowest revenues, lowest margins and negative free cash flow. As we stated in our press release yesterday afternoon, we have reaffirmed our revenue, adjusted EBITDA and free cash flow guidance for 2016, and we remain on track with our multiyear strategic and financial plan that we laid out to shareholders in August of 2015. And with that, I will turn it over to Ed.

Thanks, Ned. Good morning, everyone. We had a very strong quarter, no doubt, and we are obviously happy to start off the year this way. For the quarter, cost of ops as a percentage of revenue improved 320 basis points year-over-year, even better than the 260-basis-points improvement in the fourth quarter. As you can imagine, the key operating metrics that I follow are all very positive, so I don’t think it makes too much sense to spend time on them today on the call. What I would like to talk about is some of the fundamental practices we have in place that are driving our success and about our focus on continuous improvement. Let’s start with price. We have worked very hard to provide outstanding service for our customers, investing in reliable equipment, assuring a superior customer care experience and providing an attentive sales force, among other things. We know that puts us in a position to get price, but that’s only half the story. We have also established a proven process to ensure that our price increases happen as scheduled and are intelligently applied to the customer base. I personally review and approve each market’s PI worksheet each month, making sure it fits our strategy for that particular market. I also track very closely our new and lost business reports to make sure that we are being appropriately aggressive in each market without overdoing it. This process is working very well, and we have been successful in instituting a strong level of discipline in this area. We also continue to update our technology to make the process easier, improving customer profitability analytics and our ability to identify lost customers that are truly due to price. The results are very apparent. During the quarter, we achieved 6.7% price growth in the collection line of business, what I believe is a record for Casella and certainly the highest I’ve seen in my career. Another area in which we have made significant improvements is in our fleet. We have talked about this before, but I think we’re just starting to see the benefits. As you might recall, the fleet plan we adopted a couple years ago called for improved standardization of our equipment, a move towards quality in the purchases we made and a focus on automation. In 2015, we were challenged by late delivery of our budgeted trucks, most of which did not arrive until after the busy spring and summer seasons. This required us to put money into older trucks that had to stay in the fleet longer than planned, hurting us in vehicle maintenance expense. So we changed our process and pre-ordered our 2016 budgeted trucks in the fall, and most of those trucks were in very early in the first quarter. In addition, having the discipline to stick with our standardization philosophy has taken significant pressure off of our maintenance shops and off of our drivers. We still have ways to go to eliminate inefficient equipment and increase our standardization, but the heavy lifting is done, and we expect continued improvement in the fleet, as the fleet plan progresses. These are just a couple of examples of where we are striving for continuous improvement. Continuous improvement has become our mantra internally, as this drives our commitment to improve our operating results from all aspects of the business. We are certainly ahead of plan on getting price and are happy with the progress to date on increasing our operating efficiency. But we retain our sense of urgency as we continue to strive towards meeting or exceeding the targets laid out in our multiyear plan. Before I wrap it up, I want to make a comment on the economic conditions in the Northeast from our perspective. Our ability to get price, increases in landfill volumes, particularly construction and demolition materials, and our analysis of roll-off polls may be giving us an indication that the economy is showing signs of improvement. As many of you know, waste companies classify roll-off polls as to whether they relate to permanent customer sites such as a school or industrial site or other long-term customer, or to a temporary project like construction or demolition jobs. Temporary polls were up 8% over the year over the prior-year first quarter. Well, that could be partially due to milder-than-normal winter weather, as construction and demolition jobs were able to continue through the winter or it could be due to improved economic activity, or it was some combination of both. What is interesting is that the permanent polls were up 9%. Not definitive, but this is a pretty good indicator of improving economic conditions as our permanent customers are generating more waste and requiring additional service. The trend is even more prominent in our Eastern region, where the larger population base is. So we are off to a very good start, and I’m looking forward to the next few quarters as we get into our prime season. I would like now to turn it back to the operator to facilitate the question-and-answer session.

Thank you. [Operator Instructions] The first question is from Tyler Brown of Raymond James. Your line is open.

Hi, good morning guys.

Good Morning.

Good morning Tyler.

Hey very nice quarter. So I wanted to talk a little bit about the collection pricing. It clearly continues to garner tremendous traction. Can you talk a little bit about how much the SRA fee benefited that number? When you guys mentioned that it would moderate through the year, I’m assuming that some of that is from lapping the SRA. But can you give us some flavor of what we should expect?

Yes, the SRA fee was 2.4% of the 6.7%. We’ve also done, if you remember, we were, as you mentioned, we’re going to start lapping it. We implemented this a little over a year ago. So I tried to figure out how much of the SRA fee, if it had been fully established a year ago, what that benefit would have been and it would have been about point, a little less than 1%. So I look at that as true price because we didn’t have an SRA fee before.

Right. Okay, okay. So, a slight step down but nothing super-dramatic.

Right.

And then on the landfill volumes, obviously they were off the charts. We saw waste, we saw connections; it’s certainly understandable. But you guys have talked a little bit about starting to see some moderation here in Q2. Can you just talk about a little bit about what you are seeing specifically through the first four or five weeks of the quarter, at least as it relates to disposal tonnage?

Yes, as we said, it is moderated slightly. I think that’s a very fair perspective, Tyler. I think that, as we indicated in the call, some of what we’ve done purposely is to move out lower price material at our Southbridge facility, which makes a great deal of sense in terms of the progress that we made on volumes in the first quarter to try to enhance the price at the facility. And also it gives us a bit more time from a permitting perspective as well and then just the reality in terms of what we are seeing with regard to the Marcellus and McKean.

So, but to be clear, I mean are landfill volumes down year-over-year in April?

Slightly, yes.

Okay, okay.

Yes as you think about last year, Tyler, we had this terrible winter in the Northeast, and not much was getting done in January, February and March and the winter broke in early April, and we were off to the races in April, whereas this year there was a more consistent level of construction throughout the winter.

It’s difficult, but we really do believe that we had some April business pull forward into the first quarter.

Yes, now, totally, totally understandable. Okay. All right that’s good. And then John, I’m just going to leave this as an open-ended question. But can you just give us broadly an update on where we are with the Southbridge permitting and maybe how much life you do have there currently?

Sure. We have about two years of capacity there right now. We are in permitting for an additional four years currently. We have – we are in the process of our MEPA permit right now. Once we have that, we will be in DEP permitting. So we are – we expect that we will be through that process probably in a year and a half or so.

Okay, okay. Good. And then Ned, how much did you guys spend on the three transfer stations?

It was just under $3 million. And these were transfer stations that give us good internalization benefit going forward. And as you know, we have the leading network of transfer stations in the Northeast, and it really allows us to access third-party customers and route them to our landfills.

But it’s also important to, with regard to Southbridge, we also have additional permitting activity and additional capacity that we will be permitting after the 2.5 years of capacity that we have in permitting right now, too, Tyler. It’s important to point that out as well.

Yes. Okay, all right, understood. And then Ned, my last one here, on the last call, you guys noted that your notes were actually trading under par. I’m not sure, I think maybe you got upgraded by one of the agencies this quarter, but, again, I’m not sure on that. But can you talk a little bit about where those notes are trading today and if they are closer to par, does that change your aggression on buying those notes?

Yes, great question. So we have repurchased some bonds at 96.75 last quarter, which was great. We had a nice entry point to the market. Wish we had gotten more. But as you know, Q1 is a low free cash flow quarter, so we bought as many as we could. Coming into Q2, we have seen our bonds trade up above 102. They are trading above our call price of 101.9. But we will continue to be active throughout the year buying down those bonds and we still have a strategy to buy back roughly $20 million of the bonds during the year. If we can do better than that, then we will. It is still a great capital allocation decision to buy back those bonds versus paying down the revolver, which is currently at LIBOR plus 225. And once our leverage drops below 4.5 times, we actually move down the pricing grid on the revolver to LIBOR plus 200. So the decision becomes even better at that point in time.

Okay, great, great quarter. I appreciate the time.

Thank you, Tyler.

Thanks Tyler

Thank you. The next question is from Al Kaschalk of Wedbush Securities. Your line is open. Q - Al Kaschalk Hi, good morning guys.

Hey good morning, Al.

Hey good morning, Al.

Just to clarify, and Ned, when do you expect to get leverage under 4.5 times?

Yes, so this fiscal year, we expect to – by the end of the year to have leverage below 4.5 times. Whether it happens in Q3 or Q4, it really depends on the timing of some of our cash outlays with the landfill construction projects. But we are tracking, we’re on track to get below 4.5 times this year.

And is that more of a function of EBITDA growth or the cash outlays to retire or repay or a combination thereof?

It’s a combination, but we are focused on absolute debt repayment. We are not just delevering through EBITDA growth. Q1, our reduction of leverage was through EBITDA growth. But over the last year, we have paid down absolute debt and taken leverage of the business, and you’ll see the same thing through 2016.

I’m going to ask a broad question. I guess, I’m going to try and take your pulse on where you believe the margin performance is on the SWO [ph] part of the business, given the others have been a little bit more appropriate metrics to look at than the EBITDA margin. So, given your price and the volume pickup, are you trending? Have we still plenty of room to grow to drive that margin or how do we talk about where we are at given all the moving pieces you’ve had in the past and the positive trends you are seeing?

Well, one thing I expect is much steadier improvement on the hauling side than we’ve had in the past where it’s been bouncing around. Now we are a lot more stable. We have a more standardized fleet. We have better process and discipline in place. And on the disposal side, really we are starting to see movement. We are certainly seeing it on the east side. And there is – as you know, there’s a few macro things that are going on in the Western landfills that I think will at some point will pop for us. So we are seeing good improvement on the East, slow improvement on the West and we expect at some point that will accelerate.

Okay. Just a final – and I think Ned, you may have mentioned it, but could you just clarify again G&A costs were a little bit higher than we had thought. I don’t know if that was a period think because of the comp costs. But maybe you could just address where that is relative to historical, where you are trending and yes, let’s leave it at that.

Sure. We a little bit low last year on our incentive compensation accruals. As you remember, we came out of Q1 of 2015 a little bit behind budget with the tough winter. We made it up through the rest of the year. We really did a great job to get back on track. But our incentive comp accruals were a little bit lower last year. And this year, we came out against gangbusters, and our incentive compensation accruals were a little bit higher than budget in Q1 because we beat our budget numbers. So the variance there was about $1 million on that one item. There are some differences in professional services fees year-over-year about $0.5 million higher this year. Some of that is timing differences that will resolve through the remainder of the year. So there’s nothing else really going on there in the quarter besides those two factors.

Okay, so we have, I guess, eliminated, for lack of a better word, or don’t have the traction from some of that prior cost you had at the end of last year.

Yes, so there was no spend in the quarter on a proxy contest or the like. The professional services fees I was talking about were just some additional legal fees on various matters and timing differences on accounting and auditing fees, but there is nothing allocated towards this same matter as last year.

Okay. The reason why I ask is that the rate of growth there in SG&A was greater than the revenue growth and obviously there was something there and that seems to take care of it. I appreciate it. Good luck.

Thank you, Al.

Thanks Al.

Thank you. The next question is from Corey Greendale of First Analysis. Your line is open.

Hey, good morning.

Good morning, Corey.

Good morning, Corey.

Hi, so very nice job on the quarter. First, just a clarifying question, the year-over-year increases you are giving in roll-off polls, was that polls per day, or does that include a benefit from the extra day in the quarter?

That includes the extra day.

Okay. So basically taking one over 91 or something like that, and that sounds like… A - John Casella Yes, Ned we can probably do that math for you off-line and give you the metrics on that, Corey.

Okay. All right.

From the extra day.

Yes, that would be great.

Yes.

And maybe you don’t have this either, but given that, do you have any estimate of what impact was with the extra day on overall volume around EBITDA in the quarter?

Yes, we didn’t really look through that, Corey. I apologize. We can run some numbers afterwards and circle back to you.

Okay, that’s fine. And then Ned, just maybe splitting hairs a little too fine, but when you suggested that kind of the key metrics we’ll see the same seasonal pattern this year as we have in past years, that sort of implies that Q1 wasn’t that aided by weather? So I just want to clarify are you assuming that there was not much of a benefit in the guidance now or how are you viewing that?

Yes I think is was more a point of Q3 is typically our best quarter of the year; Q2, our second best; Q4, our third best; and Q1, our lowest performing quarter. And then furthermore, when you look at free cash flow, and probably more of my comment was directed to that, you expect the same progression through the year where Q1, we have our changes in assets and liabilities is a negative drag in Q1, mainly because of the large biannual interest payment on our senior sub notes. Q2 will be a positive free cash flow quarter, much like last year. Q3, a positive but, once again, slightly impacted by that interest payment and Q4 will be a strong free cash flow quarter as well. So I don’t think that I was implying that we will see that the ramp-up will change per se given the weather. I think we think the ramp-up will be a little bit less this year, but just more our quarter should stack up the same way as they normally do from a top-to-bottom standpoint.

Okay. And also on the guidance, there seemed to be some puts and takes, so Q1 was particularly strong. Maybe that was weather. And then you got kind of the ramp-down that you are doing at Southbridge. So I just wondered you reiterated the guidance. I presume you are still confident but could you just address that? And, again, how much of these things were factored into the guidance and how much did it surprise?

I think that we’re very confidence with the guidance, Corey. We have other facilities that are over-performing besides just the negatives that we discussed that were going to impact volumes slightly through the end of the year. So we’re very confident in the guidance at this point.

Okay. And John, I think – and please correct me if I have this wrong, I think Chemung is the other one where you are in kind of a nearer-term permitting process. Is that right, and could you give us s sense update?

That is very true. We expect our permit from DEP or DEC, rather from New York probably within the next few weeks, which gives us the time to get constructed in Chemung. At this point in time, we don’t anticipate any issues, but we have not received that permit yet. But we do expect it probably within, as I said, the next few weeks.

And that permit is kind of a two-part permit. It’s, one, a total airspace increase, which gives us another 15-plus years of life, which is great at the site, but it also allows us to increase our annual tonnage intake at the site from 200,000 tons a year to roughly 417,000 tons a year. We don’t plan to utilize that in the near term, but it will be a great option value for us and for shareholders. As the market tightens more and it gets more constrained, we will have a permit already issued that we can access to put more tons in.

Yes, it’s also important, Corey, to talk about the fact that we’ve been in the permit process there for over four and a half years at this point in time as well. So we are at the tail end of it. And, as I said, we expect to get the permit probably in the next few weeks to a month.

All right. Great. That’s all I needed, thanks and congratulations again good luck for the year.

Thanks, Corey.

Thank you. And the next question is from Joe Box of KeyBanc Capital Markets. Your line is open.

Hey, good morning guys.

Good morning, Joe.

Good morning Joe.

So, I want to ask a similar question, just a little bit differently. I want to drill into the landfill tonnage comments a little bit more just to try and understand what a normalized number could look like. Because you’re talking about a 20% growth rate in 1Q kind of going to a negative growth rate in 2Q. So what I want to dig into is, if you X out that C&D number, which is probably your most seasonally sensitive business, and you X out the actions at Southbridge, are you still seeing decent MSW and special waste growth X these items?

Yes, X both of those items, we expect – X Southbridge and X McKean, we expect positive volume growth in Q2. So even with some of our perspectives of some pull-forward to Q1, much more moderate, though, in a single-digit percentage range, not the double-digit percentage range in our model. And I think you’ve got to remember, too, in 2015, we had a really warm and unseasonably nice Q4 as well. So we had some really nice volume trends late in 2015 as we sit here today, we just don’t want to get ahead of ourselves. Great Q1 and we’ve got visibility in lot parts of our business. But as you know, the disposal market, construction and demo, special waste job, you only have visibility out several months. So…

I think your point is really well taken in terms of we are anticipating at this point in time a normal winter October, November and December and that’s not what we had last year, obviously. We closed out the year very strong because of the weather as well.

Got it. Specifically, how should we think about the EBITDA impacts from taking less tonnage into Southbridge, but obviously getting better mix?

Yes, so we – the McKean and Southbridge moves hit our budget about $2 million to $3 million for the year. However, as John said, we are outperforming in other areas of our business that make up for the headwind – more than make up for the headwind, so no negative impact to guidance at this point in time. And McKean, we were taking some really nice price tons from the drilling. These were tons we are solidifying at the landfill and there are value-added services. And our expectation is that some of the oil and gas companies who are in the northern Marcellus, they will come back. There’s some great areas. They own a lot of property, and there’s upside in the future there.

Ed, I want to go back to your lost business reports that you alluded to earlier. Are you seeing increased churn at all on that 6.7% collection price that you are getting pushed? And maybe what are you finding relative to where your pricing is shaking out in the market relative to some of your peers?

So we have a report that we get daily. It really becomes more meaningful when the month is complete because a lot can happen in the first and last day of the month. And what we are seeing in that, I compared to a year ago, I compared to how much price we are getting one year versus the other and right now we are about seeing the same churn that we saw a year ago. We are basically staying even on new versus lost customers while we are getting significant price in the market, which is a great sign.

Right, right and then maybe where are you at positioned relative to your competitors your premium player are you in line?

We have two kinds of markets in the Northeast. We are playing in the urban markets like Massachusetts; Boston; Bangor, Maine; Portland, Maine. We are so are in very rural markets. So our competition is different in those two types of markets. Obviously in the more urban markets, we have the bigger players, Republic Waste Management and smaller companies that are sizable, but they are small – smaller than the nationals or regional's. And then in the Western markets, we are more competing with one, two, three-truck haulers that have a totally different cost structure. Now, as far as our pricing in those different markets, I would say our pricing in the urban markets is in line with the big players like Waste Management and Republic who have discipline in their pricing models. And in the smaller markets, we are definitely the premium service. But what we’ve seen over time is when customers leave us and go with one of these small haulers, there is a strong tendency they are going to come back to us because they are – they can’t get the service that they were getting with us.

Another thing, and we've talked about this before, and Joe, I know you’ve done a lot of research in the area as the tightening disposal markets greatly impact our ability to push price in the hauling side of the business. If you flash back five years ago; it was hard for us to advance pricing increases in the hauling line of business because of small independents who didn’t have their own landfills. They could shop around their tons; look for low-price disposal option. Now that the market is becoming so tight, we see every disposal option pushing price up, that there are no more of those discounts. And then, furthermore, with the recycling business that’s causing additional inflation for small haulers where a few years ago, they were getting rebates at Mertz. Today, they are having to pay tipping fees to bring their materials in. So it gives us a great backdrop for these pricing programs, and it causes a little bit less of activity of small haulers trying to gain volume at the expense of price.

And the other contributing factor to that as well is we were successful with our relationship with Willa Brader [ph] last year in filling their capacity in the wintertime. And we re-upped that program with them for another three-year contract. So the capacity that would normally be available to a lot of folks in the wintertime is no longer in the market, where we fill their capacity during their winter months and we are going to continue to do that for the next three years. That is also another factor – positive factor in the pricing story.

Got it. And then just lastly real quick, I mean if you look at recycling, you guys were up $1.1 million in operating profit year-over-year. Is that producing a positive EBIT for you guys in the quarter? And what do you think needs to be done to get you guys back to the type of returns that you need to be at for that business?

Yes, so we are right around breakeven EBIT in the quarter. However, for the full year, we are projecting EBIT to be positive and get us to about 8% to 10% return levels. So we are not quite to where we want to be, but we are getting close. And that assumes our forecast for the year that recycling commodity prices don’t bounce back. So we’ve made up for a lot of headwinds here. As we said last year, we had negative $8.8 million headwind from commodity price, this quarter $1.3 million, so right over $10 million of headwind and we are improving operating income through that period, so it’s a pretty big accomplishment for us, and we really have shifted our business model to off take the risk.

Got it. Thank you, guys.

Thank you, Joe.

Thanks Joe.

Thank you. [Operator Instructions] The next question is from Brian Butler of Stifel. Your line is open.

Good morning, thanks for taking my questions.

Hey, Brian.

Hey, Brian.

Just first one on the working capital and how you talked about the seasonality, so first quarter was a big use of working capital. And it looks going back to 2015, it looks like second quarter was a positive, third quarter a negative, and then fourth quarter a positive on the working capital. Is that the right way to think about that again going into 2016?

Yes, so we are very similar in Q1 on our use of working capital. As you know, one of the biggest uses in Q1 is the payment on senior sub notes. Q2, we actually worked that down quite a bit, and we expect the same process this year where year-to-date last year we were still slightly negative, but we had a nice positive working capital in Q2. Q3, as you stated, we had negative changes in assets and liabilities, again, as we made that large interest payment on senior sub notes and then Q4, positive. So the same trend through the year. As we talked about last quarter, we do expect slightly negative to neutral working capital for the full year. We don’t expect as big of a benefit as we had in 2015. Some of what we experienced in 2015 was just timing differences. When we changed our fiscal year-end, various accruals broke in different times and it gave a bit of an unusual pick-up at the end of the year. This year should be a more normal pattern.

Okay, great. And then on capital spending, how is that trending versus your guidance of the 46 to 50? Are you still on track for that?

Yes, we are still in the guidance range. We are probably tracking a little bit towards mid to upper right now within the guidance range just given some of the acceleration of landfill development projects that we are doing. We are building out at Ontario right now a multiyear platform there to expand the landfill. So we are well within our guidance range probably a little mid to upper right now.

Okay, great. And then can you give some color on just kind of landfill pricing kind of by region and in between the contracted per spot?

Well, as I said earlier, on an overall basis, our price was up about 1.3%. We were up 2.8% in the Eastern region, so significantly better price in the Eastern region. And we are beginning to see positive price in the West as well.

Is that across both contracts and spot volumes?

Yes, so our contracted volumes, each one of them has price escalators and there are any - they range from CPI indexes to negotiated rates. And then on spot volumes, we are actually seeing better increases than CPI in almost all cases we are following the same pricing mantra that we have in other parts of the business. We’re particularly seeing that in sludges in the Northeast right now. That market is getting very tight with some of the incinerators shutting down, so we are seeing some nice PIs there in the sludge business.

And if you remember, Brian, in our 2018 plan, we didn’t anticipate any significant price in the Western region until 2017 and even then, it is still a pretty moderate price. But when you look at 2016 and our plans to 2018, we didn’t anticipate that we were going to see significant price at all in the Western region. We did obviously, we were able to increase tons 152,000 tons, though, as we previously discussed in the first quarter. So we are pretty positive about where volume is, even though there is slight decline to the end of the year.

Okay, great. And then last one, I think you kind of touched on it, but on the recycling business, obviously making good process with the SRA fees offsetting the price pressure, what is the right way to think about growth and margin in this kind of through 2016 and maybe going forward?

So I think that is as the business to the extent that the business model improves, we will be able to improve our returns in terms of commodity prices and to the extent that we have more offsets in terms of lower prices, we’re going to recover that dollar for dollar. So I think that we are in a terrific place from our perspective. And I think that we have a model that really fixes the recycling business model for the industry, which is it’s a value-added service. And in our market it’s a service that is mandatory service. We need to get a return on the invested capital and I think we’ve got the path and have demonstrated the ability to really solidify the position with regards to recycling and it’s proven itself over the last year or so.

And we finished calendar 2015 with around 11% - 11.5% adjusted EBITDA margins. We are driving North of 15% this year roughly and if you flash back in time, we were in the high teens from a margin standpoint in high commodity markets, and our goal is to be in the mid-to-high teens in lower commodity markets as well. So we are well on our way to that goal.

Okay, great. Thank you very much for taking the questions.

Thanks Brian.

Thanks Brian.

Thank you. I do show we have another question from Tyler Brown of Raymond James. Your line is open.

Hey, just a quick follow-up. Hey John, on sludges, how important do you think the curtailment of shipments to Big Run has been? And do you think that those tons are finding homes locally?

Well, I think that there is a tremendous difference in our view in terms of what has happened with sludge over the last six months or so. So I think that that had an impact. There were other impacts that are in the marketplace as well as Big Run. And so I think that with the capacity constraints, there is less sludge that can be taken to the facilities and in terms of the total amount of sludge, you can only put so much sludge in the facility by volume. And so that market has tightened pretty considerably.

Okay, very interesting. And then this is a big-picture question, but since you guys laid out your longer-term plan, it looks to me that Big Run stopped taking tonnage, Covanta announced another plant impairment, which I assume means another shutdown. Tullytown is shutting down. I mean is it crazy to think that this market may actually tighten even more than what you had originally anticipated?

I think when we had originally started talking about the tightening of the market, the announcement from Covanta wasn’t there, Big Run wasn’t there and Tully wasn’t there. And so, I think that there is certainly the possibility that that could happen. Keep in mind, to put disposal capacity in place is long-lived assets. So I think that it is not likely that we are going to see any new development. If there is a new development for disposal capacity, it’s probably a four or five-year lead time just from a permitting standpoint. So I think that we are going to see tightening. And then as I said before to Brian, we didn’t anticipate that we are going to see it in 2016. We think that it’s a 2017 and 2018 issue in terms of even more tightening in the marketplace.

Right. Okay, good. And then just lastly, can you give any update on McKean regarding the rail?

Yes, I mean we still have the DOT grant where we are going to have that extended for another year. We are in the process of extending our permit right now at McKean. We had that five-year permit; the five-year permit expired. We are in the process of renewing that permit. We will probably have that done in the next six months or so. And it is still a big option for us in that we are not going to build out and put any capital in unless we get a long-term contract for 200,000 to 300,000 tons a year of waste. But there are several opportunities that the landfill team is working on. There is nothing that we have currently, Tyler, but it is an option that we have. And there are some circumstances where we think that there may be some municipal contracts that potentially we could attract for McKean.

Okay, interesting. And I lied, one last one. Sorry. Ed, do you know how much maintenance and repairs were down in the quarter?

About, the percentage of revenue, it was oh, hold on. Let me instead of going from memory, let me take a quick look about 30 basis points down.

Okay, interesting. All right, thanks guys.

Thanks Tyler.

Thanks Tyler.

Thank you. And at this time, I will turn the call back over for closing remarks.

Thank you. In conclusion, I think it’s pretty clear that we continue to execute extremely well against the strategic plan that we laid out three years ago to improve our financial and operating performance. We’ve established a process and discipline throughout the organization to focus time and capital resources on the key drivers of our business. We believe that these actions will further the Company’s performance and allow us to continue to delever the balance sheet going forward. And with that, thank you very much for your attention this morning. We look forward to discussing our second quarter earnings with you in late July. Thanks, everyone. Have a great day.

Thank you. Ladies and gentlemen, this concludes today’s conference call. You may now disconnect. Good day.