Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Casella Waste Systems, Inc. (NASDAQ:CWST)

F4Q 2014 Earnings Conference Call

June 26, 2014 10:00 ET

Executives

Joe Fusco - Vice President, Communications

John Casella - Chairman and Chief Executive Officer

Ed Johnson - President and Chief Operating Officer

Ned Coletta - Senior Vice President and Chief Financial Officer

Analysts

Scott Levine - Imperial Capital

Joe Box - KeyBanc Capital Markets

Michael Hoffman - Wunderlich

Sam McGovern - Credit Suisse

Charles Redding - BB&T Capital Markets

Operator

Good day, ladies and gentlemen and welcome to the Casella Waste Systems’ Fourth Quarter 2014 Conference Call. At this time, all participants are in a listen-only mod. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) Please note that today’s conference is being recorded.

I would now hand the conference over to Joe Fusco to begin today’s call. Sir, please go ahead.

Joe Fusco - Vice President, Communications

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

Today, we will be discussing our fourth quarter and fiscal year 2014 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 SEC’s Safe Harbor provisions. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our prospectus and other SEC filings. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change and therefore, you should not rely on those forward-looking statements as representing our views as of any date subsequent to today.

Also, during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial table section of our earnings release, which was distributed yesterday afternoon and is also available in the Investors section of our website at ir.casella.com.

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

John Casella - Chairman and Chief Executive Officer

Thanks, Joe. Good morning and welcome to our fiscal year 2014 fourth quarter conference call. Today, we plan to discuss the fourth quarter results, provide you with an update on our midterm strategy and provide guidance for future periods. I will start with a brief overview, Ned will take us through the numbers and Ed will review the operations.

We started the year with six of the strongest months that we have ever had as a company with results up significantly year-over-year. Our team was motivated to improve the business across many fronts. During the third quarter, we experienced some of the worst winter weather in over 50 years in the Northeast with long periods of record-breaking cold, snow and ice storms and several significant freeze-thaw cycles. In fact, there was 5 freeze-thaw cycles through that period of time.

We are seeing weather patterns that plagued us in the third quarter continued into the fourth quarter with winter stretching nearly until mid-April in many of our market areas. What does it mean for us? We conservatively estimate that extreme weather in the late spring negatively impacted adjusted EBITDA by roughly $1.2 million in the fourth quarter and $2.1 million in the third quarter. Our operating teams work hard to flex all the variable expenses during the fourth quarter to offset these operating challenges. We did a great job mitigating further negative impact. As you can imagine, running a route-based company in the Northeast servicing over 200,000 customers, we faced significant challenges over extended periods to get all of our customers serviced and get our people home safely. I remind our teams constantly at the end of the day, these are the two most important things to Casella: exemplary customer service and keeping our people in communities safe.

At the beginning of fiscal year 2014, we laid out four key strategies that we have planned to focus on during the year to improve our core operations, increase financial performance and improve shareholder returns. These strategies were sourcing incremental landfill volumes; two, improving route collection profitability; three, furthering our long-term Eastern region strategy to improve our business positioning in margins; and four, driving high return revenue growth through our customer solutions offerings.

Sourcing incremental landfill volumes, we executed extremely well against our goal to source additional landfill volumes with fiscal year 2014 volumes were up 350,000 tons year-over-year excluding the positive impact from the Worcester closure project. Landfills have a high fixed cost basis and these incremental volumes added significant margin with disposal adjusted EBITDA up $9.2 million year-over-year. Improving landfill returns remains a key strategy for fiscal 2015 with our focus shifted slightly from past year. We still have over 400,000 tons of excess capacity at our sites in Western New York. However, we believe that now is the time to focus on further improving landfill returns by increasing price.

We do believe that parts of our market are in the early stages of the multi-year shift in competitive dynamics. Over the last 18 months, six disposal facilities in Massachusetts, New Hampshire, Vermont and Maine, permanently closed. We estimate that another six facilities will close in the next several years. What does it mean? We estimate roughly 2.7 million tons of capacity will be permanently closed and our in-market facilities have transportation advantage over moving waste to distant sites. We have begun advancing price increase across several of our sites in response to the changing market dynamics. Improving collection route profitability, Ed has been leading our efforts to improve the profitability of our hauling operations with the focus on improving route profitability through selective price increases, dynamic routing, on-route marketing to improve density, along with equipment optimization and fleet standardization.

As we discussed over the last year, the starting point with this work was addressed with local teams had leadership gaps and we work hard to quickly fill those voids. Overall, we replaced 35% of our hauling manager over 18-month period of time and these new teams are making a difference. Hauling adjusted EBITDA was roughly flat year-over-year with higher maintenance cost on weather-related productivity issues offsetting significant improvements in the markets, where we made leadership changes.

Furthering our Eastern region strategy to improve our business positioning and margins, about three years ago, we laid out a comprehensive strategy to improve operational and financial performance of our Eastern region. We have made significant progress against this strategy, which is readily apparent in our improved financial results in the Eastern region. Our adjusted EBITDA margins in the Eastern region are up from roughly 15.5% in the 12 months ended January 31, 2013 to 21.4% for fiscal year 2014.

We have driven this dramatic improvement through the execution of a series of key steps. We settled the litigation at North Country enabling us to expand the landfill footprint and drive additional volumes to the site. We sold a negative cash flow Maine Energy waste energy facility permanently closed in November of 2012 required, BBI hauling and transfer assets in December 2012 gaining internalization benefits to our landfills and recycling facilities with other synergies with our operations. We received the permit to expand Southbridge ramping the volume 105,000 tons a year. We sold the negative cash flow biofuel C&D processing facility. In September we were awarded a 10-year hauling contract disposal and recycling contract with the City of Concord, New Hampshire.

With the hauling contract beginning on July 1, 2014 and the disposal of the contract beginning January 1, 2015, we expect to internalize up to 30,000 tons per year from this contract. We received the permit modification at our Juniper Ridge landfill in February 2014 to accept 81,000 tons of in-state MSW, allowing us to redirect volumes from the closure of Maine Energy at our Westbrook transfer station to the site. In late April we were awarded the five year contract to operate the Brookline, Massachusetts transfer station. And when the contract begins on July 1, we expect to internalize up to 30,000 additional tons to our Southbridge Landfill.

Moving into next fiscal year we had several exciting opportunities to significantly reduce costs and grow revenues in the Eastern region. Most notably the Ogden put-or-pay disposal contract expires on December 31, 2014 and we expect to yield $3.7 million of savings. Driving returns through revenue growth through the customer solutions offering Paul Ligon, our Senior Vice President of Business Development and Customer Solutions has done an extraordinary job over the past year reshaping our former major accounts brokerage business into a customer solutions group.

This group is focused on leveraging our full suite of offerings to provide environmental and resource solutions for industrial, municipal, institutional in multi-location retail customers. We experienced strong growth in customer solutions group during fiscal 2014 with revenues up 22.4% from growth in all customer categories. This group was key during the year in our efforts to renew and secure a number of new municipal and institutional contracts including Concord, New Hampshire, Brookline, Massachusetts, Oswego, Tompkins, Schoharie which are three New York transfer stations that bring us approximately 80,000 tons of additional waste to our New York facilities that contract started on May 1 of this year along with success with Brandies Colleges of Fenway as well.

We remain very excited about our growth profile in this business and we are investing capital to improve our IT infrastructure to enable further growth. Our success in fiscal year 2014 executing against these key strategies is readily apparent in our financial results with revenues up 9.3%, adjusted EBITDA up $7.3 million and free cash flow up $13.5 million year-over-year. In addition, we made progress and we do think the risk profile of our business by selling and closing underperforming cash flow negative businesses. As Ned will discuss the final clean up work associated with these actions will occur over the next eight months at which time we expect that our free cash flow performance to further improve.

With that here is Ned with the numbers.

Ned Coletta - Senior Vice President and Chief Financial Officer

Thanks John. Revenues in the fourth quarter were $118.9 million, up $10.2 million or 9.4% year-over-year. Solid waste revenues were up $5.1 million or 6.3% year-over-year, with the increase mainly driven by higher disposal volumes, acquisition activity and higher collection pricing and volumes. Revenues in the collection line of business were up $2.1 million year-over-year, with price up 1.5% and volumes up 1.5%. Our pricing programs in the commercial and residential lines of business remained on track with positive 2.2% pricing in the quarter partially offset by slightly negative pricing in the roll-off line of business. Roll-off volumes were up 4.4% in the quarter driven by strong volumes in the Eastern region in mid to late-April.

Revenues in the disposal line of business were up $2.9 million year-over-year. Pricing went down 1.5% in the disposal line of business with the decrease mainly driven by waste mix shifts with two major factors coming into play. A higher percentage of long haul tons at our Western New York landfills and continued efforts of several other sites to have third party haulers pay their own taxes and district fees. Our total landfill volumes were roughly 850,000 tons in this quarter, up 86,000 tons year-over-year excluding the positive benefit in the quarter from Worcester.

For the fiscal year our total landfill volumes were 3.9 million tons, up 350,000 tons year-over-year. As we have previously discussed, we received an approval last June, June 2013 to place additional soils at the Worcester landfill closure project. This resulted in a one-time benefit in fiscal 2014 of roughly $5 million of revenues and $2.5 million of adjusted EBITDA. We began the final grading, shaping and closure of this site this spring and we expect to have the site permanently closed by this fall.

Recycling revenues were up 3.6% year-over-year with the majority of the increase driven by the acquisition of the Tompkins MRF and the remainder driven by slightly higher commodity prices and shipped volumes. The year-over-year increase in respect in commodity prices was driven by higher plastics prices partially offset by a decline in fiber prices. We expect plastics prices to moderate in the coming months as supply returns to normal levels after challenging winter.

Other revenues were up $4.7 million year-over-year with organics revenues up $300,000 on higher volumes and customer solutions revenues up $4.4 million on organic growth, growth in the industrials group, and the acquisition of an industrial services company in the second quarter. During the quarter, we recognized $4.8 million of revenues from the roll-over impact of acquisitions.

Adjusted EBITDA was $19 million in the fourth quarter, down $400,000 from the same quarter last year. Solid waste adjusted EBITDA was $18.3 million, up $1.1 million year-over-year with increase driven by higher landfill volumes, higher energy prices in the landfill gas-to-energy business and improved performance in the hauling business partially offset by the negative impacts of the severe winter weather.

Recycling adjusted EBITDA was $300,000 in the quarter, down $600,000 year-over-year with the decline mainly driven by higher operating costs with lower throughput driven by bad winter weather again. Adjusted EBITDA was $400,000 in the other segment, down $900,000 year-over-year with higher organics performance partially offset by increased overhead expenses as we grow our customer solutions offerings and increased incentive compensation accruals during the quarter.

We estimate that weather negatively impacted adjusted EBITDA by approximately $1.2 million in the quarter, with the underperformance driven by lower than expected hauling productivity, lower than expected landfill tons and lower than expected recycling productivity combined with the 6-week to 8-week delay to the normal seasonal business upswing in the spring.

Cost of operations was up $9.9 million year-over-year with the majority of the increase resulting from higher solid waste in customer solutions volumes, bad weather that impacted productivity and costs were up for maintenance and landfill gas treatment during the quarter.

Depreciation and amortization costs were up $1.8 million year-over-year largely due to higher landfill amortization on increased volumes, higher amortization associated with acquisitions and the accelerated depreciation of certain assets associated with the CARES Water Treatment joint venture.

There are a few unusual items in income statement this quarter that I would like to run through quickly. One, during the quarter, we recorded a $7.5 million non-cash asset impairment charge related to the shutdown of the non-performing CARES Water Treatment facility. We owned 51% of the CARES joint venture and the results are consolidated to our financials. We also recorded $400,000 of severance and reorganization charges in the quarter and a $1.1 million gain on the settlement of contingent consideration related to the acquisition of the industrial services company in September.

Our free cash flow for fiscal 2014 was positive $1.3 million, just below our guidance range. We missed guidance due to two factors: one, lower than expected operating results due to the prolonged winter and weather events and two, our seasonal upswing occurred six to eight weeks late leading to a later than expected cash cycle crossing into May. Our leverage was down year-over-year with total debt to bank EBITDA at 5.04 times, total debt at $509.5 million and true availability to our tightest covenant at $58.9 million. Our next major debt maturity is a $227.5 million senior secured credit facility due in March of 2016. As of April 30, we had $133.9 million borrowed on the credit facility. We expect to refinance this indebtedness ahead of its going current in March of 2015.

Yesterday afternoon, we announced our plan to change our fiscal year end to December 31. This change will be effective next January 1, 2015. With the change we will report an eight months transition period ending December 31, 2014 and then our first full fiscal year ending December 31, 2015. During the eight months transition period we will still report our current quarters July 31, 2014 and October 31. We believe that this change will better match our annual business cycle to our reporting periods. By beginning our fiscal year with our seasonally weak periods we will have additional flexibility to better mange our business in a number of key areas from cost to capital expenditures allowing us more run way to make adjustments through our fiscal year.

Yesterday we also announced guidance ranges for the eight months transition period ending December 31, 2014 and the full first 12 months fiscal year ending December 31, 2015. After speaking to several analysts last evening we have recognized that it would probably be helpful to outline several additional statistics from a modeling standpoint. We have estimated the following ranges for the 12 months ended December 31, 2014. This includes four months of actuals from January through April 2014 and in eight months of projections we have estimated revenues between $513 million to $523 million during this period, adjusted EBITDA between $94 million and $98 million. This takes into account roughly a $2.5 million headwind from the Worcester landfill and free cash flows between negative $8 million and negative $12 million during this period.

As we have previously discussed our number of final cleanup numbers and investments that will negatively impact cash flows during the eight months transition period, these include roughly $6 million of final capping and closure at the Worcester Landfill, roughly $3 million to complete the environmental remediation and site improvements of Maine Energy and biofuels respectively, roughly $6 million to install gas treatment system at the Juniper Ridge landfill to meet the air quality standards. We expect this to reduce operating expenses by roughly $2.5 million per year and roughly $7 million of investments although some are related to several new municipal and institutional contracts, our new Lewiston MRF expected to be online in November and the development of the McKean rail transfer station. These items total roughly $22 million and will negatively impact free cash flow during the eight months period.

We will be well positioned to materially improve free cash flows during calendar year 2015 and we estimate that we will generate between $14 million and $18 million of positive free cash flow on higher operating results and a normal capital and closure cycle.

And with that I will turn it over to Ed.

Ed Johnson - President and Chief Operating Officer

Thanks Ned. Good morning everyone. I am going to touch on the quarter and talk briefly about the year just ended, but would like to focus most of my time on where we are as a company, what we have accomplished and what we need to continue working towards. I think this past year has been a significant turning point for us and we remain focused on positioning ourselves to take advantage of the substantial restructuring of the business over the past few years and the opportunities in our core activities that we are starting to see.

The overwriting story for the fourth quarter typical of all of our fourth quarters is that the financial results are always dependent on when winter ends. With our Northeast footprint February and March remain challenging due to weather, early April gave us false sense of spring that collapsed into a late season snow event and then the spring finally broke out in mid-April. Late April produced a significant uptick in demand allowing us to still meet the low end of our EBITDA guidance. The good news is now that the severe winter is over we are seeing a strong beginning to our spring season with all factions of the business collection, disposal, recycling and organic producing strong numbers.

Looking at the full year, we are happy to report that we made some significant progress. Ned went through the improvement in the consolidated results but there are more important facts to me are that the underlying fundamentals that produce those results are strong and continue to improve. We have improved volume in all lines of business, continued to improve price in the collection line and believe that we can achieve positive pricing at the landfills going forward particularly next January when the Western disposal market dynamics really begin to change.

The year behind us I would like to talk about where we are as a company focusing on how we define our corporate purpose, the scope of our activities, our key corporate objectives and our strategies to get there. I think this viewpoint is important to understand how we have successfully transferred – transitioned the company and the logic behind it. As with most companies, our corporate purpose is to create shareholder value. This year, we are happy that by any measure we have been successful with an 8.3% increase in adjusted EBITDA and a $13.5 million positive swing in free cash flow. I don’t think anyone can argue that our enterprise value has not increased significantly from where it was a year ago and the stock price has improved accordingly.

Some of the most important changes we have made in the past few years relate to our corporate scope. What business activities are we in and where are in them? We work hard to greatly reduce the company’s business risk profile by reducing exposure to volatile revenue streams, concentrating our efforts geographically to the Northeast, where our assets can work synergistically and jettisoning businesses outside our core activities.

Earlier in the year, we sold our interest in GreenFiber. This past month as you saw in our press release, we exited the water treatment business servicing the Marcellus Shale drilling activities in Western Pennsylvania. This is a great example. We found this business to have high revenue volatility that was hard to predict and plan for. We were struggling to reach profitability with it and the market seemed to be moving away from us. So, we move correctly to discontinue it. With these last two pieces, I think it’s fair to say that the business is now totally focused on its core activities and maximizing returns on core assets.

Our key corporate objectives relate to what we believe is most important to creating shareholder value within our business scope. Our first business objective is to be risk averse. We have a levered balance sheet. So, we are not a company that should take chances on a new technology or business venture that does not have a low risk profile. And as we have stated before, risk adjusted IRR hurdles are embedded in our decision-making process. Our second objective is to improve EBITDA annually by 5% to 10%. Our third key objective is to drive the business to meaningful cash flow generation. This one has been illusive, but we have made a lot of progress this year and are on track to get there in the 2015 calendar year as indicated by our guidance.

In relation to that, I want to make a brief comment on our fiscal year change. Ned spoke of our decision to change our fiscal year end from April to December to better match our annual business cycle. That’s true. There were certainly some meaningful operational advantages to the change, particularly in a seasonal business like ours is in the Northeast and that is the main driver of this decision. But it also allows us to address certain obstacles that remain in reaching our cash flow objective in the condensed period of time. We realize that we don’t need another year to get there we just need two quarters. So, it fits right in with the reporting change. Our fourth corporate objective, which is more meaningful to us internally than to the investment community is to reach GAAP profitability and we will continue to drive towards that end.

To reach these objectives, we have focused our management efforts around four corporate strategies that John went through. These strategies fit right in with our defined scope for the business. One, sourcing tons to our landfills, and for that matter, our waste recycling and processing facilities as well directly increases our EBITDA and cash flows on existing assets. Two, improving route profitability also increases cash flow and EBITDA in a low risk manner on primarily existing customers and assets. This is all about reducing our cost metrics as related to collection revenue. Three, completing our long-term Eastern region positioning strategy should move Eastern region margins from 21% to a more respectable mid-20s level again on existing assets. And four, driving revenue growth through customer solutions, this is the low-risk, asset-light approach to generating cash flow and EBITDA.

Coupling these strategies with the market dynamics that we are seeing in both the Western disposal market and the Eastern disposal and recycling markets makes this as an exciting time for us. As most of you know, there has been an overcapacity of airspace in the Western disposal market over the past several years. This market condition is forecast to change starting in January 2015, when New York City Waste awarded to the Marine transfer bidding process begins to flow to our customers in the market requiring them to push out other volume that we are well-poised to take. The long-term Eastern trend is a reduction of disposal capacity with landfills and burn plants continuing to close with no clear new capacity coming online. Pricing should rise.

In addition, recycling participation rates are climbing creating more demand for our strategically positioned processing facilities. To sum it up, we think we have had a very good year. Progress continues on all fronts. And as we make it through the summer, we will be well-positioned to meet all of our objectives in calendar 2015.

That’s the end of our formal comments. I would like to now turn it over to the operator to open up the lines for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Scott Levine from Imperial Capital.

Scott Levine - Imperial Capital

Good morning guys.

Ed Johnson

Hey, good morning.

Ned Coletta

Good morning, Scott.

Scott Levine - Imperial Capital

So, first question, with respect to the quarter and really the back half of the year, you had some impacts from weather there, but even backing out the EBITDA impact, we saw a little bit of a slowdown in the year-over-year margin expansion relative to where you guys were posting in the first half of the year. I know a lot of your operational initiatives were behind that. But if you could comment with regard to, on an underlying basis, thoughts on margin expansion potential year-over-year? And given the strong start to the spring, should we expect it to be loaded towards more spring and summer or do you think you continue to move margins up on a companywide basis year-over-year throughout this sub-period through 2014 and into 2015?

Ed Johnson

That was a lot of question there. Yes, I guess simpling it down, the margin question year-over-year and the seasonality, I mean this – first of all, this has a lot to do with why the change in fiscal year is so important to us operationally. In this quarter, the past four quarters, unlike any I have seen by pushing the spring launch to mid-April, it causes a lot of things that maybe the street wouldn’t really pickup on to happen. First of all, the spring roll-off activity just exploded in mid-April. And so what that does to the company is we have to run boxes out to our customers. In many of our sites, all of our boxes were out by early May. You run these boxes out. There is a cost to that. There is no revenue associated with it, because you would only get the revenue as you pulled the boxes. So, the delay in spring has a significant effect on us.

And now by putting April, the most important month in this as part of the second quarter next year, that’s going to make the start of spring a little less relevant and we are going to be able to capture the revenues to the match the cost. The cost of ops as a percentage of revenue will reflect a lot better. So, year-over-year, I think well certainly we still have room to improve on our cost of ops on an annual basis. So, ignoring the quarter and just looking at the years, our focus on cost on route profitability is really primarily a focus on cost of ops as a percentage of revenue. So, you’ve got to get your routes more dense. You’ve got to get your cost per yard on that route for that day to be more in line. And that’s the main focus of my efforts.

On the disposal side, as we all know, it’s a lot to do with volume. And we have been getting the volume increases, but we have seen a tick up in cost of ops on the disposal side primarily related to a couple of factors. One is the gas treatment, which has really spiked this past year at our Juniper Ridge Landfill. This is directly related to our decision to put in a gas treatment plant and that’s part of the CapEx over the next couple of months, that plan is under construction and that will bring that cost well back to the normal cost of ops. Yes, it’s about $2.5 million savings once that plant is installed.

The other thing I have to do with three landfills out in the west, which are undergoing – they are in the middle of various stages of permit processing. And as you go through an expansion permit for a landfill, there is a lot more scrutiny on the landfill. We have regulators that we are discussing things with everyday and there is a little uptick in the costs during those periods. So, I hope that answered your question, but I think as we get through these issues over the summer and get the gas treatment plant in place that will be in good position to reduce our cost of ops and improve our margins.

Scott Levine - Imperial Capital

That is helpful. Thanks, Ed. As a follow-up, you talked here about the push to increase pricing at the landfill. Over the past year, the focus I think has been more on the volume side, but if you could comment about how confident you are that you will be able to drive price while continuing to drive volume or does this anticipate a tightening of the market for all the reasons you mentioned on the call and have in recent calls?

Ed Johnson

I think that clearly the change in the market is beginning to have an impact. The three transfer stations that we just put in – that we just were awarded as of May 1, Scott, we were able to move price fairly significantly 20% to 30% on those transfer stations represents about 80,000 tons. We are beginning to see activity there. Clearly, it’s our view that with 2.7 million tons of capacity coming out of the Northeast market, it’s likely that we should begin to see an opportunity to move price. Last year, our focus was to go at market price get the tons. This year, we want to also continue to get more tons flowing to the Western region landfills, but we need to be a little bit more sensitive in terms of being able to move price as well. And we think that the market dynamics are consistent with our ability to do that.

Scott Levine - Imperial Capital

Thanks. One last one if I may really quickly, are there any other kind of large one-time cash outflows that you would foresee beyond the summer time that are assumed either in your 2015 guidance or beyond that, that we should just think about for monitoring purposes?

Ned Coletta

Yes, Scott. Hey, the only other major liability on our balance sheet is for the environmental remediation at our Potsdam Scrap Yard. And there is roughly $5.5 million accrued. We expect that money to be spent over a 20-year period of time with the majority of it’s spend, roughly $3 million in calendar ‘16. There is nothing else out of cycle in calendar ‘15. Our landfill capping and closure plans are more muted over the next several years. We don’t have a big capping event and closure event like we do at Worcester in the next eight months.

Scott Levine - Imperial Capital

Got it. Thanks Ned.

Ned Coletta

Thanks.

Operator

Thank you. Our next question comes from the line of Joe Box from KeyBanc Capital Markets.

Joe Box - KeyBanc Capital Markets

Hey, good morning guys.

Ed Johnson

Good morning, Joe.

Joe Box - KeyBanc Capital Markets

Going to dig into the reacceleration kind of post-winter months, can you maybe this is to Scott’s question as well, can you just quantify or at least directionally give us a sense where landfill pricing is at right now? And maybe same question on the roll-off side, I am curious if this is something that’s more kind of included in your guidance going forward or if we are actually starting to see it in the numbers right now?

Ed Johnson

No. Clearly, it’s – we did not incorporate significant price. I mean, if you look at the models and look at the guidance that Ned has laid out, we didn’t include significant price movement at the landfills in the guidance.

Ned Coletta

Yes. We are seeing roll-off polls once again. It’s a story of kind of two areas as well as we saw last summer, where are more urban markets, which represent say 30% of our hauling market areas are seeing stronger trends in our more rural markets or secondary, tertiary markets. And we as John and Ed described, we saw in late April into May into June, a lot more roll-off boxes being delivered. And we have actually had to add roll-off boxes. We have been purchasing for the first time in five or six years. We are seeing expansions as much like the same trends we saw late last summer into early fall. We don’t want to get too far ahead of ourselves today though, because we had such a terrible winter that we have some pull-through from March and April and even February into May and June. And it’s always hard to know how much until after you get through it. So, I think as we get into the summer months, we will start to see where this pattern normalizes out. And we kept our guidance in a conservative place even though we outperformed in May to our expectations, but it’s hard to divide how much of that April pulling through versus May being a stronger trend.

Joe Box - KeyBanc Capital Markets

Right, right, okay. Switching gears then on the disposal side, particularly in New England, we are certainly aware of the supply that’s going to be coming offline over the next five years and what that could displace into other landfills. But we have also seen a number of agreements out there for incineration or recycling or organic programs. So, how should we think about the amount of displaced tonnage that could occur, that could just be avoiding the landfill altogether, because it goes into one of these recycling programs or organics? Is that a risk to the 2.7 million tons that you are talking about?

Ed Johnson

Yes. Just one comment, you mentioned the burn plants of the incineration, there are no new burn plants right. And they have always filled their capacity. So, you have seen some agreements recently that are providing them committed capacity. Well, that’s great for the market, because those burn plants were very tough to compete – compete within the spot market in the winter months when volume goes down. So, we are really happy to see that. So, on a capacity basis, they are not taking any of the new capacity that’s being pushed out of the landfills, because there are no new burn plants and they were a capacity before.

John Casella

From an organic standpoint, we are really at our earlier stages of that. I think we characterize it as kind of the wild, wild West. And we are a first mover in Massachusetts with first anaerobic digester. In fact, we just brought the second anaerobic digester up and operational this past month in Massachusetts, in Hadley, Mass. So, the organics team has done a good job of capturing the opportunities there, but it’s going to be a slow process of moving organics out of the waste stream over the next 5 to 10 years. There isn’t anything dramatic going to happen. Clearly, we continue to see – we will continue to see reductions of total MSW going to disposal facilities over time. And part of our plan obviously is to increase the total amount of special waste that we have to offset that a bit, but clearly we are going to continue to see decline in total amount of MSW that’s going to ultimate disposal, but that’s going to happen over a 10-year period of time, Joe, in our view.

Ned Coletta

Yes. Just one more point on that, Joe, our MSW volumes at our landfills are up every year over the last six years as a company. So, we are getting more of the market share every single year. So, while additional recycling is happening, our differentiated service offering, bundled recycling and waste has allowed us to capture more and more market share. So, over the last five years, every year we have had MSW increases at our landfill. So, I think while they are making a global secular trend here over the long period of time, our market positioning and our customer base has allowed us to buck any sort of trend there and we continue to increase our volumes.

John Casella

Yes. You have to keep in mind that in Massachusetts as an example, where we have very small market share. Our opportunity to go to a municipality and help them move 40% of the stream through our processing recycling facilities allows us to take 50% of that to our disposal facilities and with very low market share that all represents upside opportunity for us. So, while we are going to continue to see that trend, we have been successful, as Ned said, in getting more tons going to our facilities, both the processing side as well as the disposal facilities.

Joe Box - KeyBanc Capital Markets

Understood. Thanks for the color there. I will leave it at that.

Ed Johnson

Thanks Joe.

Operator

Thank you. Our next question comes from the line of Michael Hoffman from Wunderlich.

Michael Hoffman - Wunderlich

Thank you for taking my questions. If we could focus on a couple of your comments, you have mentioned, you are targeting the EBITDA growth rate of 5% to 10%, what’s the underlying assumption about sales growth to support that?

Ed Johnson

Well, I think the sales growth has to be close to that range as well although we do think our cost of sales is going to be declining over the next year or two.

Ned Coletta

Yes. Our forward-looking models though have a compound annual growth rate of revenues even a little bit less than our EBITDA growth and that’s because of some of these large cost items that are changing in our business and a lot of the work Ed is doing from a synergy standpoint and to just really the accretion at the landfills from additional price in volumes that we are looking at over time.

Michael Hoffman - Wunderlich

Okay. Well, that’s – so that’s a perfect segue. So, could you help characterize for us ideally by region sort of how is the profitability of your collection business looks in the east say compared to the West and how does the disposal process look East compared to the West?

Ned Coletta

I have data sitting in front of me, Michael, of collection in total and regions in total, but I don’t have it split up right now. Maybe we can check in later just to give some high level numbers on that.

Michael Hoffman - Wunderlich

Okay. Could you share with us the collection in total, the disposal on total then?

Ned Coletta

Sure. So, adjusted EBITDA in the collection line of business in total came in at the end of the year roughly at 21% in the disposal line of business roughly 51%, the recycling business, roughly 10%, the organics business roughly 13%, and then our – those are the major business segments.

Michael Hoffman - Wunderlich

So, when you look at the collection, what do you think the upside is in the aggregate to that in helping, because the disposal is a pretty attractive number, so…

Ed Johnson

When you – actually, I was thinking while Ned was answering that, when you look at the Eastern region and the Western region, the Eastern region has more high population metropolitan areas. It’s more competitive. The Western region has more pockets, where we have significant market share. And so you are going to see when you breakdown the collection that the margins are higher in the West than they are in the East, as we proceed through our initiatives, I think the Eastern margins will start to climb, particularly in areas like New Hampshire and Maine where we have an opportunity to have better market share.

Ned Coletta

And we also have $3.7 million savings that’s built in with the expiration of the put-or-pay contract with Covanta that hits in January of ‘15 as well.

Ed Johnson

Okay.

Ned Coletta

It’s already in that. And then, I mean there is $3.7 million there, there is $2.5 million of cost that will come out with the gas treatment facility that we are putting in the summer as well. So there is significant cost reductions that are already built in to January ‘15.

Michael Hoffman - Wunderlich

Got it. And within the context of the two lower margin businesses, just because they are lower margin, it doesn’t necessarily mean they are not good returns, can you frame that in recycling at 10% or organics at 13%, how do you feel about the return on the capital you have tied up there?

Ed Johnson

On the organics business, it’s absolutely terrific. The organics team has done a really great job and the returns are significant from organics perspective. And it’s also an emerging area in terms of the regulatory environment. So, we have got states now that are from a regulatory standpoint requiring organics to be processed in various stages and it’s going to happen over a five-year period of time, but that business model is very sound and very positive returns. The recycling business is a challenge, particularly coming out of this last winter with the impacts that we saw from an operating cost standpoint we have work to do there. And I think that there is significant effort that’s got to be made on the recycling side, particularly where commodity prices are right now.

Michael Hoffman - Wunderlich

Okay. And just to understand your definition, I think of this as a very New England question too, since people in Vermont always say yonder and you wonder if yonder is 5 feet or 5 miles. So, what’s the definition of meaningful to a Vermonter?

Ned Coletta

Yes. So, in the organics business, the return on net assets in that business is over 25%. It’s a more asset-light business. And while the margins are low at 13%, it has high return profile and low CapEx needs. The recycling business has actually seen headwinds of adjusted EBITDA of over $6 million over the last four years. And coming off our fiscal year 2011 to fiscal year 2014, we have seen a trend with adjusted EBITDA going backwards. And it’s really due to two things: one, with China exited the commodities market, the demand is just down overall. So, we are seeing commodity prices roughly 20% below 10-year, 15-year averages. And there is no near-term catalyst just to see that breakout. We expect them to remain flat in the coming months, but we have also had some challenges on the operating side of that business, as winter hit us especially hard and we have a lot of management focus right now to get our operating costs per ton back to historical levels. It’s causing a headwind in that business. And we have concrete strategies to help that returns in that business, but we are actually negative this year. They are slightly negative. So, that’s unacceptable to us. And there is some capital put to work in that business unit. So, we have quite a bit to do.

John Casella

One of the things that we are doing, one of the strategies there obviously Michael is, where commodity markets are, but we need to really rethink the pricing model I mean to the extent that from a practical standpoint, that service is going to be required from a municipal standpoint, we need to get a fair return on the invested capital. And so we have really got to rethink the pricing models. We have done that in terms of new bids and how we are approaching that, but I think that’s probably one of the biggest movers there or levers that we can pull, is to rethink the pricing model in terms of providing that service.

Michael Hoffman - Wunderlich

Okay. And then asking the same meaningful question when you say that it produced meaningful free cash, what’s the definition of meaningful in that context?

Ned Coletta

So, for us, it’s – we have said the next big step is to get to mid-teens to $20 million to improve from there, Michael. So, I think we have put out a plan that gets us in calendar ‘15 to the first major step that we have been talking about $14 million to $8 million of free cash flow and there is growth from there. We have a lot of focus on the core operations taking cost out of the business. We are at the beginning of a multi-year pricing cycle we believe on the disposal side, which will drop to free cash flow. And I think you have seen from our management team, we are removing all the distractions. And the distractions are always the cash sinks and the management time sinks and we are focused everyday on the core business, which is a different thing at Casella than where we have been in years past. We believe there is a lot of value be created from our set of assets and we want to translate that value for shareholders.

Michael Hoffman - Wunderlich

Okay, fair enough. So, can you help me with the pieces you have given if I look at say the midpoint of your EBITDA guidance at $105 million and then the free cash say midpoint of $16 million, capital spending I am assuming is going to be probably $47ish million, $48 million, leased is about $5 million, is that the right way to think about it?

Ned Coletta

Yes. We are looking at roughly $47 million to $48 million for calendar ‘15.

Michael Hoffman - Wunderlich

And the leases should be about $5 million, $5 million to $7 million number?

Ned Coletta

Yes, yes.

Michael Hoffman - Wunderlich

Okay. So then my – I think of cash flow from operations and you subtract out CapEx and leases, gets me to that $16 million, if I work that backwards, that’s – to get to that, I am struggling with the $105 million as the EBITDA and then getting to a net income number that drops in plus D&A working capital changes to produce that cash flow from ops number. So, is there something happening below EBITDA either much lower interest, cash interest or favorable tax issues that are helping that cash flow from ops number?

Ned Coletta

No, I think the first part of it is just on the EBITDA line as you laid out and there are some concrete building blocks from calendar year ‘14 to calendar year ‘15. So, we laid out just a minute ago calendar year ‘14 in the range of $94 million to $98 million of adjusted EBITDA. And as we have talked about, there is $8 million of items that just naturally occur on January 1, 2015 the $3.7 million with expiration preventive Covanta put or pay, the new gas treatment system that will be online. We already have one of these operating at another site so we know how to operate and we know how to save money that’s going to be over $2 million-$2.5 million savings.

And then with new municipal contracts both Concord, the new recycling facility we believe will add over $2 million. So we are at a point where we have a lot of visibility on four or five items. And then we are just netting everything itself in our business model assuming that pricing gains to be offset by various cost inflation. But there is nothing radically different. The only thing that we see is working capital is going to be with negative in fiscal ’14 and will be negative in eight months ended calendar ’14 because of some of these liabilities we are paying down such as the cleanup of Maine Energy and biofuels and capping and closure. And there is not as much of the negative swing on the liabilities sides coming into calendar ’15 so that’s one item in net cash provided by operating activities that is different.

Michael Hoffman - Wunderlich

Okay. So this is – last question is a little bit tough but I saw the change in the fiscal year I think that’s a great shareholder friendly move, there is a pending proxy item around decertification of the Board, is management going to encourage shareholders to support that decertification?

John Casella

That’s an issue at the Board level and the Board hasn’t really – has not come to a conclusion on it at this point Michael.

Michael Hoffman - Wunderlich

Okay. And then, I think what you laid out is not unreasonable, it’s just, it’s going to take some time in the context of significantly producing cash that allows sort of both cash as well as EBITDA to work with the D&A down, I mean the leverage down, so is it prudent too then for the Board to explore since the time value and money issue can’t be ignored that maybe you should evaluate strategic alternatives including possible sale of the business today versus a very pragmatic and prudent model mapped out, but it’s a multi-year model in order to get to the same place two or three years from now?

Ed Johnson

I think that we are talking about two quarters and everything that we have executed on over the last three years basically we have done everything that we said that we are going to do on – in terms of execution along the way with regard to the strategy particularly over the last couple of years. So from a practical perspective when we look at where we could be in three year it doesn’t make a lot of sense strategically to sell a company today.

Michael Hoffman - Wunderlich

Okay. Fair enough. Thank you for taking my questions.

John Casella

Thanks Michael.

Operator

Thank you. Our next question comes from the line of Sam McGovern from Credit Suisse.

Sam McGovern - Credit Suisse

Hi guys.

John Casella

Thanks Sam.

Sam McGovern - Credit Suisse

Thanks for taking my question. And when you talk about the long-term objectives for EBITDA growth, should we expect that that incremental EBITDA fall down to free cash flow and therefore delevering or incremental CapEx and working capital will take at least a portion of that away?

Ned Coletta

No, it is our expectation that a good portion of it drops through – I am not sure I have a percentage calculation here from year-to-year of changes, but we do expect I don’t know if that number adjacent on he conversion fact but there aren’t looming items, there are liabilities that we expect to chew up our free cash flow in the next couple of years. We expect to have good conversion.

Sam McGovern - Credit Suisse

Got it. And I know in the past you discussed sort of a long-term goal being sort of in the low fours, as you guys sort of make this transition to actually generating cash is that still a target that you guys are aiming for or are you sort of more comfortable sort of in the mid-fours or would you go below four times?

Ned Coletta

We are still aiming to get below four times. As you have seen over the last 12 months with debt actually going up slightly mainly acquisition activity we have seen leverage come down from 5.37 times total debt to bank EBITDA to 5.04 times, so there is a path with growing our business to get leverage out as we do produce positive free cash flow we will be paying down debt and we will see acceleration of that de-leveraging.

Sam McGovern - Credit Suisse

Got it. And my last question, you mentioned earlier on the call that you plan to address the credit facility well ahead of the maturity there, the bonds that you guys have outstanding become callable in February of next year to the extent that you guys are out there doing a new credit facility would you guys have been looking to do a total refinancing of the capital structure or would you wait for the call premium to sort of…?

Ned Coletta

Yes. I will never say never, but it doesn’t look like a positive NPV trades for the company. And one thing I think everyone can agree in the company and many of our shareholders is we don’t really need to pay on bank fees and fees when we don’t need to, so we put an eight year instrument in place and it’s at a decent interest rate 7.75%. Yes, it’s a little bit high. But now we have to improve on that to pay that call premium it doesn’t make sense given the current market. And as the management team we want to get the refi done on the senior secured credit facility. We are only levered at 1.32 times to senior secured debt which is not a lot of leverage given the first priority lien on our assets and equity interest. And we just need to focus on running this business and getting the costs out and driving price. And we really don’t want to be in the mode we were in for the last five years, it’s constantly doing bonds and refinancing, so if we can get out a couple of more years on that bond that would be idea for us.

Sam McGovern - Credit Suisse

Got it. Thank you, guys. And I will pass it on.

Ned Coletta

Thanks Sam.

Operator

Thank you. Our next question comes from the line of Charles Redding from BB&T Capital Markets.

Charles Redding - BB&T Capital Markets

Good morning, gentlemen. Thanks for taking my call.

John Casella

Good morning.

Ed Johnson

Good morning.

Charles Redding - BB&T Capital Markets

Just a quick follow-up on improvement inflation, if you could just remind us kind of what percentage of the business roughly speaking the current contracts are tied to inflation right now and are most of the contracts you resetting in the back half of the year call it June, July versus half one?

John Casella

We are really not – we don’t have a significant portion of our revenue tied to inflation. We have significant customer base across the Northeast that is residential and it’s all based directly with the individual customers. So we don’t have a lot of municipal contracts that were tied to escalating inflation numbers.

Charles Redding - BB&T Capital Markets

Okay. And obviously the recent roll-off volume is particularly encouraging, could you just talk a little further about how you view the current housing construction cycle. And then switching over on the commercial side, where are commercial volumes right now relative to kind of prior peaks and have you seen any nascent increases there in terms of the container reach or starts?

John Casella

Well, as Ned said earlier in his comments this is the first time in five years that we bought roll-off boxes. When the winter finally was over in mid-April we have put every roll-off box that we had as the company and that’s first time in the five years and we are actually buying as I said buying containers. So I think that we have seen a significant increase. But also as Ned said we also felt March and April are where we really didn’t have the kind of activity that we normally would because of the winter, so it’s hard to say right now whether we are going to experience the kind of demand that we had right now through the rest of the summer through July and August. So we will have the better sense of that probably in another month. But clearly right now we are seeing significant impact and I think that we have seen from a roll-off standpoint and also from a commercial standpoint more activity this year than we have in the last few years.

Ned Coletta

Yes. We are going through our book of business in many markets just to make sure we are getting positive net revenue increases where our container weights do start to clip up and before you have service level increases you could go a little bit backwards because you start out higher container weights in the commercial customers. But as I said earlier to John’s point the roll-off activity just like we see late last summer, earlier fall is our more urban markets. We are seeing more of it and in the rural markets we are still seeing the economy lag a bit in the rural markets. And once we see that break out that will really create some more growth for us.

Charles Redding - BB&T Capital Markets

Great. Thank you very much.

Ned Coletta

Thank you

Operator

Thank you. And I have no further questions in the queue at this time. I would like to turn the conference back to Casella for any concluding comments.

John Casella - Chairman and Chief Executive Officer

Terrific. Thank you all for joining us. I look forward to you joining us on our next conference call. Thank you very much. Have a great day.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Casella Waste Systems' (CWST) CEO John Casella on F4Q 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts