Casella Waste Systems, Inc. (CWST) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Q2 2016 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference 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 second 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 Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in the risk factors section of our most recent annual report on Form 10-K which is on file with the SEC. 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 views change. These forward-looking statements should not be relied upon 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 to the extent they are available without unreasonable effort are available in the appendix to our Investor slide presentation, which 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 second quarter 2016 conference call. We are quite pleased with our second quarter results as reported in yesterday's press release. Our revenues for the second quarter were 144.7 million up 0.7% from last year. Adjusted EBITDA was 34.8 million up 13.3% from last year and adjusted EBITDA margins were 24% up 270 basis points from last year our highest margin in five years. Year-to-date we are ahead of our adjusted EBITDA plan through our strong pricing and operating efficiency programs as such we've increased our adjusted EBITDA guidance range for the year. While operating results are outpacing our plan, we have maintained our free cash flow guidance range for the year as capital expenditures are higher than planned due to time sensitive construction schedule at Ontario County landfill that faced significant permitting delays in 2015.Ned will go deeper into the numbers in a minute. But first I’d like to recognize that these strong results are tangible evidence to our commitment in continued execution against our key strategies. Our continuing success and consistently improving results are testament to our dedicated team and the process and discipline that we've established throughout the organization to focus time and capital resources on the key drivers of our business. 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 developing or closing operations that did not fit within this strategy and have refocused management attention and capital resources on our core operations and strategy of strategic business initiatives. Going forward, we continue -- we will continue to focus on increasing landfill returns, driving additional profitability at our collection operations, creating incremental value from resource solutions and reducing financial and operational risk while improving our balance sheet. We are confident that our enhanced process discipline and continuing focus on key operating strategies will further drive improved performance and increased free cash flow enabling us to continue to delever our balance sheet. As expected we did experienced volume headwinds at the landfills during the second quarter with tons down 8.4% year-over-year as unseasonably warm weather in northeast winter resulted in a pull forward of volumes from the second quarter to the first quarter. Our efforts to improve price at selected site in landfill volume growth and planned diversion at Southbridge reduced volumes into the site, energy related waste streams were down in the Marcellus shale region as well. With that said landfill volumes were still up year-over-year at 2.6% or 51,000 ton year-over-year. This improvement was predominantly driven by higher construction demolition volumes in select markets. We increased our disposal pricing by 1.9% with particular strength in the eastern region where we increased price by 3.1% as we further capitalize on tightening disposal markets across the region. We expect these positive pricing trends to continue into the future as the disposal capacity constraints become more acute across our footprint and we remain focused on executing against our disposal strategy. During the remainder of the year, we have forecasted landfill lines to be down due to our continued volume reduction at the Southbridge landfill as we push out low-price soils and lower price volumes to give us more time to complete the permitting process for the next cells to be developed at the site and continued weakness in energy volumes in the Marcellus shale. We made excellent progress on landfill permitting over the last several months, as we discussed last quarter, we received a minor modification in our Highland landfill to expand the annual permit from 312,000 tons a year to 465,000 tons per year in January. Running at current levels this gives us close to 45 years of capacity or if we were able to increase annual volumes up to the new permit level we will have over 30 years of capacity. Further in late January, the Ontario landfill received its final permit for 15.7 million cubic yard expansion which creates an additional 13 years of aerospace at that site. In June the Chemung landfill received its permit for 8.2 million cubic yard expansion which creates additional 14 years of aerospace at that site. Further the permit also included an increase in annual tonnage from 180,000 tons per year to 417,000 tons per year of MSW including construction and demolition waste, the total annual permit limit is 437,500 tons per year. We continue to make great progress with 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. The disposal capacity constraints in the northeast markets are also providing a positive backdrop for us to advance pricing increases in the collection line of business. With the context of this rapidly improving marketplace, we’ve continued to add advanced hauling price increases in the residential and commercial lines of business with only limited price rollbacks. In the second quarter combined residential and commercial collection pricing growth was 5.3%.Roll-off pricing model moderated slightly from the first quarter to the second quarter with roll-off pricing at 3.7% in the second quarter. This moderation was due more to the mix between permanent and temporary roll-off polls versus any significant changes in the marketplace or a change to your pricing strategy. On the operating side we continued to advance a number of initiatives to further improve our operating costs in the collection line of business. In the second quarter, we improved our collection cost of operations by 360 basis points year-over-year. This improvement is being driven by our strong pricing programs, coupled with a positive impact from our five-year fleet plan maintenance initiatives, improve the fleet routing and efforts to swap or develop underperforming routes. 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 organics processing and disposal in the northeast to our market-leading recycling business. Customer solutions group continued to improve margins and returns through the second quarter. Adjusted EBITDA margins improved by 215 basis points and on continued operating and G&A leverage despite commodity pricing headwinds in much of the industrial services group. Our organics group had a very good quarter improving adjusted EBITDA margin by 450 basis points as we effectively capitalize on the rapidly changing disposal and regulatory environment for biosolids across the northeast. While recycling commodity prices have trended up over the last several months, prices are still well below 10 year averages creating one of the largest challenges and opportunities facing the solid waste industry. Even with this backdrop, we have continued to improve results in the recycling line of business with adjusted EBITDA margins up 510 basis points year-over-year on higher processing fees and higher commodity pricing. In fact the margins in the recycling line of business were roughly at the same level as 2012 when commodity prices were roughly 40% higher than they are today. These results are a clear indication of how we have effectively reshaped the recycling business model to generate an appropriate return on our infrastructure investments through all market cycles. This effort has included the implementation of our higher tipping fees at our recycling facility and the introduction of our sustainability recycling fee or SRA fee. Also we continued to make progress improving our balance sheet and reducing operational and financial risk over the last two months we repurchased and permanently retired another 20.5 million of our senior subordinated notes. Demonstrating our continued commitment to reduce leverage, accelerate free cash flow generation by retiring our highest cost debt. We are well positioned for the future and committed to a disciplined capital investment strategy with free cash flow primarily used to repay debt or in select instances we may consider small tuck-ins and growth investments in our core operations. We continue to execute extremely well against the strategic plan that we laid out in August 2015 to improve our financial and operating performance. At all levels of the organization we are devoted to operational blocking and tackling with a focus on pricing strategies at the local level to improve our operational efficiencies and disciplined capital allocation. We believe these actions will further improve the company's performance and allow us to continue to delever the balance sheet going forward. And with that I’ll turn it over to Ned to walk us through the financials.

Thanks, John. Revenues in the second quarter of 2016 were 144.7 million up $1 million or 0.7% year-over-year. Solid waste revenues were actually down 1.7 million or down 1.5% year-over-year in the second quarter with higher collection and disposal pricing higher collection volumes and acquisitions of three transfer stations offset by lower disposal volumes and lower energy pricing in the landfill gas to energy business. Revenues in the collection line of business were up $3 million year-over-year in the second quarter with prices up 4.8% and volumes up 0.5%. Our pricing programs in the second quarter in the residential and commercial lines of business continue to be robust with pricing up 5.3% year-over-year. The roll-off line of business had a tough year-over-year comp, as we experienced pull forward from the second quarter to the first quarter in 2016 due to the unseasonably warm winter in the northeast. While in 2015, we experienced the exact opposite pattern with a harsh winter driving less activity in the first quarter and a more activity in the second quarter as spring arrived. Even with this shift in seasonality year-over-year, we still advance roll-off pricing by 3.7% year-over-year and our volumes were slightly up. Revenues in the disposal line of business were down $4.7 million year-over-year in the second quarter with over 50% this decline driven by a lower landfill volumes and the remainder driven by lower pass-through transportation costs on C&D contracts or a transportation in disposal contracts. We increased third-party reported disposal pricing by 1.9% year-over-year in the second quarter with disposal prices up 3.1% in the eastern region as we continue to capitalize on the tightening disposal market. We expect these same positive pricing trends to continue through 2016 as we plan further price increases in key markets. Our total landfill volumes were 1.1 million tons in the second quarter down 100,000 tons year-over-year. However, year-to-date landfill volumes were up 51,000 tons and particular strength in construction and demo volumes which were up 124,000 tons year-to-date, year-over-year. Recycling revenues were up $1.4 million year-over-year in the second quarter with improvement driven by both higher processing fees and higher average commodity revenue per ton. With average commodity revenue per ton up 7.9% year-over-year and higher fiber pricing partially offset by lower plastics and lower metals pricing. Organics revenues were up $1.3 million year-over-year in the second quarter and higher volumes as our team continued to source new streams of biosolids in the ever tightening northeast disposal markets. Customer solutions revenues were flat year-over-year in the second quarter with continued growth in industrial services revenues partially offset by lower recycling revenues. During the second quarter acquisitions net of divestures added 600,000 of revenues. Adjusted EBITDA was $34.8 million in the quarter up $4.1 million year-over-year with margins improving 270 basis points to 24%.So with revenues up $1 million and adjusted EBITDA up 4.1 million that gave us a flow through impact of over 400%.What’s happening here is we’re shutting less profitable volumes or low margin volumes while at the same time we're securing pricing increases and cutting operating cost. Solid waste adjusted EBITDA was $30.8 million in the quarter up $2.6 million year-over-year. We achieved this strong adjusted EBITDA growth on lower revenues. Solid waste adjusted EBITDA margins were 29% up 280 basis points year-over-year in the second quarter reflecting strong pricing coupled with cost efficiencies. Lower fuel costs benefited margins by roughly 70 basis points while this was partially offset by lower energy prices in the landfill gas energy business of negative 35 basis points and increased intercompany tipping fees. When you net these three factors together we had about a 25 basis point tailwind a small piece of the 280 basis points improvement in the quarter. Hauling adjusted EBITDA was up $3.2 million year-over-year with margins expanding 360 basis points this was partially offset by slightly lower disposal adjusted EBITDA and lower performance in the landfill gas energy business. Recycling adjusted EBITDA was up was $1.5 million in the quarter up $800,000 year-over-year. Adjusted EBITDA was $2.5 million in the other segment up $700,000 year-over-year. The increase was driven by higher performance in both the organics and the customer solutions slide of the business. Cost of operations in the quarter was down $3.5 million or 290 basis points year-over-year as a percentage of revenues. G&A cost in the quarter were flat year-over-year while D&A cost in the quarter were down $400,000 year-over-year largely due to lower landfill volumes in the period. As John mentioned we continued to opportunistically repurchase and permanently retire a higher cost 7.75% senior sub-notes during the quarter. During the second quarter we retired an addition $15.5 million worth of the bonds and on July 1, we retired another $5 million of the bond. Including the bonds retired in July 1, this brings the total repurchased bonds to $39.4 million in the last four quarters. As we’ve 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% debt is a great capital allocation decision because the interest cost on the senior sub-notes is roughly 5% higher than the interest cost of the revolver. This enables to accelerate free cash flow generation and debt repayment. On June 2, we completed an offering of $15 million of New York State EFC solid waste tax exempt bonds due to 2044. The bonds were initially sold in a term rate mode with a fixed interest rate of 3 1/8% fixed for 10 years a great offer for us. On June 30, 2016, our total debt to EBITDA was 4.43 times. This is down from 5.42 times on December 31, 2014 or down almost exactly one turn in 18 months. We remain focused on further reducing leverage and as laid out in our multiyear plan we announced last August we’re targeting a leverage level of 3.25 to 3.75 times by the end of 2018. On June 30, we actually crossed through a really important leverage level as our total debt-to-EBITDA dropped below 4.5 times. This allowed us to step down a notch in the pricing grid on our ABL revolver facility. With this step down in the grid our interest rate has dropped from LIBOR plus 225 to LIBOR plus 200 basis points. As expected in the quarter given operational and working capital seasonality of our business, free cash flow was positive $18 million in the quarter or a positive $9.8 million year-to-date. Free cash flow is projected to be positive in both the third and fourth quarters and will generally follow the same pattern as 2015 with free cash flow lower in the third quarter as we pay the semiannual interest payment on our senior sub-notes and landfill capital expenditures are up sequentially. As stated in our press release yesterday afternoon, given our strong pricing and cost efficiency execution year-to-date we have increased our adjusted EBITDA guidance range from previously announced range to an updated range of 113 million to 116 million for the year. Further we reaffirmed our revenue and free cash flow guidance ranges for 2016. We do however expect capital expenditures to be up for the year between 50 million to 54 million in total for 2016. This is up from the previously announced range with increase primarily driven by higher than anticipated construction cost at the Ontario County landfill as delays in our permit issuance caused us to expedite construction and incur heightened cost this summer. In closing we remain on track with our multiyear strategic and financial plan that we laid out for shareholders in August 2015 and with that I’ll turn it over to Ed.

Thanks Ned. Good morning everyone. Things continue to go well. At the risk of sounding like I am repeating my comments from last year cost of ops as a percentage of revenue improved 290 basis point year-over-year and we continue to improving pricing with 4.8% of price increase in collections services led by 5.3% in the core residential and commercial line to business. As you can imagine from the financial results all of the key operating metrics that I follow continue to reflect positive trend. So we’re happy with where we are at the half way point of the year, we have good momentum operationally and our focus is on the continuous improvement of processes and systems to allow that momentum to continue. So it takes a lot of ingredients to bake a cake but I cannot overemphasize the importance of the fleet plan that we adopted in August of 2014 as an underlying basis of our success today. In just two year’s time we have made great strides towards standardizing our fleet around a few quality manufactures results in less complex maintenance shop requirements, increase automation and more dependable service and higher customer satisfaction leading to a better ability to get price. With less operations fires to fight we’re now able to focus on incremental improvements, systems and process improvements intended to make us more efficient and effective in meeting our financial goals. I thought you might be interested in some examples so to protect our fleet investment and support operations we’ve established a simple internal reporting platform that track preventative maintenance practices and efficiencies and effectiveness of each maintenance shop I call this my early warning systems as it tells us when there is a issue brewing at a division. We’re rolling this out at all the selection operations and hope to have this implemented in the landfill shops in the near future to cover heavy equipment. The PI process has continued to improve as we find new ways to raise the market and tighten up our estimates of profitability at the customer level. This is all about having a disciplined process and making smart decisions on who and how we raise price. We’ve implemented a new CRM or customer relationship management tool this year. CRMs are all about increasing the efficiency and effectiveness of your sales force by capturing and retaining more data on customers and prospects feeing prioritized leads to our sales personnel and preventing what I’ll attention gaps when a sales person leaves a company it’s just easier to put someone new into a system with all of the pertinent prospect and customer information as opposed to starting from scratch trying to figure out what the person that left was working on. One of the keys to operational efficiency on the collection side of the business is routing and we’ve certainly made, been able to make a lot of progress in this area over the past few years and the progress continues. Routing opportunities come about from improved automation, deification, sales efforts, driver experience level improvements and individual customer service changes over time. So this is pretty much a constant process at each division. Routing is dependent not only the best sequence that service customers but on the type of service, type of equipment used, days of the service, quantities of waste or recycling material picked up at each stop, distance from disposal outlets, distance and traffic obstacles between stops et cetera. In other words there is a lot of variables many of which are estimates or averages. We do a pretty good job with routine so we’re primarily focused now on improving the accuracy of the assumptions that the ops teams use for routine some of this through automating data collection performing right along route audits and continuous driver trainings as to what opportunities to spot on a route. So these are just a few examples of what we’re focusing on and I can tell you it’s sure the pleasure to be doing a lot less fire fighting and a lot more process improvement. Keeping my comments short we’re happy with the quarter and we continue to improve. The third quarter is off to a good start and we look forward to finishing the year off as well as it has started. I would like now to turn it back to the operator to facilitate the question and answer session.

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

Thank you. This is Ken Wang on for Corey. Just wanted to - so can you elaborate a bit more on the volume headwinds you saw in some of your landfill during the quarter, I think we know that some of this can be explained by the mild winter and the pull forward into Q1 but given the pricing gains are a key component of your strategic plan I would be really helpful to hear your thoughts on the pricing opportunity at those landfills, were volumes lost maybe specifically relating to the pricing elasticity in the demand environment?

Well I think that clearly it’s our view that we had fairly significant pull forward from the second quarter to the first quarter and across the footprint we have different obviously much stronger pricing in the eastern region than we had in the western region but we’re able to get some price in the western region as well. So I think that in our view kind of set we’re really I think the majority that pull forward is really the impact from a volume standpoint. We are pushing out some of the lower price material in the east region as we indicated itself to just give us more time from a permitting standpoint. So we’re pushing out lower priced soils, lower priced our lower quartile pricing customers at those facilities. And with that – that’s where we are really – that’s really where we’re actually being a bit aggressive in terms of pushing out the lower price material.

And is there any capacity coming out of the market that would lead you to be more confident or maybe boost your confidence from a pricing standpoint?

Yeah, that’s a great question. We continue to see capacity coming out of the market. There was just an announcement that Covanta is going to shut down the biomass incinerator. There is a number of facilities that are coming out in the next – probably next few years. We’ve got several hundred -- I think about 400,000 tons coming out of the Massachusetts market. In the next year there’s a number of facilities that are closing the [Chapadi] [ph] facility in 2017 or 2018,as I said, the pits field facility, waste energy facilities is closing. And then there’s several other facilities that are closing as well. So we’re going to continue to see the same dynamics that we've seen for the last year we think will help for the next few years.

Okay, thanks. That’s very helpful. And then just switching gears a bit, what assumptions you’re making around commodity pricing and the recent improvements on that front have been factored into your estimates?

Actually our commodity pricing assumptions for the rest of the year probably a little bit lower than we saw in late June. We typically refresh our forecast on leading up to earnings we did that in mid-to-late June and some of the strengths we've seen in fibers over the last four weeks are not fully included in that forecast. We learned a long time ago to not expect commodity prices to go up to negative numbers for the year. So we typically forecasted declining pattern for the remainder of the year. But as we’ve discussed earlier in these lower markets we're actually doing quite well. We’ve really have one contract if you can believe that out of our network of contracts that doesn't have the ideal revenue share formula. So as commodity prices decline, if they do, we recover now dollar for dollar through processing fees on all of our customers but one. So we’ve done a great job rolling over that portfolio. The SRA fee applied to our collection customers offsets any sort of declines in commodity markets and we feel very good from the downside protection through the remainder of the year and if we do see commodity prices increase or even stay at current levels it could give us a slight risk for the rest of the year.

Excellent. Thanks, very helpful. That’s all I had.

Thank you. And our next question comes from the line of Al Kaschalk from Wedbush Securities. Your line is open.

Good morning, guys and congrats on the progress and execution. Good morning. I have a relatively simple question I guess from the standpoint I want to just dig a little deeper on the volume headwinds and the market dynamics in terms of the capacity specifically. Can you maybe talk about the organic growth or the moderation in organic growth on volumes and then or if there is more of the acceleration and specifically there I am talking about the energy side? And then secondly in conjunction with that I guess your strategic moves that you're doing because of the profitability or the return metrics that may be some of the prior waste streams are not captured you’re not capturing because whether it's pricing or you want to fire a particular customer? In light of that I asked up because of what's going on with some of the capacity reduction that you said the accelerated CapEx that you're doing because of the timing at Ontario. So maybe be just add a little color around that in terms of how much I guess you’re walking away from…

Yes. So Al, good question. Just starting with disposal revenues in general about half of the volume decrease in disposal revenues was through our transportation group. So we talked about this a lot last year where we had on boarded several new customers especially in the Marcellus shale who required us to transport their waste streams and dispose of them. Great volumes coming into the landfill but we had passed through revenues where we were getting paid to transport those material hiring third-party providers to transport those materials but we were not making a margin. So part of what we’ve seen is we’ve lost some of those shale related volumes coming into the landfills which is a negative. But on the flip side, it’s a little bit margin accretive because we’ve shed there’s no margin pass-through transportation volumes. As John was describing a minute ago it’s kind of two different things going on with landfill volumes. If you X out three different things generally our volumes are off across the board. So if you take out that the lost volumes in the Marcellus shale that’s one negative on the business, if you take out the Southbridge plant diversion as John described where we push out all of the low-priced soils and the lowest quartile customers. And then from a solid waste standpoint we saw some seasonality there and we've also just had a little bit of trouble in one market getting some approvals which is resolved now and now it’s giving us a bit of a headwind. But if you look across the rest of business construction and demo tons are very robust. MSW tons are off across the business. So it’s really just a couple of factors and one of them something we’re getting on purpose diverting time to Southbridge over the next two years.

Okay. That’s all I have. I appreciate it and good luck guys.

Thank you. And our next question comes from the line of Michael Hoffman from Stifel. Your line is open.

Good morning. This is Brian in for Michael today. I’m good. Thanks. First one just on the margins I mean, you guys made tremendous progress in the second quarter with your adjusted EBITDA margins in that 24% range when you think about this in the guidance that you gave kind of going in the second half, are there some headwinds there that are going to be pulling you back from that 24% range or a really what…

Well, I think that when you look at last year we were going to have a tough comp in the fourth quarter because of the warm weather that we had last year. We had a very, very, very mild end of the year last year. And we're not anticipating that we’re going to see that – we really believe we’re going to go back to a normalized winter. So we have a tough comp in the fourth quarter.

And you know we’re not seeing anything remarkably change in with our business environment or overall with our strategy today. I think it's just more of the same from us where we’ve had a great first half of the year, we're performing above our budget and we're trying to be conservative half way through the year. So we're still firing on all cylinders and you – there might be a little bit of opportunity there I think in our view. But as John said it's hard to see the fourth quarter today and understand you know the tough comps from a roll-off standpoint and landfill lines and get too far heading to south.

Okay. Well, maybe stepping back and just kind of looking at it on a little bit longer scale I mean getting to a 24% margin in the second quarter here and you think about what you have left in some of your best practices and as you kind of continue to move forward on those.You know what’s the timeline of getting, can you get to 24% margin or is that a 2017 where you get that for the full year or is there really some additional steps that have to happen here getting to those kinds of numbers?

I think – I don't think in our plan we quite get there in 2017.We don’t quite get in 2017 but the building bolster definitely coming in place. As you know we do have some aspects of our business that causes to blend down a bit from our CARE group such as our organics group and our resource solutions, customer solutions group. They are slightly not lower margin businesses. So organics group for instance is about 10% of our revenues has 13% EBITDA margins but only requires about 2 to 3% of revenues in CapEx very nice cash flow producing group but it blends us down a little bit. The solid waste group this quarter had margins of roughly 29% our integrated solid waste group. We are tracking an accurate to the north of 26% next year, 27% so doing very well there. It’s a full business we’re not tracking to get to 24% next year. But it’s definitely a goal for us over time.

Okay. And, let’s see then. I just looking at kind of this service upgrade cycle that you guys have been seeing on the commercial side of the business. Can you just give some more color on how that’s progressing, if you’re seeing any kind of regional weakness from any customers on service upgrades?

No. I think, as steady as you go, we’ve seen roll up pulls continue to be up. Business from a commercial standpoint continues positively. So we are not seeing any change in trend at this point in time at all.

Okay. Good to hear. And then on Southbridge, when you look at permitting process, you talked about two years of delay or diverting volume. Is that the timeline for a new permit? And what is the alternative if the permit does not occur? Is that something that…

Well, there are several alternatives. We could move waste to, as we are, to our other facilities partially. We move to other facilities in the area as well. And there’s also the potential long term from a real standpoint in addition. Our percent to this point is it is probably a two year process in terms of pushing down the total tons going into the facility from a permitting standpoint. So we expect to do that next year as well just to make sure that we’ve got enough capacity to get through the permitting process. Permitting process is very difficult, unpredictable, and very difficult to get through. However, we’ve had tremendous success in the last year with what I talked about earlier in terms of Ontario, Hyland, and Chemung, very major permitting efforts that we got through. So I think we’re confident but we are also want to put ourselves in a position where we give ourselves in a position where we give ourselves as much time as we can.

And John, something to point out is a many years ago, you pioneered a model on the Northeast of partnering with communities, and this has been a model that’s been really a big winner for us. Where Ontario and Chemung, the communities own those landfills and you have long term operating lease agreements with them. It really helps from a public-private partnership standpoint to help or develop their space that’s both beneficial for our municipal partners and us. And in Southbridge, we have the same business model there where we have a strong partner in that community. They actually own the landfill, own the permit. It really helps to differentiate the facility and work through permitting challenges.

Okay. And on Southbridge, when you think about those volumes that you’re diverting, when the permit comes through, what’s the timeline for recovering those? Is that very quick or is that going to be another two years of trying to re-ramping those volumes?

Our view is it’s going to be very quick, the disposal capacity in that area is really - some of it is being transferred to other facilities that we have. So I think that we also have supply and demand. What’s that Ed?

The waste is coming through our transfer station amount of it.

Yes. That’s a good point. Also, as Ned pointed out, the waste is going through our transfer station as well. So we have control of the majority of that waste that we are diverting to other facilities. So once we get the permit, we think we’ll ramp up. The other thing that sits over the top of it, Brian, is that we have is supply and demand constrain in that market and it’s not going away anytime soon. So I think that once the capacity comes on, we’re not anticipating difficulty getting the tons back into the facility.

Okay. And one last one just on the balance sheet. When you talk about, obviously, the deleveraging process that you’re going through, is there any - what’s the level, I guess, the ability or appetite to accelerate that beyond, kind of, the pace you are at right now?

I think that if there were an opportunity for us to do that, we’d certainly - we certainly look at any opportunity that makes sense. As you know, we’ve looked at other opportunities in terms of ways that we can delever the balance sheet. So I think, certainly, we’ll keep an open mind in that regard.

Okay, great. Thank you very much.

Thank you. And our next question comes from the line of Charlie [indiscernible] from Raymond James. Your line is open. Q – Unidentified Analyst : Hi, good morning guys. So just, kind of, staying on that balance sheet topic for a second or so, Ned you mentioned, crossing over that 4.5 leverage threshold with your ABL pricing being reduced a bit. Aside from maybe not call it paying down aggressively, paying down those are senior sub-notes, what we could there be some sort of opportunity to refi that as suppose to may be kind of slowing down on the pace of retirements.

Great, question. We continued to talk to our bankers and monitor the markets very closely because there is an opportunity today to go to the markets. Our performance has been strong. Our cash flows are improving , leverage is coming down and there been several open market windows to re do the senior subordinate notes to your 2019. However, when you look at capital strategy more broadly for us, it's very tough to take our highest cost debt and put a new debt instrument today there would be non-call instrument because if we replace the senior sub-debt with another senior subordinated note or senior unsecured note, it would be no call for eight plus years. So there would be left with a balance sheet is still a little bit more leverage and we liked to be and our only debt we could be really be paying down and only repayable debt left in our capital structure would be the ABL Revolver which is LIBOR Plus 200. So, when we look at strategy over the next several years, in the last factor there is our guest callable today but its callable at 101.9. So, we still take our best use of cash is just actively using excess cash to go into open market or to call our senior sub and just to get piece by piece. When we reach the prior call day in February of '17, things start to change but I really don’t want to put a huge piece of non-callable debt in place we're not to our ideal capital structure. We don’t feel like we’re in a huge rush, market windows opening close I realize that but we are sticking to our strategy. We are producing cash as each quarter goes by our credit ratings are improving. We've three upgrades from S&P in the last two year so, the agencies are really paying attention what we are doing as well and debt holder so, and we’re stay in the course for the time being. Q – Unidentified Analyst : Okay, all right. That’s a great color, thank you. And then my last question is, can you talk about the big puts and takes when bridging EBITDA into '17, I know it’s still early I’m not really asking for any specific guidance but with the SRA benefit lapping, I would expect to see some collection pricing possibly slowing but then the benefits from, presumably tighter North Eastern disposal market beginning to materialize. So just kind of any sort of big picture items we could think about next year.

This is Ed, couple of things come to mind right. So the SRA is kind of lapping now, it's starting to lapse, so we're still going to continue to be fairly aggressive on price and we're trying to get smarter and smarter by improving the data that we have on customer profitability is to how we get price. So, although I don't think we’ll get price like you saw last quarter that was over 6%. We’re going to have continuing strong price going into 2017 and also the efficiency programs we have in the – on the operating side are continuing. So as we improve our data that we used to do our routing activities as we incorporate additional fleet additions, we expect to take additional cost may be from 80 basis points to 120 basis points in margin out of the cost for the collection operations.

Yes, I think that we're pretty confident that we're going to meet the plan that we laid out of 2018 plan in terms of price. And obviously so far we're bit above the plan where we thought we would be from a price standpoint in the plan. So we think - we're pretty confident we're going to meet or exceed the guidance that we have in the 2018 plan from a price standpoint. A – John Casella: If you look at 2018 plan there were three major pockets one on the landfill side, one on a collection hauling side, and one on the resource side, and where we sit today we're ahead on the collection side and what we're performing very, very well where we are right on target or slightly slower on the landfill side and above target on the resource solutions side. And we always said it is in a hockey stick plan, you don't have to wait three years as a shareholder for its comment coming ratably, we’re tracking very well this year, and there's nothing that we expect given where we are today to disrupts that linear pattern into 2017.

Okay, all right. Thank you.

[Operator Instructions] At this time I'm showing no further questions. I would like to turn the call back over to John Casella for closing remarks.

Thank you. Thanks everyone for your attention this morning. We look forward to discussing our third quarter earnings with you in early November. Have a great day everyone. Thanks.

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