Casella Waste Systems, Inc. (CWST) Q2 2017 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Q2 2017 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 conference call is being recorded. I would now like to turn the conference over to your host, Mr. Joe Fusco. You may begin.

Thank you for joining us this afternoon, 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 2017 second quarter results. These results were released earlier this 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 our 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. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures to the extent they are available and 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. With that, I'll turn it over to John Casella, who will begin today's discussion.

Thanks, Joe. And good evening everyone and welcome to our second quarter 2017 conference call. Before we get started on the quarter, I would like to discuss our decision to close the Southbridge landfill. We worked hard over the last 14 years to develop environmentally sound disposal facility to meet the needs of our customers in Massachusetts. However, over the last three years we faced many political and regulatory road block as we've worked to permit additional airspace at the site. We believe that two of the most important building blocks were sustainable landfill are having solid community support and structuring a win-win relationship that has strong alignment of financial interest. We believe that our agreement with Southbridge aligned financial interest and provided significant benefits to the community. However, over the last few years we have not received a level of local support and it is necessary to develop a sustainable long term landfill. As such we invigorated our efforts to engage community leaders and the residence of Southbridge in a productive dialogue about the landfill. That's part of this effort on June 13, we put forward a non-binding referendum to the citizens of Southbridge to seek support for the development of additional airspace. Unfortunately very few citizens came out to vote and we only received roughly 40% of the vote. This lack of community support and our inability to advance permitting due to circumstances outside of our control and extremely high cost to develop airspace at the site as led us to conclude that we cannot generate an adequate risk adjusted return. As such we have adopted a plan to close the landfill with the permitted capacity is fully consumed. We have roughly 300,000 tons of capacity remaining as of June 30, and we expect to close the site by December 2018. As we work through the challenges at the site over the last three years, we have already ramped down volumes to conserve capacity and to enhance returns on the remaining tons places. With this ramp down, we believe that we have minimized the comparative headwinds when the site is fully closed in late 2018. And with that, I'll turn it over to Ned.

Thanks John. As a result of our plan to close the site, we incurred a $64.1 million landfill closure charge in the second quarter consisting of a $48 million accident impairment charge, $9.1 million project development charge, $6.4 million environmental remediation charge and a $600,000 of legal and transaction costs. $15.4 million of these charges reflect our current engineering estimates for future capping closure remediation and post closure activities at the site. As we placed remaining site tons at the site over the next year, we will continue to record non-cash landfill amortization and asset retirement obligations on a per ton basis, which we expect to be roughly in line with historic rates. When we finished placing the final tons at Southbridge in late 2018, we expect to recognize the loss in operating contract of approximately $3.1 million associated with future obligations owe to the town is part of our agreement. We account for this contract as an operating lease. Now looking at the cash impacts of this decision. We expect cash expenditures to be roughly $21 million over the next five years to be spent on capital environmental remediation, capping closure and post closure expenditures. However, we expect the tax impact of the Southbridge impairment, the shield cash taxes and the slow down the years of our loss in credit carryforwards for an additional year through 2022. Given the current tax loss and our current tax rates, we expect the cash benefit of these tax savings to be roughly $20 million recognized over the next five years. So, on a net basis included since estimated tax benefit, we expect our net cash outflows to be roughly $1 million over the next five years. With that, we're going to move on to the quarter now. On to the quarter, revenues in the second quarter 2017 were a $154 million, up $9.3 million or 6.5% year-over-year. Solid waste revenues were up $5.9 million or 5.5% year-over-year with higher collection and disposal pricing, higher solid waste volumes and acquisition activity of $0.5 million. Revenues in the collection line of business were up $2.6 million year-over-year with price up 2.8% and volumes up 0.7%. Pricing was up 3% in our residential and commercial lines of business in the quarter. We experienced volume growth in the residential line of business, but volumes were slightly down in the commercial and low loss lines of business as we continue to trade positive pricing over lower margin volumes. Also the unusually rainy spring negatively impacted the construction trends in the Northeast. Revenues were up $2.8 million in the disposal line of business, with both positive pricing and volumes. We increased our third-party reported landfill pricing by 3% year-over-year and more importantly, we increased our average price per ton at the landfills by 6.3% as we improved a mix of customers and volumes. We actually increased our price per ton 9.8% in our western region as we have pivoted strategy in mid 2016 to focus on advancing pricing versus capacity utilization at our sites. Overall landfill volumes were 1.1 million tons in the quarter up 2.1% year-over-year. During the quarter, we did continue to ramp down tons at the Southbridge landfill, if you exclude Southbridge our tons were up 4.7% year-over-year. Recycling revenues were up $3.4 million year-over-year with higher commodity pricing and volumes partially offset by lower tipping fees or lower processing fees. Average commodity revenue per ton, what we call ACR was up 27% year-over-year on higher fiber and metals pricing. Commodity prices were actually down roughly 14% sequentially from the first quarter to the second quarter, most of this decline was driven by a significant drop in export pricing for fibers as China as reduced purchases and increased quality standards through their National Sword program. This negative trend began to reverse in late June and July with fiber prices up sequentially in the periods. Organics revenues were down a $1.2 million year-over-year on lower volumes as the west spring negatively impacted our land application and product sales. Customer solutions revenues were up $1.2 million year-over-year with continued growth in our industrial services businesses. Adjusted EBITDA was $36.1 million in the quarter, up $1.3 million year-over-year with margins slightly down. Result in the quarter, were negatively impacted by two significant headwinds, one, our healthcare cost were up $2.2 million year-over-year, were up a 117%. This substantial increase was mainly due to higher than normal claims activity. We do believe that activity in cost should normalize closer to at the store collaborative history the remainder of the year. Our leachate cost were also up significantly, they are up $1 million year-over-year, 84% on the abnormally high rain in the Northeast. Solid waste adjusted EBITDA was $31.7 million in the quarter up $900,000 year-over-year with strong pricing and higher volumes coupled with cost efficiencies, partially offset by the higher healthcare cost and higher leachate expense. Solid waste margins were 28.2% down 75 basis points year-over-year or to exclude the healthcare and leachate headwinds they are actually up 175 basis points year-over-year. Recycling adjusted EBITDA was $2.1 million in the quarter, up $600,000 year-over-year with the improvement mainly driven by a combination of higher commodity pricing, coupled with the structural changes we've made to the recycling business to off-take risk and increase our returns. Adjusted EBITDA was $2.3 million in the other segment down $200,000 year-over-year with the decrease mainly driven by lower organics activity in the period. Cost of operations was up $7.3 million year-over-year were up 75 basis points as a percentage of revenue with the increase mainly driven by 41.7 million of higher healthcare cost and $1.5 million of higher recycling purchase materials cost and higher commodity pricing, higher third-party disposal, direct labor and other direct operational cost on our higher volumes, our new contracts and acquisitions in the period and also the higher leachate cost during the period. General and administrative costs were up $700,000 year-over-year, this increase was mainly driven by $600,000 of higher healthcare cost in the period. Our normalized free cash flow was $12.3 million in the quarter as compared to $18 million last year. This decline was driven by $7.9 million of higher cash outflows associated with changes in assets and liabilities in the period with $7.1 million of this negative invariant driven by a lower interest approval at June 30, of this year as compared to last year. As you may recall, last year with the senior sub notes we paid interest two times a year on February 15, and on August 15. As such we carried a substantial interest accrual at June month and last year. With the refinancing of the senior sub debt to the term loan B back in October 2016, our interest is now primarily paid on a monthly basis, which in turn reduces accrual year-over-year. So our interest costs are down and we have actual cash interest savings, but our accrual is causing a negative variant in the period. So, if you look at this for an year-to-date basis it really gives cleaner picture of what's going on. Year-to-date our normalized free cash flow was $13.4 million up $3.7 million from last year. This improvement was driven by improved operating performance and lower cash interest cost, partially offset by higher CapEx and lower proceeds in the sale of property and equipment. We incurred a small loss on debt extinguishment during the quarter related to successful repricing of the $350 million term loan B on April 18. As you may remember, we reduced our interest rate on the term loan B from LIBOR plus 300 basis to LIBOR plus 275 basis points. We also reduced interest rate step down to now in our consolidated net leverage ratio is at or below 3.75x, our interest rate was drop to LIBOR plus 250 basis points down from the previous 275 basis points. This amendment is expected to save us roughly $900,000 a year of cash interest costs, and this is on top of the $11 million of cash interest savings we already yielded from the October 2016 refinancing. As of June 30, our consolidated net leverage ratio as defined by our credit facility was 3.92x, which is down 1.5x since December of 2014. We expect the non-cash charges related to the Southbridge landfill closure charge will be added back to our bank EBITDA for covenant calculations, as per the definitions of consolidated adjusted net income and consolidated EBITDA. As stated in our press release, we are tracking towards the upper end of our previously announced revenue, adjusted EBITDA and normalized free cash flow guidance ranges for the year. Our result year-to-date in our forecast for remainder of the year, but its ahead of our budget, however this outperformance is being dampened by a higher than expected healthcare cost year-to-date, our conservative forecast for remainder of the year for healthcare along with the continued unbudgeted ramp down of volumes into the Southbridge landfill. However, we remain very confident in achieving our guidance ranges for the year. And with that, I'll hand it over to Ed.

Thanks Ned. And good evening everyone. As Ned laid out we finished the quarter ahead of plan despite the headwinds and other care cost and the challenges of operating in a period of unusually heavy rain and remain on track to exceed our 2018 targets. Being able to overcome obstacle by fees is a testament to our commitment to discipline decision making and continuous process improvement. Great example of this include our continuing pricing discipline, our focus on improving efficiency metrics in all lines of business. And the same kind of attention to attaining adequate risk adjusted returns on a day-to-day basis that we demonstrated with our decision to close the Southbridge landfill. We've been very successful in reducing our cost of ops, as a percentage of sales over the past three years, which is decline from 71.7% of revenue in calendar 2014 to 67.6% in calendar 2016. Although the cost of ops percentage ticked up basis 75 basis points in the second quarter year-over-year, when you factor out the bump in healthcare cost accounting for 100 basis points and the rain effect for leachate cost alone accounted for another 60 basis points. The core improvement continues. Over the long run we've saved significant amount of money by self-insuring our employee healthcare benefits, but it does subject that the volatility during any particular reporting period. To be conservative, we factored in higher cost for the remainder of the year in our updated guidance, but that cost is more than offset by improvements in our other operating results. We beat our numbers, but are not using whether as any kind of excuse for anything, but you might be interested in how heavy rainfall affects our business. We estimated the rainfall in Q2 this year was roughly double the rainfall for Q2 last year across the footprint. I'd mentioned the increase leachate cost, but the landfill is also have to deal with the erosion, customer trucks getting stuck on the steep and muddy landfill access roads, requiring the diversion of our equipment for assistance, an increased difficulties in spreading required cover soiled and maintaining size loops, hauling operations are also affected. We track pounds per container yard is one of our key metrics and saw that increase over the 3% a typical rain affect and now resulted in a 40 basis point increase in cost of ounce for that line of business. In addition, for those collection divisions that dump at a landfill, the operational challenges that the landfills are then third-party sites cause wait times to rise substantially when its raining. This spices our guys did a fantastic job dealing with these challenges during the quarter and I congratulate them. Our line of business, recycling, disposal and customer solution groups all achieved improved margins during the quarter. Collection operations which has the most employees and that bears the brunt of the healthcare cost allocation had a decline in margins, but key operating efficiency metrics actually improved. As Ned mentioned, pricing was strong throughout. Focusing in on the disposal line of business, our landfill sales team did a great job in the quarter working to source new customers and way streams into the landfills, while also advancing our average price per ton by 6.3%. This effort more than offset the continued volume reduction at the Southbridge landfill. In total our landfill tons were up 2.1% in the quarter and excluding the plan diversion at Southbridge tons were up 4.7%. Disposal capacity continues to tighten in the Northeast market as permanent site closures are reducing capacity and strong economic and construction activity are driving higher volumes. We believe that this positive pricing backdrop will continue into the future as additional site closures including Southbridge are expected over the next several years. As we rollout multi-year contracts we expect to advance pricing in excess of CPI on a larger percentage of our book a business. On the landfill development side, in early June we received a permit for a 9.4 million cubic yard expansion at our Juniper Ridge Landfill and that extent is the life of the site to around 2033. Excluding the healthcare and weather headwinds already discussed, the collection operations had a very strong performance in the quarter. We advanced pricing by 3% in the residential and commercial lines of business and 2.5% in the roll-off line of business. You may remember from the past that we had struggled getting price in roll-off. During 2017, one of our key initiatives is a newly launched grow our profitability tool that is already driving positive pricing decisions on both temporary and permanent roll-off work. In addition, we launched new energy and environmental fee in several pilot markets. This new fee is designed to help recover a heightened environmental regulatory and permitting cost coupled with our fuel surcharge. On the operating side, we continue to advance a number of key initiatives and believe there is additional room for improvement, particularly as we continue to update and improve our fleet, our maintenance procedures and management and key routing and other efficiency metrics. Recycling remains a strong performer for us, higher commodity prices coupled with the changes that we made over the last two years to reshape our recycling business model help to drive strong recycling performance in the quarter. We generated to return on net assets of over 22% in the quarter up from roughly 2% back in 2015 when we started this transition to a more profitable business model with a lower risk profile. So another good quarter and we look forward continued improvement as we move forward through the year. With that, I'd like to turn it back to John.

Thanks Ed. In summary, we're very pleased with the second quarter results, as we reported in our press release revenues were up 6.5%, just in the below for the quarter was up $1.3 million and year-to-date normalized free cash flow was up $3.7 million from last year, year-over-year improvements with strong pricing execution, our operating efficiency programs and continued strong overall execution against our key strategic initiatives. Our team has been later focused over the last several years in executing the strategy we first laid out for the street in early 2013, which we then refreshed in August 2015 when we laid out our 2018 financial target. As everyone knows we're tracking roughly one year ahead of this plan with solid execution across all aspects of the plan driving our outperformance. I'd like to say first thank you and congratulations to the team on a job well done. The 2018 plan was an ambitious plan with substantial goals and with by no means a lay out. We said that adjusted EBITDA growth target of $25 million to $35 million, a normalized free cash flow growth target of $21 million to $31 million and the target to reduce leverage by 1.7x to 2.2x. As of June 30, only two years into a 3.5 year plan we've increased adjusted EBITDA by $29 million increased normalized free cash flow by $21.5 million and reduced our debt leverage by 1.5x comparing the results from 12 months ended December 31, 2014 to the 12 months ended June 30, 2017. Looking back to August 2015, I'm not sure how many believers we had outside the company, however, our team believes in the plan and put a 110% effort into executing it. We're proud of those efforts and they haven't gone noticed as we've driven substantial shareholder value as our stock price is up a 179% since August of 2015. Many aspect to this plan were foundational focused on blocking and tackling in our core operations, pricing strategy, sales execution, operational efficiencies, upgrading our fleet, reducing recycling risk, improving capital discipline and reducing leverage. We have achieved many of these foundational goals or with others significantly advanced along a pathway to long term success. Underlying each of these efforts with our focus on driving enhanced process and discipline ensuring that we had the right people in the right roles and the right accountability and the right compensation programs to align success. Today, we have a refocused company with a strengthened foundation and exceptional time. Now its time to adjust strategy to execute against initiatives and goals that we couldn't do until we put basic building blocks in place. As we discussed last quarter, we've had several strategic planning sections with our Board of Directors to update our multi-year strategic plan. We just completed another assessing yesterday. We are now in a position to give an update on our strategy and our multi-year goals. We do not plan to give explicit 2021 financial targets, so don't bother to ask Michael, but instead a financial plenty more to guide, our decision making in strategy. Our core strategies have been working exceptionally well and we plan to continue to focus in these three key areas, increasing landfill returns driving additional profitability within our collection operations and creating incremental value through resource solutions. We are introducing two new areas of focus, reducing G&A and improving the efficiencies and allocating capital to balance delevering with smart growth. Reducing G&A and improving efficiencies, we believe that we have an opportunity to reduce our G&A cost as a percentage of revenues and more importantly to reorganize our resources and invest intelligently to drive long term profitable growth. Over the last two years we've been slowly, but truly ramping up efforts to improve our IT systems and technology platform, driving our sales force effectiveness and increasing back-office efficiencies. We've already taken a number of steps in these areas including adoption of a five year technology plan focused on improving our core financial and operating systems. We had successfully implemented Microsoft dynamic CRM system and we are in the process of implementing Oracle NetSuite ERP platform. We are still in the investment phase, which means that we have redundant expenses in capital outlays that will begin to yield positive returns over the next three years. We are targeting 75 to 100 basis points improvement in G&A as a cost of revenues over the next four years as part of the strategy. Today, we believe that we are in a unique position, the environmental industry to grow our cash flows at a higher rate than our industry peers given our small overall size or [nimble this] in a range of opportunities in our pipeline. Over the last three years, we were focused on those all of our excess cash to pay down debt or on the transaction cost to refinance high cost debt to lower our interest cost. We are now in a position where we have dramatically lowered our interest rates and we reduced our leverage to 3.92x total debt to EBITDA. As such we are adjusting our capital allocation strategy from the so focused on repaying debt to a balanced approach where we will continue to focus on reducing leverage, but we'll reduce though, also begin to selectively pursue acquisitions in growth, investments within our core operations. Over the last several months we reinvigorated our acquisition and development pipeline in internal resources. We believe that there is over $500 million of acquisition opportunity in our Northeast markets that could be direct tuck-in with our existing operations or could strategically integrated with our assets. We've developed and implemented in acquisition and development framework to aligning strategy, financial returns and to focus resources on key targets. We are focused on acquisitions that will generate returns well above our cost of capital enhanced our vertical integration, drive operations and G&A synergies will either be immediately delevering or have past pace, fast path to recognize synergies and cash flows to delever. As an example in the second quarter, we completed an accretive online tuck-in acquisition for total purchase price of $4.9 million and roughly 3.5x bid multiple after operating synergies. Wrapping up the financial framework for our newly adopted 21 plan is as follows. Organic revenue growth targeted at 3% to 4% per year which is inclusive of roughly and negative 2% headwind from the closure of the Southbridge landfill over the next two years. We've targeted $20 million to $40 million of acquisitions on development activity per year, we expect this activity to ramp up over a period of time and we don't plan to budget it. Acquisitions or development activity will be opportunistic and we'll strictly inherit to our disciplined capital return hurdles and process. Normalized free cash flow growth of 10% to 15% per year with the baseline target of generating more than $50 million per year of normalized cash flow by 2021. Total leverage targeted between 3x and 3.25x debt to EBITDA. And with that, I'll turn it over to the operator to start the questions.

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

Hey, good afternoon.

Good afternoon, Corey.

Good afternoon, Corey.

I was going to say like now my goals are can you talk about your 2021 plan, but you did provide color on it, so I appreciate it.

Thank you.

So, on the acquisition front and could you just get into a little more so, understanding you are gearing that back up, but just a little more detail, and firstly kind of how are you managing that, do you have a separate team is that, are things being found by the local operators and bubbling up, so just I'm looking how they can work?

That's a great question. So first of all we have, we've identified $200 million or so, $250 million of core tuck-in acquisitions, small acquisitions that sit across the Northeast. And on top of that, there is probably in our estimate 4 or 5, $40 million to $50 million companies that sit across the Northeast when the $0.5 million worth of opportunity from an acquisition standpoint. We have a business development director acquisition director in place today, he is sourcing opportunities and then turning those over to the region teams who are responsible for putting together the performers and obviously responsible for executing the acquisitions and integrating those acquisitions after they are completed. So, I think that its fair to say that we may add some financial resources to Ned's team, but the acquisition resource is also some of my time, some of that's time what we spent in that area visiting with people that we've known for a lot of years in the business. But primarily the financial modeling, all of that will be done by the regions who are ultimately going to be responsible for the integration of that acquisition into their region.

But, I think its fair to say John, in no way to we plan to take our eye of the ball, but this is - this isn't like a huge pipeline or goal?

No, no, not at all. And I think its also fair to say that from a financial discipline standpoint, while the recent teams will be responsible for putting those performance together Ned in the financial team will be reviewing all of those performance to make sure that we're getting the kind of returns that it going to help us to continue to delever the balance sheet and create additional shareholder value.

If you look across that the special targets in the Northeast, how much of that potential is tuck-ins where you are the natural buyer, because of your asset positioning and how much would be more getting into new kind of microwave sheds that are ones we want to put it?

I think the vast majority of it is over the top of the existing asset base that we have, there maybe a few areas in the Northeast where we are already operating in some states where we don't have a presence in the given community. But they would be adjacent to existing infrastructure that we have in place, to add some communities, large communities that are close to some of our disposal facility that we don't have a presence in today. So, but the vast majority of it in my view Corey would over the top of the existing asset base.

Okay. And then switching topics, so I understand the impact of Southbridge, the 2% headwind over the next couple of years. But, just to make sure we haven't straightened it, Ned could you just walk through that kind of the timing of the revenue impact and the EBITDA impact over the next couple of years?

Sure. So, as you may remember, we've have already stepped down tons to the site pretty dramatically back in 2015, we generated roughly $12.5 million of adjusted EBITDA and we generated roughly on a number of, $14 million of revenues, $18 million of revenue, 2016 we generated roughly $7.5 million of adjusted EBITDA and roughly $15 million of revenues. We are on track this year to do about $4.5 million of adjusted EBITDA and $11 million of revenue and we expect to do about the same next year. So, we'll do about $10 million or $11 million, $12 million of revenues in about the same in adjusted EBITDA. And then 2019, we'll be the comp period and as you can see we've already ramped down pretty dramatically. So, this has been like a cliff that we're facing, we've already managed through a lot of the head window over the last couple of years, as we've been outperforming as a team. This year low and that's a great example, as we started to experience some real headwinds and things are moving backwards with our permitting, we redirected our capital plan during the year and we start to reallocate capital way from Southbridge to other positive opportunities in the business including developing sales and two New York landfill the year ahead of schedule, so we could try to ramp volumes more aggressively at those sites within our pricing program and that's worked well for us. So, we've already overcome a lot of this Corey, and the comp will come into 2019.

Great. Further quick ones and I'll turn it up. I just want to make sure, I think…

No, you are at four or five now. Got that sorry.

I'm sorry this is not Michael, and I'm sorry. Sorry, I apologize Michael, I don't mean. $20 million to $40 million in acquisition, for a year, with that I had I assume, I think dollar allocated acquisition is not dollars of revenue?

That's dollar of purchase price not dollars of revenue.

Okay. And then last question is just on the sounds like it's a good decision from just the returns perspective, can you remind us are there other landfills where you have, my question is basically, could other communities could they see the results and say, hey wait a minute if we, we are on to that maybe there will be, back away from our community also any concern over that?

I don't think so, I mean, I think that bet cuts both ways without good support, the community could lose the potential benefit. So, I think that it certainly cuts both ways.

And we've had a couple of huge successes as you know Corey, two of our communities where we have long term operating contracts in Ontario County and Chemung County last year in 2016 we had 14 to 15 year expansions, we've got very, very positive relationships with both communities and we've created value for them and their citizens and also for our shareholders. So..

The same thing, whether the 9.5 million cubic yard expansion taken us to 2033 and remain as well.

We should take the next question. Thanks Corey.

Thank you.

Thanks.

[Operator Instructions] Your next question comes from the line of Tyler Brown [Raymond James]. Your line is open.

Hey, good afternoon guys.

Good afternoon, Tyler.

Hey, Ned. Just real quick so the $2.2 million in healthcare expense you noted it's not recurring but you also noted conservatism. So, basically what is the guidance for the back-half?

Yes. So, we brought up our budgeted healthcare actually the remainder of the year by $1.5 million versus our budget. So, will it be up year-over-year case, do you know that, any chance?

I will opt it for it. We can get it for you.

I have to find the number, I don't have it. But, we just projected that some of the trend would reserve but not all of it. We can kind of get there a little bit understand generally what's happening and some of our highest cost claimants really drove the cost over runs. But, we've done a wonderful job in really navigating to healthcare field over the last couple of years provide a great benefit for employees. But having limited inflation, limited cost increases to them, but while still only having I think roughly 1.2% inflation a year. But, we don't have a huge population, so every once in a while we have statistical anomaly like this where we get a group of sicker employees or dependants that sponsor results, we have looked at ways to manage this risk and frankly, if you look at them over a longer period of time, there is going to be more expenses. We just have to deal with this for the time being.

Okay. That's helpful. And then, John on Southbridge, so clearly, that landfill tough to permit that's not new here in Massachusetts, but I'm just curious now that Southbridge is closing, what are your plans on the hauling side, I mean does it make sense to haul there? Would that be a divestiture market or even maybe better yet? Would that be a swap market?

I think there maybe asset so from a swap standpoint. But, fundamentally, we don't -- I think that we are in a position where we have other facilities where we are moving that waste to now Tyler. So, it's probably not a high probability in terms of swaps at all.

Okay. Okay. And then…

There is possibility but as I said I think we are turning to move that waste to our other facilities.

Okay. Okay. And then, Ned, you mentioned in the prepared remarks, I think the solid waste margins were up 175 basis points x the items, is that right?

Yes.

Okay. What is in the full year expectations for solid waste margins at the mid-point?

Asked me a hard question, do you have that changes.

Is it 26, 27?

I might need to circle back. But, I don't have the forecast broken out.

Okay. I guess my bigger question is, you mentioned a goal of getting over 27% on the solid waste margin side. You just talked about some G&A opportunities, but ultimately where do you think that those margins could pan out because that's could you get close to 30% or is there something that's structurally keeping you from that?

No. I think over several years that's our plan. Our pricing program continues to advance in excess of CPI, we have done a great job managing inflation in our business. We still have excess capacity at our landfills, which will help to blend up our margins as we access additional tons as the markets get tighter. So, we definitely believe we can track that direction through the next several years taking out back office cost will additionally help with that effort.

Okay. I will jump back in queue. Thanks.

Thank you.

Thanks Tyler.

Your next question comes from the line of [Shawn Egan] [ph]. Your line is open.

Hey, good evening guys.

Good evening, Shawn.

I had two questions for you. First time recycling with the strength in recycling prices year-to-date, have you had any customer push back on your campaign contractual renegotiations or any kind of shift in customer sentiment towards the new agreements?

Really haven't had any push back at all, from the point in time that we put SRA fee in place, it has been tremendously successful with very little push back from a customer standpoint. And I know the recycling team led by Bob Cappadona has done a good job on the municipal side. We really haven't had any significant push backs. I think that the results obviously in the return on the invested capital from recycling standpoint is -- some of the highest that we have seen in history of the recycling component. So, not really seeing any push back. I think that there is -- there is a potential this season disruption from China standpoint going out into the future. But, we certainly we are not having any disruption with regard to customers.

But, I think it's important to say the reason we are not having push back is because our programs are completely fair, when commodity prices go up, we are sharing back with our customers, when they go down --

Exactly right.

They are paying us more. So, they are very consistent, we developed frameworks for doing this a couple of years ago and month by month we adjust and it's done completely fairly. So, within that context, our customers' value recycling and when we went to them a couple of years ago and said we weren't making any money in recycling, we had to adjust our programs. They understood that. And our prices went up at that point in time. They have come down over the last several quarters as recycling commodity prices have come up. It's a way to balance risk for us and it has worked well.

Got you. And then, on the M&A front, I know you guys alluded to a recent deal done in the 3.9 EBITDA multiple, if I heard that correctly. Is that kind of level that you are willing to pay for this small tuck-ins going forward, I'm just -- we are trying to understand how you guys are thinking about cash on cash return and multiples paid with these deals going forward?

Yes. I mean that was a nice one. That has some --

It's 3.5x.

Really 3.5x. That had some great operational synergies and its fact and circumstances of every transaction, I would say. But, we work with our Board of Directors to set hurdle rates for different types of investments, different types of acquisition. I would generally say post synergies we are looking at 3x to 5x EBITDA multiple. We got of course an internal hurdle rates and a framework we are looking at for each acquisition and [indiscernible] will keep very strict discipline John and myself were looking at each opportunities.

I think it is fair to say that the larger the transaction the more sophisticated the fire is going, so you are going to be at the upper end of those ranges for the larger transactions. I think that smaller transactions we should be in that 3.5x to 4x.

Okay. Got it. Understood. And then, just kind of rounding out question on the landfill pricing, do you have a sense for the pricing improvement split between your own internal efforts and maybe the market in general or is that a little difficult to split out?

I guess we've been the market leader in pricing in the northeast would be my perspective. We've taken aggressive stands especially in several markets like New York State where we were not generating an adequate return on invested capital at several of our sites coming out of 2008, 2009 recession. And the south projection we just took shows the value of landfill capacity. It's very, very hard to curb at new capacity. There a couple of big successes recently as well and [indiscernible], but that capacity is very, very valuable, its expenses are put in place. The regulatory cost is going up everyday. So, we are playing some catch-up in our view. We are going to stay focused on returns at the landfills and pushing price at these levels.

Got it. Thank you very much. That's all for me.

Thank you.

Thank you.

[Operator Instructions] Your next question comes from the line of William Grippin [Barclays]. Your line is open.

Hi, guys. Couple of quick ones for me. Some of your peers have been talking down the potential impact of the recent China announcement to restrict recycling imports. Just kind of curious what were your stances on that, how you think that going to impact you guys?

I think that it's fair to say that there could very well be an impact, I think that one of the things that we have been able to do from a quality standpoint is the -- I think of much better situation in terms of the quality that our team is generating day in and day out and good portion of what we ship goes domestically as well. But clearly, we like everyone else exporting materials to China. So, if it's not China then it's India. There are other Asian markets that you will be able to go to. But certainly, potentially going to be disruptive and I think this is going to cause different people, different levels of cost in terms of cleaning up what they are shipping. I think that we had a tendency to be shipping much cleaner materials than some of our peers and so, I think it's going to be a little bit less of an impact on us than it maybe on some other folks.

Got it. Thank you. And then, second question was just any thoughts around potentially implementing an environmental fee to help us at some of the leachate costs?

We just implemented the E&E fee, Environmental and Energy fee which is doing exactly that. That fee is helping to offset some of the environmental cost inflation that we have experienced over the last year whether it's permitting leachate cost et cetera. So, that went into place when we started --

But we started pilot programs, so it's not in place every time.

I'm sorry. Pilot program was put in place July 1. We have implemented pilot program in four different divisions and we will be executing that strategy between now and the end of the year for the rest of the company. Pilot program has gone fairly well so far with not a lot of negative feedback.

Okay. Should, we can expect some of the impact of the higher leachate cost sort of I guess be mitigated going forward?

Well, I think it is likely to be mitigated going forward, I suspect we will probably get back to normal rainfall that said, we are 100% increase in terms of the annual rainfall for May, June. So, we expect that we are going to go back to more normal -- more normalized precipitation over the last two quarters of the year.

But, you also kind of have a double land where we are doing constructions at seven landfills. We have two months historically high rainfall when you got sights opened up. It's double head almost.

Yes. So, we think that's going to mitigate over the balance of the year.

Hopefully weather was in your favor.

Thank you.

Thank you.

Your next question comes from the line of Brian Butler [Stifel]. Your line is open.

Hi. Thanks. So, I'm going to ask some Michael question, you said on -- you said for 2020, 2021 target, did you say 50 million in free cash flow?

Yes. That was disguised at the bottom end.

So, 30 -- you call it somewhere between 30%, 35% conversion rate, so you are around what $150 million in EBITDA?

So, we didn't add number but you think those are…

I have to try and -- okay, so, on the Southbridge piece where you talked about 2018 being kind of that $10 million to $12 million revs and $4.5 million in EBITDA, post -- when that ends, did those -- are you just losing all that volume is that going to a competitor or are you going to see that go somewhere else and the reality is that $4.5 million of lost EBITDA come -- potentially some of it comes back, you are just going to have hard call?

A small portion of that will come back and a portion of that will go to third party. So, I think we will benefit from some of the tonnage that's left today. I will move that to our other facilities and some of that will go to third party, so maybe half and half maybe 60%, 40%, I think, 60% to third party facilities, 40% to us. This is a ballpark, approximate.

So, I mean at the very least, it's just not all disappearing in, does get somewhere. And then, when you think about the acquisitions and the multiples page, you kind of mention some of them, is that kind of before synergies or is that an after synergies when you think about after being incorporated.

Yes. It does multiple sort of after synergies, after being incorporated.

All right. I think most of my other ones have been answered. So, thank you very much.

Thanks Brian.

Thanks Brian, appreciate. Have a nice day.

Your next question comes from the line of Scott Levine [Imperial Capital]. Your line is open.

Hey, good afternoon guys.

Hey, Scott. How are you?

Hey, good.

Good. How are you?

Good.

Thanks for taking the question. I had a couple. Firstly, just more context on Southbridge, I know permitting is always difficult and what have you -- but, having a lot of site closer to northeast, just trying to get a sense, just kind of a unique situation, is it getting any more difficult these types of negotiations, provide more color on kind of what developed there and is it really site specific or are there any general trends in volume permitting in the region?

I think that it is probably more site specific. I think that as we said in the prepared remarks clearly one of the underpinning just to have local support and we had a referendum. We went to the community. We spent time trying to build that support. We were unsuccessful in getting that support. Consequently I think that certainly a driver along with the other issues out of our control from a permitting standpoint. So, I think the difficult is getting through the regulatory environment, the difficulty associated with -- the cost associated with the regulations also had a [indiscernible]. This stuff clearly out of our control. But, again, probably one of the biggest underpinning is that support of the community, without the support of the community it really makes it difficult to fight through that battle.

Understood. Thanks. And one follow-up, you guys obviously done a great job, leverage down last few years, understandably you are pivoting towards growth here. But, is that low 3, is what you are talking about in terms of leverage 2020, 2021, kind of where you see kind of optimal for you guys. And is there a point that which maybe even capital returns running out of the equation years down the line?

John laid out the kind of broad financial framework for our new plan. And one of the key goals of that framework is, getting leverage between 3x and 3.25x, we don't see a large benefit to getting well above 3x given our current size. We don't believe we have become invest grade at the rating agencies even we had leverage maturely below [Technical Difficulty] are pretty low today as well. So, given where we sit today, this is one of the discussion points with our Board of Directors as we are looking at strategy of, did you start to return money to shareholders, or do we have a range of opportunities to have an adequate return profile, risk profile where we could grow cash flows at a rate that that's very good. And we believe today given the range of opportunities in front of us that we can balance delevering over the next couple of years with growth. And we believe we could grow free cash flow 10% to 15% a year. And if we get to the point which I don't think we will in the next few years where there is less opportunity or higher risk opportunity, we will contemplate returning money to shareholders, but it doesn't make sense to us today.

Understood. Thanks. Good to talking to you guys.

Thanks Scott.

Thank you, Scott.

I'm showing no further questions at this time. I would now like to turn the call back over to John Casella for closing remarks.

Thanks everyone for your attention this evening. Look forward to discussing our third quarter 2017 earnings with you in early November. Thanks. Thanks everyone have a great evening.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. And have a wonderful day. You may all disconnect.