Casella Waste Systems Inc (CWST) 2017 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Q2 2017 Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Joe Fusco. You may begin.

Thank you for joining us this afternoon, and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ed Johnson, our President and Chief Operating Officer; and Ned Coletta, our Senior Vice President and Chief Financial Officer.

Today, we will be discussing our 2017 second quarter results. These results were released earlier this afternoon.

Along with a brief review of those results and an update on the company's activities and business environment, we will be answering your questions as well.

But first, as you know, I must remind everyone that various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on our Form 10-K, which is on file with the SEC.

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

Also, during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures, to the extent they are available without unreasonable effort, are available in the appendix to our investor slide presentation, which is available in the Investors section of our website at ir.casella.com.

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

Thanks, Joe, and good evening, everyone, and welcome to our second quarter 2017 conference call.

Before we get started on the quarter, I would like to discuss our decision to close the Southbridge Landfill. We worked hard over the last 14 years to develop an environmentally sound disposable facility to meet the needs of our customers in Massachusetts. However, over the last 3 years, we faced many political and regulatory roadblocks as we worked to permit additional airspace at the site. We believe that 2 of the most important building blocks for a sustainable landfill are: having solid community support and structuring a win-win relationship that has a strong alignment of financial interests. We believe that our agreement with Southbridge aligned financial interests and provided significant benefits to the community. However, over the last few years, we have not received the level of local support that is necessary to develop a sustainable long-term landfill. As such, we invigorated our efforts to engage community leaders and the residents of Southbridge in a productive dialogue about the landfill.

As part of this effort on June 13, we put forward a non-binding referendum to the citizens of Southbridge to seek support for the development of additional airspace. Unfortunately, very few citizens came out to vote, and we only received roughly 40% of the vote. This lack of community support and our inability to advance permitting due to circumstances outside of our control and the extremely high cost to develop airspace at the site has led us to conclude that we cannot generate an adequate risk adjusted return. As such, we've adopted a plan to close the land fill when the permitted capacity is fully consumed. We have roughly 300,000 tons of capacity remaining as of June 30 and we expect to the close the site by December 2018. As we work through the challenges at the site over the last 3 years, we have already ramped down volumes to conserve capacity and to enhance returns on the remaining tons placed. With this ramp down, we believe that we have minimized the comparative headwinds when the site is fully closed in late 2018.

And with that, I'll turn it over to Ned.

Thanks, John. As a result of our plan to close the site, we incurred a $64.1 million landfill closure charge in the second quarter consisting of the $48 million asset impairment charge; a $9.1 million project development charge; a $6.4 million environmental remediation charge; and $600,000 of legal and transaction costs. $15.4 million of these charges reflect our current engineering estimates for future cap and closure remediation and post-closure activities at the site. As we place the remaining site tons at the site over the next year, we will continue to record noncash landfill amortization and asset retirement obligations on a per ton basis, which we expect to be roughly in line with historic rates. When we finish placing the final tons at Southbridge in late 2018, we expect to recognize a loss in operating contract of approximately $3.1 million associated with future obligations owed to the town as part of our agreement. We account for this contract as an operating lease.

Now looking at the cash impacts of this decision. We expect cash expenditures to be roughly $21 million over the next 5 years to be spent on capital, environmental remediation, capping, closure and post-closure expenditures. However, we expect the tax impact of the Southbridge impairment to shield cash taxes and slow down the use of our loss and credit -- carryforwards for an additional year through 2022. Given the current tax loss and our current tax rates, we expect the cash benefit of these tax savings to be roughly $20 million recognized over the next 5 years.

So on a net basis, included this estimated tax benefit, we expect our net cash output to be roughly $1 million over the next 5 years. With that, we're going to move on to the quarter now.

On to the quarter, revenues in the second quarter of 2017 were $154 million, up $9.3 million or 6.5% year-over-year. Solid waste revenues were up $5.9 million or 5.5% year-over-year with higher collection in disposable pricing, higher solid waste volumes and acquisition activity of $0.5 million. Revenues in the collection line of business were up $2.6 million year-over-year with price up 2.8% and volumes up 0.7%. Pricing was up 3% in our residential and commercial lines of business in the quarter. We experienced volume growth in the residential line of business, but volumes were slightly down in the commercial and roll-off lines of business as we continue to trade positive pricing over lower margin volumes. Also, the unusually rainy spring negatively impacted the construction trends in the Northeast.

Revenues were up $2.8 million in the disposal line of business with both positive pricing and volumes. We increased our third-party reported landfill pricing by 3% year-over-year and more importantly, we increased our average price per ton at the landfills by 6.3%, as we improved our mix of customers and volumes. We actually increased our price per ton 9.8% in our Western region as we have pivoted strategy in mid-2016 to focus on advancing pricing versus capacity utilization at our sites.

Overall, landfill volumes were 1.1 million tons in the quarter, up 2.1% year-over-year. During the quarter, we did continue to ramp down tons at the Southbridge Landfill. If you exclude Southbridge, our tons were up 4.7% year-over-year. Recycling revenues were up $3.4 million year-over-year with higher commodity pricing and volumes partially offset by lower tipping fees or lower processing fees. Average commodity revenue per ton, what we call ACR, was up 27% year-over-year on higher fiber and metals pricing. Commodity prices were actually down roughly 14% sequentially from the first quarter to the second quarter, most of this decline was driven by a significant drop in export pricing for fibers, as China has reduced purchases and increased quality standards through their National Sword program. This negative trend began to reverse in late June and July with fiber prices up sequentially in the period.

Organics revenues were down $1.2 million year-over-year on lower volumes as a wet spring negatively impacted our land application and product sales. Customer solutions revenues were up $1.2 million year-over-year with continued growth in our industrial services businesses.

Adjusted EBITDA was $36.1 million in the quarter, up $1.3 million year-over-year with margins slightly down. Results in the quarter were negatively impacted by 2 significant headwinds. One, our health care costs were up $2.2 million year-over-year, or up 117%. This substantial increase was mainly due to higher-than-normal claims activity. We do believe the activity and costs should normalize closer to our historical averages through the remainder of the year. Our leachate costs were also up significantly, they were up $1 million year-over-year, 84% on the abnormally high rain in the Northeast. Solid waste adjusted EBITDA was $31.7 million in the quarter, up $900,000 year-over-year with strong pricing and higher volumes, coupled with cost efficiencies, partially offset by the higher health care costs and higher leachate expense. Solid waste margins were 28.2%, down 75 basis points year-over-year. Or if you exclude the health care and leachate headwinds, they were actually up 175 basis points year-over-year.

Recycling adjusted EBITDA was $2.1 million in the quarter, up $600,000 year-over-year with improvement mainly driven by a combination of higher commodity pricing, coupled with the structural changes we've made to the recycling business to off-take risk and increase our returns. Adjusted EBITDA was $2.3 million in the other segment, down $200,000 year-over-year with a decrease, mainly driven by lower organics activity in the period.

Cost of operations was up $7.3 million year-over-year or up 75 basis points as a percentage of revenue with increase mainly driven by $1.7 million of higher health care costs, $1.5 million of higher recycling purchase materials cost on higher commodity pricing, higher third-party disposal, direct labor and other direct operational costs on our higher volumes, our new contracts and acquisitions in the period and also the higher leachate costs during the period.

General and administrative costs were up $700,000 year-over-year. This increase was mainly driven by $600,000 of higher health care costs in the period.

Our normalized free cash flow was $12.3 million in the quarter as compared to $18 million last year. This decline was driven by $7.9 million of higher cash outflows associated with changes in assets and liabilities in the period with $7.1 million of this negative variance, driven by a lower interest accrual at June 30 of this year as compared to last year. As you may recall, last year with the senior sub notes, we paid interest 2x a year, on February 15 and on August 15. As such, we carried a substantial interest accrual at June month, and last year. With the refinancing of the senior sub debt to the Term Loan B, back in October 2016, our interest is now primarily paid on a monthly basis, which, in turn, reduces accrual year-over-year. So, our interest costs are down, and we have actual cash interest savings, but our accrual is causing a negative variance in the period.

So, if you look at this on a year-to-date basis, it really gives a cleaner picture of what's going on. Year-to-date, our normalized free cash flow was $13.4 million, up $3.7 million from last year. This improvement was driven by improved operating performance and lower cash interest costs, partially offset by higher CapEx and lower proceeds from the sale of property and equipment.

We incurred a small loss on debt extinguishment during the quarter related to a successful repricing of the $350 million Term Loan B at April 18. And as you may remember, we reduced our interest rate on the Term Loan B from LIBOR plus 300 basis points to LIBOR plus 275 basis points. We also reduced the interest rate stepdown, so now when our consolidated net leverage ratio is at or below 3.75x, our interest rate will drop to LIBOR plus 250 basis points, down from the previous 275 basis points. This amendment is expected to save us roughly $900,000 a year of cash interest costs, and this is on top of the $11 million of cash interest savings we already yielded from the October 2016 refinancing.

As of June 30, our consolidated net leverage ratio, as defined by our credit facility, was 3.92x, which is down 1.5 turns since December '14. We expect the noncash charges related to Southbridge Landfill closure charge will be added back to our bank EBITDA for [covenant] calculations as per the definitions of consolidated adjusted net income and consolidated EBITDA.

As stated in our press release, we are tracking towards the upper end of our previously announced revenue, adjusted EBITDA and normalized free cash flow guidance ranges for the year. Our results year-to-date and our forecast for remainder of the year put us ahead of our budget. However, this outperformance is being dampened by our higher-than-expected health care costs year-to-date, our conservative forecast for the remainder of the year for health care, along with the continued unbudgeted ramp down of volumes into the Southbridge Landfill. However, we remain very confident in achieving our guidance ranges for the year. And with that, I'll hand it over to Ed.

Thanks, Ned, and good evening, everyone. As Ned laid out, we finished the quarter ahead of plan, despite the headwinds and the health care cost and the challenges of operating in a period of unusually heavy rain and remain on track to exceed our 2018 targets. Being able to overcome obstacles like these is a testament to our commitment to disciplined decision making and continuous process improvement. Great examples of this include our continuing pricing discipline, our focus on improving efficiency metrics in all lines of business and the same kind of attention to attaining adequate risk-adjusted returns on a day-to-day basis that we demonstrated with our decision to close Southbridge Landfill.

We have been very successful in reducing our cost of ops to the percentage of sales over the past 3 years, which has declined from 71.7% of revenue in calendar 2014 to 67.6% in calendar 2016. Although the cost of ops percentage ticked up by 75 basis points in the second quarter year-over-year, when you factor out the bump in health care cost, accounting for 100 basis points, and the rain effect, where leachate cost alone accounted for another 60 basis points, the core improvement continues. Over the long run, we've saved a significant amount of money by self-insuring our employee health care benefits, but it does subject us to volatility during any particular reporting period. To be conservative, we factored in higher costs for the remainder of the year in our updated guidance, but that cost is more than offset by improvements in our other operating results.

We beat our numbers, so I'm not using weather as any kind of excuse for anything, but you might be interested in how heavy rainfall affects our business. We estimate that the rainfall in Q2 this year was roughly double the rainfall for Q2 last year across the footprint. I mentioned the increased leachate cost, but the landfills also have to deal with erosion, customer trucks getting stuck on the steep and muddy landfill access roads, requiring the diversion of our equipment for assistance and increased difficulties in spreading required cover soil and maintaining side slopes. Hauling operations are also affected. We track pounds per container yard as one of our key metrics and saw that increase over 3%, the typical rain effect, and that resulted in a 40 basis point increase in cost of ops for that line of business.

In addition, for those collection divisions that dump at a landfill, the operational challenge is that the landfills, ours and third-party sites, cause wait times to rise substantially when it's raining. Despite this, our guys did a fantastic job dealing with these challenges during the quarter, and I congratulate them.

Our line of business, our recycling, disposal and customer solution groups all achieved improved margins during the quarter. Collection operations, which has the most employees and, thus, bears the brunt of the health care cost allocation had a decline in margins, but key operating efficiency metrics actually improved. As Ned mentioned, pricing was strong throughout. Focusing in on the disposal line of business, our landfill sales team did a good job in the quarter working to source new customers and waste streams into the landfills, while also advancing our average price per ton by 6.3%. This effort more than offset the continued volume reduction at the Southbridge Landfill. In total, our landfill tons were up 2.1% in the quarter and excluding the planned diversion at Southbridge, tons were up 4.7%.

Disposable capacity continues to tighten in the Northeast market as permanent site closures are reducing capacity and stronger economic and construction activity are driving higher volumes. We believe that this positive pricing backdrop will continue into the future, but additional site closures, including Southbridge, are expected over the next several years.

As we roll off multi-year contracts, we expect to advance pricing in excess of CPI on a larger percentage of our book of business. On the landfill development side, in early June, we received a permit for a 9.4 million cubic yard expansion at our Juniper Ridge landfill and that extended the life of the site to around 2033.

Excluding the health care and weather headwind, already discussed, the collection operations had a very strong performance in the quarter. We advanced pricing by 3% in the residential and commercial lines of business and 2.5% in the roll-off line of business. You may remember from the past, that we had struggled getting price in roll-off. During 2017, one of our key initiatives is a newly launched roll-off profitability tool that is already driving positive pricing decisions on both temporary and permanent roll-off work.

In addition, we launched a new energy and environmental fee in several pilot markets. This new fee is designed to help recover heightened environmental, regulatory and permitting costs, coupled with our fuel surcharge. From the operating side, we continued to advance a number of key initiatives and believe there is additional room for improvement, particularly as we continue to update and improve our fleet, our maintenance procedures and management and key routing and other efficiency metrics.

Recycling remains a strong performer for us, higher commodity prices, coupled with the changes that we made over the last 2 years to reshape our recycling business model, helped to drive strong Recycling performance in the quarter. We generated a return on net assets of over 22% in the quarter, up from roughly 2% back in 2015, when we started this transition to a more profitable business model with a lower risk profile.

So another good quarter, and we look forward to continued improvement as we move forward through the year.

With that, I would like to turn it back to John.

Thanks, Ed. In summary, we're very pleased with the second quarter results. As reported in our press release, revenues were up 6.5%. Adjusted EBITDA for the quarter was up $1.3 million and year-to-date normalized free cash flow was up $3.7 million from last year. We drove year-over-year improvement through strong pricing execution, our operating efficiency programs and continued strong overall execution against our key strategic initiatives. Our team has been laser focused over the last several years in executing the strategy we first laid out for The Street in early 2013, which we then refreshed in August 2015, when we laid out our 2018 financial targets. As everyone knows, we are tracking roughly 1 year ahead of this plans with solid execution across all experts -- all aspects of the plan, driving our outperformance.

I would like to say first, thank you, and congratulations to the team on a job well done. The 2018 plan was an ambitious plan with substantial goals and was by no means a layup. We set an adjusted EBITDA growth target of $25 million to $35 million and normalized free cash flow growth target of $21 million to $31 million and a target to reduce leverage by 1.7x to 2.2x. As of June 30, we are only 2 years into our 3.5-year plan and we have increased adjusted EBITDA by $29 million, increased normalized free cash flow by $21.5 million and reduced our debt leverage by 1.5x comparing the results from 12-months ended December 31, '14 to the 12-months ended June 30, 2017.

Looking back to August 2015, I'm not sure how many believers we had outside the company, however, our team believed in the plan and put 110% effort into executing it. We're proud of those efforts and they haven't gone unnoticed as we've driven substantial shareholder value as our stock price is up 179% since August of 2015. Many aspects of this plan were foundational, focused on blocking and tackling in our core operations, pricing strategy, sales execution, operational efficiencies, upgrading our fleet, reducing recycling risk, improving capital discipline and reducing leverage. We have achieved many of these foundational goals or, with others, significantly advanced along a pathway to long term success. Underlying each of these efforts was our focus on driving enhanced process and discipline, ensuring that we had the right people in the right roles, and the right accountability and the right compensation programs to align success. Today we have a refocused company with a strengthened foundation and an exceptional team. Now it's time to adjust the strategy to execute against initiatives and goals that we couldn't do until we put basic building blocks in place.

As we discussed last quarter, we've had several strategic planning sessions with our Board of Directors to update our multi-year strategic plan. We just completed another session yesterday. We're now in a position to give an update on our strategy and our multi-year goals. We do not plan to give explicit 2021 financial targets, so don't bother to ask, Michael. But instead, a financial framework to guide our decision-making and strategy.

Our quarter strategies have been working exceptionally well and we plan to continue to focus in these 3 key areas: increasing landfill returns, driving additional profitability within our collection operations and creating incremental value through resource solutions.

We are introducing 2 new areas of focus: reducing G&A and improving efficiencies; and allocating capital to balance delevering with smart growth. Reducing G&A and improving efficiencies, we believe that we have an opportunity to reduce our G&A costs as a percentage of revenues and, more importantly, to reorganize our resources and invest intelligently to drive long-term profitable growth.

Over the last 2 years, we're slowly, but surely ramping up efforts to improve our IT systems and technology platform, driving our sales force effectiveness and increasing back-office efficiencies. We've already taken a number of steps in these areas, including adoption of a 5-year technology plan, focused on improving our core financial and operating systems. We have successfully implemented Microsoft Dynamics CRM system, and we are in the process of implementing Oracle NetSuite's ERP platform. We are still in the investment phase, which means that we have redundant expenses and capital outlays that will begin to yield positive returns over the next 3 years. We are targeting 75 to 100 basis point improvement in G&A as a cost of revenues over the next 4 years as part of this strategy.

Today, we believe that we are in a unique position in the environmental industry to grow our cash flows at a higher rate than our industry peers given our smaller overall size, our nimbleness and the range of opportunities in our pipeline. Over the last 3 years, we've focused almost all of our excess cash to pay down debt or on transaction costs to refinance high-cost debt to lower our interest costs. We are now in a position where we've dramatically lowered our interest rates, and we've reduced our leverage to 3.92x total debt-to-EBITDA.

As such, we're adjusting our capital allocation strategy from sole focus on repaying debt to a balanced approach where we will continue to focus on reducing leverage, but we will do so, also begin to select -- selectively pursue acquisitions and growth investments within our core operations.

Over the last several months, we have reinvigorated our acquisition and development pipeline and internal resources. We believe that there is over $500 million of acquisition opportunity in our Northeast markets that could be direct tuck-in with our existing operations or could be strategically integrated with our assets. We have developed and implemented in that acquisition and development framework to align strategy, financial returns and to focus resources on key targets. We are focused on acquisitions that will generate returns well above our cap -- cost of capital, enhanced our vertical integration, drive operations and G&A synergies. We'll either be immediately delevering or have a fast-paced -- fast path to recognize synergies and cash flow -- cash flows to delevered. As an example, in the second quarter, we completed an accretive all-in tuck-in acquisition for a total purchase price of $4.9 million at roughly 3.5x EBITDA multiple after operating synergies.

Wrapping up, the financial framework for our newly adopted '21 plan is as follows: Organic revenue growth targeted at 3% to 4% per year, which is inclusive of roughly a negative 2% headwind from the closure of the Southbridge Landfill over the next 2 years. We've targeted $20 million to $40 million of acquisitions for development activity per year. We expect this activity to ramp up over a period of time, and we don't plan to budget it. Acquisitions or development activity will be opportunistic and we'll strictly adhere to our disciplined capital return hurdles and process. Normalized free cash flow growth of 10% to 15% per year with a base line target of generating more than $50 million per year of normalized cash flow by 2021. Total leverage targeted between 3 and 3.25x debt-to-EBITDA.

And with that, I will turn it over to the operator to start the questions.

(Operator Instructions) Your first question comes from the line of Corey Greendale.

I was going to say like, I'm not Michael, so can you talk about your 2021 plan? But you actually did provide some good detail, so I appreciate it.

Thank you.

So on the acquisition front, Ed, could you just dig into a little more? So, I'm understanding you're gearing that back up, but just a little more detail on first of all, kind of how are you managing that? Do you have like a separate team? Is that -- are things being found by the local operators and bubbling up? How's that going to work?

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

But I think it's fair to say, John, in no way, do we plan to take our eye off the ball. This isn't like a huge pipeline or goal.

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

Look across at the financial targets in the Northeast, how much of that potential is tuck-in where you are the natural buyer because of your asset positioning? And how much would be more getting into new kind of (inaudible) waste [gens] or however you want to put it?

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

And then, switching topics. So I understand the impact of operating 2% headwind over the next couple of years. But just to make sure we have it straight, Ned, could you walk through the kind of the timing of the revenue impact and the EBITDA impact over the next couple of years?

Yes, sure. So as you may remember, we've already stepped down tons to the site, pretty dramatically. Back in 2015, we generated roughly $12.5 million of adjusted EBITDA, and we are generating roughly -- sorry, I'm trying to find the number, I can't remember -- $14 million of revenues. I'm sorry, $18 million of revenues. In 2016, we generated roughly $7.5 million of adjusted EBITDA and roughly $15 million of revenues. We're on track this year to do about $4.5 million of adjusted EBITDA and about $11 million of revenues. And we expect to do about the same next year. So we'll do about $10 million, $11 million, $12 million of revenues and about the same in adjusted EBITDA. And then 2019, will be the comp period. And as you can see, we've already ramped down pretty dramatically. So this isn't like a cliff that we're facing. We've already managed through a lot of the headwind over the last couple of years as we've been outperforming as a team. This year, alone, as a great example, as we started to experience some real headwinds and things were moving backwards with our permitting, we've redirected our capital plan during the year. And we started to reallocate capital away from Southbridge to other positive opportunities in the business, including developing [cells] at 2 New York landfills a year ahead of schedule. So we could try to ramp volumes more aggressively at those sites within our pricing program, and that's worked well for us. So we've already overcome a lot of this, Corey, and the comp will come into 2019.

Great. Just one other quick one and then I'll turn it over. I just want to make sure -- I think I knew...

You're at 4 or 5, now. Go ahead, sorry.

I'm sorry. I'm just not Michael, I'm sorry. I apologize, Michael, I don't mean it. $20 million to $40 million per year, [Ned], was that -- I assume, that's a dollar allocated to acquisitions, not dollars of revenue?

That's dollars of purchase price. Not dollars of revenue.

Okay. And then last question I had, is just on Southbridge. So it sounds like it's a good decision from just a [returns] perspective. Can you remind us, are there other landfills where you have something -- my question is basically, could other -- in other communities, could they see the results here and say, hey, wait a minute, if we waive our arms enough maybe they'll back away from our community also. Any concern over that?

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

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

Same thing in Maine with a 9.5 million cubic yard expansion taking us to 2020 and 2033 in Maine as well. So...

(Operator Instructions) Your next question comes from the line of Tyler Brown.

Ned, just real quick. So the $2.2 million in health care expense, you noted it's not recurring. But you also noted conservativism. So basically what is in the guidance for the back half?

Yes, so we -- we brought up our budgeted health care through the remainder of the year by $1.5 million versus our budget. So what would that be up year-over-year, Jason? Do you know that? Any chance?

I'd have to pull it, but we can get it for you. I think it's...

I'd have to pull that number, I don't have it. But we just projected that some of the trend would reverse, but not all of it. This is all HIPAA stuff, but we can kind of get under the hood a little bit, understand generally what's happening and some of our highest cost claimants really drove the cost overruns. But we've done a wonderful job in really navigating the health care field over the last couple of years to provide a great benefit for our employees while having limited inflation, limited cost increases to them, but while still only having, I think, roughly 1.2% inflation a year. But we don't have a huge population. So every once in a while, we have a statistical anomaly like this, where we get a group of sicker employees or dependents that pops our results. We've look at ways to manage this risk and frankly, if you look at them over a longer period of time, they are going to be more expensive. So we just have to deal with this for the time being.

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

I think there may be assets from a swap standpoint, but fundamentally, we don't -- I think that we're in a position where we have other facilities where we're moving that waste to now, Tyler. So it's probably not a high probability in terms of swaps at all.

Okay. Okay. And then...

It's a possibility, but as I said, I think that we're tending to move that waste to our other facilities.

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

Yes.

Okay. What is in the full year expectations for solid waste margins at the midpoint?

Ask me a hard question. Do we have that, Jason?

Is it 26%, 27%?

Hold on for a second. I might need to circle back with you. I don't have the forecast broken out.

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

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

Your next question comes from the line of Sean Egan.

I have 2 questions for you. First, on recycling, with the strength in recycling prices year-to-date, have you had any customer push back on your contractual renegotiations or any kind of shifts in customer sentiment towards the new agreements?

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

But, I think it's important to say the reason we're not having pushback is because our programs are completely fair. When commodity prices go up, we're sharing back with our customers. When they go down, they're paying us more. So they are very consistent. We've developed frameworks for doing this a couple of years ago and month-by-month, we adjust and it's done completely fairly. So within that context, our customers value recycling, and when we went to them a couple of years ago, and said, we weren't making any money recycling, we had to adjust our programs, they understood that. And our prices went up at that point in time. But they've come down over the last several quarters as recycling commodity prices have come up. So it's a way to balance risk for us and it's worked well.

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

Yes, I mean that was a nice one. That had some really -- 3.5x. That had some great operational synergies. And it's the facts and circumstances of every transaction, I would say, but we've worked with our Board of Directors to set hurdle rates for different types of investments, different types of acquisitions. I would generally say post-synergies, we're looking to pay 3 to 5x EBITDA multiple. We've got, of course, an internal hurdle rates in a framework we're looking at for each acquisition and we'll keep very strict discipline, John, Ed and myself, looking at each opportunity.

I think it's fair to say, that the larger the transaction, the more sophisticated the buyer is going to be. So you're going to be at the upper end of those ranges for the larger transactions. And I think that the smaller transactions, we should be in that 3.5 to 4x.

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

Well, I guess, we've been the market leader in pricing in the Northeast would be my perspective. We've taken aggressive stands, especially in several markets like New York State, where we were not generating an adequate return on invested capital at several of our sites coming out of '08, '09 recession. And you know, the Southbridge action, we just took shows the value of landfill capacity, it's very, very hard to permit new capacity. We had a couple big successes recently as well in Chemung, Ontario and Juniper Ridge, but that capacity is very, very valuable. It's expensive to put in place, the regulatory cost is going up every day. So we're playing some catch-up in our view. We're going to stay focused on returns at the landfills and pushing price at these levels.

(Operator Instructions) Your next question comes from the line of William Fisher.

Just a couple of quick ones for me. First of all, some of your peers have been sort of talking down the potential impact of the recent China announcement to restrict recycling imports. Just kind of curious what your stance is on that? How you think that could impact you guys?

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

Got it. And then second question was just any thoughts around potentially implementing an environmental fee to help offset some of the higher leachate costs?

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

We started pilot programs. So it's not in place everywhere.

Yes, sorry, pilot program was put in place July 1. We've implemented the pilot program in 4 different divisions and will be executing that strategy between now and the end of the year for the rest of the company. Pilot program has gone fairly well, so far, with not a lot of negative feedback.

Okay. So should -- we can expect some of the impact of the higher [leachate] costs to sort of, I guess, be mitigated going forward?

Well, I think it is likely to be mitigated going forward. I suspect we'll probably get back to normal rainfall. As Ed said, we were 100% increase in terms of annual rainfall for May and June. So we expect that we're going to go back to more normal -- more normalized precipitation over the last 2 quarters of the year.

We also have a double whammy where we're doing construction at 7 landfills. We have 2 months of historically high rainfall when you got sites opened up.

Right. Exactly.

It's kind of -- it's a double hit almost.

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

Got you. Well, hopefully the weather works in your favor.

Your next question comes from the line of Brian Butler.

So I guess I'll ask the Michael question, you said for 2021 target, did you say $50 million in free cash flow?

Yes. That was kind of at the bottom end, the base line.

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

We didn't lay out a number. But...

I had to try. And -- okay. So on the Southbridge piece, where you've talked about 2018 being kind of that $10 million to $12 million revs and $4.5 million in EBITDA. Post -- when that ends, do those -- are you just losing all that volume? Is that going to a competitor? Or are you going to see that goes somewhere else and the reality is, is that $4.5 million of lost EBITDA comes -- potentially some of it comes back, just you're just going to have higher costs.

A small portion of that will come back and a portion of that will go to a third party. So I think we will benefit from some of the tonnage that's left today. We'll move that to our other facilities and some of it will go to a third party. So maybe half and half. A little -- maybe 60-40, I think, 60% to third-party facilities, 40% to ours. Just as a ballpark -- approximate -- approximately.

So I mean, at the very least, it's not just all disappearing. It does go somewhere. And then, when you think about the acquisitions and the multiples paid, you kind of mentioned some of them. Is that kind of before synergies? Or is that an after synergies when you think about after it being incorporated?

Yes, so those multiples were after synergies, after being incorporated.

Your next question comes from the line of Scott Levine.

I have a couple. Firstly, just looking for more context on Southbridge. I know permitting is always difficult and what have you. But they're having a lot of site closures in the Northeast, just trying to get a sense. Is it kind of a unique situation or is it going to get any more difficult these types of negotiations? So a little bit more color on kind of what developed there. And is it really site-specific or are there any general trends involving permitting in the region?

I think this is probably more site specific. I think that as we said, in the prepared remarks, clearly, one of the underpinnings is to have local support. And we had a referendum, we went to the community, we spent time trying to build that support. We were unsuccessful in getting that support. And consequently, I think that's certainly a driver, along with the other issues out of our control from a permitting standpoint. So I think the difficulty of getting through the regulatory environment, the difficulty associated with -- the costs associated with the regulations also had a clear bearing and just stuff, clearly, out of our control. But, again, probably one of the biggest underpinnings is to have the support of the community. Without the support of the community, it makes it really difficult to fight through that battle.

Understood. And one follow-up -- you guys have obviously done a great job getting leverage down the last few years. Understandably, you're pivoting towards growth here. But is that low [3s] you're talking about in terms of leverage 2021, kind of where you see kind of the optimal for you guys. And is there a point at which maybe even capital returns might enter the equation years down the line?

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

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

Thanks, everyone, for your attention this evening. We look forward to discussing our third quarter 2017 earnings with you in early November. Thanks, everyone. Have a great evening.

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