Casella Waste Systems Inc (CWST) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems, Inc., third-quarter 2015 conference call. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to turn the conference over to your host for today, Mr. Joe Fusco. Sir, 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 third-quarter results. These results were released earlier this morning. 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 SEC 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 earlier this morning and is available in the investors section of our website at ir.casella.com.

And now I'll turn it over to John Casella, who will begin today's discussion.

Thanks, Joe. Good morning, everyone, and welcome to our third-quarter 2015 conference call.

We are very pleased with our third-quarter results. Ned, as usual, will go through the numbers in detail and Ed will take you through operations.

First, I'd like to recognize that these strong results are a testament to management's commitment and continued execution against our key strategies, all despite ongoing headwinds from the lower recycling commodity prices and lower energy pricing. I'd also like to note that the fourth quarter is off to a solid start, driven by continued positive pricing and volume trends.

Almost three years ago, we laid out a comprehensive strategy to improve our financial and operating performance. We have diligently followed and executed against that plan, as our results demonstrate. 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 have refocused management attention and capital resources on our core operations and strategic business initiatives.

Going forward, we plan to continue to focus on, one, increasing landfill returns; two, driving additional profitability through our collection operations; three, incremental value through resource solutions; and four, reducing financial and operational risks, while improving our balance sheet. We are confident that our focus on our core operations will continue to drive improved performance and increased free cash flow, enabling us to continue to delever our balance sheet.

In mid-August, we further described our multiyear plan by announcing financial targets for fiscal-year 2018, including adjusted EBITDA targets of $122 million to $132 million, a free cash flow target of $30 million to $40 million, and total debt to EBITDA target of 3.25 to 3.75 times.

This plan is focused on driving pricing, volumes, and operating efficiencies through our current asset base and does not include any acquisitions or new development projects, nor does it contemplate the recovery of recycling commodity prices, energy prices, or the construction market to help drive the achievement of these financial targets. We believe that this plan is conservative and achievable and our execution over the last three years clearly demonstrates our ability to execute.

As the Northeast disposal market continues to tighten due to the permanent closure of various competitor disposal facilities, we further advanced our landfill strategy during the quarter with higher pricing and increased volumes. We have had great success sourcing incremental tons to our landfills, with annual landfill volumes up by 720,000 tons since fiscal-year 2013, while at the same time we have increased average price per ton by 3.5%.

We have driven higher volumes to our landfills through our focused landfill sales strategy, building our special waste capabilities, as well as our landfill asset positioning. The average price per ton at our landfills continues to improve as we advance price increases and improve the mix of customers and materials at key sites.

We expect these positive 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, mainly focused on pricing programs, broad optimization, and fleet standardization, which Ed will discuss in much more detail.

Disposal capacity constraints in the Northeast markets are also providing a positive backdrop for us to advance pricing increase in the collection line of business. With disposal pricing increasing above CPI, haulers across our market are experiencing higher inflation on disposal cost, which is the largest cost line for the hauler, and as such haulers are in turn advancing pricing to customers to offset this inflationary pressure.

Within the context of this rapidly improving marketplace, we have continued to advance hauling price increases in the residential and commercial lines of business with only limited price rollbacks. In the third quarter, combined residential and commercial collection pricing was up 5.2%, the strongest pricing execution that we have experienced in the last 10 years. We expect these positive trends to continue.

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

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

The customer solutions group continued to improve margins and returns through the third quarter, with revenues down about 1.1% year over year on declines in pass-through commodity pricing offsetting growth in the multilocation retail line of business, and adjusted EBITDA margins are up on lower overhead costs.

Lower recycling commodity prices remain one of the largest challenges and opportunities facing the solid waste industry today. Prices were down another 10.4% year over year in the third quarter, due to the continued lower global demand for recycling commodities, a stronger US dollar, and lower oil prices.

We have taken steps to earn an appropriate return on our recycling infrastructure investments through all market cycles. Given the substantial decline in recycling commodity prices over the last two years, this effort has include implementation of higher tipping fees at our recycling facilities.

Another critical step that we have taken is the introduction of our new Sustainability/Recycling Adjustment fee. The SRA fee is similar to a fuel surcharge, where it floats inversely to the changes in recycling commodity prices. The implementation of the SRA fee has gone very well, with the fee rolled out to roughly 80% of our collection markets with minimal rollbacks.

When fully implemented, we expect the SRA fee to offset over two-thirds of the negative impacts associated with all -- with lower recycling commodity prices. We expect to recoup the remaining one-third through third-party recycling customers as contracts come up for renewal.

We would like to thank our team for their ongoing efforts to implement the SRA fee and educate our customers about its importance. It was an absolute team effort where the marketing team, our customer care team, really did a great job in explaining the fee, explaining how it worked to our customers, thereby minimizing the impact.

So we also continue to make progress improving our balance sheet and reducing operational and financial risk. We have simplified our business by divesting and closing underperforming and non-core operations. In addition, we do not have any significant debt maturities until 2019, and in early September, we repurchased and permanently retired $9.7 million of our 7.75% senior subordinated notes, our debt with the highest interest rate.

Since the first quarter, we have reduced our total debt, net of restricted cash, by $19.9 million and reduced our leverage roughly by half a turn.

We are well positioned for the future and 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, but as I said the majority, other than small tuck-in acquisitions, of free cash flow will be used to repay debt.

And with that, I will turn it over to Ned.

Thanks, John.

Revenues in the third-quarter 2015 were $146.2 million, up $4.3 million, or 3%, year over year. Solid waste revenues were up $5.4 million, or up 5%, year over year, with the increase mainly driven by higher disposal volumes mainly with a change in mix, higher collection and disposal pricing, partially offset by lower processing price and volumes, lower fuel surcharges on lower diesel prices, lower energy pricing in the landfill gas to energy business, and the sale earlier this year of the CARES Water Treatment business.

Revenues in the collection line of business were up $2.9 million year over year, with prices up 4.3% and volumes up 1%.

Our pricing programs in the commercial and residential lines of business strengthened again this quarter, with pricing up 5.2% year over year with particular strength in the commercial line of business. We also advanced stronger pricing in the rolloff line of business, with pricing up 2.3% in the quarter as we tested elasticity in select markets with strong volume trends.

Revenues in the disposal line of business were up $3.6 million year over year. Roughly 50% of the increase came from a shift from intercompany to third-party volumes and the remainder mostly came from higher revenues at the transfer stations and in the transportation business, driven by several new transportation and disposal contracts initiated over the last year.

As we talked about last quarter, with T&D contracts we typically subcontract the majority of the transportation work, and as such, revenues are grossed up to cover the increased costs of transporting a customer's waste from a transfer station to a landfill. With these contracts, total cash flows improved with additional funds through our landfills, although these additional pass-through costs slightly compressed our adjusted EBITDA margins during the period.

We increased third-party reported disposal pricing by 1.2% year over year in the third quarter, with disposal prices up roughly 2.3% in the eastern region as we continue to capitalize on tightening disposal markets. We increased our average price per ton at the landfills by 3.3% as we cycled out lower-priced customers and improved our customer mix and waste mix at the sites. We expect these positive pricing trends to continue through 2015 into 2016.

On a last 12-months basis, landfill volumes were up by roughly 720,000 tons per year since our fiscal-year 2013, with this gain driving adjusted EBITDA gains of $15.6 million during the same period.

Recycling revenues were down $600,000 year over year, with the decrease driven by lower commodity pricing down 10.4% on lower fiber, plastics, and metals pricing, partially offset by higher recycling volumes in the period. Recycling volumes were up 5.9% on new contracts and continued organic growth.

Other revenues were down $520,000 year over year, driven by lower volumes in the organics and customer solutions lines of business. During the third quarter, we recognized $130,000 of revenues from the rollover impact of acquisitions, net divestitures.

Adjusted EBITDA was $33.1 million in the third quarter and margins improved 100 basis points to 22.7, so with revenues up $4.3 million and adjusted EBITDA up $2.4 million, that gave us a flow-through impact of 56% in the quarter.

Solid waste adjusted EBITDA was $31 million, up $2.7 million year over year after neutralizing for any changes in the allocation of intercompany management fees. This correlates to a flow-through benefit of roughly 50% in the period.

Hauling adjusted EBITDA was up $3.3 million year over year, with margins expanding 435 basis points. Disposal adjusted EBITDA was up slightly year over year, with higher pricing by -- offset slightly by higher operating costs at several sites.

Solid waste adjusted EBITDA margins were 28.1%, up 110 basis points year over year, reflecting the strong pricing, coupled with cost efficiencies and fuel benefits, partially offset by higher intercompany recycling tipping fees.

Recycling adjusted EBITDA was $1.5 million, slightly up year over year, with higher tipping fees to both third-party and intercompany customers offsetting lower commodity pricing, with the average commodity revenue per ton down 17.4% year over year.

Adjusted EBITDA was $600,000 in the other segment, down $300,000 year over year. The decline was primarily driven by higher overhead costs, partially offset by gains in the customer solutions business.

Cost of operations as a percentage of revenue was down 100 basis points year over year, which Ed will run through in more detail. General and administrative costs were up slightly year over year, but down 20 basis points as a percentage of revenue. This improvement was made despite spending roughly $500,000 of costs during the third quarter responding to the proxy solicitation from JCP Investment.

During the third quarter, we recorded a $345,000 loss on debt extinguishment in relation to our repurchase on the open markets and permanent retirement of $9.7 million of our senior subordinated notes.

As we have previously described, our ABL revolver allows us to pay down junior debt as long as we maintain a minimum threshold availability on the revolver. Paying down the 7.75% senior sub notes was a great capital allocation decision because the interest costs on the senior sub notes is currently 5.25% higher than the interest costs on the revolver, enabling us to accelerate free cash flow generation and debt repayments.

Free cash flow was $760,000 in the third quarter and $11.6 million year to date. As expected, free cash flow was down sequentially from the second to third quarter, due to the semiannual $15 million cash interest payment on the senior sub notes in August and higher capital expenditures during the third quarter as we work to complete landfill construction projects.

We remain on track to generate $15 million to $19 million of free cash flow for 2015 and we expect free cash flow to ramp up in the fourth quarter, with cash interest down sequentially.

On September 30, our total debt to EBITDA was 4.98 times, down from 5.43 times on March 31. We remain focused on further reducing leverage, and as we laid out in our multiyear plan announced in mid-August, we are targeting a leverage level of 3.25 to 3.75 times by the end of 2018.

In late August, we completed a small solid waste tax-exempt bond offering in Maine for $15 million. The bond has a tenor of 20 years and we sold an initial 10-year term rate bond for 5.25% fixed interest.

With solid waste tax-exempt bonds, you can only use the bond proceeds for qualified capital expenditures. As such, on September 30 we held roughly $4.5 million of restricted cash from the offering. Netting this restricted cash, which will be used to pay for qualified capital expenditures over the next several quarters, against our September 30 debt balances, our net leverage was actually 4.94 times at the end of September.

And with that, I will hand it over to Ed.

Thanks, Ned. Good morning, everyone.

From an operational standpoint, I was really happy with the quarter. Of course, it could've been better if we hit on all cylinders, but we did have success in most areas and there was still plenty of room for upside.

I was particularly happy with some of the key operating metrics I follow. So at the big-picture level, cost of ops as a percentage of revenue improved 100 basis points year over year and was sequentially 50 basis points better than the second quarter.

I want to point out that last year's calendar third quarter was really a breakout quarter for us, particularly at the landfills, so beating the numbers this year shows continued progress in the fundamentals.

Collection operations accounted for 43% of our revenue for the quarter and cost of ops as a percent of revenue improved 435 basis points over the third quarter last year. This improvement continues to be driven primarily by disposal cost savings, lower fuel costs, and our ability to get price. Net fuel savings is 160 basis points of this number.

The pricing environment, following years of market resistance in the Northeast, continues to be strong. Our collection operations generated 4.3% in price growth for the quarter, exceeding the 3.7% last quarter and setting a new high-level mark.

Again, I wanted to thank our local-market management teams for a job well done. Hitting price is only possible when you provide great service and stay focused on meeting your customer needs. That includes the need to educate the customer on changing dynamics, such as the drop in commodity prices that devalue the recyclable offset to service and the introduction of our floating SRA fee to make up for that decline. The teams have done a great job and I congratulate and thank them.

Getting to those key operating metrics, I'm happy to say that the positive trends continue. We have improved our net revenue per hour for commercial services 11.5% as compared to calendar 2014 Q3. While our variable cost per hour has dropped 3.6%, our margins are obviously improving in this line of business.

Similarly, the residential net revenue per hour is up 12.4%, as compared to an increase in variable cost per hour of 6.2%. These numbers are higher on both sides due to the increased tipping fee for recyclables being passed through to the customers on the revenue line, a strategy that has been very successful in shifting commodity risk to the ultimate beneficiary, the customer.

Last quarter, I disclosed that our lifts per hour had improved by 3.7% in the residential line of business as a result of improved automation relating to equipment we put into service late last year, but that we had experienced some manufacturer delays on our budgeted fleet additions this year. Now that some of those trucks have started coming in, the improvement in lifts per hour was 8.1% in the third quarter year over year. We are making some good progress and I expect that to continue through next year as we continue to modernize our fleet.

Our disposal line of business, consisting of our network of landfills and transfer stations, accounted for about 30% of our revenue for the quarter and the market dynamics continued to develop in our favor. As Ned mentioned, we reported 120 basis points in price improvement from disposal on our price volume report in the press release.

The average price per ton figures, which are more reflective of our strategy to move out lower-price customers and to work towards a higher-valued mix of materials, improved 3.5%. As you may recall, our focus last year was to get the volume and now our focus is to maximize price for the air space.

Our recycling operations continue to produce results that might be surprising to most of you, based on what's going on in the commodity markets. Because of our strategic initiative to change the risk profile of that business and pass commodity risk through to the collection companies in the form of tipping fees, so that it can be passed on to the customer, our recycling line of business increased its net revenue contribution and achieved a 120 basis-point improvement in cost of ops as a percentage of revenue year over year.

Customer solutions, which includes our brokerage services and our rapidly growing industrial services offering, also made progress during the quarter. As a reminder, these are lower-margin businesses as we are generally getting a spread on a high volume of materials and third-party services, but have minimal capital requirements and overhead cost. This group also benefits our other operations within the footprint, as any margin on services provided internally is passed through. The focus here is EBIT contribution, which continued to improve this quarter.

With those comments, I would like to turn it back to John for some closing comments.

Thanks, Ed.

We continue to execute extremely well against the strategic plan that we laid out nearly three years ago to improve our financial and operating performance. We are devoted to operational blocking and tackling, with a focus on pricing strategies at the local level, improving our operational efficiency, and a 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.

However, as I said last quarter, this call is about our third-quarter results, and we do not plan to discuss on this call the proxy contest that JCP Investment Management is conducting in connection with our 2015 annual meeting and will not be addressing any questions concerning the proxy contest.

And with that, I will turn it over to the operator to open it up for questions.

(Operator Instructions). Corey Greendale, First Analysis.

A couple of questions. First of all, just so we understand where things are flowing, the SRA fee, is that showing up in solid waste price?

It actually gets booked in the collection line of business, so it is showing up in that price line, and what we are doing, Corey, is each month we're flexing tipping fees in the recycling business to both third parties and intercompany customers to reflect current market pricing of recycling commodities.

So then that flows through intercompany as a higher cost line with lower commodity prices, and as such, we put the SRA fee in on collection customers to be able to dynamically flex our pricing to residential and commercial customers.

Yes, so I understand the dynamic. Do you have -- can you give us a sense of how much of the solid waste price growth in the quarter was from the SRA fee?

In solid waste -- in collection -- I would have to look at solid waste for a second, but in the collection line of business, it was roughly 1.2% of the $[4.3 million].

Okay (multiple speakers)

And I would have to figure out solid waste. I can circle back to you on that.

Okay, that's fine, but fair to assume that that 1.2% could go up because you still have some part of the customer base to go, and I don't know if you had the whole 80% that you did implement it on, if all that was done at the very beginning of the quarter?

No, it cycled in through the quarter, so we continue to ramp in. At the beginning of the quarter, we started about 60% or a little bit below that, and we ramped up to about 80% at the end of the quarter, and the remaining customers will roll on in early 2016.

So, that's -- say you expect 100% of your customers will have this or that's 100% of the ones where you think it is possible?

Yes, it won't be -- it will never be on 100% of our collection customer base. It will get implemented on about 60% of our collection customers. It will never be implemented on rolloff C&D customers. And there are certain municipal contracts that we can't just put the fee on. When we look at contract resets, we will discuss that with our customers in those cases on municipal contracts.

And then, when you look at 2015, you reaffirmed the guidance, so I know you're on track. But I think that some things are going better than you would have expected at the beginning of the year and then some things aren't going as well, and they are offsetting each other. Can you just talk about what's going better than expected and what isn't going as well as you expected?

Sure. We put together this guidance all the way back in June 2014 and we are still tracking to the EBITDA guidance. We raised our free cash flow guidance, as you know. So we are getting better at forecasting our business long range.

But there has been quite a bit of volatility behind the scenes in the last 12 to 18 months where recycling is substantially off from where we expected it to be when we budgeted this year. But we are making up for that through the SRA fee and lower fuel prices.

We have also done better from a pricing standpoint at our landfills in the eastern region and that is making up for some of the issues Ed talked about earlier where we had expected to have trucks in in Q1 and they are still trickling in today, so some of the productivity and maintenance savings in our collection line are a little slower coming in.

Healthcare costs continue to be high. We continue to see inflation at very fast paces there. We have done a lot. John has been shepherding an effort to restructure what we are doing with healthcare. We will be rolling to a new provider into the next year to help bring down our costs and there is some great leadership there to bring that down.

But it has been a year where there has been some moving pieces, but we have been able to stay on track to our guidance and make dynamic changes to get there.

And part of why I'm asking you to somewhat answer this, you're getting really nice EBITDA margin improvement in the collection business. So in light of that, I was wondering about your confidence level in being able to get the 80 to 100 basis points of improvement after 2015, going into 2018. But you said maintenance isn't where you want it to be, but can you just comment on confidence level in that particular guidance?

Yes, actually, when you get down into the details, I have a lot of activity based around automation of the fleet, especially around residential customers, and the trucks haven't come in.

So now they are just starting to come in. We are rolling into another year of improvement next year and I'm pretty confident in hitting those targets.

Okay, and then I just had a couple of quick disposal questions. Similar question on your target for price in the eastern region disposal. I think that has this year not been the -- not been up to the 350 basis points a year you are expected to get. I know a bunch of capacity has come out of the system, so what is it that will drive greater increases there than we have seen already?

If you look at the eastern region pricing, Corey, it's actually this past quarter -- the past few quarters, it has been about 6%. So the eastern region pricing has been well above the 350 basis points that we have in the plan on a go-forward basis. So we're pretty confident that we will be able to maintain that.

Also in the plan, we didn't put any significant pricing on the western region in the plan. We just kept up with inflation and we're a little bit above that in the western region. So we think that the plan is, relatively speaking, pretty conservative.

Okay. I thought you said 250 basis points in the eastern, which I must have misheard. The other quick question is I know in your geographies expansions are never easy and there being discussions with local -- that just comes with the territory. But can you just comment a little bit, there continued to be -- I have seen some headlines locally about the expansion in Ontario and Southbridge, just confidence level in ultimately being able to get the expansions you're looking for?

I think we always have -- it is always difficult to get through the process in the Northeast from a permitting standpoint, and I think ultimately we will get through those -- we will get through that permitting.

In some cases, though, you can see delays and issues that we have got to be even more proactive than what we have been historically, in that the regulatory agencies are seeing budget pressures. It is taking longer to get through the process, so we have got to be more aggressive.

But we have had success in the past, we have been able to get through that, and we expect that we will be able to get through it as we go into the future. But it is something that we have got to stay very diligent on and it is difficult to get through that process. It's part of the -- but getting through that process is part of the barriers to entry, obviously.

Tyler Brown, Raymond James.

Nice quarter. It's nice to see the focus, attention to detail, really starting to pay off here. But, Ned, just a real specific question about your yield metric. So when we see your collection yields, does that include both rollbacks and the impact of churn or is that just including rollbacks and not churn?

No, it has both impacts in it. It is a true net price number.

Okay, great. Very helpful. And then, just if we could maybe drive down a little more on the construct of your business model here. So, I know that the Northeast has quite a bit of, let's call it, that subscription business in the residential line up there. So if you were to break your model down, how much of your business do you think is, call it, in that open or subscription market versus having some pricing restrictor on it, maybe either CPI or a regulated return?

You guys asked me this question off-line this quarter. I got to find my data, so I can give you the same response. It is a complex question. Hold on a second, Tyler.

So in the collection line of business, we said roughly 91% open markets and roughly 9% is restricted markets. We only have about 9% of our collection revenues in municipal contracts today and then there are no franchise or restricted markets in the Northeast.

Okay, that's very helpful. Thank you.

And then, this is my big-picture question. I appreciate that I'm sure you're going through the budget process right now into 2016. So I'm not asking for specific details, but can you give us what the big puts and takes are to think about in 2016? I am thinking on the puts side you have got internal growth. You have got the SRA fee continuing to roll out. You got landfill -- maybe incremental landfill volumes in the west, but on the puts -- or on the takes side, maybe you've got landfill gas, maybe recycling. But can you just give us maybe the big buckets to think about as we look to 2016?

Yes, as we look at our 2016 plan, as you said we have not completed budget nor have we guided to next year, but some major moving pieces that we laid out in the multiyear plan were, on the landfill price side, we plan to continue to execute into next year in the eastern region as capacity further tightens.

In the western region, the gains on the landfill side we expect to be lumpy over the next several years, and as we've said previously, 2016, our forward look there is for volumes to be relatively flat into 2016 and then larger gains into 2017 and 2018 as the New York City contracts roll into New York State.

The collection line of business, as Ed said, our pricing programs are very robust right now. We don't see any lightning up there. We will have the rollover impact of the SRA fee into 2016. We'll yield about $2 million of benefit in 2015 and about $3 million of benefit in 2016.

Ed mentioned on the hauling side the fleet programs will continue to roll into next year, so a lot of focus in the hauling business.

And then on the recycling side of the business, we have a couple of contracts that are underwater right now. We talked about before, we dropped about $7.5 million to $8 million of adjusted EBITDA in the recycling business from 2012 to 2015. About two-thirds of that is going to come back through through the SRA fee, and one-third is with contract reset in the recycling business and we expect to have some progress there as well in 2016.

Okay, yes, that's very helpful. And then just maybe my last one here, but what is temporary rolloff as a percentage of your book?

It is about between 15% and 18% of our collection revenues today.

Okay, and are you seeing anything -- I don't know if you have maybe a pulls per day or anything -- any indication of how that's tracking?

Ed, do you want to (multiple speakers)

Yes, we -- it has improved dramatically this year over last year, so it is tracking very well. Of course, we are a very seasonal business, so this is the right quarter to ask that because we have just gone through our stronger two quarters on rolloff pulls.

Yes, I think that it has improved, but I think if you look at it in context of where rolloff was back before the collapse, we are still way, way lower than the performance at that point in time.

So back at that point in time, construction and demolition revenue was probably $30 million plus. We are probably back now at $7 million, $8 million. So, it has improved, as Ed said, but not anywhere near where it was before the economic collapse.

I totally appreciate that. I was just seeing if there was any maybe chinks in the armor, so to speak, if things were deteriorating, but it doesn't sound like it. I'm going to pass it on. Thank you.

Joe Box, KeyBanc Capital Markets.

It is [Sean] on for Joe. I had a quick question, if you could help me understand the step down in solid waste internalization, particularly in the western region. Is that a mix issue, a large contract? Any clarity there would be helpful.

We made a decision this last year to contract with several third parties. There is a small landfill coming online in New York state, new capacity, and also we have talked a bit about the burn plants and some of what they -- in the winter months, how they go out and they are a bit starved for volumes.

So we have two contracts we entered into this year to take some of that capacity out of the marketplace to further our pricing programs during the year. So we have a little bit less internalization and that's what I said earlier where our mix at our landfills, the reason our disposal stat, revenue stat is up a little bit is that we see a shift from some interparty -- intercompany tons going to our landfills and a little bit more third-party tonnage coming to our landfills.

And that really enabled us to -- we may have lost a bit of volume, but it enabled us to move price.

Okay, understood, understood. And then, I know that you guys alluded to this earlier, but I am wondering on a consolidated basis if you could help us bridge the total EBITDA margin expansion by order of magnitude. Would you say first it was price, then it was increased volume, and then it was cost? Just any order there would be helpful.

I am not sure if I'm prepared to answer that on this call. I probably would need to look at some real detail, Sean. Maybe we can circle up afterwards.

Okay, sure. Thank you.

And then, skipping through to price, obviously you discussed this quite a bit. But I am wondering how aggressive you feel you have been. I understand that the market is improving to support your efforts, but do you feel that there is plenty of ceiling left and maybe we can see some incremental pricing gains at a higher -- greater momentum than we have seen thus far?

So to answer that, the way I view it, if you go back just a few years we were getting very little price in the market. There was a lot of resistance.

Things have changed. Our service levels have changed, the economy has changed a little bit, and the regulation relating to recycling has changed. So there's a lot of visibility in our markets and we've been able to develop a pricing program with quite a bit of momentum, and I still think there is a bit of room before -- because we went so many years with low price and costs increasing that now we have that opportunity to catch up to where we should have been, had pricing been appropriate the whole time. So I think we have a couple more years of good momentum here.

Okay, got you. And then, lastly for me, I realize that you haven't put together your 2016 budget, but can you help us understand this year's level of CapEx on a sustainability basis? You are at 7.5% of revenues year to date. How long can this go on, considering the need for cell development, et cetera, as you hopefully capture some of this greater volume in the eastern region?

So for calendar 2015, we plan to be around 8.7% to 9% of revenues by year-end for CapEx.

As we look into the future, there is a slide I put into the latest investor deck that shows our CapEx broken down by our solid waste -- integrated solid waste business -- hauling, transfer, landfill, landfill gas to energy, versus our resource businesses -- recycling, organics, and customer solutions. And what's really interesting if you look at that slide, we're tracking about 11% of revenues in the integrated solid waste business and we are tracking at about 4% of revenues for CapEx in the resource businesses.

About 75% of our revenues today are integrated solid waste and we are roughly 25.2% adjusted EBITDA margins in that line of business.

In the resource businesses, we have much lower capital requirements. A great example of that are our organics or biosolids business. This is a business that has a roughly 13% EBITDA margins, but requires, year in, year out, about 4% of revenues for CapEx. So a business that brings down our overall margins, but brings up our returns and our cash flows, a great business to be in.

But we have a little bit of a different mix than some of our peers, so when you look at our overall CapEx at about 9%, it seems a little bit low, but when you get into the components of it, we are tracking at 11% in solid waste and we are right where we should be.

Okay, great. Thank you very much. That's all for me.

Scott Levine, Imperial Capital.

So I was just looking for a little bit more clarity. I guess, Ned, you mentioned, I think, in your -- formulating your intermediate-term plan there that you were banking on flattish volumes in 2016 and that we see maybe some more acceleration in the outer years as New York City has more impact on the western region. Did I hear that right?

And I guess I'm just trying to reconcile some of the macro trends, which seem pretty healthy, with maybe the outlook preliminarily for next year and whether on an underlying basis there isn't any reason to expect underlying volume growth rates to hold or maybe even improve as we go forward?

I think your perspective is the right one, Scott, and that is that from a practical standpoint, the impact in the western region is likely to be 2017 and after. We're going to see a little bit of that in 2016, but the second contract being let from the Department of Sanitation is likely to be a 2017 event. So we are going to see the western region tighten up more towards the 2017 and 2018 time frame.

And from a macro standpoint, is there any noteworthy difference between your two main operating regions? Is one performing materially better or worse than the other right now?

I just think that the -- no, the eastern region is performing better from a price standpoint, particularly on disposal and that is a function of the supply and demand differences between the east disposal facilities versus the west. And I think that's a primary difference.

And what's interesting about that is our eastern region is coming off a much lower base, so just a couple of years ago, we had 15% EBITDA margins in the eastern region. And if you look at where we sit this quarter, for the last 12 months basis we're up to roughly -- in the eastern region, we're up to roughly 23%. So we have had a dramatic improvement there.

The western business -- the western region, especially Vermont, part eastern New York, has a very highly integrated business that performs in the 28%, 29% range, and then out into New York state we had some margin deterioration of a few years ago as landfill [signs] declined. As signs have come back in, we have seen that market raise back up and we are in the 26%, 27% margin range in that business today.

Got it. One more, if I may, on customer solutions. I don't know if you touched on the profitability. I know that's been a focus, raising that over the last couple quarters. But are you continuing to like what you see there, and might we see potential for acceleration and earnings improvement in that business line?

Yes, I think that we're pretty confident that that business continues to move in the right direction.

Revenues were flat for the quarter, but EBIT contribution was improving. So I think that we are -- Paul and the group have done a good job in terms of the overall sales effort.

The cycle in terms of moving revenues in is a little bit longer than what we saw in the first quarter, but still making great strides there in terms of the industrial side of the business in particular, as well as some great activity on the college and university side, as well as the municipal side.

Got it, great. Thank you.

Tony Bancroft, Gabelli Capital.

Just a big picture, what do you say -- I have heard the argument -- what do you say to the argument that disposal constraints in New England aren't as dire as you say? We have discussed this in the past, but haulers actually have other options of disposal capacity in that region. Is there -- maybe not just alluding to what you have talked about in the past and the constraints and the closures, but is there something else that you could tangibly point to, saying, hey, no, this is a real thing and this will continue (multiple speakers)

I will take that, Tony. I think there is a couple of things that are impacting the disposal market in the Northeast.

Obviously, the 2.5 million tons of capacity coming out of the market with six or seven facilities that have already closed and 1.5 million tons already out of the market and another 1 million tons that is going to happen over the next year or so.

The other thing that has changed, too, is that there has been real consolidation in the rail served activity. A lot of those businesses now have been consolidated into one company, which we think is going to change the dynamics in terms of some of the disposal capacity that historically has impacted the marketplace.

The other thing that we have done is we have worked with additional capacity, pushing additional tons to the waste-to-energy facilities in the wintertime and running our facilities harder in the summertime at a higher price, so that's another dynamic that has changed in the marketplace over the last year. So we're actually moving tons to those facilities in the wintertime and that has proven to be very beneficial, both to them, as well as to us. And fortunately, we are able to move higher tonnage in the summertime when we have a higher price point.

So, I think that trend is going to continue over the next few years. We don't see anything from a capacity coming online that is not already in the conversation or in the presentations that we -- the investor presentations that we've done. We've put the new capacity that has come online in place as well.

So, I think that we're pretty confident that the trends are going to continue into the future with regard to the disposal capacity supply and demand quotient that we have identified.

And there is a couple of other factors. As we said, I think when we saw you last, the other thing that has happened is the Tullytown facility is going to close in 2017 and that is another factor that six months ago wasn't even in the equation.

So I think that there is -- at least from our perspective, anyway, it is all of the -- and there is another effort from a rail standpoint in the Kentucky facility where they are no longer going to take sludge by rail, so it is a big run facility in Kentucky.

So there is a number of things that have -- that continue to happen that support the perspective of the supply and demand issue in the Northeast. So I think we're pretty confident.

That's great. Thank you.

Brian Chin, Bank of America.

Thanks for taking my call here. Just turning to the capital structure here and your guidance of EBITDA and leverage in 2018. At least according to my math, I'm getting -- it implies about $85 million worth of debt paydown. So one, I guess, is that math correct? And two, can you give us a sense of cadence? Will most of that be towards the latter end or is that evenly throughout the next couple years? Also, how much of that is cash flow generation versus self assets?

And then, finally, and I know this is a lot of questions, but they are all related, whether you are expecting that to mostly come from the senior sub notes?

Yes, great question. So from -- you are right that the model does suggest between $80 million to $100 million of debt repayment over the next three years. That's what the leverage and the EBITDA statistics suggest.

From a cadence standpoint, it will increase as we go through the next several years, but we expect free cash flow to ramp up from where we are today $15 million to $19 million up to the $30 million to $40 million in the last year, so you will see an increase cadence and that increased cadence has a lot to do with debt repayment, too, as our cash interest costs go down in each period.

What we contemplated when we look at this model was in each year we do plan to be retiring senior subordinated notes and we do plan to have a refinancing ahead of 2018, as well, of that senior subordinated debt that is due in 2019. So, our model contemplates both of those.

The model does not contemplate any asset sales during that period to pay down debt, though. It is all operating cash flows.

Okay, thank you very much. Appreciate it.

Al Kaschalk, Wedbush Securities.

Just a couple of loose ends to tie up on my side, given the number of questions. On the comment about flat volume in 2016, how should we think about, in that type of environment, your ability to drive price? And I assume you meant that the flat volume was more landfill than collection, but can you just help maybe give us some thoughts on how price will come in an environment where volumes may not be growing?

Al, if you look at the disposal market, particularly in upstate New York, although this really applies everywhere, you have now a substantial amount of tonnage planning to come in from New York City to the upstate market.

Well, the landfills and Covanta, who are going to get those tons, they have got to plan for that. So as bids come up for transfer stations, some of the longer-term bids, we are seeing them already react where they are not putting in low numbers. They are putting in either a high number or not bidding. So that is where your price pressure comes before that volume starts flowing.

And Al, just to clarify my comment, as we said earlier we have not completed budgeting for next year and that was just a comment in relation to New York state. In the eastern part of our franchise, we are hitting permit limits at the majority of our sites, so we are advancing price increases. And we do expect to see positive collection volumes into the next year as we see continued favorable economic trends across our market.

And I think the other thing that's important too, Al, is that in the model, in our financial target model, we didn't incorporate price in the western region. So I think there's an opportunity there.

We just incorporated keeping up with inflation in the western region from a price standpoint. We are a little bit ahead of that, so we think there may be -- we think that that's the appropriate way to model that in terms of looking at our targets for 2018. I think our view is that there could be opportunity there from a price standpoint in the western region.

Okay. Just to be clear, though, if you are seeing -- I don't know if, Ed, you said bids, but awards, does this imply that the near term we should see that in numbers or potentially see that in numbers in terms of the pricing aspect? I just want to -- not necessarily saying you're guiding to X, but more of the market dynamics are actually seeing these contracts come on at higher price points, therefore --

I think that it is too early to tell at this point in time. I think the preliminary view that we have and what we have seen recently in the marketplace is higher pricing from some of the bids that we have just seen. So it's early innings, Al, in terms of that perspective, but it is certainly what we have seen in the last month.

Right. And then, my follow-up would be just to Ed's question on productivity. Sorry, I am not trying to pick on you today, Ed, but how should we think about as these trucks come on, the automation, some of the further items you are doing from an operations standpoint from a margin perspective in terms of the solid waste side of the business?

When I dig down into the details of what's happening now in the last nine months, you look at some of the benefits that we have gotten through automation, like the -- as we reroute and get more efficient on the routes, but then you look at something like vehicle maintenance. Because these trucks haven't come in on schedule, our vehicle maintenance numbers were very high this year.

So, of course, that is going to reverse automatically when we get rid of some of these older trucks that are breaking down.

Okay, thank you. Good luck.

Michael Hoffman, Stifel.

Ned, I just want to be reminded. Out of the $15 million to $19 million, it is still $4 million or $5 million is asset sales this year? I just want to make sure I didn't miss that.

Yes, we -- so we had $5 million roughly of asset sales, but we had to pay $1.5 million to our joint-venture partner at CARES, so it was $5.3 million, less $1.5 million, so a little bit less than $4 million.

Okay, and I would take that out of the $11 million, that's the underlying operating number? Okay.

And then, guidance, I am trying to reconcile where we are year to date at $406 million of revs and $78 million of EBITDA. And where the guidance is because it's a fairly steep revenue decline relative to normal seasonal patterns for the fourth quarter. And candidly, the Street estimates are too high to come in at the midpoint.

So should you be actually, in fact, raising guidance or is there something we need to keep in mind that you are thinking about as we are now in a calendar cycle of October, November, December instead of -- is that November, December, January?

Yes, so it really depends on our visibility of one or two T&D contracts at the landfills that we have and we are right at the upper end of the revenue guidance or maybe even a little bit above it.

So your perspective is right there where we are hitting the upper end of that. Our visibility on one of these jobs is -- not sure if it is hitting in late this year into next year, so we just left the guidance number alone.

Okay, and then the nature of the guidance, the way it sits and what's left in the year, it is a 15%, almost 16% revenue dip sequentially, but it is only 4.5% margin dip. So, again, that is just -- you started with a set of numbers, you have stayed with them, and maybe they needed to be repositioned, but they're going to err towards the upper end. Is that how I am supposed to think about this?

We are going to be at the upper end of revenues. That is correct.

Okay, and then I just wanted to clarify. John, you've said $8 million or $9 million of construction revenues, but Ned, you have said 15% of collection. 15% of collection would be $40 million, so I am just wanted to make sure I understood which --

Yes, let me say that a little bit differently. So John said it, but I want to clarify it.

So if you flash back to 2007 or 2008, and you flash forward to 2011 or 2012, we dropped about $35 million of construction and demo revenues during that period, both from a collection and a landfill standpoint. And if you look at what we have gained back from that valley in late 2011, early 2012, we have gained back about $8 million or $9 million from that floor.

So it wasn't absolute dollars John was talking about. He was talking about changes in revenues across that period.

Right (multiple speakers)

Okay, so it's about a $40 million business, that was what -- is then the right way to think about it?

Yes (multiple speakers)

Just under.

Okay, fair enough. And then, Ed, on your price side, I realize this may be a challenge in that -- given you all as a Company weren't pushing as hard on price, but how would you frame your ability to retain what you're going to the market with, given the positive macro environment? And versus the competitive issues?

Is basically -- is everybody else pretty much full, too, so that is helping you retain more of what you're going to the market with and what is your thoughts about how sustainable that is?

As you know, the Northeast is fairly highly regulated even on the trucking side, so a lot of our competition has suffered the same challenges we have because a lot of our competition are smaller haulers.

So, say four or five years ago when we tried to push price, we saw an immediate reaction where we start losing a few customers here and there. Now we are pushing price in a much bigger way and we are not seeing that kind of a reaction because -- for two reasons.

One, the customers are in slightly better economic times, so it is a little less of a focus to them, but the second is that the competitors really can't take that business.

And the other thing that is happening, Michael, is that from a competitive standpoint, haulers are feeling inflation from a disposal standpoint, they are feeling inflation from a recycling standpoint, and those are big line items from a cost standpoint.

So the whole dynamic from a disposal standpoint is really driving real inflation to all of the haulers, both on the disposal side, as well as on the recycling side.

So that being said, this is a very different environment than it was five or six years ago where there was overcapacity where they could just simply shop. It is becoming obviously much tighter and therefore they're seeing a lot more inflation that they have got to go back to the customers and get offset.

Okay, so a combination of their cost inflation is rising pretty hard, plus the volume in the market is keeping them full, means that your go-to-market price, you should be able to continue to retain more of that, not less, for a while?

We believe that to be the case. Yes.

Cool. And then, how would you frame the inning we are in in your region on the trend of volume improving? It lags lots of other parts of the country. Where do you think you are in the -- before you hit a, okay, we have leveled out at this is going to be the annualized pace of change? (multiple speakers) change.

There is two factors to that. There is the economy and there is us as a Company, and I think in both of those we're in fairly early innings.

So 18, 24 months before you hit a normalizing point, or 12 to 18? How do you think about that?

I am thinking through the automation side on what we're -- everything we are doing. We're probably looking at 24 months.

Okay. And then, John, if the New York City volume -- it is going to come -- it is coming. It is just the when. If it doesn't come until late 2017, so you're really not seeing a full-year impact of it until 2018, how does that impact the three-year plan? I think it is page 11 in the presentation from the summer. How does that impact your thoughts about that plan?

I think that we purposely, Michael, put the majority of that at the end of 2017 and 2018, so I don't think that that will impact us all that much.

Okay, and then to that end, the low end of the plan from an EBIT standpoint, it is about a 200 margin basis point improvement in EBIT margins. How do I think about the flow of that? Am I looking at a 2016 as flat with a little bit of upward bias because of the volume scenario in the western region, and then it starts to pick up and it is more acceleration (multiple speakers) 2018? How do I think about the progression?

Yes, we didn't guide to each year in the plan, but as we said earlier, we haven't guided to 2016, but it is generally ratably step through the collection activities, through the resource solutions activities, through our pricing activities at the landfill, but the volume growth in the western region where we were planning to bring in another 200,000 to 400,000 tons a year is showing up in 2017, a little bit in 2018 in the model.

So you see a progression that does accelerate through the three years, Michael, as we continue to gain margin in the collection line of business each year. So we are looking at a step up in each period, but it's not so much back-end loaded, just the one initiative.

Okay, and then last question for me, what is the solid waste business EBIT margin, and therefore what is the resource EBIT margin?

Give me a second. I might need to answer that off-line. Let me circle back to you.

Okay. Thank you very much. Well, John, I know you didn't want us to ask a proxy question. All I want to ask is a logistics issue. Is there -- we won't know anything until November 7 or is there a possibility you know something before? So what's the news cycle is really what I was trying to understand?

We, I think, initially said that we weren't going to comment on the proxy contest, Michael, so we're not going to comment on the proxy contest.

Okay, I just wanted to understand the news cycle, just in the sense of can you tell us earlier or you have to wait until the seventh or sixth.

The meeting is on the sixth, so.

Yes, I meant the sixth, sorry.

All right.

Did that buy you enough time to figure out the answer, Ned?

No, we are not answering the question.

No, no, not that question. He is looking at the EBIT question I was --

Oh, oh.

Yes, I got to refresh the model. I will call you back.

Okay, fair enough. Thank you.

Tyler Brown, Raymond James.

I know this call is long, but I got a couple loose ends here. Now, Ned, I am certainly not the brightest bulb here, but you did note that debt was down, I think, $10 million on the 7.75%, but debt actually rose sequentially on the balance sheet. So did you just -- did you effectively just swap out that 7.75% for the ABL?

Yes, so debt would have been down, but we did a small municipal tax-exempt bond offering where we were sitting on $4.5 million of restricted cash. So from 6/30/15, we had $529.9 million of debt. At 9/30, we have $533.2 million. Netting that restricted cash, we're at $528.7 million on 9/30.

And it really comes down to just the timing of when we bought down the senior sub debt where we had been paying down revolver borrowings through Q2 and mechanically we went into the market to buy the sub debt in Q3.

Okay, okay. And then, is there any more opportunities on that muni side? (multiple speakers). What were those Maine rates at? I assume they are, what, sub 5 or something?

Yes, the Maine bond, we did a 10-year bond as 5.25%. The last we did in New York in late December 2014, a five-year bond sits at 3.75%, so it is a great marketplace for us to buy down the cost of our capital and get long-term fixed debt.

What we have been doing is we have been structuring indentures that have a drawdown structure, so the Maine bond we just did is a $30 million indenture, and in this first tranche, we offered $15 million, so there is another $15 million to do at a later point in time.

In New York state in December, we did a $40 million indenture and we first drew down $25 million, so there is another $15 million sitting on the shelf. So in the next number of quarters as we get more and more qualified capital expenditures, we will do more of those bonds.

Okay, great. That's super helpful.

And then my very last one here, I just want to go back to landfill CapEx for just a second. So if you're expecting those western landfill volumes maybe to start ramping more like in 2017/2018, is 2016 a heavy year of cell development in front of that or is that something that you can do more coincidentally?

We would do that more coincidentally, but I think that we have got cell development, Tyler, that happens every year, so in some years we could have three or four projects. In other years, we may have one or two projects. So it just depends on the cycle. It could be a little bit lumpy in terms of depending upon how many cells we have to develop in a given year.

Okay, thanks, guys. I appreciate it.

Thank you and I am showing no additional questions in queue. I would like to turn the conference back over to management for any closing remarks.

Thanks, Operator. Thanks, everybody, for your attention this morning. We look forward to discussing our fourth-quarter earnings and our 2016 guidance with you in early March. Thanks, everyone. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you all disconnect. Have a great rest of your day.