Casella Waste Systems Inc (CWST) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Inc. Q4 2017 Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to introduce you all to your host for today's conference call, Mr. Joe Fusco. You may begin sir.

Thank you for joining us this morning, and welcome.

With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Edwin Johnson, our President and Chief Operating Officer; and Ned Coletta, our Senior Vice President and Chief Financial Officer. Also sitting with us here today is Jason Mead, our Director of Finance.

Today, we will be discussing our 2017 fourth quarter and year-end results. These results were released yesterday afternoon. Along with a brief review of those results and an update on the company's activities and business environment, we will be answering your questions later as well. But first, as you know, I must remind everyone that various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by those forward-looking statements as a result of the various important factors, including those discussed in the Risk Factor section of our most recent Annual Report on 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.

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

Thanks, Joe, and good morning, everyone. We're very happy with our fourth quarter results and our fiscal year 2017 results. As reported in yesterday's press release, our revenues for the year were $599.3 million, up 6.1% from last year. Adjusted EBITDA was $129 million, up 7% from last year. Normalized free cash flow was $38.8 million, and we continue to reduce leverage, ending the year with a consolidated debt leverage ratio of 3.68x.

Our fiscal year 2017 results beat our original and revised guidance for revenues, adjusted EBITDA and normalized free cash flow. It's a great accomplishment for our team. We drove year-over-year improvements through our strong pricing execution, our operating efficiency programs and continued execution against our key strategic initiatives. These gains were partially offset by expected headwinds in the recycling business due to the China's National Sword program, which has negatively impacted paper and cardboard prices and caused us to increase sorting and quality control labor to meet new lower contamination standards.

While we continue to further improve the quality of our recycled fiber products, we have also done a great job over the last several years building a series of programs to help mitigate commodity risk in the recycling business. These programs include our revenue share contracts above a threshold with our customers or below the threshold our customers pay dollar per dollar processing fee. Our net average commodity rate formula that allows us to pass back increased cost to sell commodities, including higher labor or equipment costs to meet new quality standards, and our floating SRA fee that works like a fuel surcharge for our hauling customers where the SRE fee goes up when commodity prices drop and to ensure that our customers are covering the true cost to recycle.

Our risk programs generally work on a trailing 1-month basis, so with rapidly falling commodity prices from September to December and higher processing costs as we slow down the processing lines to improve quality, our risk mitigation programs have under-recovered during this period. However, as commodity prices stabilize, our programs will work to cover off the majority of the potential impact of lower commodity prices.

Even with the recycling headwinds, our outlook for 2018 is positive, and we are focused on executing against the strategies that we outlined this past August as part of our 2021 plan. With the 2021 plan, we will continue to focus on our core strategies, which have been working exceptionally well. These strategies include 3 areas: increasing landfill returns, driving additional profitability within our collection operations and creating incremental value through resource solutions.

In addition, we introduced 2 new areas of focus as part of the new 2021 plan: reducing G&A costs and improving efficiencies and allocating capital to a balance -- to balance delevering with smart growth. In providing a little more color on the latter 2 strategies, we have set a goal to reduce our G&A cost by 75 to 100 basis points as a percentage of revenues by 2021, and more importantly, to reorganize our resources and invest intelligently to drive long-term profitable growth.

Over the last 2 years, we have been slowly but surely ramping up efforts to improve our IT and technology platform, drive our sales force effectiveness and increase back office efficiencies. We've already taken a number of key steps in these areas, including the adoption of a 5-year technology plan focused on improving our core financial and operating systems. We have successfully implemented Microsoft Dynamics CRM system (inaudible). And just last month, we successfully brought online our new NetSuite ERP system and will close our first quarter 2018 books in the new system. This is a tremendous accomplishment for our finance and IT teams as they brought the new system online in 10 months, most importantly, on time and on budget.

Moving on to our strategy of balancing delevering with smart growth, we believe that we are in a unique position to grow our free cash flows at 10% to 15% a year given our size, our nimbleness and the range of opportunities in our pipeline. Over the last 3 years, we have then allocated almost all of our excess cash to paying down debt while focusing on efforts to refinance high-cost debt to lower our interest costs. We are now in a position where we have dramatically lowered our interest rates, and we have reduced our leverage to 3.68x. As such, we've adjusted our capital allocation strategy from a sole focus on repaying debt to a balanced approach where we will continue to focus on deleveraging, but we will also begin to selectively pursue acquisitions and strategic growth investments within our core operation. With this, we have set a goal to grow revenues by $20 million to $40 million per year through acquisition or development activity.

We have had early successful execution against this strategy with roughly $18 million of acquired revenues over the last 3 months. In late December, we accomplished a small tuck-in hauling acquisition. And in early January, we acquired Complete Disposal, an integrated solid waste company in Western Massachusetts. Complete is a great strategic fit with our operations and long-term plan. With this acquisition, we entered into an adjacent market and enhanced our construction demolition capabilities with the state-of-the-art processing facility and added rail and truck transfer capabilities in the Western Massachusetts marketplace that will see another 800 tons -- 800,000 tons of capacity [pending] close in 2018. Ultimately, we expect to be able to direct additional waste volumes to our landfills in New York and Pennsylvania.

Our acquisition pipeline remains robust, and we believe that there is over $500 million of acquisition opportunity in our Northeast markets. It could be a direct tuck-in to our existing operations or it could be strategically integrated with our assets.

We have developed and implemented an acquisition strategy and development framework to align strategy, financial returns to focus on -- focus resources on key targets. And we are focused on acquisitions that will generate returns well above our cost of capital, enhance our vertical integration, drive operating and G&A synergies we will either be delevering or have a fast path to recognize synergies and cash flows to delever.

One other area of focus our team is building on -- is focused on is building and retaining key employees. Trucking companies across the country are struggling with attracting and retaining drivers and mechanics. We have recently welcomed a new VP of Human Resources to the company, and we are working on a new program to build career paths for all roles in the company. We've done a great job over the years with development and retention of key management roles. But now, it's important to extend career development to all roles in the company.

Wrapping up, as reflected in our guidance, our 2018 plan is on track with our 2021 plan and displays continued execution of our strategies with a goal of driving additional shareholder value. We expect the continued strength in the solid waste pricing and volumes to offset recycling headwinds. And as I mentioned, our acquisition pipeline is very robust and provides us with great upside opportunity.

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

Thanks, John. Now onto the quarter. Revenues in the fourth quarter of 2017 were $151.2 million, up $7.4 million or 5.2% year-over-year. Solid waste revenues were up $7.8 million or 7.4% year-over-year, with higher collection and disposal pricing, higher solid waste volumes and the rollover impact from acquisitions. Revenues in the collection line of business were up $5 million year-over-year, with price up 3.7% and volumes up 1%. Pricing was up 3.5% in our residential and commercial lines of business and roll-off pricing was up 3.8%. We also experienced volume growth in all lines -- all collection lines of business during the quarter.

Revenues were up $2.6 million in the disposal line of business, with both positive pricing and positive volumes. We increased reported landfill pricing by 3.6% year-over-year. And more importantly, we increased the average price per ton at the landfills by 4.6% as we improved our mix of customers and volumes. In fact, we increased our average price per ton 6.2% in our Western region as we continue to focus on advancing pricing ahead of volumes. We expect these same positive pricing trends to continue through 2018 as we recognize the rollover impact of price increases already completed and we advanced further pricing increases in key markets.

Our landfill volumes were 1.2 million tons in the quarter, up 7.1% year-over-year with particularly strong volumes in our Western region as we took advantage of the tight market conditions to source new volumes at premium pricing. Recycling revenues were down $1.9 million year-over-year with lower commodity pricing, lower volumes, partially offset by higher tipping or processing fees.

Average commodity revenue per ton, or as we say ACR, was down 23.8% year-over-year, mainly on lower fiber pricing. Commodity prices were down almost 40% from July to December, with the majority of this decline driven by lower paper and cardboard pricing as China has drastically reduced purchases to increase quality standards. This negative trend has continued into early 2018, with commodity prices down another 20% as paper pricing has dropped further in January and February. Our customer solutions revenues were up roughly $1.9 million year-over-year. This is due to several new multisite retail customers and continued growth in our industrial services group.

Adjusted EBITDA was $30.2 million in the quarter, up $800,000 year-over-year, with margin slightly down. Solid waste adjusted EBITDA was $29.4 million in the quarter, up $2.8 million year-over-year, with strong pricing, higher volumes and cost efficiencies, partially offset by higher intercompany recycling fees, higher vehicle maintenance costs. Higher fuel costs during the period were almost completely recovered by our floating E&E fee.

Solid waste adjusted EBITDA margins were 26.2%, up 75 basis points year-over-year or up over 1.5% year-over-year, excluding the intercompany recycling and fuel margin headwinds. Recycling adjusted EBITDA was $600,000 in the quarter, down $2.1 million year-over-year, with the decline driven by lower commodity prices, lower volumes and higher variable processing costs as we had to slow processing speeds and add labor numbers in an effort to meet tighter quality standards. This was partially offset by higher tipping and processing fees. Adjusted EBITDA was $200,000 in the other segment in the quarter, up $100,000 year-over-year, with the increase mainly driven by improved performance in the customer solutions group.

Cost of operations was up $6.7 million year-over-year, with the increase in cost mainly driven by higher third-party disposal and transportation costs, higher recycling labor, higher wages on higher volumes. Some of our new contracts and acquisitions are a little bit higher maintenance costs. G&A costs were up $900,000 year-over-year. This increase was mainly driven by higher bonus and equity compensation accruals during the period.

Because of U.S. tax reform, we revalued our federal deferred taxes and valuation allowance in the fourth quarter, resulting in a $15.3 million tax benefit for fiscal year 2017. This includes a deferred tax benefit for reducing our federal taxes from 35% to 21% and a $12.8 million benefit for 80% of the indefinite life deferred tax liabilities, which became available as a source of future taxable income. Our $101 million in federal net operating losses remains available to offset future taxable income, and it doesn't begin expiring until 2031.

Our normalized free cash flow was $38.8 million in the fiscal year, up $11.7 million from last year. This improvement was mainly driven by our great operating performance in the period and our $10.9 million of lower cash interest costs. It was partially offset by higher capital expenditures in the period as we built out airspace at 7 landfills and continue to invest in our fleet.

As of December 31, 2017, our consolidated net leverage ratio as defined by our credit facility was 3.68x, which is down 1.74x since December 31 of '14. In addition, our total debt was $497.7 million at year-end, which is down over $39 million in the last 3 years. As we laid out in our 2021 plan, we remain focused on further reducing leverage in the business with a goal of getting leverage down to between 3x and 3.25x through continued capital discipline.

Our actions to reduce leverage, reduce debt and improve cash flows has not gone unnoticed, and on February 26 or just this Monday, Standard & Poor's increased our corporate credit rating from B to a B+ with a positive outlook.

As stated in our press release yesterday afternoon, we announced our guidance for fiscal year 2018 by estimating results in the following ranges: revenues between $618 million and $628 million. Our revenue growth in 2018 as we indicated in our press release is slightly muted because of the adoption of the new revenue recognition standards. This will lower our revenues by approximately 1.5% in the year. Adjusted EBITDA during the period, we're estimating a $135 million to $139 million or up 4.5% to 7.7% year-over-year. We're estimating normalized free cash flow between $42 million and $46 million or up 8.3% to 18.6% year-over-year.

As we indicated yesterday, our budget does not include impacts from any new acquisitions that have yet to be competed. However, it does include the rollover impact from acquisitions completed in 2017 and in early 2018.

As John laid out, we remain cautious about the near-term headwinds in the recycling business. And given current market conditions, which is pricing up through February, we expect recycling adjusted EBITDA to be down roughly $2 million to $3 million year-over-year. However, this headwind is already included in our guidance ranges for the year.

We have projected very strong performance in the solid waste operations in the fiscal year, with price growth of 2.5% to 3.5%, positive volume growth and the rollover impact of acquisitions and the continued execution of our strategic initiatives.

With that, I'll hand it over to Ed. Thank you.

Thanks, Ned, and good morning, everyone. As Chief Operating Officer, my focus is on the efficiency of our operations and the key financial metric is the cost of ops as a percentage of revenue. As most of you know, we've been very successful in reducing our cost of ops from 73.4% of revenue in 2014 down to 67.6% in 2016. And that trend continued through the first 9 months of 2017, at which point we were down another 30 basis points year-over-year. Our success was driven by increased efficiency and our ability to improve pricing ahead of inflation, both aided by improved equipment and automation, improved service levels and by our innovative pricing mechanisms.

In the fourth quarter, our reported results show an increase in the cost of ops percentage of about 110 basis points. Ned went through some of the key dollar cost increases for the quarter. Some of these increases are covered by increased revenue, either from price or from new business, but some of the cost increases are not covered. From an operational efficiency standpoint, John walked through the cost increases in recycling and mentioned that we have had to slow our processing speeds and increase our labor to meet new market-driven quality standards. As a result, our cost per ton has risen, so we've lost efficiency there. But I wanted to assure everyone that we have not lost efficiency in our collection and disposal operations.

Staying on recycling for a minute, the commodity markets and the increased processing cost will continue to be headwinds in the near term. As Ned said, we're building in a shortfall for 2018. In the long term, our pricing mechanisms and the expiration of certain long-term municipal contracts entered into back when the market norm was to take the market risk will allow us to adjust our revenue to rebuild our margins from recycling. In addition, as the entire industry has the same quality standard issue, everyone has slowed their processing speed, effectively reducing processing capacity in the market at a time when building new MRFs is financially infeasible and no new capacity is coming on. Couple that with the fact that recycling is mandatory in all of the states we operate, simple supply and demand pressures should drive tipping fees even higher.

The other changing dynamic specific to our markets in the Northeast is the rise in disposal pricing. This is obviously a great benefit to us due to our unique set of assets. With price outpacing cost, landfill margins are up and the trends going into 2018 are very positive. The landfill sales team is driving volume as well, incremental tons being high-margin due to the fixed cost orientation of landfill operations, so the cost of ops as a percentage of revenue should continue to improve. Day-to-day landfill operations are always challenging, but our teams are doing a great job of meeting them while maintaining operational efficiency.

The rising disposal prices and the increased SRA fees are passed to the [streets for billings] from our collection operations, which continued to perform well. In a period of rapid inflation in these key cost, it's difficult to pass-through both the cost and margins fast enough to match cost. John mentioned the one-month delay in SRA recovery. So collection margins deteriorated slightly during the quarter. This will be recovered quickly, and we're forecasting continued margin improvement in 2018 for the collection line of business.

From a pure operational efficiency standpoint, our key operating metrics remained strong. And as we continue to upgrade equipment to the fleet plan, improve training and recruiting practices through several new initiatives and benefit from improved purchasing practices through the new ERP platform, we're expecting continued improvement.

So we are happy with the way we closed out 2017 and feel we're getting a great start to 2018.

With that, I'd like to turn it back to the operator for -- to coordinate your questions.

(Operator Instructions) Our first question comes from Corey Greendale with First Analysis.

So I just had a few questions. The guidance for 2018, the -- does the volume -- and just given the context of the capacity coming out of the system, I noticed that the volume guidance doesn't seem very aggressive. Are you assuming that because of your more aggressive pricing [does it] increase the churn? Or just kind of what's driving the relatively modest volume guidance?

Yes, Corey, this is Ned. So as you may know, we started to ramp down some volumes in Southbridge in anticipation of closure. We've also ramped some volumes down at several other sites. So as we look into 2019 we have additional capacity, long-term built-out capacity to move some of our Southbridge volumes to. So we're balancing a bit between the 2 years in anticipation of ramping down the site. In addition, as you know, we've been very focused on pricing, and we put together robust pricing strategies for 2018, with prices up as much as 10% to 12% in many markets. The volume had been coming in a robust manner early in 2018 and probably outpacing slightly our volume expectations year-to-date. But we'll continue to look at pushing pricing further as we manage those volumes.

Is there a way to quantify what the volume guidance would have been x the ramping down at Southbridge?

Yes. Do we have something, Jason, on...

Should I go to my next one?

Sorry. Yes, go to your next question. We might have to get back to you on that one.

No problem. I just had a couple other guidance questions. The -- just mathematically, I would've thought the guidance for revenue growth from acquisitions would have been higher, given what you already announced. Does that -- does some portion of the acquired revenue end up shifting from revenue to cost savings because of internalization or something?

No. It's -- I guess, we -- I'm not sure. We -- some of it are comps during the year. But overall, our revenue still are muted in the year by about $10 million because of the adoption of the new revenue recognition standards. So that might be some of what you're seeing where we guided $618 million to $628 million overall, and our revenues would have been $10 million higher. So with the adoption of the revenue recognition standard, there are certain revenue streams, like in our recycling facilities where we used to recognize gross revenues and then have netted against those certain rebates or purchase materials with our customers. So no positive operating income impact, but our revenues were grossed up and our costs were grossed up. With the adoption to standards, revenues are coming down, costs are coming down by $10 million. So it's muting a little bit of our overall revenue numbers in the year.

Is -- that recognition changes, is that almost entirely because of customer rebates and going through the recycling line? Or is there an impact on the solid waste line.

Yes, it's mainly the recycling a little bit our solutions business, a little bit in solid waste as well.

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

Give me 1 second. [Where's Mike?] Sorry, Corey, I just want to pull up the models.

No problem.

Solid waste we're guiding -- so we ended the year around 26.6, and we're guiding to be up maybe closer to 80-plus basis points.

Our next question comes from Tyler Brown with Raymond James.

Ned, so quick clarification, but you guys are forecasting a $2 million to $3 million EBITDA drag in recycling versus '17. Is that right?

Yes.

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

It's working very well, and our other risk programs are working well. Our issue right now is really related to a couple remaining contracts in the recycling business that have floors. So when we entered into these contracts 3, 4, 5 years ago, we would've never imagined that we would've charged processing fees this high to customers. In certain markets, we're charging $50, $70, $75 a ton tipping fees. And in some of these old contracts, we had floors that said I'll never charge you more than, say, $40 a ton or something like that. So we have hit some of those floors. And then one of the other small issues we have, just because we're at historically low prices, is some of our municipal book of business. We have revenue shares that are structured to have a threshold, so over a certain threshold amount for ACR is, say, $75 or $80 a ton, we share revenues. To meet that, we charge. As the cost structure is dramatically changed in the recycling business, a number of those contracts were not flexible enough to allow us to change that threshold. So we've really made our contracts more and more sophisticated over the last few years to allow us to move those thresholds. Some of those historic contracts don't have that flexibility. So almost all of that headwind year-over-year is not due to our risk programs that are working. It's due to legacy contracts that don't let us offtake that risk.

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

Yes, so in the fourth quarter, that's a great point, we have a lot of it.

In the fourth quarter there's been a tremendous -- much more of it was because of the lag and not catching up with the fees.

Yes, probably at least half of it.

Yes.

Okay, okay. That's helpful. Then what is the M&A EBITDA rollover benefit in '18 based on what you've done that's assumed in the guide?

So it's about 2.5 to 3.5 range.

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

Well, some of the things that we're doing from a development standpoint or looking at, well, first of all, they're all looked at on a return basis. And some of the development work that we're doing is additional capital development at the recycling facilities to meet the new standards. Some of the other things that we will look at from a development standpoint would be the depackaging facilities and other things that handle organics, Tyler. But again, it's looked at in a -- on a disciplined basis from a financial standpoint.

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

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

Okay, and a couple more here. So, Ned, can you give some additional color on the NetSuite rollout? Maybe what are some of the benefits to moving to that system? And then you guys mentioned the 5-year technology plan, so what's next on that list?

Yes, great. So first of all, thank you to my entire team and all of the finance professionals throughout the company and the IT team. It's actually quite remarkable. We implemented the software in 10 months, on time, on budget, which is a pretty big accomplishment. We implemented first fixed assets, general ledger and purchasing. We have not done the revenue side of this yet, and that's what's next. We are currently ramping up our efforts to look at a new, what we call field service package, so how we route our trucks, how we have work order management, how we bill our customers. This first stage is definitely the foundation to allow us to advance additional technologies. You and I have talked about this before. If you flashback a couple of years as we worked on great operating technology initiatives or customer-facing technology initiatives, it felt like as much as half our time and half our money was being spent trying to back integrate the 20- the 25-year-old systems. With the NetSuite application, it's a modern-day system with modern day, what they call APIs or interfaces, and it allows us a lot more flexibility to advance our technology program. And next on the roadmap is getting field services, dynamic routing, new billing and whatnot. And that will be our next major initiative.

Okay. So more of '19 or '20? Or when would we expect that?

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

You might want talk about the planning process for NetSuite because that was over the 1.5 year process before the beginning of the implementation so -- because I think that it's important that...

Yes, yes, from the day we had the concept of putting new ERP in place to the day it was completed, it was more like 2 to 2.5 years. But from the date we said we're implementing was 10 months. So we did a lot of preplanning, a lot of work putting resources in place, finding the right vendors to support us. So I think our perspective is all that preplanning and making sure requirements are correctly done and we have the right resources is important to be successful. So we'll update you through the year as we look to the future, but this could be a big game changer for us. You look at technology today and other industries, there really isn't the same level of technology in this business. And there's a lot of operational upside. And also just meeting customer needs that we think we can make a big advancement on over the next several years.

I mean, just having 1 database for the entire company is just going to pay a lot of dividends as we move out into the future in terms of being able to take advantage of technology from an inventory standpoint, a pricing perspective. All of that should be able to be done from a systems from a business intelligence standpoint. That's a path that we're going down. This can take some time to get there. But with the foundation of the ERP system, we're positioning ourselves to be able to take advantage of technology on a go-forward basis.

Okay, very good. And my last one, any thoughts on G&A guidance for the year?

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

I don't but...

Yes, no, the $79 million is good.

I'll get that.

Thank you, Tyler.

Our next question comes from Michael Hoffman with Stifel.

The spot [tippies], how could -- would you for us frame what happened in '17, so from the beginning of the year, to the end of the year, on your -- on the spot market, and what your thoughts are about that spot rate within the landfill side and how that's part of the 2.5 to 3.5?

So I think that the spot rate now has matured to a point where we're at 8% to 10% increases in terms of as contracts come on up, as we are pushing out the lowest-priced materials going to all the facilities. I think we're in a -- we certainly didn't start out at that rate, but that's kind of where we are now at 8% to 10%.

Okay. And in the strength of the volume going into '18, based on the level of displacements going to come from Southbridge, you could've argued you would've been a minus half to a plus half. So clearly, you're picking up some of the overall market displacement, yet you're maintaining price. So is this because of the Complete Disposal acquisition? Are you starting to see some of that leverage to that transfer station? That's part one of that. Part two is, you were looking for capacity expansion there, so I'm wondering where the status of that is.

So I think that it's a little bit early to be getting a tremendous amount -- we have a little bit of benefit from Complete, but Complete has agreements in place. It's more a '19 issue for us, where we'll get the benefit to our facilities from the Complete acquisition. We got a little bit now, but it's not all that significant. It will be much more significant in '19. And what was the second part of the question, Michael?

Capacity expansion.

You're seeking to expand your capacity.

Yes, we're -- we've got -- I think Brian and his team have worked through, and I believe they've gotten approval from the community, and we're just in the process of moving a ton of [junk] up -- moving the permit up.

Okay, so going back to the '18 volume guidance, where is that tonnage coming from and predominately going to? I am assuming most of this is landfill base, not collection base, but you're not looking for that kind of strength of volume in the collection side.

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

So -- and so to be clear, what you're doing is letting go lower price points? When Southbridge clears, the spot market is higher, you'll be able to walk that volume in the New Hampshire and the county waste to -- at a higher price point. So you get both price and volume.

Yes, so -- exactly. Some of it will just like go back into the market. Some of it will flow to New Hampshire. Some of it will flow out to New York State. And as you know, landfills have annual capacities and total site capacities, and we're managing over a 3-year horizon how we want to balance pricing and volumes into our sites. So we're running slightly lower at a couple of sites in 2018 to give us more capacity into 2019.

Okay. And then switching gears to recycling. So in the guidance, are you reassuming the current low as the basis? And so it's this bad and therefore, $2 million to $3 million, and if it gets better, great, or be at least dampened by the SRA fee?

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

Okay. And just -- I'm going to repeat that just to be clear, you're assuming the current low as in guidance, and if it gets better that's a positive, but at the moment, they're current low.

Yes, we have not assumed it will get worse.

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

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

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

Yes, our capital budget is all front-loaded, particularly in the trucks into the front of the year. More than half came in early January and the rest are coming in February, March. So we really don't have a lot of exposure. The prices are fixed, the orders are in.

It'll be a container exposure there.

Yes, it would just be on the containers. Yes.

Right. And so how do I think about that in the context if I remodel it in '19 and this tariff really happens? Do you -- what's the -- all of 24 hours and you started talking to vendors, what's the immediate reaction that prices are definitely going up or that -- or taking a wait and see?

It's too early to tell.

Yes. That's just been announced yesterday.

Yes, and we see it as experimental. I think that they're -- I think...

Yes, no, you're the first live data point since it was announced, so that's why I was asking sort of where it might end up. The acquisition pipeline, so all of the peers have all talked about how frothy the deal market is. Can you sort of talk about your own pipeline in the context of opportunity as well as what's happening in price devaluations? And how do you think about the prospects of an incremental transaction given where you are in discussions?

Sure. So I think that we look over the top of the existing franchise that we operate in. And now, Michael, there is about $0.5 billion worth of opportunities, there are 4 or 5, as you know, 4 or 5, $40 million, $50 million companies, maybe even a little bit larger than that. And then there's a couple $100 million of tuck-in acquisitions, and I think that we're going to be opportunistic. We're -- we obviously know most of the -- if not all -- most, if not all of the people in the business in the Northeast. And I think that we're clearly going to be opportunistic in terms of the purchase, and we're going to continue to file -- follow the financial discipline that Ned and Ed had established. All of those transactions come across this desk, and we evaluate them and make sure that we got the financial discipline to do the right thing. That's why we're not projecting a certain amount of acquisitions per quarter, because it just doesn't make sense. So -- but the opportunities are significant. And I don't know if you want to go through, Ned, the financials and the -- on a couple of transactions that we did?

Yes. So we -- the smaller tuck-ins, you just have such tremendous synergy value, Michael, that those synergies we're buying them in 3x to 5x range.

As John laid out earlier, Complete was a high-teens after-tax return, and the synergies will come over a couple of years as we work to internalize some of the volumes. But that was a great one because it's an adjacent market for us, an area where we don't haul today and a great growth opportunity. So as you look at (inaudible)

Also, the rail service as well. I mean, it's a brand-new facility with rail and truck service, which gives us capabilities to our facility in Pennsylvania.

So you're kind of talking about 2 types: just tuck-ins, just fit right in and create synergies, recognize early; and then things that get us into maybe some adjacent markets or strategic fitting assets.

Okay. And you were about to frame the valuation you paid for that, you didn't?

Oh, so that's -- initially, it's more like 6-ish times. But once we get the synergies recognized, it'll be in the 5s. So -- but that's kind of high-teens after-tax unlevered returns because of the fit with our assets, great acquisition.

The smaller acquisitions and smaller tuck-ins, the $1 million, the $2 million, the $5 million, as you know, are going to likely to be in the 3x to 4x. And then the larger acquisitions, when you get the $15 million, $18 million, $20 million, you're going to be on the higher end towards the 5x or 6x.

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

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

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

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

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

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

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

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