Casella Waste Systems Inc (CWST) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the Casella Waste Systems Incorporated Q2 2015 conference call. (Operator Instructions). As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Mr. 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.

Today, we will be discussing our 2015 second-quarter results. These results were released yesterday afternoon. Along with a brief review of those results and an update on the Company's activities and business environment, we'll 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.

Thanks Joe. Good morning, everyone, and welcome to our second-quarter 2015 conference call. We are very pleased with our second-quarter results. As you saw in yesterday's press release, our revenues for the second quarter of 2015 were $143.7 million, up 4.7% from the same quarter last year. Adjusted EBITDA was $30.7 million, up 8.4% from the same quarter last year, and free cash flow was $18.3 million. We also increased our 2015 revenue and free cash flow guidance ranges and reaffirmed our adjusted EBITDA range. Ned will going to the numbers in more detail in a moment, but these strong results reflect our continued execution against the key management strategies we are committed to follow despite ongoing headwinds from lower recycling commodity prices and lower energy prices.

I'd also like to note that the third quarter is off to a solid start, driven by continued positive pricing and volume trends.

Two and a half years ago, we laid out a comprehensive strategy to improve our financial and operating performance. We've diligently followed that plan and as our results demonstrate, we continue to execute well against it. Pursuant to that plan, we have refocused the Company while simplifying our business structure. We have reduced risk exposure by either divesting or closing operations that did not fit within this strategy, and we refocused management attention and capital resources on our core operations and strategic business initiatives.

Going forward, we plan to continue to focus on increasing landfill returns, driving additional profitability at our collection operations, creating incremental value through resource solutions, and reducing financial and operating risks while improving our balance sheet. We are confident that this focus on our core operations will drive improved performance and increased free cash flow.

As the Northeast disposal markets continued to tighten due to the permitted closure of disposal sites, we further improved profitability and returns at the landfill during the quarter through higher pricing and increased volumes. We have had great success sourcing incremental tons to our landfills with volumes up 46,000 tons year-over-year in the second quarter. Furthermore, since fiscal year 2013, we've also increased annual volumes by 716,000 tons while increasing average price per ton by 2.5%. We have driven higher volumes to our landfills through our focused landfill sales strategy, building our special waste capabilities, as well as our assets and landfill asset positioning. The average price per ton at our landfill continues to improve as we advance price increase and improve the mix of customers and materials at key sites. We expect these trends to continue for the next several years as disposal capacity constraints become more acute across our footprint. We continue to concentrate on core blocking and tackling in our hauling line of business, namely a focus on pricing programs, route optimization, fleet standardization, which Ed will discuss in more detail.

We have continued to advance hauling price increases in the residential and commercial lines of business in a number of markets with only limited price rollbacks. In the second quarter, residential and commercial collection price was up 4.3%, among the strongest that we've experienced in the last 10 years. We expect these positive trends to continue.

As part of our comprehensive hauling strategy, we developed a plan designed to simplify our fleet and target truck replacement to maximize returns. We are in the second year of a five-year plan, and we believe that this plan will reduce our operating costs through lower maintenance costs, improve our capital efficiency, and improve our service levels through decreased downtime.

We differentiated ourselves in the marketplace by offering value-added resource solutions. These solutions range from our customer solutions group, which provides professional services to large industrial customers, to our organics business that is a leader in organics processing and disposal in the Northeast to our market-leading recycling business.

Our customer solutions group continued its growth through the second quarter with revenues up 1.5% year-over-year on growth in the multisite retail business. More importantly, operating income for this group was up $700,000 year-over-year as we gained operating leverage and scaled revenues on lower overhead costs. Our team continues to expand existing relationships while also winning new business.

Lower recycling commodity prices remain one of the largest challenges and opportunities facing the solid waste industry today. Prices were down 15% year-over-year in the second quarter due to lower global demand for recycling commodities, a stronger US dollar, and lower oil prices.

The Company has taken steps to earn a 15% return on its recycling infrastructure investments throughout all market cycles. As such, we've implemented higher tip fees at our recycling facilities. Last quarter, we discussed our new sustainability recycling, or SRA, fee that is similar to a fuel surcharge where it floats inversely to changes in recycling commodity prices. The implementation of the SRA fee is going very well with the fee rolled out to roughly 65% of our collection markets with minimal rollbacks. When fully implemented, we expect the SRA fee to offset over two-thirds of the negative financial impacts associated with lower recycling commodity prices. We expect to recoup the remaining one-third through third-party recycling customers as contracts come up for renewal.

I'd like to thank our team for their ongoing efforts to implement the SRA fee, educate our customers about its importance, and ensuring that we continue to offer value-added recycling services and invest in the necessary recycling infrastructure.

We continue to make progress improving our balance sheet and reducing our operational and financial risk. We've simplified our business by divesting and closing underperforming and noncore operations. In addition, we do not have any significant debt maturities until 2019 and we paid down $18.7 million of debt in the second quarter, reducing our financial leverage.

We are well-positioned for the future and we are committed to a disciplined capital investment strategy with free cash flows primarily used to repay debt. In addition, we will also consider select tuck-in acquisitions and growth investments within our core operations.

We continue to execute extremely well against the strategic plan that we laid out two and a half years ago to improve the financial and operating performance. We are now at a point where much of our time and focus is devoted to operational blocking and tackling, a focus on pricing strategies at the local level, improving our operational efficiencies and disciplined capital allocation. We believe these actions will further improve the Company's performance and allow us to continue to delever the balance sheet going forward.

Over the last two months, we refreshed our multi-year plan to ensure that our strategic focus is on driving the highest returns for our shareholders. We presented this plan to our board and expect to announce the plan and our multi-year financial targets at the Jefferies conference on August 11. This event will be webcast and we will make our presentation public. Ned and I will be available to discuss the plan and our targets after this event. As such, we expect that many of you will have questions regarding this plan. However, this call is going to be focused on our second-quarter results. Likewise, we will also not be discussing on this call the proxy contest that JCP Investment Management has indicated it plans to conduct in connection with our 2015 annual meeting and will not be addressing any questions concerning the proxy contest.

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

Thanks John. Revenues in the second quarter 2015 were $143.7 million, up $6.4 million or up 4.7% year-over-year. Solid waste revenues were up $6.6 million, or up 6.5% year-over-year, with the increase mainly driven by higher disposal volumes, higher collection pricing, and disposal pricing, partially offset by lower fuel surcharges on lower diesel prices, lower energy pricing in the landfill gas to energy business, and the sale of the CARES Water Treatment business in our first quarter.

Revenues in the collection line of business were up $2.3 million year-over-year with prices up 3.7% and volumes up 1.1%. Our pricing programs in the commercial and residential lines of business strengthened with pricing up 4.3% year-over-year in the second quarter with particular strength in the commercial line of business. Roll-off pulls were up 5.2% year-over-year as we experienced positive construction trends across many of our markets, especially in our Eastern region.

Revenues in the disposal line of business were up $5.9 million year-over-year. Roughly 58% of this growth came from higher revenues at the transfer stations and in the transportation business driven by several new transfer station and T&D contracts initiated over the last year. With transportation and disposal contracts, or as we say T&D contracts, we typically subcontract the majority of transportation work. And as such, revenues have grossed up to cover the increased cost of transporting a customer's waste from a transfer station to a landfill. Total cash flows improved from these additional tons to our landfills, although these additional pass-through costs compressed total company adjusted EBITDA margins by roughly 40 basis points.

We increased disposal pricing by 1.2% year-over-year in the second quarter with landfill prices up 2.5% in the Eastern region as we capitalized on the tightening disposal markets. We increased our average price per ton at the landfills by 4.9% as we cycled out lower price customers and improved our customer and waste mix at the sites. We expect these positive pricing trends to continue through 2015.

Our total landfill tons were roughly 1.2 million tons in the second quarter, up 46,000 tons year-over-year. As John said, on a last 12 months basis, landfill tons were up by roughly 716,000 tons per year since our fiscal year 2013 with adjusted EBITDA up roughly $15.8 million during the same period.

Recycling revenues were down $500,000 year-over-year with the decrease driven by lower commodity pricing, down 15.2% year-over-year on lower fiber, plastics, and metals pricing partially offset by higher recycling volumes. Recycling volumes were up 10.9% in the period on new processing capacity and new contracts.

All remaining revenues were up roughly $300,000 year-over-year, driven by volume growth in the customer solutions and organics businesses. During the second quarter, we recognized roughly $350,000 of revenues from the rollover impact of acquisitions net of divestitures.

Adjusted EBITDA was $30.7 million in the second quarter and margins improved 75 basis points to 21.4%. So, with revenues up $6.4 million and adjusted EBITDA up $2.4 million, that gave us a flow-through impact of roughly 37%. However, excluding the grossed up revenues and transportation costs from the new T&D contracts, we had flow-through of roughly 66% during the quarter on the remainder of the business.

Solid waste adjusted EBITDA was $30 million in the quarter, up $3.5 million year-over-year. This correlates to a flow-through benefit of roughly 53%. Hauling adjusted EBITDA was up $2.8 million year-over-year with margins expanding 365 basis points. Disposal adjusted EBITDA was up $1.3 million year-over-year partially offset by lower performance in energy and processing. Solid waste adjusted EBITDA margins were 27.8%, up 165 basis points year-over-year, reflecting strong pricing coupled with cost efficiencies. Lower fuel costs benefited margins by roughly 85 basis points while increased inter-company recycling tipping fees were a 80 basis point headwind. Recycling adjusted EBITDA was $900,000, which was flat year-over-year with higher tipping fees and volumes offsetting lower commodity pricing. If we exclude the $900,000 of higher inter-company tipping fees to our own hauling and transfer operations, recycling adjusted EBITDA was close to breakeven, or down $900,000 year-over-year.

Adjusted EBITDA was negative $200,000 in the other segment, down $1.1 million year-over-year. This decline was primarily driven by higher G&A costs, partially offset by gains in the customer solutions business.

Cost of ops was down 210 basis points year-over-year, and Ed will run through some details on that in a moment.

G&A costs were up 120 basis points year-over-year as a percentage of revenues, primarily due to Europe and (technical difficulty) timing differences in various expenses as we changed our fiscal year end and heightened costs due to professional fees we have incurred in responding to the proxy solicitation that JCP Investments has indicated it plans to conduct in connection with our 2015 annual meeting.

During the second quarter, we sold several underperforming collection hauling routes four $870,000 in total consideration and recognized a $675,000 gain.

Free cash flow was $18.3 million in the second quarter, which was higher than expected, primarily due to the timing of capital expenditures which the Company expects to normalize through the remainder of the year. Free cash flow was $10.8 million year-to-date through the second quarter.

As John said, during the second quarter, we repaid $18.7 million of debt and brought total debt to EBITDA to 5.08 times. This is down 0.35 times sequentially from the first quarter and something we are very excited about.

As reported in our press release yesterday afternoon, we increased our 2015 guidance ranges for free cash flow and revenues while we reaffirmed our adjusted EBITDA guidance range. We increased revenue guidance to $525 million to $535 million to reflect the change in disposal revenue mix where, as I mentioned earlier, we are generating higher revenues from our transfer stations and new T&D contracts. We expect free cash flow to be positive for the remainder of 2015 with cash flows lower during the third quarter due to the semiannual cash interest payment on the senior subordinated notes.

Year-to-date, consistent with our strategy of reducing financial and operational risk by focusing on our core businesses, we have generated roughly $3.8 million of net cash proceeds from the sale of non-core businesses and assets. We plan to redeploy roughly $2.5 million of these proceeds to support two new long-term municipal and hauling contracts that we recently won. As such, we are increasing our free cash flow guidance range for 2015 by $1 million on either end.

Further, as we noted in our press release, we recovered roughly $550,000 in property insurance settlement for several pieces of equipment that were lost to a fire. As such, when you factor in the capital expenditures for the new municipal contracts and CapEx to replace the equipment lost to fire, we expect our CapEx to come in at the high end of the previously announced range of $45 million to $48 million.

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

Thanks Ned. Good morning everyone. Well, as you can tell by the tone, we are very happy with the quarter not only because we hit our numbers but because of our success in positioning the Company where we want it to be. We have spent the last few years reducing the risk profile of our business and focusing on fundamentals. A couple of years ago, we set a goal to transition the Company to a business model that could provide steady improvement and financial results, and our execution this quarter increases our confidence that we've accomplished that.

From an operational standpoint, the key metrics I focused on last quarter show additional positive momentum in Q2. Big picture, cost of ops as a percentage of revenue improved 210 basis points year-over-year. Collection operations, disposal, and even our recycling operations have contributed to this improvement in performance.

Collection operations accounted for 42% of our revenue for the quarter and cost of ops as a percent of revenue improved 330 basis points as compared to the second quarter last year. This improvement continues to be driven primarily by disposal cost savings, lower fuel costs, and our ability to get price.

The pricing dynamics have certainly improved for us. Our collection operations generated 3.7% in price growth for the quarter, the strongest by far since I've been with the Company. And I wanted to take the opportunity to point out how great a job our local market management teams have done to get us on the right track here. If you know the business, price only becomes possible when you provide great service and stay on good terms with your customers, and you have to ask for it. The teams have done a great job and I congratulate and thank them.

On the last call, I mentioned that some basic operating metrics were improving, and I'm happy to say that the trend continues. We have improved our net revenue per hour for commercial services almost 7% while our variable cost per hour has dropped about 7%. So, our margins are substantially better than this time last year. Similarly, the residential net revenue per hour is up almost 6% as compared to an increase of less than 1% in variable costs per hour. The residential line is where our fleet plan and related automation efforts will have the most affect. We improved our lifts per hour on the residential line of business by 3.7% as a result of equipment we put into service late last year. We have experienced some manufacturer delays on our budgeted fleet additions this year, but as these trucks come in during the third quarter, I expect the efficiency improvements to continue.

Our disposal line of business consisting of our network of landfills and transfer stations accounted for about 31% of our revenue for the quarter and the market dynamics continue to develop in our favor. I mentioned last quarter that the industry computes price and volume on disposal activities on a customer-by-customer basis by disposal site, so if you lose a customer at a lower price and pick up another customer at a higher price, it all gets captured as volume changes. Under this scenario, we reported volume up 13.9% and price improvement of 120 basis points.

Looking at the more meaningful total tonnage and overall average price per ton received at the landfills, our volume is up 46,000 tons, or 4%, and we improved average price per ton by a significant 4.9%. As expected, the Eastern region led the charge with 6.2% in average price, but we were very pleased to achieve 4.1% in the Western landfills.

Overall, without some of the internal changes that we have made, the cost of ops in our recycling business, as you would expect, would be up 380 basis points due to lower commodity prices.

We have talked about our strategy to change the business model for recycling over the past two quarters. John mentioned the SRA fee we are passing through to our hauling customers. We are charging tipping fees to third-party haulers, and we are targeting long-term to get a 15% return on our recycling facility investment.

Internally, we have increased inter-company tipping fees to our own hauling divisions, which, by the way, provided a $900,000 headwind in collections that we easily outperformed. As this is how we pass through the cost to the team -- the cost of recycling to the team that is tasked to recover price from the street. As a result of these changes in the recycling line of business, revenue is showing higher from tipping fees and direct costs are lower due to the elimination of material purchases and rebates. So cost of ops as a percentage of revenue improved by 230 basis points as compared to the prior year. This is all working even better than we planned, but we still have wood to chop to get to the returns we are targeting.

Customer solutions, which includes our industrial services line, is continuing to make progress and managed to reduce our cost of ops percentage by about 120 basis points from the prior year. The solutions team is completing a back-office transition to streamline billing and support processes that should allow us to take advantage of a significant backlog of higher-margin work.

With gross margin improving in all of our lines of business, operationally we feel pretty good about the quarter. So, enough said.

I'd like to now turn it back to the operator to facilitate the question-and-answer session.

(Operator Instructions). Corey Greendale, First Analysis.

So, I guess I have more than a couple of questions, but I'll ask two and then get back in the queue if they aren't answered. So maybe I'll start with on the structuring -- the restructuring you are doing for the recycling business and the new fee, can you just talk a little bit more about the structure of that? And basically I'm what trying to understand is, kind of for modeling purposes, how does it flow through the P&L? And what happens if commodity prices go up? Do you get less of the benefit as it goes up? Or how does that work?

So, we, Corey, as you know, a percentage of the volumes coming into our recycling facilities are coming from our own trucks, say 50% of those volumes. And we want to actively manage rebates and tipping fee structures both to third-party customers and inter-company as Ed described. So during the last quarter, we reduced rebates and increased tipping fees to our inter-company businesses. But we need to have a way to actively flex that to our customers on the street, both our residential and commercial customers, to offtake as much of that risk as possible to earn an adequate return in all markets. So we introduced the sustainability recycling adjustment fee, which is almost like a fuel surcharge, and it goes on to a residential or commercial customer's hauling bill. And as commodity prices fall, it's a fee that increases, and as commodity prices go up, it's a fee that decreases. And that's the mechanics of how the fee works in the business.

Okay. And then a follow-up, maybe I'll try to do this as a two-part question. On the free cash flow, Ed, (technical difficulty) you were able to pull some underperforming routes. Can you just talk a little bit more about are there buyers out there for things like that? Might there be more opportunities to sell underperforming routes?

And on the other side of free cash flow, your maintenance CapEx is, at the moment anyway, running well below the 9% of revenue that I think of as kind of common in the industry. Can you just talk about kind of the long-term prospects for where you think maintenance CapEx goes?

Corey, this is Ed. I'll talk about the underperforming routes. So when we are stretching our footprint to get to a market where we don't have a lot of density, those end up being low margin performing routes. And there are always other haulers in the market where our customers would be, would provide them with a lot more density. So they would be higher-margin incremental customers to them. And so there is always a buyer for your customers. That's something pretty standard in the industry. It's all about density in a market. And when we are stretching our footprint from a division to get to a market to service just a handful of customers, that ends up being incrementally negative to us.

And in regards to your question on CapEx, I think you have to think about our business of just how our revenue splits. It's a little bit different in every waste company. So roughly 70% of our revenues are in core solid waste collection, transfer, landfill, and 30% are allocated to recycling or organics business and then the customer solutions business. All three of those business units are less capital intense, especially organics and the customer solutions business. Recycling does have some capital. But once again, it is lower overall than an integrated solid waste strategy.

So when we look at our platform, we've been running 8.5% to 9% roughly, and we expect to continue to run 8.5% to 9% of revenues into the future on replacement CapEx. However, the solid waste business is a little bit higher and that average comes down because of the lower capital requirements in customer solutions and organics.

All right, thanks. I'll jump back into queue.

Scott Levine, Imperial Capital.

So, I'm maybe looking for a little bit more color on the thought process behind the guidance revision where you are taking the revenue up $5 million but the EBITDA is staying put. I think I understand your comments regarding contract mix and the T&D contracts. But is there some certain cost items that are coming up that weren't budgeted for and/or how would you assess your conviction level regarding that EBITDA guidance? And maybe should we be favoring the higher end of the range based on what you've seen transpire here through the spring into summer?

Yes, we left the guidance range alone at this point, Scott. There have been a lot of moving pieces since we first developed our budget back in November, you know, with diesel dropping and a price, which is a bit of a tailwind but a massive headwind in the recycling business. And where we sit today, we feel confident with our plans and our guidance ranges, but there's no movement off the midpoint per se where we left the range intact. With those T&D contracts, revenues have grossed up but we're still getting the same EBITDA at the landfills. We just have a little bit of margin compression with that flow-through of the transportation cost.

Got it. So effectively it's the costs coming up basically one-for-one with the revenue upside there that's effectively causing you to keep the EBITDA range where it is.

Yes. Let me give you an example. Say you have a contract with someone at $75 a ton to transport and dispose of their waste. You might hire a subcontract hauler for $25 a ton to transport that waste from a transfer station to a landfill and the waste hits the landfill at $50 a ton. So you just had a pass-through of that $25 a ton of cost to the third-party customer on the T&D contract. Of course, we would love it if all contracts were just showing up at the landfill. But sometimes we need to provide the service to a customer that they want and that's part of the service we do provide. And we've had a couple of new contracts that have come up that customers have wanted us to handle the hauling aspect as well.

Got it. And with regard to the pricing side, you know, you mentioned in your prepared comments I think, John, the effect of a tightening capacity in the market. Is that something we should continue to expect to affect your Eastern region a little bit more here in the near-term, or maybe a little bit more regional color in terms of disposal pricing trends within the market and for you guys specifically East versus West.

Yes, sure. I think that there is no question that the market is a bit tighter in the east as evidenced by what we've been able to put up in terms of pricing numbers. So, the pricing numbers are a couple of hundred basis points higher in the east than they are in the west. But interestingly enough, I think we are at the beginning stages of a three- or four-year period of time where we are going to continue to see that kind of activity from a market standpoint.

The disposal capacity is going to continue to tighten over the next few years. We also have the Department of Sanitation contracts, which are going to affect the western region landfills as well in a very positive manner.

The other thing that has happened recently is the closure of Tullytown in 2017. That's another big factor in that. That's a very large facility that is closing in 2017 which will also positively, at least in our view, positively impact the western New York market dynamics from a disposal standpoint for us.

Got it. Last one then if I may, the new municipal contracts that I think you said were an additional $2.5 million of CapEx or thereabouts. I don't know if you broke that out explicitly. But is that -- can you rough out how much the annual EBITDA -- is that a needle mover there? A couple of million bucks? Or you know, beginning in 2016 I think you said, but a little bit more color there.

I'm not sure if I have the EBITDA number in front of me, Scott. Give me a second. It's roughly, on an annualized basis, between the two contracts, it will get about $800,000 of EBITDA. But they role in second half of this year and we'll give some limited benefit second half of this year and then we'll roll them in fully next year. And one is a five-year contract, one is a 10-year contract.

Got it. Great. Thank you.

Al Kaschalk, Wedbush Securities.

I wanted to press a little bit on the pricing. I'm very glad to see the collection pricing number and I think disposal as well. Help me appreciate the end market dynamics. How much of that was kind of asking for it versus maybe some market dynamics where there is increased volume and therefore you don't have as many competitors nipping at the contracts, having to roll those back or lower them?

I think that it's a combination of all three, Al. I think that there is a little bit better economic activity. We have the constraint in the market from a disposal standpoint in terms of -- there's 1.5 million tons that have already come out. Seven facilities have already closed in the Northeast market. So, and then I think that there is no question that the work that Ed has done with the teams in the field from a pricing standpoint is beginning to really take hold. So I think it's a combination of all three of those issues. And certainly it's -- we are seeing a little bit of a benefit from a little slightly better economic activity as well.

The other thing that you have to keep in mind too with regard to the success that we've had from the SRA fee, we are in the Northeast, and the Northeast has had a propensity to have much more recycling activity than other areas of the country. So I think that there is a higher visibility in terms of recycling being a value-added service. And I think that the industry really has an opportunity at this point in time to really get a return -- the entire industry has an opportunity to get an appropriate return because recycling is a value-added service that our customers want.

John, I appreciate that color. Does that mean, of the $2.2 million you reported in the quarter, I think I have my number right, or it was $3.7 million, I forget, but included in that is the SRA fee. So on a go-forward basis, should we look for a similar level of price at least for the next couple of quarters when you do a year-over-year comp? Or are we going to --?

Yes, a couple of comments there. One is the SRA, by my numbers, and, Ned, correct me if I'm wrong, but it wasn't -- it was less than 1% of the 3.7% that we got on the collection side.

60 basis points.

Okay, 60 basis points. So most of it is core price improvement. And secondly, the SRA is only rolled out -- we've only rolled out 65% of it.

Yes and that was rolled out in the last several months. So we are not -- we didn't start rolling that out until April, so we obviously only have gotten a few months of benefit from the SRA fee. So I think that we should continue to see pretty robust pricing on a go-forward basis as we continue to get the benefit of the SRA fee and continue to move our pricing programs.

Our plan right now, we'll get about 40% of the benefit of the SRA in total in calendar 2015 and about 60% in calendar 2016 because this is being rolled out in a very rational manner market by market. So the rollover impact of this fee will take the next year to fully come into the numbers. And besides that, as Ed said, our core pricing programs are working very well as well.

That's good to hear. And I guess the message to take away is that we should expect core pricing to remain firm, if not better, given what you just reported.

I think firm is a fair perspective. I don't know if it's going to be better, but I think certainly it's going to be firm.

Okay. My follow-up then -- I appreciate that -- talk a little bit about the asset disposition here. I know there's sort of the strategic review in terms of what you are going or have ongoing, excuse me. But this was -- was this in the east? Was it in the west region?

It was in the west region.

How much is the --.

It was in the west region. It was a small hauling operation that we had in the western region that, as Ed said, were customers that were stretching to get to from a division and it just made no sense. It makes much more sense to have somebody else densify their routes. So we were able to get a fair price for the revenue and it just made sense for us to sell it.

Okay. Thank you guys.

(Operator Instructions). Michael Hoffman, Stifel.

So, just so I'm clear I got this right, the solid waste margins net of puts and takes from recycling and fuel was up 80 basis points approximately. Is that correct?

If you net out recycling and fuel with the puts and takes, it's up roughly 160 basis points.

Okay, that's the moving -- the cost issue around. But the pure underlying garbage business, if we moved costs out of recycling into collection, it's an 80 basis point improvement.

No, it's 160 basis points. It's a pure, solid waste. If there was no fuel tailwind and there's no recycling headwind, it was up 160 basis points.

Okay. So why aren't we seeing more free cash flow operating leverage? The $1 million increase from operations, that's an asset sale, so that's not recurring. So why isn't there more cash conversion out of the business then?

Well, first of all, you know, we did not move the EBITDA range, so we are tracking well to our budget for the year. And then, as we laid out earlier, we reallocated dollars from the asset sale to two new municipal contracts which will give us a nice growth profile over the next year.

And frankly, we are seeing a decent flow-through in the solid waste business as well. If you -- we talked about that one T&D contract that had a margin impact. But flow-through including that to the EBITDA line was roughly 53%. If you exclude that, flow-through was 90% because we're doing a lot of cost reductions and we are getting good price.

So I think we are on plan for the year and we're getting flow-through. Over the next couple of years, we'll see acceleration of free cash flow as we start to pay down our most expensive debt with our free cash flow. In the period, we paid down $18.7 million of debt. We took out 0.35 times of leverage and we are headed in the right direction.

Okay, I get all that. But all things being equal, that level of operating leverage off of solid waste should've -- everything else happening as well, should've produced more cash conversion of the model. It doesn't appear that's happening.

That may be your perspective, Michael. I think that Ned just laid out for you what we were generating and flowing through and the subtleties in terms of some of the things from a transportation standpoint. So I think that we did get the flow-through.

Okay. And when you look at your recycling business, why -- I have the sense by the way you are talking about it that you are not pushing to change from a commodity-based model to a process fee model. Or is that also going on in parallel?

We've had a processing fee model for 20 years. The problem that we've had is we've never been able to get the kind of returns that we should because other players from an industry perspective are using it as a loss leader and no one in the industry was really working in a manner to get a return on the invested capital.

And I think that -- so we've always had a model where we have our processing fees and we share above the processing fees and we charge a tip fee below. Now the difference is that with the industry of a mindset that we need to get a return on that invested capital from a recycling standpoint, we'll incorporate that return as part of that processing cost and it will float then on the basis of where commodity prices are. And we hopefully, as an industry, we should all be in a position where every company can get a return on investments from a recycling standpoint. After all, it's a value-added service that our customers are looking for, particularly in the Northeast. Some of the states that we operate in, recycling is mandatory. It's part of what has to be done. So I think this is a really big change. I think there is obviously great leadership from the leader in terms of waste management. And I think that -- I think the entire industry for the first time in my career has got an opportunity to get a real return on recycling assets, and we should, because, as I said, it's a value-added service that we are providing to our customers. And I think it represents a big opportunity for Casella. We've made that investment. Now it's a matter of executing and getting the returns on that investment that we've already made.

Okay. And then you made a comment in your prepared remarks, John, that unfortunately I was writing away and I missed what you were saying. You said something about an announcement coming at a conference shortly. What was that? I missed it completely.

We had discussed previously I think with yourself, Michael, and several of the analysts and investors that we are refreshing our multi-year model and we're going to put some new guideposts out for the Street on where we expect to bring the business over the next three years and lay out our refresh strategy, refresh multi-year targets. And we thought it was a good time to go into mid-August.

Yes, basically put out some targets so people can have a better understanding of where we are going to take the business, Michael.

Okay, fine. So I also appreciate, John, the proxy comment. The question I have a high level is why go through a fight? Why not try and find a common ground so you don't incur the expense and the distraction?

I think that we already addressed whether we were going to answer any questions or not, Michael, and we're not going to answer any questions about the proxy contest.

Okay. Thank you very much.

Corey Greendale, First Analysis.

I have a couple of quick follow-ups. So the first question -- I realize this is going to be perhaps a little hard to parse, but what I'm interested in is the growth in tonnage that you are seeing at the landfills, some of the national companies are seeing strong growth also and they are more exposed to the entire country, not just to the Northeast dynamic. So it would be helpful to understand how much of the growth is just kind of economic versus changes in market dynamics versus your sales efforts.

I think, over the last two years, about two-thirds of the growth we've seen has been gaining market share as competitor sites have reached the end of life. So we've had excess capacity and we've been able to meet market needs with our capacity. Over the last year -- and that was more centric to our eastern segment. Over the last year, it's probably a bit more of just pure economic growth we are seeing with some of the volume gains we've seen. We've seen a little bit more growth in the western region, which is a very healthy, and we are seeing --

You might want to go through the dynamics on C&D in terms of where we were to where we are now because it's still not very significant.

Yes, that's a great point John. If you flash back pre-recession back 2007, 2008 to -- and you take a delta from there to 2011, the depth of the slowdown in the northeast, we lost $30 million to $35 million of revenues from the construction and demo slowdown. It we've seen somewhere between $7 million and $9 million of that come back over the last -- since 2011. So we really have only gained back about 20% there. So we are seeing some nice trends and we feel good about it, but the market is not overheated in the Northeast whatsoever.

Okay, that does help. And then my other question is just following local press reports, I think there's some discussion ongoing about expansion at Southbridge and whether that's going to get approved. Can you just address that question and what is the likelihood of risk around expansion there?

I think that, as you know, most expansion is going to happen at existing facilities. But permitting is always a challenge and there is always risk associated with it, but we've got a pretty good track record of getting through those issues, and we expect to get through it at Southbridge as well as all of our facilities.

And how much capacity do you have at Southbridge now in the absence of getting the approval?

I think we have several years of capacity right now. From a timing standpoint, we've been in that process for a number of years at this point in time, so I think that we've got a couple of years of capacity and we believe we'll get through that issue.

And just a general comment about the Northeast, typically we don't permit life of sight in the Northeast. We don't permit 10 years. We might permit five or six years at a time. So this is more routine for us to constantly be in a permitting cycle to expand airspace at facilities. I would say it's more normal course of business than abnormal for us.

Great. I appreciate it. Thank you.

Thank you. I'm not showing any other questions at this time. I'd like to turn the call over to John Casella for any closing remarks.

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

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