Casella Waste Systems Inc (CWST) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Casella Waste Systems eight-month transition period 2014 conference call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Mr. Joe Fusco. Mr. Fusco, you may begin.

Thank you for joining us this morning, and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ed Johnson, our President and Chief Operating Officer; and Ned Coletta, our Senior Vice President and Chief Financial Officer. Today, we will be discussing results for our eight-month transition period ending December 31, 2014.

These results were released yesterday afternoon. Along with a brief review of those results and an update on our Company's activities and business environment, we will be answering your questions as well.

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

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

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

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

Thanks Joe, and good morning, everyone. Welcome to our transition-period 2014 conference call.

As a reminder before we get started, Casella has changed its fiscal year to end on December 31 from a fiscal year ending on April 30. On today's call, will discuss the Company's operating results for the eight months ended December 31, 2014, which we are referring to as transition-period 2014.

Over the last two years, we have refocused the Company and simplified our business structure. We have improved our cash flow and reduced risk exposure by divesting and closing operations that did not fit with our core strategy, and focusing management attention and capital resources on our core operations and strategies.

We've had great success over the last two years improving our financial performance, driving towards positive cash flow by advancing efforts against four management strategies. One, increasing landfill returns. Two, driving additional profitability at the collection operations. Three, furthering our Eastern region strategy. And four, differentiating our business by providing resource solutions. We plan to continue to focus our efforts in these areas in fiscal-year 2015.

During the transition-period 2014, we continue to do a great job of sourcing incremental volumes to our landfills. And in total, since fiscal year 2013, we've increased our landfill volumes by roughly 660,000 tons per year. We have successfully driven higher volumes to our landfill -- to our focused landfill sales strategy and our landfill asset positioning in several key markets that have contracted permitted capacity. A number of landfill and waste energy facilities in the Northeast have either already closed or are expected to close in the next several years. And in total, we estimate a net closure of 2.4 million tons, or approximately 25% of the total market disposal capacity in Massachusetts, Maine, New Hampshire, and Vermont. Furthermore, we expect that waste flows will shift in New York State, keeping more waste volumes within New York for ultimate disposal over the next 20 years, further tightening available market capacity.

Given this backdrop, we began to shift our landfill strategy in transition-period 2014 to balance sourcing additional volumes against improved pricing and returns at our landfills. While we believe it may take several years for the capacity constraints in our markets to become acute, we have begun to experience tightening price elasticity over the last year, which has enabled us to begin increasing disposal prices at several of our facilities.

We continue to work on strategies to source additional waste volumes to our landfill by increasing our geographic reach through the use of rail in accessing new end markets. Ed has been leading our effort to improve the profitability of our hauling business with a strong focus on driving price increases, improving route profitability, and standardizing and upgrading our fleet. As we discussed last quarter, we have begun to advance direct price increases in the hauling business to cover the decline of recycling commodity prices. We continue to focus on core blocking and tackling in the hauling line of business. Our team is focused on optimizing routes, improving route density, and standardizing and upgrading our fleet. In fact, over the last 12 months, we put 72 new trucks into our fleet as we reprioritized capital spending to focus on our core competencies. We expect our focus on upgrading the fleet to reduce maintenance costs and improve our service levels.

We've made excellent progress over the last two years improving our operations and financial performance in the Eastern region. Our progress in Eastern region is clearly marked by a dramatic increase in adjusted EBITDA margins, up from roughly 15% just two years ago to over 20% today. During the transition period, we completed the last steps to reposition the business, including completing site remediation at the closed main energy facility, the necessary site improvements associated with the divestiture of the BioFuels processing operation, and a majority of the final capping and closure of the Worcester landfill. We expect to advance margins further next year as we continue to grow revenues and reduce costs.

Two notable cost reductions impacting calendar-year 2015 are the December 31, 2014 expiration of the out-of-market Ogden Porter pay contract, which will save us roughly $3.7 million per year of operating costs, and the late December 2014 completion of the new landfill gas treatment at our Juniper Ridge landfill, which will further reduce our operating costs.

As a business, we continue to differentiate ourselves in the marketplace by offering value-added resource solutions. These solutions range from our fast-growing customer solutions group that is providing professional services to large industrial customers, to our organics business that is the leader in organics processing and disposal in the Northeast, to our market-leading recycling business that processes roughly 450,000 tons of recyclables this past year.

Our customer solutions group continued its strong growth through the transition-period 2014 with revenues up 33% period over period on the growth in the industrial services business. We continue to gain leverage in this business over the last several months as we onboard new customers while keeping overhead costs in line. We are in the early stages of transformation, in our view, in the recycling business, both at Casella and, I think more importantly, across the waste industry.

Historically, the recycling business has been viewed by many participants as a loss leader to gain traditional waste services or as a free service by many customers who believe that the revenues generated through the sale of recyclables is adequate to cover the cost of service. These perspectives are true in higher-commodity markets when the sale of recyclables covers the cost to process the materials and generate an adequate return on our investment necessary to provide that infrastructure.

However, this is not the case today. Recycling commodity prices have dropped roughly 29% since April of 2013. And at current levels, our recycling business is not profitable, nor is it producing a positive return. To continue to invest in the recycling business, we believe it's integral to our core business -- it is a part of the core business. We need to generate an appropriate return on these assets in all market conditions. As such, because we believe that the recycling business is a value-added service that our customers want, and from a regulatory standpoint we have requirements that we need to meet, it's clear that we really need to reshape the business model by advancing higher tipping fees at our MRFs and by the introduction of an offset fee to our hauling customers.

And with that, I'll turn it over to Ned, who will walk us through the financials.

Thanks, John. Revenues in transition-period 2014 were $368.4 million, up $28.3 million or 8.3% year over year. Solid waste revenues were up $13 million, or up 5% year over year, with the increase mainly driven by higher disposal volumes, higher collection pricing in volumes, and partially offset by the closure of the Worcester landfill in early 2014, with those revenues down $4.3 million.

Revenues in the collection line of business were up $4.7 million year over year, with price up 1.7% and volumes up 0.8%. Our pricing programs in the commercial and residential lines of business strengthened, with pricing up 2.2% in an eight-month period. Roll-off polls were up year over year, with strength mainly concentrated in more urban markets in the Eastern region.

Revenues in the disposal line of business were up $9.3 million year over year. Disposal pricing improved as we moved through the eight-month period, with landfill price up 0.5% in November and December driven by gains in the Eastern region, where tightening market capacity has enabled us to begin advancing pricing increases.

Our total landfill volumes were roughly 3.1 million tons in transition-period 2014, up 310,000 tons year over year. And as John mentioned earlier, annual landfill volumes were up by roughly 660,000 tons per year since April of 2013. This drove adjusted EBITDA up over that same period by roughly $14.6 million.

Recycling revenues were up $4.4 million year over year, with increase driven by higher volumes, up 10.6%, on the newly expanded Boston contract and the recent win of Rockland County MRF operations. And we also had the acquisition of the Tompkins Murph during the period, and our commodity pricing was roughly flat period over period. Other revenues were up $10.9 million year over year, with organics revenues up $2 million on higher volume, and customer solutions revenue is up $8.9 million on strong growth in the industrial segment. During the transition period, we recognized $5.8 million of revenues from the rollover impact of acquisitions net of divestitures.

Adjusted EBITDA was $74.7 million in the transition period, up $1.7 million year over year. Adjusted EBITDA had two major headwinds in the transition period. One, a tough year-over-year comp due to the closure of the Worchester landfill in December of 2013. This landfill generated $2.8 million of adjusted EBITDA in the eight months ended December 31, 2013, and it did not operate in transition-period 2014. Further, healthcare costs were up $2.6 million year over year due to uncharacteristically high claims activity in 2014.

Solid waste adjusted EBITDA was $70.4 million, up $2.6 million year over year, with the increase mainly driven by higher landfill volumes, with the disposal business up $4.1 million, or up $6.9 million excluding the headwind from the Worcester landfill closure. The hauling business was down slightly year over year, with higher healthcare and insurance costs and higher maintenance costs offsetting higher pricing and lower fuel costs in the business.

Recycling adjusted EBITDA was $2.6 million, up $700,000 year over year, with the gains driven by higher volumes and lower operating costs. We have made great progress in our recycling business over the last couple of quarters, making small strategic investments to improve the processing efficiency and reduce our costs in several of our larger MRFs. We have brought down the variable processing cost per ton by roughly 3% year over year.

Adjusted EBITDA was $1.7 million in the other segment, down $1.6 million year over year, with the customer solutions group up $400,000, organics up $300,000, offset by higher incentive compensation accruals and salaries.

Cost of operations was up $22.6 million year over year, with the majority of the dollar increase resulting from higher direct costs on revenue growth and higher healthcare costs, partially offset by lower fuel costs. General and administrative costs were up $4.9 million year over year, primarily due to timing differences of accruals as we shifted our year end. Also, staffing additions in key areas and costs associated with changing our fiscal year end. Depreciation and amortization costs were up $900,000 year over year, largely due to higher landfill amortization on higher volumes.

During transition-period 2014, we had a few unusual items on the income statement related to our efforts to clean up closed or non-performing operations. This included a $2.3 million non-cash asset impairment charge related to our year-end valuation of our equity investment in recycle rewards.

Free cash flow was negative $21 million for transition-period 2014. And as expected, free cash flow was negatively impacted by roughly $18 million of one-time cash expenditures, including $6.9 million of planned cash outflows associated with the capping and closure of the Worcester landfill, the final cleanup and site improvements at Maine Energy and BioFuels. We expect to spend roughly $1.5 million in early calendar 2015 to complete this work.

We also had $11 million of increased capital expenditures associated with new contracts from projects during the period. As we have previously discussed, we had planned for heightened capital expenditures during transition-period 2014 as we onboarded several new municipal contracts, constructed a new Lewiston, Maine, material sort facility, and installed a gas treatment system at the Juniper Ridge landfill.

On a normalized basis, free cash flow was negative $3.1 million for transition-period 2014 and actually positive $9.3 million for the 12 months ended December 31, 2014. As we reported in our press release yesterday afternoon, we reaffirmed our calendar 2015 guidance ranges for revenues, adjusted EBITDA, and free cash flow despite headwinds from lower recycling commodity prices. We expect that our average to advanced price increases in the recycling business, along with the lower diesel prices, will more than offset the currently projected commodity headwinds.

We have guided to a normal capital cycle in calendar-year 2015, with capital expenditures expected to be roughly 8.5% to 9% of revenues. Further, we do not expect any large, non-recurring cash outflows over the next year.

Our next major debt maturity is a $227.5 million senior secured credit facility due in March of 2016. We have been diligently working toward the refinancing of this debt over the last several months, and we expect to have the refinancing completed shortly. This refinancing is actually being completed with three transactions, the first being a $25 million tax-exempt disposal revenue bond in New York State that was issued on December 18. This was a 30-year bond that was initially sold as a five-year put bond at a fixed rate of 3.75%. We also tacked on $60 million to our existing 7.75% senior sub notes on February 13. And we expect to shortly close on our new five-year, $190 million ABL revolver. This will initially be priced at LIBOR plus 225.

With this refinancing, we expect to complete three major capital goals as a Company. One, moving out maturities four to five years. Two, holding cash interest costs relatively flat, with pro forma cash interest up roughly $1 million per year. And three, improving the flexibility of our capital structure with a covenant-light structure with the ABL.

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

Thanks, Ned. Good morning, everyone. On the last call, I went into some detail about the capital and operational projects we had undertaken in the eight-month transition period. As 2014 finished up right as planned, no surprises, I'm going to spend my time today focusing on current operations and the outlook for 2015.

You saw in our release that we reaffirmed our guidance for 2015, and we are confident we are on track to achieve our goals for the year. There are some industry headwinds that you may have been reading about, but we have offsetting benefits to keep us on plan, so I thought it would be helpful to walk you through some of those key items.

So let's start with the declining recycling commodity market. Everybody's talking about it. We all know that commodity prices have been declining ever since China started driving fiber prices down a few years ago with their Green Sense initiative. In recent months, oil price declines have had the same effect on plastics. Our ACR, which stands for average commodity rate and represents the average price per ton received for the mix of commodities we produce on our processing plants, has declined over 50% in the past 2 1/2 years. And although prices do fluctuate over the long run, we think this is more of a new norm. We, along with others in the industry, are focused on a solution to recover the revenue shortfall and mitigate commodity risk going forward.

The waste industry is going through a long-overdue transition, redefining recycling as a value-added service as opposed to a cost-saving measure for the customer. Our job is to provide the collection, processing, and commodity sales service, and we are looking to get a return on the recycling assets we've deployed. With dropping commodity prices no longer sufficient to subsidize the processing and collection costs, we have to find a way for the customer to pay for the service. So here is how we are addressing the situation.

We process a little over 450,000 tons of recycled commodities per year in our MRFs. Roughly 2/3 of this material is provided by third-party haulers and municipalities, typically under a revenue sharing model tied to the ACR. As commodity prices fall, we directly adjust the revenue share percentage. And when the ACR drops below a level that represents our processing costs, like it has today, the revenue share becomes a tipping fee formulated to keep us whole. We do have a few municipal contracts that do not fully protect us in the short run, but they will adjust over time or upon expiration. So two thirds of our volume is essentially hedged over the long run.

The remaining third of our tons comes from our own trucks. Our collection business has provided recycling service in the past at minimal cost, counting on commodity revenue to offset the cost of service and processing. Over the past few months, we've begun adjusting our residential pricing to reflect the new norm and are now implementing an offset fee to pass the commodity risk back to the customer. The fee will affect all of our collection lines business as recycling is a mandated activity in the space in which we operate, so everyone should bear the risk on commodities. We do expect there is going to be a lag in getting this fully implemented, so we will not recover all of the negative commodity price going into 2015, but we will offset a good bit of it and definitely will set ourselves up to get a decent return on our recycling assets going forward.

The next thing I wanted to talk about is fuel prices. A few years back, we addressed a growing problem in our fuel surcharge program by rolling the fuel surcharge into the base price for our service. As a result of that, we've not had revenue from fuel surcharges in several years. And as a consequence, we are benefiting in full for the reduction in fuel costs.

On the last call, I described in some detail our cost of ops for each line of business, some of our challenges over the past two years, and our plans to reduce costs as a percentage of revenue and improve our margins. No need to repeat those details, but we are pleased that we are starting to see the benefits of our fleet plan, which we are one year into, our IP enhancement initiatives and related processes, and our training programs. We are targeting a 150-basis-point improvement cost of ops in 2015.

So to sum it up, Ned walked you through the normalized cash flow numbers. And you see that getting to our 2015 free cash flow goal is a reasonable expectation. Operationally, the commodity price declines are more than offset by fuel savings, and we are comfortable reaffirming guidance.

As this was a short sub-period since our last call and nothing has really changed in our guidance, I have intentionally stayed brief on my comments. But as usual, we are happy to address any questions you may have. I would like to now turn it back to the operator to orchestrate Q&A. Operator? Operator?

(Operator Instructions) Scott Levine, Imperial Capital.

So you outlined a logical program to address the dip in recycling, and it sounds like you haven't seen much pushback from customers yet. But you imply or infer a high-degree conviction that you will be successful with these changes with a lag. Is that a fair interpretation? And is it a situation where you don't see much risk and pushback, or just looking -- maybe assess your level of conviction that these recent changes that you have made will indeed be successful on a go-forward basis and maybe some early results that you seen in that initiative?

So far, we really haven't seen any real pushback from a pricing standpoint in terms of what we've done over the last few months, Scott. And I think that -- it is our view I think that the entire industry recognizes that we've got to get a return on invested capital to provide that value-added service.

And I think that the public is becoming -- we've got work to do from an education standpoint, but we feel pretty confident that we're going to be able to achieve the results that we are looking for. Because, again, in most cases, even though there may be a bit more cost from a recycling standpoint as a value-added service, it's still going to be positive in terms of ultimate disposal in many cases.

And Scott, as Ed said, there's two sides. So this one is tipping fee increase at our MRFs. And the other is the intercompany or passing it to our collection customers. And as we've begun to advance significant tipping fee increases at our MRFs over the last six months, we have not seen any irrational behavior in the marketplace from other operators of MRFs. We are the leader in the Northeast, but there could be market spoilers in people who act irrationally; we've not seen that behavior.

And so with these changes, should one assume that if there were to be further deterioration and pricing on the commodity side, that these initiatives would effectively offset, call it, further downside risk for the numbers associated with those changes?

That's exactly right. What we're trying to do with the offset fee is put a fee in place that will cover that off. And at the same time, we are calling it an offset fee because if commodity prices do go back to levels where they were before, it would be a credit.

In our current structure of contracts, we have started to flatten out. So we have said many times a dollar decline in recycling commodity price translates to about $0.35 to $0.40 on the dollar. Where we sit today in the current structure of our contracts is about $0.25 on the dollar, and we're trying to flatten that even further from $0.25.

Further, we're trying to really advance price increases permanently in this line of business to have a higher return. It's our view, and I think probably everyone across the waste industry, that there will be more recycled volumes over time. It's the way society is going. And we really need to advance the business model that has sufficient returns in all market conditions and will want to invest capital in that business line.

Got it. Thank you. And just a couple of other quick follow-ups. I know the refi is still in process effectively. But in thinking about -- I know you don't guide on EPS. But any thoughts on how we should be modeling interest expense, at least preliminarily, in advance of completion of that refi process?

Yes, so we expect cash interest costs to be up $1 million with the refinancing pro forma, and we expect GAAP interest to be up roughly $1.4 million. And we are looking roughly at around -- on the income statement around $37.5 million for calendar 2015 right now.

Got it. And then one last one. I know it's still early to be putting numbers out for 2016, but you had a lot of the one-time spend bracketed into 2014 on the cash side with remediation, closure, and infrastructure. Is there anything that we should be thinking about in 2016 of that nature? Or would preliminarily you expect any improvement in EBITDA to translate into cash flow given the current outlook?

We only have one more remediation activity that is accrued for, and it's something that's been accrued for over 12 years. It's a cleanup up in Potsdam, New York. We have been actively working with the US CPA and the state of New York for several years to advance that cleanup activity. And right now, it's scheduled to potentially be (technical difficulty) in 2016 and 2017. But it will get cash outflow of about $3 million, so it will probably be split over two fiscal years. And there's nothing significant on the horizon. And we really have cleaned up the portfolio over the last few years. We set out with an objective to tighten our strategy as a Company, and we have achieved that.

We have sold Maine Energy, we cleaned that up. We sold BioFuels, cleaned that up. We've cleaned up a couple of development projects that were not going to be positive returns (multiple speakers). And now the water treatment facility in Q1, we are a little ways away from selling that, and that will be a positive cash return to us on that as well.

So we are really at the bottom of the barrel from our perspective, and we feel confident for the next two years.

Turn it over.

Corey Greendale, First Analysis.

Couple of questions. So first of all, can you give us some sense -- I understand there's going to be a lot less growth CapEx in 2015, but how much of the CapEx you are guiding to is growth CapEx?

So we have a maintenance CapEx number that's around $43 million to $44 million and then a couple of million dollars of growth. And that would be a typical cycle where we have several million dollars of just container capital and very small municipal wins. If we have something more significant, we will update the Street for that as the year goes on.

And then on the commodity side, can you -- well, first of all, you just talked about this, but just to put a finer point on it, how much of this change you are making on pricing is done, and how much is this a suggestion of what you are going to do?

The only thing that has been done is the price increases that Ed talked about on our residential line of business. A good portion of that is done. The offset fee is something that is being executed as we speak.

Okay. And I know you said you think that it's more of a permanent change in commodity pricing given that your -- given your mix in the plastics mix, if the price of oil comes back up, does that offset some of the permanence you are talking about?

Basically what we're going to do is put in an offset fee. So we are tying that to the ACR. So as the ACR -- if the ICR continues to go down, then that fee will go up. If the ACR goes back to levels where it was before, say two or three years ago where it's up 50% from where it is today, then there would be a small credit on the bill.

Okay. And then turning to the solid waste business, I think Ned, in your comments you said landfill price growth was about 0.5% in November and December, which -- I think you're characterizing that as progress. It still seems like a relatively modest number in light of how much capacity is coming out of the market. So can you just kind of put that in perspective and where you think that can and should be going to?

Yes, so if we look in the specific markets where we had capacity come out, we have begun to advance more significant price increases of 4% or 5% plus. And, as you are well aware, a good deal of our landfill volumes are contracted. So we're rolling into, say, 20%, 25%, 30% as we move through this. So we have a bit of runway here over the next couple of years to roll into PIs at those sites.

Our Western New York landfill, that's still a flat environment. There's still excess capacity in that marketplace, and we're not advancing any meaningful price increase in that market this calendar year.

Okay. So if it's 4% to 5% in the markets where capacities come out, does that mean it is actually going backwards in the other markets or just effectively zero?

Flat. Flat. We're not really rolling back any price. The market is very stable.

And then if I could ask a little bit about the piece of the guidance I don't think you've given before this, the 0% to 2% growth on the solid waste side. It seems kind of conservative in light of everything going on right now. So can you just give us a little more on the assumptions? Like, what would have to happen for overall solid waste growth in the --

First of all, Corey, I think that you're right: it is conservative. I think that there is -- if we continue to see escalation from an economic perspective, the economy continues to get better than obviously it's fairly -- I think it is fair to say that we may very well do better than that. I think it's a conservative estimate. It's something that we want obviously to meet or exceed.

And one data point on that, Corey. We have a couple things in that business. One, in the solid waste business we have our landfill gas-to-energy assets, and we expect revenues to be down in that business year over year. But we've seen natural gas prices decline significantly over the last 12 months, and that defines energy pricing in the Northeast. And furthermore, as we announced earlier, we are selling the water treatment business, so we expect there to be lower revenues. So that's about 1.5% -- 1% or 1.5% of decline of revenues associated with those two lines of business that are muting some other growth in the solid waste operations.

Very helpful. Thank you.

Tyler Brown, Raymond James.

So Ned, so maybe -- can we go through some of the puts and takes in 2015 that really drive you towards that midpoint EBITDA? It seems to me you've got the CVA put-or-pay, Juniper Ridge, you've got these new contracts, and then we have a little bit of organic growth. And all of that collectively would probably push you towards the high end. So maybe there's some takes here that I am not including. I get recycling prices, maybe landfill gas. But are there any other things that we should think about, maybe leachate given the snow, or maybe the new C&D site from Connections? Any help there?

Yes, so we completed calendar year 2014 at $96.8 million of adjusted EBITDA, and the midpoint of our guidance for calendar 2015 is $105 million. So you are looking at a plus $8.2 million gain year over year. And as you correctly said, almost half of that comes from the put-or-pay rolling off. And we have some other positives and negatives in the business including production price, landfill price that we expect to advance in the period. We also expect to take some operating costs out, as Ed said.

On the negative side, we expect a headwind of about $2 million a year from recycling for the year. We might be able offset more of that as we advance these price increases. The energy side is going to be a little bit of a headwind as well, say $1 million.

And we have been pretty conservative on the landfill volume story for the year, and we are expecting a little headwind there as well as we want to be a little bit more aggressive on pricing than we have the last couple of years. So you net through, and we are right around $8 million. But as you said, there's some opportunity to outperform here.

It's been a tough winter again in the Northeast. We beat our budget in January. February is looking like a tough month for us. You can only drive one way down the streets in Boston and across Massachusetts. So we are starting the year in a conservative position. We beat our guidance two years in a row or met our guidance, so we feel good about our plan where we sit today. And as we get into the fiscal year, if we can improve the guidance ranges and outperform, we will.

Okay. That is extremely helpful. So what about the water treatment asset? Is that a meaningful EBITDA contributor today?

No.

Okay. Perfect. And then I think Fall River went down last fall. I know Massachusetts obviously had a lot of snow, so it's kind of hard to tell. But are you guys seeing a real tightening up in that -- particularly, that Massachusetts market? And do you feel like we've turned the corner on tip fees out there?

Yes, absolutely. Most of the capacity that John mentioned that has come out the market has come out on the East Coast, and a lot of that in Massachusetts. So we've been able to push price in that market, and we think we will be able to continue pushing price in that market.

Okay. Excellent. And then Ed, just really quickly, you gave some great color on the surcharge side. But can you help us with what your burn is currently in terms of gallons?

We burn about 6 million gallons of diesel fuel a year. So we went into our budget at $3.75 a gallon; that was the guidance we put out internally. And right now, we are significantly below that, but obviously that's a moving number every day. So we do feel we're in pretty good shape as far as recovering any -- or offsetting any downside on the commodities. But -- and we do -- it just depends on where fuel goes for the rest of the year, right?

Yes.

So what is currently in the guidance? Is it $3.75?

Well, yes, but you also have higher ACR in the guidance that -- so now we have moved them together.

Okay, okay. Perfect. All right. Thank you, I appreciate it.

Michael Hoffman, Stifel.

Help me a little bit, Ned, with the balance sheet plan. Sitting on the outside looking in, it just seems like this is an expensive way to buy yourself some time to work through the refinancing of the revolver, the terming out part of the revolver and carrying that extra million dollars of interest expense. Help us understand, see through the whole plan if you could.

Yes. So when you say it's an expensive plan, I think when we were given the range of alternatives and ways we could refinance the senior secured revolver, we feel like we ended up in a pretty good spot. The $1 million a year increased interest expense -- a part of that really is funding some transaction costs. We had looked at calling the entire senior subordinated bond, which was callable on February 15 of this year. It would've cost us around $13 million in call premium plus about $7 million in fees to get that done. So that would have been a very expensive route to head down. For us, we feel like we have a balanced approach here. We rolled in a new ABL revolver that is priced at LIBOR plus 225 versus our current revolver's price at LIBOR plus 375, so there's some interest savings there.

A little bit higher interest by taking the slug of senior subordinated debt, but we feel like we have actually positioned the balance sheet well to be able to execute over the next three years. We've got pushed out maturities of four to five years. We have been doing a great job rolling on tax-exempt bonds to help us diversify our capital structure and take down costs as well. So I think we end at this spot, Michael, where we feel pretty good about the balance sheet for the next three to four years to allow us to delever.

And to that end, the target of $14 million to $18 million in free cash, are we going to see all of that go on to paying down the revolver?

Our strategy is to pay down --

Our strategy is to pay down debt. With the refinancing, it gives us a couple-of-year window to put ourselves in a position where we can reduce debt, Michael.

Okay, so you guys talked at the same time, missed the very opening. So, yes, you're going to take the free cash -- each dollar of free cash goes to paying down debt, that's the plan.

Yes.

Okay. What's the opportunity for incremental working capital leverage in your free cash at this point?

There is some opportunity. You saw a negative working capital cycle through calendar year 2014. We are actually estimating slightly flat over the next year. But if we can improve our days sales outstanding, it could improve -- as we've talked about several times, we had some negative weight on working capital during calendar 2014 including the cash outflows just from accrued liabilities for closure capping and whatnot. Those don't reoccur in 2015.

However, just bridging -- if you look at our normalized free cash flow for the 12 months we gave, it took out all that non-recurring closure capping spend and remediation spend and capital. We are positive 93. You really bridge from calendar year 2014 to calendar 2015 on higher operating performance on the EBITDA line and just at a lower capital spending. We're not assuming a big working capital swing to get us to the number.

Okay. And then when I think about bridging your -- and thank you for giving us the $96 million for 2014 and then going to the guidance. Is it fair to assume you will cover your internal costs with your price, and that bridge, then, is the combination of the productivity plus volume? That's the delta?

Yes, so we've had this conversation in a few quarters. What is our true inflation? Are we covering our true inflation as a business? And, Ed, from a leadership standpoint, you can talk about this. It's really started to push significant PIs in our residential business, and we closed out calendar 2014 at over 3% price in the residential business. We've actually pushed to closer to 2% price in the commercial line of business, which is the highest we've had in over four years. So the pricing initiatives are working. And if we can -- when we institute this new offset fee for recycling, it will help to take care of another headwind. But I think --

And another thing, which I talked more about on the last call getting into all the details -- but over the past couple of years, we've really been analyzing the business and watching what's going on with our costs. So we've had costs rising in areas like maintenance and direct labor that had to do with our fleet, which is why we put a fleet plan in place a year ago. And we are executing greatly on that.

So we are looking at improvements that are slow to come, but they are coming. Certainly 150 basis points in 2015 on the cost of ops is a pretty good target. We feel pretty comfortable with it. And as we go through the fleet plan, which is a five-year plan, and the other enhancements and processes and all the details of running the business that we are making improvements in, we are pretty confident we can keep narrowing down that cost of ops as a percentage of revenue over the next few years.

Okay. All right. Thank you for taking my questions.

Al Kaschalk, Wedbush Securities.

In terms of the gallons of the $6 million per year that you burned, I assume there's little to no hedge on that.

Well, we are doing some minor hedges right now. We're picking the right time to do it. We also -- even though we do not have a fuel surcharge program that is producing any revenue over the past couple of years because we rolled it into the base price, we do reevaluate that fuel surcharge cable every -- periodically as we see changes in the business. So we still protect ourselves going forward should there be a rapid rise in fuel prices.

And just to clarify one point, Al, just so you are aware, we are not entering into any financial hedges right now. We've entered into some fixed-price contracts of purchased fuels, so essentially hedges, but we are taking risk off the table on a forward (multiple speakers).

We did that about a month ago on a small amount of our fuel. It was less than a --

We paid about 15% of our gallons so far.

About 15% of total. About a month ago.

Okay. I guess the way to think about this, though, and I think Ed made the comment, the benefit on fuel on your operations is being offset equally by the commodity change in price?

Not quite, not quite.

If you take commodities plus energy, kind of netted the two and kept guidance flat for the year, there is some opportunities to outperform there, as we have laid out a few times on the recycling side advancing the offset fee and other price increases. But where we sit coming into the year, we feel like it's close to an offset.

A lot of the other questions I had have been asked. I think the one that I would like to maybe press further, and obviously it's a sense of probably your frustration, certainly investors, I hear you loud and clear -- the 150 basis points coming on the cost of ops in 2015. But why does it feel that the price commentary that you are giving, and it's probably more in selective markets where you are seeing the positive price trend, doesn't get converted onto the P&L? Or to why we don't see it in terms of looking at the segments at a rate that would arguably be better than cost of inflation?

I think that's a very fair question, Al. I think the reason for that is those price increases have just gone in place in the two or three -- three or four months at the most. And probably most significant, in the last 50 to 90 days is when we put the price increases in place.

And just -- I talked about it in my script, but we have had a couple headwinds in the period, and one of them is in healthcare, which weighed on cost of ops by roughly 110 basis points year over year. And from an actuarial standpoint, we've had a bit of statistical anomaly from a severity standpoint. We've done a great job as an organization for many years keeping our healthcare costs in check below the national average of inflation in healthcare. And the combination of uncharacteristically high claims activity and the heightened cost from the Affordable Care Act has really driven up that cost. We have entered calendar 2015 with a little bit lower cost there, and we are cautiously optimistic that we can take some of that out or look at some plan changes to really improve on that line.

Okay, but let me press a little bit further. So with the change in calendar year, obviously doesn't change the fundamentals of the business but may change how you go to market with price. Are we now in a spot where you will be putting forth price still consistent with your customers' base? Or are you going to do this more in a traditional format of trying to get it at the front of the year going forward?

That's a very good point because we're addressing that right now. Our roll-off season, which really kicks in in the spring -- we want to make sure our price increases and our offset fee and everything are in place before the season starts because when the demand picks up, customers are a lot less price sensitive at that point. It's much more difficult to raise price on the roll-off line, say, in late summer or in the fall.

And then as far as our residential and commercial books of business, we have moved to a model over the last several years where we have price increases throughout the year. There is not one price increase that hits in one month, Al. So as John had said earlier, we are slowly rolling into a higher price increase structure, and that started in kind of a November time frame and December into January. We don't fit our entire book of business on one day.

But I think the point is that, given the mix of business, residential isn't as significant a percentage of your revenue. So therefore, the commercial and industrial, you can -- or the rolloff, you can get after it and get after a particular head of a season.

That's correct.

Thank you.

Thank you. And I'm not showing any further questions at this time.

Great. Thank you for your attention this morning, everyone. Our next earnings release and conference call will be in early May, when we report our first-quarter results. Thanks, everyone. Have a great day.

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