Casella Waste Systems, Inc. (CWST) Q4 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to Casella Waste Systems, Incorporated Q4 2017 Conference Call. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to introduce the host for this conference, Joe Fusco. You may begin, sir.

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. Also, sitting with us here today is Jason Mead, our Director of Finance. Today, we will be discussing our 2017 fourth quarter and year end 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 later as well. But first, as you know, I must remind everyone that various remarks that we may make about the Company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the 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. And with that, I'll turn it over to John Casella, who will begin today's discussion. John?

Thanks, Joe. And good morning everyone. We're very happy with our fourth quarter results and our fiscal year 2017 results. As reported in yesterday’s press release, our revenues for the year were $599.3 million 6.1% from last year; adjusted EBITDA was $129 million up 7% from last year. Normalized free cash flow was $38.8 million and we continued to reduce leverage ending the year with a consolidated debt leverage ratio of 3.68 times. Our fiscal year 2017 result beat our original and revised guidance for revenues adjusted EBITDA and normalized free cash flow. This is a great accomplishment for our team. We drove year-over-year improvement through our strong pricing execution, our operating efficiency programs and continued execution to give us our key strategic initiatives. These gains were partially offset by expected headwinds in recycling business due to the China’s National Sword program which negatively impacted paper and cardboard prices in [Indiscernible] to increases sorting and quality control labor to meet new lower contamination standards. While we continue to further improve the quality of our recycled fiber products we have also done a great job over the last several years building a series of programs to help mitigate commodity risk in the recycling business. These programs include our revenue shared contracts above the threshold with the customers or below the threshold the customer pay dollar per dollar processing fee. Our net average commodity rate formula that allows us to pass back increased cost to sell commodities including higher labor or equipment cost to meet quality standards. And a floating SRA fee that works like a fuel surcharge for our hauling customers where the SRA fee goes up when commodity prices drop to ensure that our customers are covering the true cost to recycle. Our risk programs generally work on a trailing one-month basis. So with rapidly falling commodity prices from September through December and higher processing cost as we slowed down the processing lines to improve quality. Our risk mitigation programs have under recovered during this period. However, as commodity prices stabilize, our programs will work to cover off the majority of the potential impact of lower commodity prices. Even with the recycling headwinds, our outlook for 2018 is positive and we are focused on executing against the strategies that we outlined this past August as part of our 2021 plan. With the 2021 plan, we will continue to focus on our core strategies which have been working exceptionally well, these strategies include three areas. Increasing land fill returns, driving additional profitability within our collection operations and creating incremental value through resource solutions. In addition, we introduced two new areas of focus as part of the new 2021 plan, reducing G&A cost and improving efficiencies and allocating capital to balance delevering with smart growth. And providing a little more color on the latter two strategies, we have set a goal to reduce our G&A cost by 75 to 100 basis points as a percentage of revenues by 2021. And more importantly, to reorganize our resources and invest intelligently to drive long term profitable growth. Over the last two years, we have been slowly but surely ramping up efforts to improve our IT and technology platform, drive our sales force effectiveness and increase back office efficiencies. We’ve already taken a number of key steps in these areas including the adoption of five year technology plan focused on improving our core financial and operating systems, we have successfully implemented the Microsoft dynamics CRM system and reduced [ph] that just last month we successfully brought on line our new net suite ERP system and will close our first quarter 2018 books in the new system. This is a tremendous accomplishment for our finance and IT teams as they brought the new system online in 10 months and most importantly on time and on budget. Moving on to our strategy of balancing delevering with smart growth, we believe that we are in a unique position to grow our free cash flows in 10% to 15% a year given our size, our nimbleness and the range of opportunities in our pipeline. Over the last three years, we’ve allocated almost all of our excess cash to paying down debt while focusing on efforts 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’ve reduced our leverage to 3.68 times. As such, we’ve adjusted our capital allocation strategy from the sole focus on repaying debt to a balanced approach where we will continue to focus on deleveraging but we will also begin to selectively pursue acquisitions and strategic growth investments within our core operation. With this, we have set a goal to grow revenues by $20 million to $40 million per year through acquisition or development activity. We have had early successful execution against this strategy with roughly 18 million of acquired revenues over the last three months. In late December, we accomplished a small tuck-in hauling acquisition, and in early January we acquired complete disposal in integrated solid waste company in Western Massachusetts, completed a great strategic fit with our operations and long term plan. With this acquisition we entered into an adjacent market, enhanced their construction demolition capabilities with a state of the art processing facility and added rail and truck transfer capabilities in the Western Massachusetts market place that was seeing another 800,000 tonnes of capacity permitting close in 2018. Ultimately we expect to be able to direct additional waste volumes to our landfills in New York and Pennsylvania. Our acquisition pipeline remains robust and we believe that there is over 500 million of acquisition opportunity in our Northeast markets that could be a direct tuck-in to our existing operations or could be strategically integrated with our assets. We have developed and implemented an acquisition strategy and development framework to align strategy, financial returns, to focus resources on key targets. And we are focused on acquisitions that will generate returns well above our cost of capital, enhance our vertical integration, drive operating and G&A synergies ready to be delevering or have a fast path to recognize synergies and cash flows to delever. One other area of focus our team is building on – is focused on is building and retaining key employees. Trucking companies across the country are struggling with attracting and retaining drivers and mechanics. We have recently welcomed the new VP of human resources to the company and we are working on a new program to build the career paths for all roles in the company. We’ve done a great job over the years with developing and retention of key management roles, but now it’s important to extend career development to all roles in the company. Wrapping up as reflected in our guidance 2018 plan is on track with our 2021 plan and displays continued execution of our strategies with the goal of driving additional shareholder value. We’ve selected continued strength in the solid waste pricing and volumes to offset recycling headwinds and as I mentioned our acquisition pipeline is very robust and provides us with great upside opportunity. With that, I’ll turn it over to Ned.

Thanks, John. Now onto the quarter. Revenues in the fourth quarter of 2017 were $151.2 million up $7.4 million or 5.2% year-over-year. Solid waste revenues were up $7.8 million or 7.4% year-over-year with higher collection disposal pricing, higher solid waste volumes and the rollover impact from acquisitions. Revenues in the collection line of business were up $5 million year-over-year with price up 3.7% and volumes up 1%. Pricing was up 3.5% in our residential and commercial lines of business and roll-off pricing was up 3.8%. We also experienced volume growth in all collection lines of business during the quarter. Revenues were up $2.6 million in the disposal line of business with both positive pricing and positive volumes. We increased reported landfill pricing by 3.6% year-over-year and more importantly we increased the average price per ton at the landfills by 4.6% as we improved our mix of our customers and volumes. In fact we increased our average price per ton 6.2% in our Western region as we continue to focus on advancing pricing ahead of volumes. We expect these same positive pricing trends to continue through 2018 as we recognize the roll-over impact of price increases already completed and we advanced further pricing increases in key markets. Our landfill volumes were 1.2 million tons in the quarter up 7.1% year-over-year with particularly strong volumes in our Western region as we took advantage of the tight market conditions that source new volumes at premium pricing. Recycling revenues were down $1.9 million year-over-year with lower commodity pricing, lower volumes partially offset by higher tipping or processing fees. Average commodity revenue per ton or as we say ACR was down 23.8% year-over-year, mainly on lower fiber pricing. Commodity prices were down almost 40% from July to December with the majority of this decline driven by lower paper and cardboard pricing as China has drastically reduced purchases increase quality standards. This negative trend has continued into early 2018 with commodity prices down another 20% as paper pricing has dropped further in January and February. Our Customer solutions revenues were up roughly $1.9 million year-over-year. This is due to several new multisite retail customers and continued growth in our industrial services group. Adjusted EBITDA was $30.2 million in the quarter up $800,000 year-over-year with margins slightly down. Solid waste adjusted EBITDA was $29.4 million in the quarter up $2.8 million year-over-year with strong pricing, higher volumes and cost efficiencies partially offset by higher intercompany recycling fees, higher vehicle maintenance cost, higher fuel cost during the period were almost completely recovered by our floating [Indiscernible]. Solid waste adjusted EBITDA margins were 26.2% up 75 basis points year-over-year or up over 1.5% year-over-year excluding intercompany recycling and fuel margin headwinds. Recycling adjusted EBITDA was $600,000 in the quarter down $2.1 million year-over-year with a decline driven by lower commodity prices, lower volumes and higher variable processing cost as we had the slow processing speed and ad labor and immersed [ph] and Africa meet tighter quality standards. This is partially offset by higher shipping and processing fees. Adjusted EBITDA was $200,000 in the other segment of the quarter up $100,000 year-over-year with the increase mainly driven by improved performance in the customer solutions group. Cost of operations was up $6.7 million year-over-year with the increasing cost mainly driven by higher third party disposal and transportation cost, higher recycling labor, higher wages on higher volumes on some of our new contracts and acquisitions and little bit higher maintenance costs. G&A costs were up $900,000 year-over-year. This increase was driven by higher bonus and equity compensation accruals during the period. Because of U.S. Tax Reform, we revalued our federal deferred taxes in valuation allowance in the fourth quarter resulting in a $15.3 million tax benefit for fiscal year 2017. This includes a deferred tax benefit for reducing our federal taxes from 35% to 21% and a $12.8 benefit for 80% of the indefinite like deferred tax liabilities which became available as a source of future taxable income. $101 million in federal net operating losses remains available to offset future taxable income and it doesn’t begin expiring until 2031. Our normalized free cash flow was $38.8 million in the fiscal year, up $11.7 million from last year. This improvement was mainly driven by a great operating performance in the period and our $10.9 million of lower cash interest cost. That’s partially offset by higher capital expenditures in the period as we built out airspace at seven landfills and continue to invest in our fleet. As of December 31, 2017 our consolidated net leverage ratio as defined by our credit facility was 3.68 times which is down 1.74 times since December 31, 2014. In addition, our total debt was $497.7 million at year end which is down over $39 million in the last three years. As we laid out in our 2021 plan, we remained focused on further reducing leverage in the business with a goal of gaining leverage down through between three times and three and a quarter times through continued capital discipline. Our actions to reduce leverage, reduce debt and improve cash flow has not gone unnoticed and on February 26 or just this Monday, Standard & Poor's increased our Corporate Credit Rating from ‘B' to ‘B+' with a positive outlook. As seen in our press release yesterday afternoon, we announced our guidance for fiscal year 2018 by estimating results in the following ranges. Revenues between $618 million and $628 million. Our revenue growth in 2018 as we indicated in our press release is slightly muted because of the adoption of the new revenue recognition standards. This will lower our revenues by approximately 1.5% in the year. Adjusted EBITDA during the period were estimated at $135 million to $139 million were up 4.5% to 7.7% year-over-year. We are estimating normalized free cash flow between $42 million and $46 million or up 8.3% to 18.6% year-over-year. As we indicated yesterday, our budget does not include the impacts from any new acquisitions that are yet to be completed; however it does include the roll over impact from acquisitions completed in 2017 and in early 2018. As John laid out, we remain cautious about the near-term headwinds in the recycling business, and given current market conditions, which is pricing up through February we expect recycling adjusted EBITDA to be down roughly $2 million to $3 million year-over-year. However, this headwind is already included in our guidance ranges for the year. We have projected very solid performance in the solid waste operations in the fiscal year with price growth of 2.5% to 3.5% positive volume growth in the roll over impact of acquisitions and the continued execution of our strategic initiatives. With that I’ll hand it over to Ed, Edgar [ph].

Thanks Ned, good morning everyone. As Chief Operating Officer, my focus is on the efficiency of our operations and the key financial metric is the cost of ops as a percentage of revenue. As most of you know we’ve been very successful in reducing our cost of ops from 73.4% of revenue in 2014 down to 67.6% in 2016 and that trend continued through the first nine months of 2017 at which point we were down another 30 basis points year-over-year. Our success was driven by increased efficiency and our ability to improve pricing ahead of inflation, both aided by improved equipment in automation, improved service levels and by our innovative pricing mechanisms. In the fourth quarter, our reported results show an increase in the cost of ops percentage of about 110 basis points. And headwinds through some of the key dollar cost increases for the quarter. Some of these increases are covered by increased revenue, either from price or from new business but some of the cost increases are not covered. From an operational efficiency standpoint John walked through the cost increases in recycling and mentioned that we have had the slower processing speeds and increases our labor to meet new market driven quality standards. As a result our cost per tonne has risen, so we’ve lost efficiency there, but I wanted to assure everyone that we have not lost efficiency in our collection and disposal operations. Staying on recycling for a minute, the commodity markets and the increased processing cost will continue to be headwinds in the near term. As Ned said, we are building in a short fall for 2018. In the long term, our pricing mechanisms and the exploration of certain long term municipal contracts entered into back when the market norm was to take market risk will allow us to adjust our revenue to rebuild our margins from recycling. In addition, as the entire industry has the same quality standard issue, everyone has slowed the processing speed effectively reducing processing capacity in the market at a time when building new markets is financially and feasible and no new capacity is coming up. Coupled out with the fact that recycling is mandatory in all of the states we operate, simple supply and demand pressures should drive tipping fees even higher. The other changing dynamics specific to our markets in the Northeast of the rise and disposal pricing. This is obviously a great benefit to us due to our unique set of assets. With price outpacing cost, landfill margins are up and the trends going into 2018 are very positive. The landfill sales team is driving volume as well, incremental tons being high margin due to the fixed cost orientation of landfill operations, so the cost of ops as a percentage of revenue should continue to improve. Day-to-day landfill operations are always challenging but our teams are doing a great job of meeting them while maintaining operational efficiency. The rising disposal prices and the increased SRA fees are paths of the streets building from our collection operations, which continue to perform well. In a period of rapid inflation in these key costs, it’s difficult to pass through both the cost and margins fast enough to match cost. John mentioned the one month delay in SRA recovery. So collection margins deteriorated slightly during the quarter. This will be recovered quickly and we are forecasting continued margin improvement in 2018 for the collection line of business. From a pure operational efficiency standpoint our key operating metrics remain strong and as we continue to upgrade equipment to the fleet plan, improve training and recruiting practices through several new initiatives and benefit from improved purchasing practices to renew ERP platform, we are expecting continued improvement. So we are happy with the way we closed out 2017 and feel we are getting a great start to 2018. With that, I’d like to turn it back to the operator for – to coordinate your questions.

[Operator Instructions] Our first question comes from Corey Greendale with First Analysis.

Hi good morning, congratulations on the quarter of 2017. So I just had a few questions for you. The guidance for 2018, does the volume just getting the context of capacity coming out of the system in the Northeast, the volume guidance doesn’t seem very aggressive. Are you assuming that because of your far aggressive pricing, there is an increase in churn or just kind of what’s driving the relatively modest volume guidance?

Yes, Corey, this is Ned. So as you may know we started to ramp down since volumes are Southbridge in anticipation of closure. We’ve also ramps and volumes down at several of their sites. So as we look into 2019, we have additional capacity, long term built out capacity to move some of our Southbridge volumes too, so we’re balancing a bit between the two years in anticipation of ramping down the site. In addition, as you know, we since very focused on pricing and we put together a robust pricing strategy for 2018 with prices up as much as 10% to 12% in many markets. The volume has been coming in a robust manner early in 2018 and probably outpacing slightly our volume executions to year to-date, but we’ll continue to look at pushing pricing further as we manage those volumes.

Good. Is there any way to quantify what the volume guidance would have been x the ramping down the Southbridge?

Yes. Do we have something Jason?

I got my next round?

Yes. Go to your next question. We might to get back to that one.

No problem. I just had a couple on the guidance questions. The just mathematically I would have thought the guidance for revenue growth from acquisitions would have been higher given what you’ve already announced. Is it – there’s some portion of the acquired revenue end up shifting from revenue to cost savings plus internalization or something?

No. It’s – I guess, we – I’m not sure. Some of the comps during the year. And overall our revenue still are muted in the year by about $10 million because of the adoptions of the new revenue recognition standards. So that might some of what you’re seeing where we guided $618 million to $628 million over and our revenues would have been $10 million higher. So with adoption of the revenue recognition standard there are certain revenue streams like in our recycling facilities where we use to recognize gross revenues and then have netted against those certain rebates or purchase materials with our customers. So no positive operating income but our revenues will grow itself in our comps will grow itself, with adoption of standard revenues are coming down, costs are coming down by 10 million, so its muting a little bit of our overall revenue numbers in the year.

Is that rev recognition changes. Is that almost entirely because of the customer rebates and going to the recycling line or is there an impact in this in all of those lines?

Yes. It’s mainly in recycling a little bit, in our solutions business a little bit and in solid waste as well.

Okay. And just one last quick one and then I’ll turn it over. I was doing some quick calculations while you were talking about some of the more granular details. I think I’m estimating that if you take the midpoint of all your guidance ranges, that you’re guiding to something like 40 to 50 basis points of EBITDA expansion in the solid waste line. Does that sound reasonable?

Give me a one second. Solid waste what you’re guiding – so we ended the year around 26.6 and we’re guiding to be up maybe closer to 80 plus basis points.

Okay. Good. That’s what I have. I will turn it over. Thank you.

Thank you.

Our next question comes from Tyler Brown with Raymond James.

Hey, good morning, guys.

Good morning.

Good morning, Tyler.

Hey, Ned, so quick clarification, but you guys are forecasting a $2 million to $3 million EBITDA drag in recycling versus 2017. Is that right?

Yes.

Okay. Just want to make sure that was right. And then would you say that the SRA fee has worked as expected. And at this point even if recycling prices fell further were there’ll be virtually no impact to EBITDA versus what you're already expecting? Or is that not right?

Its working very well and our other risk programs are working very well. Our issue right now is really related to a couple remaining contracts in the recycling business that had floors. So when we entered to this contract three, four, five years ago, we would have never imagine that we would have charge the processing fees this high to customers instead of market we’re charging $50, $70, $75 a ton tipping fees and some of these all contracts we had floors, I’ve said, I’ll never charge you more than say $40 a ton or something like that. So we’ve hit some of those floors. And then one of other small issues we have just because we’re at historically well prices is some of our municipal book of business. We have revenue shares that are structured to have a threshold. So over a certain threshold amount for is ACR, say $75 or $80 a ton, we share revenues to meet that we charge. As the cost structure has dramatically changes in the recycling business a number of those contracts were not flexible enough to allow us to change that threshold. So we’ve really made our contracts more and more sophisticate over the last few years, so allow us to move those thresholds. Some of those historic contracts don’t have that flexibility. So almost all of that headwind year-over-year is not due to our risk programs that are working, it’s due to legacy contracts that don’t let us off take that risk.

Well, it’s also due to the lag too in terms of the fees, right?

Yes. So, we’re in the fourth quarter. That’s a great point. There were lots..

Tremendous – much more it was because of the lag and not catching up with the fees.

Okay. That’s helpful. Then what is the M&A EBITDA rollover benefit in 2018 based on what you've done that’s assumed in the guide?

So, it about 2.5 to 3.5 range.

Okay, okay. That’s good. Then, again congrats on the early success on M&A, but in addition you guys have mentioned development projects. I was just curious about what this specific pipeline looks on in that regard? And maybe any examples of what might be in that bucket, I think that would be helpful?

Well, some of the things that we’re doing from the development standpoint, looking at – first of all, they’re all look at on a return basis. And some of the development work that we’re doing is additional capital development at the recycling facilities to meet the new standards. Some of the other things that we will look at from a development standpoint would be the packaging facilities and other things to handle organic, Tyler, but again it’s looked at on a disciplined basis from a financial standpoint.

So is there anything CapEx that would be related to that this year or 2018 I should say?

We have about $2 million allocated towards upgrading recycling facilities in our CapEx guidance and if there are any other development projects that come along that meet our return hurdles and get strategic moves we’ll update the market on as it comes.

Okay. And then couple of more here. So, Ned, can you give some additional color on the NetSuite rollout? Maybe what are some of the benefits to move into that system? And then you mentioned a five-year technology plan. So what’s next on that list?

Yes, great. So first of all, thank you to my entire team and all the financial professionals throughout the company and the IT team. It’s actually quite remarkable we implemented the software in ten months on time, on budget which is a pretty big accomplishment. We implemented first fixed asset, general ledger and purchasing. We have not done the revenue side of the business and that’s what next. We are currently ramping up our efforts to look at a new what we called field service package. How we route our trucks. How we have work order management. How we build our customers. This first stage is definitely a foundation to allow us to advance additional technology that even I have talked about this before. If you flash back to couple of years as we worked on great operating technology initiatives, our customer facing technology initiative, they felt like as much as half our time and half our money was being spent back integrate to 20 to 25 years old systems. With the NetSuite application, it’s a modern day system with modern day what they call API or interface as they allow us a lot of flexibility to advance our technology program. The next on the roadmap is getting field services, dynamic routing, new building and whatnot, now will be our next major initiative.

Okay. So more 2019 or 2020 or when would we expect that?

Yes. So, I thought I should've laid out. This isn’t a lot of money we’re talking about. We spend roughly $2 million on our NetSuite upgrade which is money well spent. And we’re in 2018, we’re working on determining software. We’re doing selection and we’ll be working and developing a pilot. So it will be out into 2019 before that next stage really is even started.

Okay. Okay.

You might want to talk about the planning, the planning process for NetSuite because that was a year and a half process before the beginning of the implementation, so it was I think that is important that…

Yes. From the day we had the concept to put a new ERM in place to the day it was completed it was more like two to two and a half years, but from the date we said we’re implementing was 10 months. So we did a lot of preplanning, a lot of work putting resources in place, finding the right vendors to support us. So I think our perspective is all that preplanning and making sure requirements are correctly done and we have the right resources is important to be successful. So we’ll update you through the year as we look to the future. But this could be a big game changer for us. You look at technology today in other industries, they’re really isn’t the same level of technology in this business and there’s a lot of operational upside and also just meeting customer needs, then we think we can make a big advancement on over the next several years.

I mean, just having one database for the entire company is just going to pay a lot of dividends as we move out into the future in terms of being able to take advantage of technology from an inventory standpoint or pricing perspective, all of that should be able to done from a systems, from a business intelligence standpoint. That’s the path that we’re going down. It can take some time to get there, but with the foundation of the ERP system we are positioning ourselves to be able to take of technology on a go forward basis.

Okay. Very good. And then my last one. Any thoughts on G&A guidance for the year?

Yes. So we’re looking at roughly 79 million-ish for the year and I actually did not recalculate the percentage based on the new revenue numbers. Do you have that Jason?

Yes. Now that’s the 79 is good.

Okay.

All right. Thanks, guys.

Okay. Thank you, Tyler.

Thank you.

Our next question comes from Michael Hoffman with Stifel.

Thank you, John, Ned, Ed, for taking the questions. And I hope you’re surviving up there on the whole year blast you’re getting.

No. We aren’t Michael. We’re getting a little snow which is nice.

How would you for us frame what happened in 2017 so from the beginning of the year to the end of the year on the spot market? And what your thoughts are about that spot rate within the landfill side and how that's part of the two and half to three and half?

So I think that spot rate now is mature to a point where we’re 8%, 10% increases in terms of as contracts come up, as we’re pushing out the lowest price material going to all the facilities, I think we’re in the – we did certainly didn’t start out with that rate, but that’s kind of where we are now 8% to 10%.

Okay. And in the – the strength of the volume going into 2018, based on the level of displacements is going to come from Southbridge, you could have argue you would have been in minus half to or plus half. So clearly you’re picking up some of the overall market displacement, yet you’re maintaining prices. Is this because of the Complete disposal acquisition? Are you starting to see some of that leverage to that transfer station? That's part one of that. Part two is you are looking for capacity expansion there, so I’m wondering where the status to that is?

So I think that it’s a little bit early to be getting a tremendous amount. We have a little bit of benefit from Complete, but Complete has agreements in place. It’s more a 2019 issue for us where we’ll get the benefit to our facilities from the Complete acquisition. We got a little bit now, but it’s not all that significant. It will be much more significant in 2019 and what was your second part of your question of your question, Michael.

You're seeking to expand your capacity.

Yes. We’ve got, I think Brian and his team has worked through and I believe they’ve gotten approval from the community and we’re just in the process of moving the tonnage up, moving the permit up.

Okay. So going back to the 2018 volume guidance where is that tonnage coming from and predominantly going to? But assuming most of this is landfill, but it’s not collection base. But you’re not looking for that kind of strength of volume in that collection side?

Well, we have been running slightly positive volumes as you know in the collection business as well. We had about 1% positive in 2017. We don’t see much that would change that, but we are of course more focus on pricing the volumes in the collection line of business. And the volume growth we expect in 2018 will come from some of our far Western New York sites. And as we've said, we’ve been holding back some of our volume in New Hampshire to balance Southbridge as it ramps down.

So, and to be clear what you're doing is letting go lower price points where Southbridge clears the spot market higher you’ll be able to walk that volume in the New Hampshire than the county waste at higher price point. So I get both on line.

Exactly. Some of that will just select to go back into the market. Some of that will flow in New Hampshire. Some of that will flow up in New York State. And as you know landfill has annual capacities in total site. Capacities and we’re managing over three-year horizon how we want to balance pricing and volumes in our site. So we’re running slightly lower at a couple of sites in 2018 to give us more capacity into 2019.

Okay. And then switching gears to recycling. So in the guidance are we assuming the current low as the basis and its this bad and therefore $2 million to $3 million and if gets better grade or be at least dampened by the SRA fee?

Yes. As we said earlier, the SRA fee will pickup to majority of any additional declines and other floating mechanisms that emerge. But we do have a portion of our book of business that doesn’t have risk coverage or we’ve gone through thresholds and that’s where the additional 2 million to 3 million comes from. We’re right now just estimating price to stay at current levels for the rest of the year. These are historically low levels we’re at and we have not guided to recycling prices rebounding. So throughout the year we’re looking at prices staying in our ACR level of kind of mid-60s.

Okay. And just – I’m going to repeat that just to be clear. You’re assuming the current low is in guidance and if it gets better that's positive, but at the moment, they're current low?

Yes. We have not assumed they’ll get worst.

Okay. But if it got worse, the SRA will sort of buffer that?

SRA will take care of the majority of that. there are some portion that will be exposed on a limited portion say 10% to 20%.

Okay. And then the U.S. announced steel tariffs or intention to do steel tariff. My question is, is that all the steel whose going to build trucks, some containers you’re buying this year has already been bought. So you have the ability to look at your vendor and say, I’m not paying for a tariff, that hasn’t hit yet. But what’s the risk so that capital spending inflation…?

Yes. Our capital budget is all front loaded particularly in the trucks and to the front of the year more than half came in early January and the rest are coming in February, March. So really don’t have a lot of exposure. The prices are fixed. The orders are in.

Okay.

Yes. That would just be on the containers.

Right. And so how do I think about that in the context if I remodeling in 2019 in this tariff really happens. What’s the – all of 24 hours and you started talking to vendors. What their immediate reaction there. Prices are definitely going up or taking a wait-and-see?

It’s too early to tell. And its too early to tell, Michael.

Yes.

I think that….

Yes. Now you are the first live data point since it was announced. So that’s why I was asking. So, we don’t might end up, the acquisition pipeline, so all the peers have all talk about how frothy the deal market is. Can you sort of talk about your own pipeline in the context of opportunity as well as what’s happening twice the valuations and how do you think about the prospects of an incremental transaction given where you are in discussions?

Sure. So, I think that – we look over the top of the existing franchise that we operate in. And now, Michael, it is about a half billion dollars worth of opportunities is four, five as you know, four, five, $40 million, $50 million companies, maybe even a little bit larger than that. And then there’s a couple of hundred million of tuck-in acquisitions. And I think that we’re going to be opportunistic. We obviously know most of the – if not all – most – if not all of the people in the business in the Northeast, I think we’re clearly going to be opportunistic in terms of purchasing, we’re going to continue to follow the financial discipline that Ned has established, you know, all of those transactions come across his desk and we evaluate them and make sure that we got the financial discipline to do the right thing. And that’s why we’re not projecting a certain amount of acquisition per quarter, because it just doesn’t make sense. But the opportunities were significant. And I don’t if you want to go through, Ned, the financials on the -- on a couple of transactions that we did.

Yes. So we’ve – the smaller tuck-in you just such tremendous synergy value, Michael, that those synergies who are buying them in three to five times range. As John laid out earlier, Complete was a high-teens after tax return and the synergies will come over a couple of years as we work to internalize some of the volumes. But that was a great one, because it's an adjacent market for us in area where we haul today and a great growth opportunity. So as you look…

Also the rail service is well. I mean, it’s a brand new facility with rail and trucks which gives us capabilities to our facility in Pennsylvania.

Okay.

So you kind of just talking about two types, just tuck-ins, just fit right in and increase synergies, recognize early and then thing they get us into maybe some adjacent markets or strategic fitting assets.

Okay. And you were about to frame evaluation you paid for that, you didn’t?

So that’s, initially its more like 6-ish [ph] times but once we get the synergies recognize they will be in on 5s [ph]. So that’s kind of high teens after tax unlevered returns because of the fit with our assets, great acquisition.

Okay. All right. And then what’s the…

In smaller acquisitions – the smaller acquisitions, smaller tuck-ins, the million and the two million to five million, as you know going to likely to be in the three to four time and then the merger acquisitions when you get to 15, 18, 20 million you’re going to be on the higher end towards the five or six times.

And are you seeing this breakdown in the recycling market. Is that forcing some of these companies to have that service and they’re now underwater in those businesses, like forcing them?

Michael, we’re seeing a lot of pressure on haulers, both from a disposal perspective as well as from a recycling standpoint. And I think that we’re going to continue to see that. As we said earlier, another 800,000 tons is coming out of the Massachusetts market in the next year, and that pressure on those smaller haulers is going to continue. Pricing pressure from a recycling standpoint is also going to continue. So I think that we’ve got the right dynamics right now. The value of those businesses is going down. Over the last couple of years, value of those businesses is obviously going down because of the additional cost both from a recycling standpoint as well as from a disposal perspective.

And as you well know, inflation should be your friend. In many ways, and for us on the disposal side its great, because we’ve got excellent franchise across the Northeast and great pricing opportunities. Also as you know we have some unused annual capacity that we can start to bring on line. And then the collection side of the business, we've done a really great job of taking risk, pushing price, recovering inflation, so we’re very nimble. We see this inflationary environment very positive for us, but some of our competitors as John led out maybe haven’t been as nimble and it's a big stress on them right now.

Got it. And then last one from me. What is your target leverage for closing 2018?

So, we ended 2017 at 3.68 times and we’re tracking to be around 3.3-ish at the end of 2018.

Perfect. Thank you so much.

Thank you.

Thanks, Michael.

And I’m not showing any further questions at this time. I’m going to turn the conference back over to our host.

Thank you all for joining us this morning. And look forward to attending our next conference call at our first quarter earnings call which would be in early May. Thank you everyone, have a great day.

Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.