Casella Waste Systems Inc (CWST) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems, Inc. Q1 2015 earnings call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to Joe Fusco. You may begin.

Thank you for joining us this morning and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ed Johnson, our President and Chief Operating Officer; and Ned Coletta, our Senior Vice President and Chief Financial Officer. Today we will be discussing our 2015 first-quarter results -- these results were released yesterday afternoon. Along with a brief review of those results and an update on the Company's activities and the business environment, we will be answering your questions as well.

But first, as you know, I must remind everyone that various remarks that we may make about the Company's future expectations, plans, and prospects constitute forward-looking statements for the purposes of the SEC's Safe Harbor provisions. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors including those discussed in our prospectus and other SEC filings.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change. And therefore, you should not rely on those forward-looking statements as representing our views as of any date subsequent to today.

Also during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial tables section of our earnings release, which was distributed yesterday afternoon and is also available in the investors section of our website at IR.Casella.com.

And with that, I will turn it over to John Casella, who will begin today's discussion. John?

Thanks, Joe. Good morning, everyone, and welcome to our first-quarter 2015 conference call. We are pleased with the results for the first quarter. As you saw in last night's press release, our revenues for the first quarter of 2015 were $116.6 million, up $3.4 million or 3% from the same period last year. Our adjusted EBITDA was $14.5 million, up $1.1 million or 7.9% from the same period last year. And as expected, our free cash flow was negative in the first quarter.

We remain on track to achieve our financial targets of $520 million to $530 million in revenue, adjusted EBITDA of $103 million to $107 million, and free cash flow of $14 million to $18 million in 2015. Ned will go through the numbers in more detail in a minute, but I just wanted to comment on the most difficult quarter for us on a go-forward basis is certainly going to be our first quarter. And this is the first quarter in a new calendar year, and it's great to have that quarter behind us at this point in time and look forward to the next nine months.

And we continue to execute well against our key management strategies and that is despite one of the worst winters on record in the Northeast and sharply lower recycling commodity prices. Our teams responded well to these prolonged operational challenges, and I'd like to thank each and every member of the Casella team for their contribution to make this possible.

The second quarter is also off to a good start. We've experienced strong trends through late April into early May, albeit a somewhat delayed seasonal ramp-up of landfill volumes and construction and demolition activity. We've also made significant progress towards reshaping our recycling business and begin rolling out a recycling adjustment fee to our hauling customers in April with positive initial results. More on that in a minute.

2.5 years ago I took that action to recast our senior management team. We laid out a comprehensive strategy to improve our financial performance and operating performance. And we followed that plan and executed well against it. Since then we have refocused the Company while simplifying our business structure. We have reduced risk exposure by either divesting or closing operations that did not fit with our strategy and refocused management attention and capital resources on our core operations and strategic business initiatives.

During the first quarter, we furthered these efforts with the divestiture of certain CARES water treatment assets and select associated assets for roughly $3.1 million of net proceeds to Casella. Going forward, we plan to continue to focus on increasing landfill returns, driving additional profitability at the collection operations, furthering our long-term Eastern region strategy, and differentiating our business by providing resource solutions. This focus on our core operations should drive improved performance and free cash flow.

We remain excited about our landfill assets. Over the last two years, we have had great success sourcing incremental volumes to our landfills. We have increased annual landfill volumes by 365,000 tons in the last 12 months and by 730,000 tons over the last 24 months. We have driven higher volumes to our landfills through our focused landfills sales strategy, building our special waste capabilities, and our landfill asset positioning.

As we discussed last quarter, disposal capacity in the Northeast is contracting and we expect New York to export less of its waste over the next 20 years, further tightening market capacity. In the first quarter landfill pricing increased by 1.7% in the Eastern region. We expect this trend to continue for the next several years as disposal capacity constraints become more acute across our Eastern region.

We are concentrating on core blocking and tackling in the hauling line of business, namely optimizing our routes to improve route profitability and standardizing and upgrading our fleet, which Ed will discuss in more detail. As part of our comprehensive strategy, we developed a fleet plan designed to simplify our fleet and target truck replacements to maximize returns. We believe this plan will reduce our operating costs through lower maintenance costs, improve our capital efficiency, and improve our service levels through decreased downtime.

We continue to advance hauling price increases in the residential and commercial lines of business in a number of our markets with only limited price rollback. In the first quarter residential and commercial collection pricing are up 2.8% and among the strongest that we have experienced in the last 10 years. We expect these same positive pricing trends to continue.

We have made excellent progress improving our operational financial performance in the Eastern region over the last two years, where we have increased annual adjusted EBITDA margins from 15% to 21%. We expect to further advance margins in fiscal 2015 as we expand revenues further while reducing operating costs.

We differentiate ourselves in the marketplace by offering value-added resource solutions. These solutions range from our fast-growing Customer Solutions group that provides professional services to large industrial customers, to our organic business that is a leader in organic processing and disposal in the Northeast, to our market-leading recycling business. Our Customer Solutions group continued its strong growth through the first quarter of 2015 with revenues up 9.4% year-over-year growth in the industrial and the multisite retail businesses. More importantly, operating income for this group was up $0.5 million year over year as we gained operating leverage and scaled revenues on lower overhead cost. Our team continues to expand existing relationships and win new business. We are very excited about the group's prospects for the remainder of 2015.

Our recycling business continues to experience headwinds from lower recycling commodity prices. Our average realized revenue from commodities for the quarter was down 20% since October due to lower global demand for recycle commodities, a stronger US dollar, and lower oil prices. Lower recycled commodity prices are one of the largest challenges and, at the same time, opportunities facing the solid waste industry today. To continue to invest in recycling business, which we believe is integral to our core business, we need to generate an appropriate return on these assets in all market conditions. We cannot control commodity prices. However, we have taken steps to offset fluctuating commodity prices to ensure that the Company earns an appropriate return on its investments in recycling infrastructure throughout all market cycles.

In that regard, we have begun to reshape our recycling business by advancing higher tipping fees at our recycling facilities. We have also begun rolling out an adjustment fee to our hauling customers that will float based on the commodity prices that Casella actually receives. We are encouraged by the initial results from this launch. We plan to roll out this adjustment fee over the next several months.

Beyond the increased tipping fees and introduction of the recycling adjustment fee, we have improved our processes and reduced our variable processing costs per ton by 1.5% since last year. We have executed extremely well against the strategic plan that we laid out 2.5 years ago. We made significant progress against these goals. We are at a point now where much of our time is focused and devoted to what I would consider operational blocking and tackling -- a focus on pricing strategies at the local level, improving our operational efficiencies, disciplined capital allocation. We believe that these actions will further improve the Company's performance and allow us to delever the balance sheet going forward.

As we have previously announced in a press release dated April 28, 2015, we received a notice of nominations from a relatively new shareholder, JCP Investments. We refer you to that press release for further information and our comments regarding this matter. This is all we plan to say about the matter on this call. We request that the question-and-answer period remain focused on the order and our midterm strategy.

With that, I will turn it over to Ned to walk us through the financials.

Thanks, John. Revenues in the first quarter 2015 were $116.6 million, up $3.4 million or 3% year over year. Solid waste revenues were up $2.6 million or up 3.2% year over year with the increase mainly driven by higher disposal volumes, higher collection pricing, partially offset by lower energy pricing in the landfill gas to energy business and the closure of the Worcester landfill in early 2014. Revenues in the collection line of business were up $900,000 year over year with price up 2.1% and volumes down slightly.

As John laid out, our pricing programs in the commercial and residential lines of business strengthened with pricing up 2.8% year over year in the first quarter 2015 with particular strength in the commercial line of business as we continue to test price elasticity in key markets. Roll-off pulls were down year over year as the record low temperatures and snow falls limited construction activity across the Northeast. However, roll-off activity was particularly strong in late April and early May as we experienced some pull-through from low first-quarter activity.

Revenues in the disposal line of business were up $3.6 million year over year. We increased disposal pricing by 0.8% year over year in the first quarter with landfill price up 1.7% in the Eastern region as we began to capitalize on the tightening disposal markets across this market area. We expect these positive trends to continue through 2015. Our total landfill volumes were roughly 775,000 tons in the first quarter 2015, up roughly 10,000 tons year over year. Annual landfill volumes were up by roughly 730,000 tons per year over the last two years with adjusted EBITDA during the same period up $14.9 million in the disposal line of business.

Recycling revenues were down $100,000 year over year with the decrease mainly driven by lower commodity pricing, down 15.9% on lower fiber, plastics, and ferrous pricing, partially offset by higher recycling volumes, up 15.2% on new processing capacity. Other revenues were up $900,000 year over year, driven mainly by continued strength in the Customer Solutions group. During Q1 2015, we recognized $400,000 of revenues from the rollover impact of acquisitions net divestitures.

Adjusted EBITDA was $14.5 million for the first quarter 2015, up $1.1 million year over year. Adjusted EBITDA margins improved 60 basis points year over year. Solid waste adjusted EBITDA was $15.2 million, up $1 million year over year after neutralizing for the changes in the allocation of intercompany management fees, with the increase mainly driven by strong performance in the hauling lines of business despite the acute operating challenges given the winter weather.

Hauling adjusted EBITDA was up $2.3 million year over year with margins expanding 380 basis points on higher pricing, lower fuel costs, and lower third-party disposal costs. Adjusted EBITDA in the disposal line of business was down slightly year over year, mainly due to shifting tons from our transfer network to third-party disposal sites where we could take advantage of seasonally low disposal costs. We expect to recapture these tons at our landfills during the summer months at higher rates.

Adjusted EBITDA was down $1.3 million year over year in the landfill gas to energy line of business, due to significantly lower energy prices. Recycling adjusted EBITDA was negative $700,000 for the period, down $300,000 year over year or down $900,000 if you exclude the intercompany tipping fees we charged our own hauling and transfer operations. The decline was driven by lower commodity pricing, partially offset by higher volumes and productivity improvements.

Adjusted EBITDA was breakeven in the Other segment, or up $400,000 year over year. This is once again neutralizing for any changes in allocation of intercompany management fees. The improvement was primarily driven by gains in Customer Solutions.

Cost of operations was down 100 basis points year over year as a percentage of revenues in the first quarter with the improvement driven by lower disposal costs, lower fuel prices, lower gas treatment costs at our Juniper Ridge Landfill and lower landfill depletion and accretion, partially offset by higher recycling cost of operations as a percentage of revenues, due to lower commodity prices reducing the operating leverage.

G&A costs were down 10 basis points year over year as a percentage of revenues due to lower G&A spend in many categories. Depreciation and amortization cost were up $100,000 year over year, largely due to higher capital expenditures in calendar year 2014. During the first quarter 2015, we had a few unusual items in the income statement related to our efforts to clean up closed and nonperforming operations, including a $3.8 million gain related to the disposal of certain CARES water treatment assets and other related Casella assets; also a $1.2 million reversal of excess cost related to the Maine Energy divestiture and $500,000 loss on debt extinguishment related to refinancing of the Company's senior credit facility.

As previously announced on February 27, we closed a new five-year asset-backed lending facility that was the last step in the refinancing of our senior secured credit facility. This refinancing combined with the add-on to our senior subordinated notes and the solid waste disposal revenue bonds completed in late 2014 enable us to achieve three major capital goals -- extending out our debt charities, holding cash interest costs relatively flat, and, three, improving the flexibility of our capital structure.

As expected, given the normal seasonality of our business, free cash flow was negative $7.5 million in the first quarter of 2015 due to mainly three factors -- one, operating results were impacted by seasonally lower volumes and revenues in our first quarter while much of our cost structure is fixed, most notably at our landfills and recycling facilities. Two, working capital was negatively impact by the semiannual interest payments on our senior subordinated notes due in February. And as such, our cash interest cost were $15.3 million in the first quarter. We expect cash interest costs to be roughly $2 million in our second quarter. And three, working capital was negatively impacted by lower accounts payable, mainly due to the timing of payments for capital expenditures purchased late in calendar 2014.

We expect free cash flow to be positive for the remainder of the year. As reported in our press release yesterday afternoon, we reaffirmed our calendar year guidance ranges for revenues, adjusted EBITDA, and free cash flow, despite the headwinds from lower recycled commodity prices and weather impacts. We have guided to a normal capital cycle in calendar 2015 with capital expenditures expected to be roughly 8.5 to 9% of revenues. Taking these factors in account, we are confident we are going to meet our cash flow guidance for the year.

And with that, I'll hand it over to Ed.

Thanks, Ned. Good morning, everyone. Well, we are off to a good start the year and things are progressing pretty much as planned. Our teams did a great job managing around the record snowfalls in many of our markets, and we got through the winter quarter in pretty good shape. One of the great benefits to changing to our calendar fiscal year is that we have our toughest quarter behind us, are on plan, and feel confident in reaffirming our guide 2015.

Now that we have exited all of our targeted ancillary non-core activities, my focus on these calls is going to be on garbage company fundamentals. As COO, a good portion of my time and effort has been spent on reducing our cost of ops and improving margins, and we are starting to make some good progress. The first quarter, as you know, is our low quarter for revenue and operating income. But on an apples to apples basis, our consolidated cost of ops improved 100 basis points in Q1 2015 year over year.

Well, that's a good start. But I think the important thing to understand this where the improvement is coming from, what we are doing to continue to improve going forward, and how we have addressed the challenges with the cost of ops like the commodity price issue on the recycling side.

So let's start with collection operations, as this is where we experienced the biggest improvement and where our expectations for continued operational improvement are the highest going forward. Collection operations accounted for 46% of our revenue in the first quarter, about 44% on an annual basis. So it's about half of our business. Cost of ops as a percentage of revenue improved 380 basis points for Q1 this year. This improvement was driven primarily by disposal cost savings, improved pricing, and lower fuel costs. I mentioned on the last call that we are in a great position to benefit from lower fuel prices, and we are seeing that in the numbers. Recent fuel prices have been below our fuel surcharge threshold, so we have not lost any revenue as fuel declined. We expect to continue benefiting from lower fuel costs and have locked in about 45% of our fuel purchases for the rest of the year.

We were starting to see some improvement in basic operating metrics. We have improved our net revenue per hour for commercial services almost 5% while our variable costs per hour has dropped about 5.5%. Our list per hour declined by 4% but that is directly related to the records no events. This tells me we have better pricing and we're getting more efficient. Similarly, the residential net revenue per hour is up 6.2% as compared to an increase of only 1.9% in variable costs per hour, and we have improved our list for our intent line of business by 7.2%. So again, we're getting more efficient.

We expect the benefits of the comprehensive five-year fleet improvement plan that we put in place in the fall to start showing up in the next quarter. It is early days in the fleet plan, but as new equipment comes in over the year, savings and route efficiency and downtime are expected to drive lower labor and maintenance costs while improving service. Our expectation for the full year for our collection operation was a 300 basis point reduction in cost of ops, and we were off to a very good start.

Our disposal line of business, consisting of our network of landfills and transfer stations, accounts for about 24% of our revenue in the quarter, 27% on an annual basis. So it's about a fourth of our business. John and Ned both talked about success we've had capturing more tons. We were up 11,000 tons for the quarter in our landfills, but in addition we controlled enough additional tons to allow us to take advantage of low disposal rates at third-party sites on the collection line of business. This new strategy conserves airspace in key markets for the higher-priced summer months while taking some of the seasonally cheap rates out of the market to our own benefit.

Speaking of price, I have some easy disposal math for you that I think you're going to like. The industry computes price and volume on disposal activities on a customer-by-customer basis, by disposal site. So if you lose a customer to lower price and pick up another customer at a higher price, it all gets captured as volume changes. Under this scenario, we reported improvement of 80 basis points. But our strategy has been to push out lower paying customers and (technical difficulty) higher-priced material. If you just look at the average price per ton received at the landfills, we improved average price per ton Q1 2015 over Q1 2014 in the Western landfills by 2.7%. In the Eastern region, where the reduction of capacity is already improving market, we raised our average price per ton by 6.3%. This is a significant indicator of improving conditions and should provide a lot of comfort that our long-term strategic plan is coming to fruition.

Just over 10% of our revenue comes from commodity-based activities, power generation at the landfills, and recycling. Power generation at the landfills is almost all fixed cost, and prices were much higher last year. Power prices were down about 40% Q1 2015 versus 2014, given consolidated cost of ops as a percentage of revenue an 80 basis point headwind. We can't control power pricing, but the comps get better going forward. So the year-over-year headwind is a one-quarter event.

On the recycling side, we were able to offset some of the swings in commodity prices. And as John mentioned, we were implemented a pricing strategy on the collections side that will greatly improve our ability to reduce our commodity risk. I talked about this at length on the last call. So just to give an update, that change in billings has been well accepted in the first markets implemented, and we expect to have it rolled out in the majority of our markets over the next few months. I have to commend our sales and marketing personnel for doing a great job explaining the charges to customers and gaining acceptance that recycling is a value-added service and does not pay for itself. On the operations side, we continue to improve our efficiency as our recycling operations reduced variable processing costs per ton by about 1.5% in Q1 versus 2014.

Customer Solutions, which includes our industrial services line, continues to be a great story for us. As you might recall, early last summer we had a blip in the ramp up of this new growth area as significant revenue increases did not flow through to the bottom line. We fixed this by the fall quarter by slowing down the growth and focusing on more efficient customer on-boarding and on back-office automation so that we can more smoothly step on the accelerator. Margins continue to improve as year-over-year revenue growth of 9.4% in this segment is matched by a $500,000 improvement in bottom-line contribution.

Most of you know that we are a leader in organics in the Northeast. Casella Organics continues to be a very steady performer, and this management team not only continues to provide landfill volumes and maintaining margins in its traditional biosolids business, they are leading our efforts to carefully navigate expanding area of source-separated organic in compliance with the initiatives mandated by several of the states in which we are operate.

In conjunction with this, we welcome Steve Finn to the team as the new RVP for Casella Organics. Steve has an extensive background as an expert in sustainability, innovation, and food waste management.

That completes the formal portion of our call, and I would like to turn it back to operator to facilitate the question-and-answer session.

(Operator Instructions) Scott Levine with Imperial Capital.

Just looking for a little bit more color on how 1Q played out relative to expectations. Clearly, weather was very rough late in the quarter. I don't know if you can quantify the impact of perhaps lost earnings versus what you guys had in your plan, and maybe a little bit more color regarding how strong activity has come back since, call it, the seasonal uptick in late April into May.

As you remember, we had a challenging winter in 2014. But the 2015 winter was quite remarkable in the Northeast. There were the second-lowest temperatures on record, over 125 years, and in many markets there were the most snowfalls on record. Boston, I think, had 7 feet of snow over three weeks. And it's challenging to run a route-based business in that environment. And economic activity was a lot lower during that period. We saw lower tons to the landfills, lower tons to the recycling facilities, and higher operating costs.

Comp, year over year, it was pretty neutral, actually, because we had some challenges the year before from the winter. But when we budgeted for the year we had assumed we had a more normal winter. So we are behind budget by over $1 million in the quarter. Moving our fiscal year end to December 31 gives us a lot of that benefit to catch up. We had other efforts in the quarter that help us to offset some of that, most notably on the pricing side.

Got it. And then if we look at, for example, you guys provided, I think, all four quarters for 2014 on a December fiscal year-end basis last quarter. Is that indicative of how we should expect your seasonality to be with the December fiscal year-end? Or was there anything unusual about last year that would be worth keeping in mind in modeling the quarters for 2015?

No. We expect generally the same splits from a revenue and adjusted EBITDA standpoint, where if you look at if you look at Q1, about 21%, 22% of revenues; Q2, 26%, 27%; Q3, 26%,27%; and Q4 25%-ish. That same sort of that will go through the year. But you saw in Q1 the seasonality slightly exacerbated, whereas we have January, February, and March combined now, which is the slowest period in the Northeast from an economic activity and landfills tonnage standpoint, whereas before those were split between two quarters. So, you saw a little bit in the first quarter of what we expect to be a normal seasonal trend where the high fixed costs in the business, lower revenues caused a slightly lower margin in the new calendar Q1. But then we will see a real nice benefit in Q2, Q3.

Got it. And one last one, if I may on the new debt structure. I don't know if you provide a specific break down of where the debt falls out. I don't think we've received that in the Q yet. And if you will let us know when you expect to file the Q, that will be helpful as well.

We expect to file the Q today, Scott. And what exactly were you looking for with that question?

Basically the breakdown of where the debt falls within your individual categories of securities and also looking for a debt to EBITDA ratio, if you have one.

Total debt to EBITDA at the end of the period was 5.43 times. And we currently, if you look -- this will be in the Q. But the debt was roughly $89.8 million senior secured debt. Then there was an additional senior unsecured debt. We have several disposal revenue bonds outstanding in Maine, Vermont, New Hampshire, and New York. And at the senior level there is an additional $77 million-some-odd. And then we have the senior subordinated notes, $385 million outstanding, for a total debt of $548.6 million.

And you said cash interests for -- basically, with the refinancing your expectation is that it's basically neutral to your borrowing costs?

It was up slightly. We've modeled up about $1 million year over year. We expect for the year for cash interest to be right around $36 million.

Great, thank you.

Al Kaschalk with Wedbush Securities.

I want to just focus on the Customer Solutions and then a little bit on recycling. Ed, you gave a little more information about some of the customers on boarding and focus on more operational improvements versus the volume category. The 9%, though, in the quarter was a good growth rate. And I'm wondering how that should carry out through 2015 and into 2016.

Well, if you recall, a lot of that growth came through the summer. So on a year-over-year basis it's still there. We slowed down the growth so we could catch up in our on-boarding processes and our back-office processes, and we've made a lot of progress there. So there's significant demand in that business. And we've actually spread out our customers' on boarding through the next couple quarters. But I would imagine -- we are planning on that growth rate to start ticking back up. Of course, when we get in the summer we will be comping over the customers that came on a year ago. But we have new customers lined up to come on board. So I would imagine it is going to tick back up to cover that.

Okay. And in terms of managing this business, should we be thinking more of the cash flow contribution versus an operating or EBITDA margin?

I think so, because it's very low capital. And it's a high RONA business.

So, not to put words in your mouth or [offer] an outlook standpoint, we should start to see the benefit in free cash flow level as a percentage of revenue?

Yes.

On the recycling side, I want to appreciate, I guess, the confidence that maybe you are communicating here on the adjustment fee and recycling fee and the ability to keep that going. Also, I think you mentioned the increasing processing capacity in the quarter. Are we are in an easy comp there from a volume perspective? So the messy question is, one, confidence about the fees sticking and the ability to manage that and then, two, the volume benefit in the quarter. That adds some benefit to continue through the end 2015.

I think we have been very thoughtful about how we have implemented this fee in the way we are describing it to customers. And we also make sure that our invoices for billing methodology was going to be clear and understandable and would work smoothly. So we brought on a few markets over the past couple months, and to see how it was going to play out. We focused on residential in some markets and commercial in other markets. And we are finding that it's being very well accepted. People see the news, they understand what's been going on in recycling. And our competition obviously is very aware of what's going on in recycling. So it's not like there's someone else that's going to go provide the service for less money.

A real opportunity for the entire industry to really rethink recycling infrastructure.

And I think the industry is rethinking it. So we feel pretty good about it.

Just a final comment. And maybe Ned can dig this out. But the improvements you showed in terms of top-line growth versus cost of sales was positive this quarter by substantial margin. I'm not sure when the last time that was, but it's good to see that flow through the P&L. Thanks a lot. Good luck.

Michael Hoffman with Stifel.

Ned, can you walk us through, just so we can be better at managing this in a model, some of the cash in and outs? So cash interest, you had $15.3 million out in 1Q, you are saying $2 million out in 2Q. I'm assuming there's another $15 million-like in 3Q and then kind of a $2 million-something in 4Q. Is that the way to think about it?

Yes.

All right, and then the CapEx at $5 million in the first quarter -- how do I think about that to get to the $45 million?

Yes, the majority of cap ex is Q2, Q3 with both truck purchases are coming in and also landfill development. So we have model the vast majority, over 75%, split between Q2 and Q3.

Okay. And then based on how you calculate working capital, what do you think your negative working capital was in 1Q? And then how do I walk back that working capital through the other three Q's?

Yes. So the big movements from working capital in Q1 were, one, the reduction of that accrued interest as we paid out that large interest payment; two, a timing difference where as we've changed our year end, certain payments have changed seasonality. And one would be incentive compensation, as an example. Another is just the period of our accounts payable, where we had a higher than typical at December 31, so the comp is tough there. We had negative working capital moves on the accounts payable line. But it's roughly a change of $10 million-ish, $10.4 million negative in Q1. We expect it to go positive in Q2, mainly due to lower interest payments and, also, we do not expect a negative accounts payable trends in Q2. We expect a normalized trend. Q3, we expect working capital to be negative as the interest payments are made. And then Q4 we expect it to be positive again. For the full year we expect working capital to be almost neutral.

Okay. And then as I think about your -- you gave us that sales mix. Do you think that the EBITDA correlates as far as the spread, as well, across the quarters?

No. Seasonality gets a little bit later with EBITDA because with the lower sales in Q1 and the higher fixed cost in the business you see even a lumpier EBITDA trend. If you look at last fiscal year, we had about 14% of our EBITDA in Q1, about 29% in Q2, 32% in Q3, and 25%, Q4. And that trend, that seasonality trend should generally match to this year.

Okay. So basically all of that seasonal pressure from fixed costs gets made up in 2Q, 3Qs because the 4Q pretty much matches about the sales mix is the way --

Yes, exactly.

Now, you lost money on an earnings basis in the fourth quarter last year. Is that typical going forward until you get through another break point in the margin upside?

At the net income line we lost money?

Yes. That's the data you gave us; you lost money in the fourth quarter.

Yes. As we look at the model this next year, we are pushing toward making positive net income over the next year or two. And Q4 is getting closer to a breakeven period. We haven't quite modeled it that way this year. We're still a little bit negative in the model. But we need to get a little bit more flow-through from pricing, a little bit lower cost, and we will be right there at a breakeven in Q4.

Okay. And then on that it's a perfect segue into the price. I get that reported price and then, because, Ed, you made the comment of how to think about price per ton. So, I guess at the high level, are you covering or exceeding your internal costs of inflation with price at this point when you think about how you are executing it as opposed to how you are reporting?

Yes, we definitely are.

And what do you think that spread looks like?

Well, it's hard to say because of the way variable costs have improved. But the spread seems to be pretty good.

Okay. And it's found a level and it's stable there? Or it can widen? And why can it widen?

I think it's stable, and you are going to see it widen as we implement the surcharge on the recycling.

Okay, and then another perfect segue to that question -- everybody is talking about this, there's no question. And the biggest company in the business has been very vocal about this has to stop. Many of these companies in this recycling business have odd contract structures that I'm not sure they would be able to do what you are talking about. What is unique about your contract structure that is allowing you to walk in here to a customer and do this? Because most of the other competitors that, while they may have walk into have a conversation about the reality of the economics, the customer is going, hey, I've got a contract. And you are stuck.

There's really two parts to our recycling business. About two-thirds of our volumes come in from third parties, whether it be municipalities or third-party callers. And in most instances, we have contract with those customers. But we've always built risk-based contracts where in high commodity markets we share revenues, and low markets we shift to a tipping fee. So that's two-thirds of our revenue base in recycling today. As commodity prices have fallen, we've lowered rebates and then shifted to a tipping fee model. We would like to see that curve shift over time where we are not making an adequate return in all cases on those customer contracts in lower markets. But the market dynamics were never such that the broader industry competed in that manner. We were a bit of an oddity by shifting risk in certain market conditions to our customers.

The part that Ed was talking about was on one-third of our volumes. So if you imagine, we have one third of our volumes going to our recycling facilities are coming from our trucks and our transfer stations. It was hard to dynamically price that segment. As prices were dropping, it's hard to go to the Street and dynamically price on a collection customer.

So what we did was we looked at a model to just be fair with our customer base. When commodity prices are low we have a fee that escalates. As commodity prices go up, that fee could reduce and at a certain cost points it even be a small credit. And what we really wanted to do was just to put forward that recycling isn't free, that it's a value-added service, and actually has a lot of high capital cost from an infrastructure standpoint. And it's costly to process recyclables. So we think we've built a very fair system and that can help to further offtake risks in recycling.

Okay. And you would describe what inning you are in on that one-third?

We are in -- we've just stepped into the box and we've taken one or two pitches.

And you haven't been hit in the head yet?

Yes.

Okay. Customer Solutions -- can we talk about the mix? Is this predominantly a solid waste brokering service you are providing? Or are you actually crossing over into some industrial waste, as you think about this across the country?

It's really more a professional services business as opposed to a brokerage business, Michael. We are providing services to colleges and universities, providing services to industrial customers and multi-location retail customers. First and foremost, over the top of the existing infrastructure to get more tons to our landfills, more recyclables to our recycling facilities. But it's really more professional services business as opposed to a brokerage business.

Okay. But at the end of the day they need something done, whether it's a dumpster for a roll-out box or an eight-yarder brought in or out. And you are not there, so you are going to find somebody who can do that service for them. Isn't that it, in a nutshell?

That's correct, but we are also going to help them reach whatever goals they have from a sustainability standpoint, put programs in place to help them do that. So it's not just being a broker of services. It's going in and helping them to reduce their overall stream and pushed more of it towards processing, recycling. Major colleges and universities, major institutions all plans in terms of how they are approaching sustainability. It's different across the board. But most major companies have plans in place that they are trying to execute against. And our services and solutions will help them do that. That's why we are getting the amount of traction that we are in terms of growth. It's a model that is really well received.

Fair enough. This is predominantly geared towards the solid waste part of their waste stream, though, not other waste streams?

It could be a myriad of services, any services that they may need. We can be doing third-party services across the board. So yes, it would be a comprehensive program.

Okay. And when you think about this once you have worked through some of the kinks from last summer and the pricing structures and what have you, the ideal margin is middle single digits?

I think the ideal margin is higher than that, I would say. I would say -- midteens is what I would characterize as the model.

We have a mix of different types of businesses within customer resource solutions, so some of it is lower margin. Where our growth is this the higher-margin end of it.

Yes, we are trying to avoid being a broker where that model is basically -- it's really mature and it's not business that we want to do. We want to be at a higher level, providing more services at a higher-margin. We are not particularly interested in growing the brokerage aspect. That's not at all what we're trying to do.

Okay. And you would frame that margin today as what?

It was about 9%, in aggregate, this last quarter. Give me a second. It's just right around 8% percent, I'm sorry, 8% in Q1 of 2015.

Okay, and there's virtually no D&A in that; right?

No, but that's a blend of 5% or 6% margin on third-party brokerage work, close to 0% margin on work we flow through to our hauling, recycling, landfill businesses in the franchise and then 15% to 20% plus on the industrial side. So within the franchise area, we run this group as more of the flow-through, pass-through to our other operations. So it mutes the margins of that.

All right. And lastly, you have delayed the AGM. If I understand the Delaware rules right, you basically got till early November before you actually have to hold the AGM. So whatever you are doing within the context of seeking Directors and what have you, you pretty much have until maybe middle September. Am I right based on the notification issues you have around an AGM? I just want to understand the timeframe.

I don't know -- we have previously announced -- we haven't really made a final determination. But I'm not sure exactly what the timing would be. I think it's probably about right from a timing standpoint in terms of the requirements, Michael.

I think it's one year and a day, which you -- didn't you do your board meeting last year on your AGM on November 7? So it would be like November 8? And if there's 30-day notice to the shareholders and then there's the proxy notice, I add six weeks to that and walk it backwards, that's the middle of September.

Our annual meeting last year was October 7.

So it's 13 months and a day. Right? Isn't that the rule?

That's the rule, 13 months. And the meeting has been deferred to a date yet to be determined by our Board.

Yes. I'm just trying to understand how much room you have to work through finding Directors and what have you. So you have basically four or five months. It's all of May, June, July, August, and September?

Yes.

Okay. Thanks.

Corey Greendale with First Analysis.

I had just one quick one and I'll follow-up with you off-line. The free cash flow -- so the free cash flow Q1 included $4.6 million from proceeds of the divestitures. Are you including that the $14 million to $18 million guidance for the full year?

It is included.

So I was under the impression the $14 million to $18 million --

Corey, sorry, just one follow-up on that. Part of that was related to the sale of the CARES water treatment business that we own 51% of and a third-party owns 49% of. So roughly $3.5 million was associated with that. So as you will see in our press release, there was a $1.5 million distribution to noncontrolling interest holder. So the net number is $3.1 million of cash to us expected.

My question is, had that been included in the $14 million to $18 million? I was under the impression that that was not including the proceeds from divestitures. But maybe I had that wrong.

Is it included in the $14 million to $18 million? Yes.

In other words, when you gave the initial guidance, where you including that $5 million from divestiture proceeds?

It's $3 million, $3.1 million. And it was included, yes.

Okay. And maybe just one other quick one, which is -- so, Ned, I appreciate the comments on EBITDA seasonality relative to last year. I would have thought it would have been a little different just because the drop in fuel costs in 2014 -- I would have thought that would have made Q4 strong relative to Q1 compared to what you would see if fuel costs remained at constant levels. Can you just comment on that?

Yes. We did have a tailwind from fuel costs in the quarter. But that tailwind was more than offset by weather issues and the recycling. So as I said earlier, the fuel was a positive. But you take that netted against recycling and the weather, we underperformed budget slightly.

Okay. And the benefit of the Ogden put or pay and the new gas collection -- that was fully in Q1?

Yes.

Okay, good. I'm going to follow-up with you off-line. Thank you.

We have a follow-up question from the line of Al Kaschalk with Wedbush Securities.

Ned, do you have the fuel benefit on its own in terms of either a margin or dollars or cost saves?

Fuel was over $1 million tailwind in the period.

Thank you.

I would now like to turn the call over to management for any further remarks.

Thank you, everyone, for your attention this morning. We look forward to discussing our second quarter earnings with you in late July. Thanks, everyone. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.