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Casella Waste Systems, Inc. (NASDAQ:CWST)

Q1 2015 Earnings Conference Call

August 28, 2014 10:00 AM ET

Executives

Joe Fusco - VP, Communications

John Casella - Chairman and CEO

Ned Coletta - SVP, CFO & Treasurer

Ed Johnson - President and COO

Analysts

Scott Levine - Imperial Capital

Al Kaschalk - Wedbush Securities

Michael Hoffman - Stifel Nicolaus

Joe Box - KeyBanc Capital Markets

Tom Bakas - First Analysis

Jack Burgess - PineBridge Investments

Operator

Good day ladies and gentlemen and welcome to the Casella Waste Systems' First Quarter Transition 2014. 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, today's conference is being recorded.

I would now hand the conference over to Joe Fusco. Please go ahead.

Joe Fusco

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 results from our first quarter of our eight month transition period ending December 31st, 2014. These results were released yesterday afternoon. Before we get started on that, we want to explain the correcting and replacing press release that we issued yesterday afternoon. Our wire service, Globe Newswire made a mistake and did not include our supplemental data tables in the original release yesterday at 4 PM. Thank you to everyone who reached out to us to let us know about this mistake. The corrected release and the 8-K, both include all of the data tables.

So along with the brief review of those results, and an update on the company's activities and business environment, we will be answering your questions as well. But first, as you know, I must remind everyone that various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the 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 as I mentioned, was distributed yesterday afternoon and is available in the Investors section of our website at ir.casella.com.

Out of breath, I will turn that over to John Casella, who will begin today's discussion. John?

John Casella

Thanks Joe. Good morning and welcome to our first quarter conference call. Today we will discuss our first quarter results and provide you with an update on our mid-term strategy. I will start with a brief overview, Ned will take us through the numbers, and then Ed will review our operations.

We started the eight month transition period solidly, with strong results driven by execution in key areas. In particular, we had a strong quarter at the landfills, where we continue to add incremental volumes and drive improved financial performance. Our team continues to focus on the key strategies that we laid out last year, to improve our core operations, increase financial performance and improve shareholder returns.

The strategies are, sourcing incremental volumes to the landfill, improving route profitability, furthering our Eastern region strategy to improve our business positioning and margins, and drive high revenue growth to our customer solutions offerings.

Strategy one, sourcing incremental volumes to the landfill; during the quarter, we did a good job sourcing additional volumes to the landfill, with volumes up 134,000 tons year-over-year. In total, we have increased landfill volumes by 480,0000 tons per year over the last 15 months. As you know, landfills have a high fixed cost basis, and as a result, these incremental volumes added significant margin, with disposal adjusted a bit up 9.8 million over this period. This was a true team effort, and many people everywhere in the company contributed to this success.

The additional tons in the quarter were mainly the result of four new long term municipal transfer station contracts, continued execution of our focused landfill sales strategy, and an emerging economic tailwind in certain markets.

During the first quarter, we started four new long term transfer station contracts, including Brookline, Mass., Schoharie, Oswego, Tompkins Counties in New York. These combined contracts represent roughly 110,000 tons per year of new volumes into our disposal network.

We do believe that parts of our market are in the early stages of a multiyear shift in competitive dynamics. Over the last 18 months, six competitor disposal facilities in Massachusetts, New Hampshire, Vermont and Maine have permanently closed. We have estimated that another six facilities will close in the next several years. What does this mean? We estimate that roughly 2.7 million tons of capacity will be permanently closed, and we believe that we are well positioned to capture some of this volume, as our end market facilities have transportation advantage over moving waste to distant sites. As a result of these improving market dynamics, we have begun to advance price increases across several of our sites.

Strategy two, improving collection, grow profitability; Ed has been challenging his management team to improve the profitability of our hauling operations, with a focus on improving route profitability through selective price increases, dynamic routing, on-route marketing to improve density, equipment efficiencies and fleet standardization. Ed has focused much of his effort on fleet standardization and updates to our maintenance programs, with the goal of improving fleet uptime to reduce maintenance costs and our cost of service.

Strategy three, furthering our long term Eastern Region strategy to improve our business positioning and margins; as you know, we brought those margins in that eastern region from 15% to 22% in the last 12 months. Our effort to improve operating financial performance has bore fruit over the last several months, and we continue to have positive initiatives there as well. In Mid-August, the New Hampshire DEC issued a modification to our permit at North Country landfill, to expand site capacity by 2.1 million cubic yards, which represents over eight years of additional airspace at this high performance site.

We made great progress on our final cleanup and closure efforts at Maine Energy, the biofuels C&D facility in the Worcester landfill. As expected, we spend roughly $3.5 million during the first quarter on these efforts and expect to spend a total of $9 million during the eight month transition period.

Looking at the upcoming several months, we have a number of exciting opportunities to significantly reduce costs and grow revenues in the Eastern Region. Most notably, our Ogden 'put or pay' disposal contract expires on December 31, 2014, and as a result, we expect to yield roughly $3.7 million per year of cost savings.

Strategy four, driving high return revenue growth through our customer solutions offerings; we continue to work on repositioning our former major accounts brokerage business into the Customer Solutions Group. This group is focused on leveraging our full fleet of offerings to provide environmental and resource solutions for industrial, municipal, institutional, and multi-location retail customers. We experienced strong growth in Customer Solutions Group during the first quarter, with revenues up 45.6% from growth across all customer categories. We are working to streamline our business processes and systems to reduce costs in this line of business, in order to improve cash flows, and we expect these efforts to reduce our G&A costs, and enable further growth.

We remain on track to deliver material higher free cash flow in calendar 2015, through our continued efforts to reposition assets, complete the cleanup and closure of non-core operations, and complete investments in key infrastructure to enable further growth and cost reductions.

While we have made progress, we still have quite a bit of work to do, as a team, to drive higher cash flow and returns for our investors. An area of increased focus is on improving our operating efficiencies and cost of service in the hauling line of business through fleet upgrades, improved routing, and on-route selling.

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

Ned Coletta

Thanks John. Revenues in the first quarter were $141.4 million, up $12.8 million or 10% year-over-year. Solid waste revenues were up $6.6 million or 6.7% year-over-year, with the increase mainly driven by higher disposal volumes, customer solutions growth, and higher collection pricing volumes.

Revenues in the collection line of business were up $1.8 million year-over-year, with price up 1.6% and volumes up 0.4%. Our pricing programs in the commercial and residential lines of business remain on-track, with positive 1.9% pricing in the quarter. A real bright spot in the quarter was the roll-off line of business, with pricing up 0.8% year-over-year, and volumes up 1.5%, driven by strong volumes in the more urban markets, where we are experiencing improved construction trends through the spring and into the summer.

Revenues in the disposal line of business were up $5 million year-over-year. Landfill price was up 0.1%, while transfer and transportation pricing were slightly down on mix shifts. Our total landfill volumes were roughly 1.2 million tons in the quarter, up 134,000 tons year-over-year.

As John discussed, over the last 15 months, we have increased our annual landfill volumes by roughly 480,000 tons per year, which has driven adjusted EBITDA up by roughly $9.8 million per year. As we have previously discussed, we received an approval back in June of 2013 to place additional soils at the Worcester landfill closure project. This resulted in a one-time benefit in fiscal year 2014 of roughly $5 million of revenues and $2.4 million of adjusted EBITDA, which generated a headwind in the quarter of roughly $400,000 of adjusted EBITDA year-over-year. We expect to complete the final grading, shaping and closure of the Worcester landfill by December of 2014.

Recycling revenues were up 11.5% year-over-year with increase driven by 5.6% higher pricing, 1.3% higher volumes on the newly expanded City of Boston Contract, and the acquisition of the Tompkins MRF. The year-over-year increase in recycling commodity prices was driven by higher plastics prices, partially offset by a decline in fiber prices. The increases in plastics pricing, has been mainly driven by higher HDPE prices, as demand continues to outstrip supply, as more and more consumer based products are using recycled plastic inputs.

Other revenues were up $5 million year-over-year with organics revenues up $800,000 on higher volumes and customer solutions revenues up $4.2 million on organic growth, growth in the industrials group, and the acquisition of an industrial services company in the second quarter of fiscal year 2014. During the quarter, we recognized $2.9 million of revenues from the rollover impact of acquisitions in previous periods.

Adjusted EBITDA was $29.9 million in the first quarter, up $1.2 million year-over-year. Solid waste adjusted EBITDA was $27.8 million, up $1.9 million year-over-year, with the increase mainly driven by higher landfill volumes, with disposal adjusted EBITDA up $2.2 million year-over-year. The hauling business was generally flat year-over-year, with higher direct labor and maintenance costs, offsetting revenue gains and the closure of the Worcester landfill as I discussed earlier was a $400,000 headwind to adjusted EBITDA during the quarter.

Recycling adjusted EBITDA was $1 million, down $100,000 year-over-year, with the decline mainly driven by lower fiber prices. Adjusted EBITDA was $1.1 million in other segment, down $600,000 year-over-year, with higher organics performance offset by increased overhead expenses as we grow our customer solutions offerings.

Cost of operations was up $10.4 million year-over-year, with the majority of the dollar increase resulting from higher direct cost on revenue growth, while we improve cost of operations as a percentage of revenues for direct labor, direct operational costs and maintenance. General and administrative costs were up $1.7 million year-over-year, with the increase mainly driven by higher labor costs, as we added administrative and sales positions, with the ramp up of our customer solutions business. We also had costs associated with our change in the fiscal year end in the period, and expense associated with two legal settlements.

Depreciation and amortization costs were up $1.2 million year-over-year, largely due to higher landfill amortization on increased volumes at select sites, higher amortization associated with acquisition activity, and the accelerated depreciation of certain assets associated with the CARES Water Treatment joint venture.

Our leverage was down year-over-year, with total debt-to-bank EBITDA at 5.06 times. Our total debt in the period was $513.5 million and availability was $57.3 million. As we previously discussed, our next major debt maturity at the $227.5 million senior secured credit facility due in March of 2016. As of July 31st, we had $138 million borrowed on the credit facility, and $32.2 million of letters of credit outstanding. We expect to refinance this indebtedness ahead of its going current [ph] in March of 2015.

As expected free cash flow in the first quarter was negative $4.1 million and down year-over-year. This decline was mainly due to a $3.5 million increase in capital expenditures on planned investments and infrastructure associated with several new contracts, the construction of the Lewiston, Maine MRF and the construction of the new gas treatment system at the Juniper Ridge landfill.

In addition, free cash flow was negatively impacted by a change of working capital, due to the planned cash outflows associated with the final cap and closure of the Worcester landfill. The final cleanup and site improvements at Maine Energy and Biofuels, and then other changes in assets and liabilities. We are estimating free cash flow for the eight month transition period ending December 31, 2014 between negative $15 million and negative $19 million, a little bit lower than our June estimate, due to the CapEx and cash flow timing differences for a couple of projects. However, we do remain on track to materially improve free cash flow in calendar 2015, and we estimate that we will produce between positive $14 million and positive $18 million of free cash flow on higher operating results, and a normal capital enclosure cycle.

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

Ed Johnson

Thanks Ned and good morning everyone. While we had a pretty solid first quarter, we remain on-track, as we progress through what we are calling our transition period towards the calendar fiscal year.

As we talked about on our fiscal 2014 year end call on June, this period is where we are working through the last significant cash expenditure requirements to get us to a clean and promising 2015. Meaningful and sustainable annual free cash flow was our goal, and we are on track to get there. All of the anticipated improvements, such as the exploration of the 'put or pay' that John referred to, the improvement of the western disposal markets, our addition of rail at McKean, mostly funded by the state grant; the construction of the Lewiston MRF and the cost saving gas treatment system at Juniper Ridge are all moving forward as planned.

I'd like to focus my time today on some of the other plans we are working on, to improve our core operational and administrative efficiencies. With everything else going well, its very important for us to stay focused on driving tactical improvements.

Ned and John both made some comments about the success of our Customer Solutions Group, which provides a full suite of offerings to generally larger and more sophisticated customers. The strategy here is the focus on asset light services, that take advantage of our recycling and sustainability expertise. An integral part of our offering, is the provision of extensive customer data on the services that we are providing in a readily accessible, timely and easy to understand format. As we have proven our ability to get to customers, we now need to automate the processes to bring more to the bottom line.

This past February, we completed a comprehensive long term IT plan for the company, to make sure that the continual evolution of our systems stays in line with the demands of our customers and our evolving operational needs. Customer solutions is the near term focus of that plan, and on August 1st, we were pleased to welcome Frank Wilk, Former CIO of OAKLEAF to the team. Frank's experience and expertise is right in line with what we need to improve operating income in our customer solutions segment, by automating the data flow to the customers, while greatly improving our efficiency and customer profitability in this rapidly growing segment.

Another significant area of focus for us ahs been the fleet, and you've heard me mention specific fleet issues in the past, some specific to us and others affecting the industry as a whole. As I am sure you know by now, the mandated regulatory initiatives to reduce submissions, put a lot of pressure on manufacturers to invent solutions, and the result was, starting in 2007, a higher maintenance, less reliable waste collection vehicle.

There has been a big learning curve, even with CNG, but the manufacturers are continuing to improve their products, and we are seeing better reliability in the newer units. Some of our challenges were more specific to us, and I mentioned them on the conference calls last summer. To be more proactive, about a year and a half ago, we started implementing a long term fleet plan designed to over time increase reliability and decrease maintenance and operating costs. The main aspects of the plan include a move towards standardization where possible, and coupled with route optimization, eventually right sizing the fleet.

Another area focused at the recycled material processing area or the MRFs. During the winter, we were hit with a spike on our operating costs per ton, brought on by the severe weather, an unusual number of freeze [indiscernible] that resulted in frozen loads coming into the plants on long haul trailers. The timing was terrible, was it hit us in the peak post Christmas period, when volumes are the highest, and we ended up double handling a lot of material. We are making several process improvements to prevent this situation going forward, including the addition of a preprocessing step in our largest MRF, and we remain on-track with the construction of our Lewiston, Maine processing plant. That will eliminate the cost and weather exposure of bringing collected materials down from Maine to our Boston plant.

There is other good news here as well; we have already been successful on replacing the volume that has been coming down from Maine to Boston, primarily with our successful bid for most of the City of Boston material a few months ago. Also, we are finding a great deal of excitement in the underserved central Maine market and expect to fill the Lewiston facility faster than expected. So we are looking forward to the next quarter and specifically, the new calendar fiscal year.

With that I'd like to now turn it over to the operator to open the lines up for questions.

Question-and-Answer Session

Operator

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

Scott Levine - Imperial Capital

Hey, good morning guys.

John Casella

Hey Scott.

Ned Coletta

Good morning Scott.

Scott Levine - Imperial Capital

So strong quarter, strong commentary regarding underlying trends. Last year in the first quarter, you had a strong performance and you nudged up the guidance a little bit for revenue and EBITDA. Here you are keeping it intact; maybe a little bit more color in terms of how the quarter played out versus internal expectations, and is this more conservatism on your part, given what happened, as you played out last year, or the trend is not as strong, maybe a little bit more color on results versus internal expectations?

Ned Coletta

Thanks Scott. I think as you know and everyone knows, we really have tried to change our budgeting and forecasting to a more conservative model, and this early in the year, we chose not to nudge up guidance next vacations. We are trending towards the upper end of both ranges, and that's a positive. We don't see anything in the near term that would put us outside of the range, so we continue to execute well. As you saw in that quarter, landfill volumes are very strong, a lot of that is new long term contracted volumes as well, over five year contracts, so we have good visibility going forward.

We have seen some shifting of volumes as well. We had some weak special waste trends in the fourth quarter and construction trends because of the late winter and winter extended five to six weeks later than we expected. We saw some catch-up in the first quarter, we saw some job shift into the second quarter and the volume trends continue to be strong at the landfills. So there is nothing really on the radar that would get us off track, but we are trying to be conservative.

Scott Levine - Imperial Capital

Got it. and then a follow-up I guess on customer solutions. So good growth in that business, you mentioned SG&A, can you help us understand maybe your thoughts on the margins or profitability we should be thinking about in that business and maybe how much improvement you might expect to see there, just given the magnitude of growth we are seeing there this quarter and the last year?

John Casella

Thanks Scott. Customer Solutions is a real opportunity for us, and we are pretty excited about it. This is targeting high level customers, the more sophisticated customers with more sophisticated solutions, and it’s an asset-light business. So we are not investing a lot in it. The learning curve here is that it requires a lot of good data flow to the customers. They are demanding daily information on what's happening; and so we did not automate that process yet. So now that we see that we have a good opportunity to grow fairly rapidly there, we are going to now automate the process, and make it a lot more profitable. What was your question on --

Ned Coletta

The margins. We traditionally had margins in our brokerage or major accounts group of roughly 8% to 10% in that range. Last year our margins, our adjusted EBITDA margins were roughly 11% in that segment. This year, they are roughly 5%, and all of the reduction actually comes at the G&A line, not at the net revenue line, we actually improved a bit there. Traditionally, this had been a business unit, to have return on net assets greater than 20%. That said, it’s a low capital business, and as we take G&A costs out, we believe we will get returns back up to those levels.

John Casella

Clearly the addition of Frank Wilk as CIO, who has been there, and really understands that whole process in terms of data flow to customers, and to be able to meet those expectations, we are very excited about having Frank on board.

Scott Levine - Imperial Capital

Understood. Thanks. And just to be clear then, so the returns, you would say, comparable to your core solid waste business better, whereas not sure where that 20% plus compares?

Ned Coletta

Much-much better. Our integrated business is 6% or so range today, and this is a business, that a lot of it is done through third parties, where we have people doing logistic work for major customers and we are hiring third parties to move material. So it doesn't require a lot of assets.

Scott Levine - Imperial Capital

Got it. One last one really quickly for me. The CapEx increase, did you indicate that was associated with new contract wins or is that additional closure spending? Not sure if I missed that, but just want to be sure I was clear?

Ned Coletta

Good question. A bit of it is just timing. We traditionally budgeted a 12 year period, and moving to the eight month period, we recognize that certain items should be accelerated into the eight month period, and that's about $3 million of the increase in range, and additional expansion of the range is related to some acceleration we are looking on at fleet additions, where Ed has been looking at opportunities to improve our service, reduce our costs, we also have a bit of growth as well, of some new customers, especially in the college-university side that is coming in the pipeline.

Scott Levine - Imperial Capital

Got it. Thank you.

Ned Coletta

Thanks Scott.

Operator

Thank you. Our next question comes from the line of Al Kaschalk from Wedbush Securities.

Al Kaschalk - Wedbush Securities

Good morning.

Ned Coletta

Good morning Al.

Al Kaschalk - Wedbush Securities

I want to focus on the solid waste side initially. The volumes were dramatically higher, sort of consistent with what you've laid out, and incrementals, I think, were 29% on EBITDA. But it seems to be sending a message about the collections side of the business, and in particular, pricing seems to still be very anemic and certainly below inflation. So help me appreciate, maybe what you're seeing, but we are not seeing numbers that give us -- that strategically, that was the right thing to do to take on these incremental volumes?

Ned Coletta

No, I mean, its generally our inflationary cost categories we are pricing in excess, Al. I think its just a more matter of higher transportation costs, moving waste a bit further away, some higher maintenance costs, just productivity issues in the fleet, more so than the inflationary line items, where we actually had price at our residential and commercial lines of business at positive 1.9% combined, and that's very much in line, we have been doing right around that 2% level for over two years now.

Al Kaschalk - Wedbush Securities

But why isn't 134,000 tons driving better EBITDA numbers in that particular business?

Ned Coletta

In the solid waste business, you got to drive a little beneath the surface. Overall, the solid waste business had revenue growth of $6.6 million year-over-year. Adjusted EBITDA growth in the solid waste business was $1.9 million. But if you exclude Worcester, it is $2.3 million year-over-year. So you shift at a disposal line of business, and we are driving it to the bottom line. We had revenue growth of $5 million and we had adjusted EBITDA growth of $2.2 million or excluding Worcester, $2.6 million. So we are translating at roughly a 50% rate, which is what we'd expect.

Now in other areas of business, we talk about the G&A increases and customer solutions, some of that muted impact that we are seeing in the disposal business.

Al Kaschalk - Wedbush Securities

Maybe we will see some of that more in the Q when its filed. On Customer Solutions Group, obviously you laid out some of the volume strength there, and strategic and not automated. My question is, if the demand is there for the service, are you able to price this accordingly to specifically drive cash flow? I understand the margin profile is not going to be as great, but its certainly not driving the cash flow level that would be essential. So are there more -- is it automation that would drive scale here, to drive the cash flow, or is it just the inefficiencies on your end --?

John Casella

I think the opportunity is on both sides. I think there is an opportunity to drive revenues and drive price, as well as taking cost out. So I think its really on both sides, Al. I mean, what is very obvious to us is there is a big opportunity, and clearly, we can drive price, as well as getting the cost out.

Al Kaschalk - Wedbush Securities

That's helpful. What's generating this opportunity? Like the end customers' problem that gets solved --

John Casella

I think more and more customers, whether its industrial or institutional, are looking at having a provider of service, provide multiple services. And looking at most organizations, whether its colleges, universities or large industrial customers have plans to minimize the waste that's being generated from the facility. So it represents real opportunities to go in and provide them with the solutions to help them meet their goals from a waste reduction standpoint.

Al Kaschalk - Wedbush Securities

Okay. And then just on the --

John Casella

You know, the other interesting aspect of it Al, is it also helps us to drive actual tons, that do have to go to landfill to our disposal facilities, as well as driving tons to our processing recycling facility. So there is a real benefit there in terms of getting additional tons moving to our infrastructure.

Al Kaschalk - Wedbush Securities

Right. So in terms of our expectations, just [indiscernible] for investors, shareholders, what should we be communicating? Is it queued next quarter, is it calendar 2015, when do we see the -- how long is it going to take you to --?

John Casella

I think we will see improvements as we go to the end of the year. But I think clearly, Frank has just come onboard in terms of the back office overhead issues. So I suspect that will be calendar 2015, when we will begin to see the results of the work that he is beginning to do right now.

Al Kaschalk - Wedbush Securities

Thanks. I will hop back in queue.

Ned Coletta

Thanks Al.

John Casella

Thanks Al.

Operator

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

Michael Hoffman - Stifel Nicolaus

Hi. Thank you for taking my question this morning.

Ned Coletta

Hey Michael.

John Casella

Good morning Michael.

Michael Hoffman - Stifel Nicolaus

Hey John, Ed, Ned. If we could dig into the P&L a little more, one question on your adjusted EBITDA, where does the $3 million landfill lease amortization number show up in the P&L?

Ned Coletta

Yeah, it actually shows up in cost of operations. So I think you're aware of that, but back in the 2003-2004 timeframe, we entered into several long term operating lease contracts with municipalities, and these are actually considered to be operating leases and not capital leases, because we never take ownership of the land, nor do ever have a part in purchase, where we can purchase the land. So we recognize an operating lease cost that is much like a depreciation or even a [indiscernible] entity that shows up through our cost of operations. Its non-cash, much like amortization or depreciation.

Michael Hoffman - Stifel Nicolaus

Okay. And then, on your capital spending, can you walk us backwards -- if I took the -- say take the midpoint of your guidance, I think that's $55 million for the eight months. How would you split it up between maintenance, growth, and the legacy?

Ned Coletta

Of the $55 million?

Michael Hoffman - Stifel Nicolaus

Yeah. If I take the midpoint of your guidance? I think that's $55 million.

Ned Coletta

Yeah. So roughly $15 million, $13 million to $17 million, besides the [ph] $15 million is associated with growth or cost reduction projects, that the main projects are the McKean Rail, the new Lewiston MRF, the [indiscernible] at Juniper Ridge landfill, and then the new contracts we brought online, Concord, New Hampshire; City of Boston, the Brookline transfer station, the transfer stations in New York State, that makes up the transitional period additional spending.

Michael Hoffman - Stifel Nicolaus

Okay. That's $15 million growth, and $9 million to $10 million is the legacy, and all the rest should be maintenance?

Ned Coletta

Yeah. And that doesn't flow through CapEx, but flows through -- there are liabilities on the balance sheet, both short term and long term, environment and cap enclosure liabilities, and you see it in our negative working capital in the period, where we are paying cash down, as we reduce those liabilities that we have built up over time; and in the period, we spent roughly $4 million associated with that $9 million for the year, the transition period on completing the capping at Worcester, and the cleanup at Maine Energy and biofuels.

Michael Hoffman - Stifel Nicolaus

Okay. So then, if I am following this math correctly then I am taking -- $40 million is maintenance capital then for the eight months?

Ned Coletta

Yes.

Michael Hoffman - Stifel Nicolaus

Okay, all right. And then, that seems high, is that the pull forward of the $3 million?

Ned Coletta

You know, traditionally we spend a good deal of our capital in the first eight months of the fiscal year. Landfill development happens during that period. We order trucks, it happens during that period. Its maybe a little bit higher than in traditional period, and we have called forward some specific truck replacements that Ed can get into. There are some opportunities to gain productivity in the fleet. But its not abnormal, Michael.

Michael Hoffman - Stifel Nicolaus

Okay. And then if I look at the sales growth, just want to make sure I understand what you're trying to tell us, and so tell me if I am thinking about this correctly. So I picked up $12 million in sales, but I got $1.2 million in EBITDA, on a reported basis, or $1.6 million if I adjust for Worcester. But if I then break into pieces, roughly $5 million is the landfill at Q2, I am not giving you the Worcester yet. And then you told me that the consumer solutions is $4.3 million, but you tell me that solid waste was $6.6 million. So I have got $1.6 million, I guess, of collection, $5 million of landfill, and that would lead all of the other recycling and the like $1.4 million, so that gives me that $12 million. It looks like, landfill was positive and everything else was negative to that incremental contribution. The other three added up to an incremental negative $1 million contribution. Am I understanding that correctly?

Ned Coletta

So in the period, landfill was the one large positive contributor. The collection line of business had revenue growth and adjusted EBITDA was flat year-over-year. The organics business had revenue growth, it had positive gains in adjusted EBITDA. The recycling group had revenue gains and slightly negative $100,000 year-over-year and then the big negative detractor was the customer solutions group that had negative $600,000 of adjusted EBITDA year-over-year. So you are getting it right.

Michael Hoffman - Stifel Nicolaus

All right. But those numbers don't add up then? I am missing about $300,000 or $400,000 of negative. Where is that -- if it’s a negative $600,000 from customer solutions, I am not getting there. If I am taking 2.2 and then adding a positive inorganics of flat in collection, but a negative in -- so there's a hole there in that?

Ned Coletta

Let me just add it up. I will call you back. I think its pretty close, as much as the organics.

John Casella

Is Worcester out of your total?

Michael Hoffman - Stifel Nicolaus

Yeah I am doing -- I am going to $1.2 million, that's what I am trying to solve from. So I am starting with 2.2 million for the landfill. All right. If you could follow up that would be great. I don't want to hold up everybody else. On the collection -- in your mix of business, you made a comment earlier, you were asked about pricing, it looked like it was not tracking inflation. But how do I divide the revenue stream between indexed versus non-indexed, and sort of what was happening in the non-index piece, as far as the net core price -- so core price net of your rollbacks, what's happening there versus what were you getting on an index basis?

Ned Coletta

Are you talking about the hauling?

Michael Hoffman - Stifel Nicolaus

So in total company, you know a certain percentage of revenue is index, is that a correct statement, again predominantly a CPI?

Ned Coletta

Yes. But it’s a relatively small percentage in our business. Although the new transfer stations that we picked up, they are all indexed going forward. But on the landfill side, the bulk of that is not indexed, and on the solid waste side, only the municipal contracts or the colleges in universities would have indexes.

Michael Hoffman - Stifel Nicolaus

Okay. So if I look at solid waste alone, revenues, and then I do have -- I am following back on the other question, the pricing that you're retaining, either you're getting really rollbacks, or what's the actual price you're going to The Street with, and versus what you're actually able to retain?

Ned Coletta

The recorded price is net of rollbacks in our solid waste business, so you're not losing something in the statistic Michael.

Michael Hoffman - Stifel Nicolaus

Then it seems -- if that's a core price net of rollbacks at $1.9 million in the solid waste business, that seems to be just tracking inflation, because inflation seems to be running around $1.8 million to $2 million, as far as company inflation. Now I am not talking CPI, I realize its lower, but company inflation between labor costs and what have you. So what's the opportunity to get that number to 2.5 million? What does it take to do that?

Ed Johnson

Well that's certainly my main focus, and a lot of it has to do with the fleet plan that we are working through, and we should see some real benefits to that, coming fairly soon. One of the reasons -- if you recall, one of the reasons that I thought the change in fiscal year was so meaningful, is because now it allows us to budget and order our trucks and time to get there for the season.

For the eight months period, we are bringing in 44 trucks, and only 22 of those trucks are in to-date; because of the lead time to get them, and most of those 22 trucks came towards the end of the quarter, and they were pretty significant too. Its not so much their new trucks, its that -- what kind of trucks they are and where they fit our operational needs, and so we are really not going to see the benefit of these trucks that we are getting now until next spring, when the season picks up.

Michael Hoffman - Stifel Nicolaus

Okay. And the point of that --

Ed Johnson

The cost numbers you're looking at, our costs are a little higher than they should be, they should be coming down.

Michael Hoffman - Stifel Nicolaus

Okay. So there is a cost save, that's margin, but how does that truck change your pricing from $1.9 million in solid waste to $2.5 million?

Ed Johnson

Well you were talking about our direct labor, our inflation costs of 1.8%, I don't know how you got to that, but --

Michael Hoffman - Stifel Nicolaus

Well it’s a guesstimate based on talking to lots of driver companies.

Ed Johnson

And that number for us is high. That will come down.

Michael Hoffman - Stifel Nicolaus

Okay.

Ed Johnson

I mean, if you recall, we put in a pretty sophisticated pricing mechanism, we call it the customer profitability analytics, CPA tool. We put that in several years ago, and we have been consistently getting price in commercial and residential lines of business. Its very consistent. When I look at a market, I look at how it relates to the disposal costs in that market, and whether we are getting the proper net revenue from our customers; and not all, but most of our markets are right inline with where they should be, and we are getting price. Where we weren't getting price before was in the roll-off line of business, which is a bit more seasonal and a bit more competitive, and we are finally getting price in that, with the introduction of a roll-off pricing tool.

Michael Hoffman - Stifel Nicolaus

Okay. And the 1.9, when you look at residential, I mean, they are such dynamically different businesses. Is that equally proportionate, or is that heavier on one or the other?

Ned Coletta

We actually -- the last probably two years, we have been doing 2.5% to 3% in residential and around 1% in commercial. We did this quarter, 1.8% in commercial, that was one of our stronger periods, and we had a good volume growth in the commercial segment. So we are pushing some price in this improving economy, to our commercial customers.

Michael Hoffman - Stifel Nicolaus

And what was the residential in the quarter?

Ned Coletta

Residential was 2.0% price.

Michael Hoffman - Stifel Nicolaus

2.0?

Ned Coletta

Yes, 2.0.

Michael Hoffman - Stifel Nicolaus

Okay. All right. That's very helpful. Thank you very much.

Ned Coletta

Thanks Michael.

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.

John Casella

Good morning Joe.

Joe Box - KeyBanc Capital Markets

So even if you exclude the Worcester expenses, why didn't the incremental tonnage of the landfill flow through at a margin north of 50%?

Ned Coletta

It roughly did. A little bit of it is mix as well. So we had $5 million of revenue growth and $2.2 million of EBITDA growth. Excluding Worcester roughly $2.6 million of EBITDA. It’s a little bit -- we are taking a bit more through transfer stations, with the transfer station wins we had, which is a great thing. We are closer to the curve, we have more security and long term contracts. But it may be at slightly lower margin, because you're handling at once, before it comes into your system. But its good flow-through.

Joe Box - KeyBanc Capital Markets

And can you just remind me then, how much of that was made up of transfer station volume?

Ned Coletta

I don't know that answer. I can do a research for you Joe of how much flow-through in the period?

Joe Box - KeyBanc Capital Markets

Okay. Appreciate that Ned. John, you mentioned earlier that -- I think you said six disposal facilities have come offline in the Northeast. Can you just maybe give us a sense of what your disposal volume growth in the East was, versus say the west, and maybe just a little bit of color of how much of that growth you think really came from disbursed volumes?

John Casella

Well I think probably the majority of -- the Eastern volumes were up roughly 54,000 tons excluding Worcester and the western region volumes were up 94,000 tons. So that's the split on it Joe.

Joe Box - KeyBanc Capital Markets

And you think that the majority of the 54,000 in the East stemmed from closed facilities, to which you picked up a lot of that volume?

John Casella

That's correct.

Joe Box - KeyBanc Capital Markets

Okay, great. That's helpful. And then, we have talked in the past, and it sounds like strategically --

John Casella

There is a little bit of a mix too, because the Waste USA facility is in the western region as well, so that's the Vermont facility, and that has received some benefits obviously from the closures that we talked about, the six closures that I talked about. So there is actually a little bit of benefit in both regions.

Joe Box - KeyBanc Capital Markets

Okay. Understood. It sounded like previously, you guys were thinking the New York contract would put more waste into the western landfill region. I am just curious about how you are thinking about sourcing the 94,000 tons that you picked up in the west. Did you do that on a short term basis, or did you lock it down into longer term contracts? Just an update on that market?

John Casella

Sure. The four contracts that started are three to five year contracts. The majority of them actually are five year contracts, only one of them is a three year contract, and we believe that's Brookline. So we -- which one was it? Tompkins County is the only three-year. The rest of them are five-year contracts. So that's about 110,000 tons and that's tied up on basically five year contracts. So I think it's a really positive story, because those, particularly transfer stations that we have been talking about, and those are long term contracts.

Joe Box - KeyBanc Capital Markets

Okay. They are; but does that limit your ability to raise prices, as we start to see more volume flow into Covanta, and potentially --

John Casella

Not at all. When that New York City contract starts with Covanta going to the incinerator in Buffalo, then obviously, the incinerators run full. So they are going to displace -- if they take 2,000 tons a day, they are going to displace 2,000 tons a day; or if its 3,000 tons a day, whatever -- whatever number, its going to displace and push waste out into the marketplace. So I don't -- there is no sense at this point that with the capacity that we have, we will be able to move price and we should be able to pick up additional volume as well. The 110,000 ton, as Ed said, has got escalators built into the contracts, and that we are very happy with. So even the work that's under contract, has already got built-in escalators; and then, to the extent that we have additional capacity, which we still do have, we still have 400,000 tons of additional capacity at the facilities that we should be able to continue to access waste at a higher price; as the market begins to move, which we have already begun to see.

Joe Box - KeyBanc Capital Markets

Okay. Well I appreciate the color there. Just one more question then, you guys alluded this last quarter, and you talked about a couple of these items this quarter, but I think you have good visibility on say four to five items, like the Covanta 'put or pay' expiring? I think you said the gas project, a recycling facility, and a couple of new contracts. January 1st is going to be right around the corner. Can you just give us an update on the progress of some of these items? What's already locked and loaded, versus say, what you have to go out and fund or renegotiate?

Ned Coletta

Yeah so, great point. As we laid out earlier, if you bridge from the midpoint of our calendar year 2014 implied numbers on EBITDA to the midpoint of -- we gave out for calendar year 2015, you have gone from 96 to basically 104, 105. And you bridge through 'put or pay' rolling off, that just happens on January 1st, so that's $3.7 million of addition. You have the [indiscernible] pack system. This is a technology we have at one of our other landfills. It treats H2S and other gases that you need to get below permit level. We are using a consumables based process today, that has higher operating costs. We expect to take $2.5 million out.

You could have a little slippage there, but we are generally on track with construction. If anything, it would be a month. And then you have all the new contracts, Concord, Brookline, Lewiston, new facilities are coming online, and they are generally going to be online, and that makes up another $2 million to $3 million. So all in all, we have a brick on items we know that are occurring, and then we have opportunity from a pricing and cost reduction standpoint to improve upon that, and that gets you to the midpoint.

Joe Box - KeyBanc Capital Markets

Okay. And is Covanta already negotiated and inked, or is it just something that needs to be negotiated at that date?

John Casella

We believe that the Covanta contract is in [ph].

Joe Box - KeyBanc Capital Markets

What do you mean you believe?

John Casella

Well they announced it publicly.

Ned Coletta

No, he is asking our 'put or pay' agreement, the new price.

John Casella

Oh okay. Sorry. We have new pricing currently, and I am not sure whether that contract is complete. Our contract with Covanta is inked as well.

Joe Box - KeyBanc Capital Markets

Okay. So it is $3.7 million that's in the books?

Ned Coletta

That's correct.

Joe Box - KeyBanc Capital Markets

That's all for me. Thank you all.

Ned Coletta

Thanks Joe.

Operator

Thank you. Our next question comes from the line of Tom Bakas from First Analysis.

Tom Bakas - First Analysis

Hey good morning guys.

John Casella

Good morning.

Tom Bakas - First Analysis

Just a couple of quick high level. If you just talk about customer levels and sort of how big you think that business can get? Over the long term I guess?

John Casella

Its really hard to say. I think we are pretty excited about the opportunity. I think there is a significant opportunity there. But we really haven't projected out how much revenue we think it could represent. But clearly, there is a large opportunity there. It’s a relatively small piece of the business at this point. But we think moving out into the future, it could be fairly significant.

Tom Bakas - First Analysis

Okay, thanks. And then just a little more macro I guess, where do you guys think we are in the economic recovery, and more specifically, you're starting to see customers increased service levels in any meaningful way?

John Casella

Well if I could answer that question, I probably wouldn't adhere.

Tom Bakas - First Analysis

Yeah, right.

John Casella

I think that -- we are clearly beginning to see improvement from an economic standpoint. We saw it in our roll-off pulls. We have seen it in waste generation. We are beginning to see it -- in the early stages, as you begin to feel a little economic recovery, before you actually can price it in. So we are beginning to feel that. We probably felt that a little bit this quarter as well. We are -- tons are moving up a little bit on the basis of economic activity. Its not clearly across the board. We are seeing a little more activity in the more urban markets, but so -- I think that its early -- I think early stages of us seeing some positive activity from an economic standpoint. I mean, your guess is as good as mine, as to how long that's going to last. Certainly, we have seen some positive trends, and its not all that significant at this point in time, but certainly, the trends have been positive.

Tom Bakas - First Analysis

Terrific. Thanks guys.

John Casella

All right. Thank you. One more? Okay.

Operator

Our final question for today comes from the line of Jack Burgess from PineBridge.

Jack Burgess - PineBridge Investments

Hi guys. Thanks for taking my question. I want to ask about wage costs. Couple of your competitors have mentioned, that they are having trouble finding truck drivers and that sort of thing, and they had to pay more. I wonder, if you could tell us what you're seeing on that front and what paper [ph] costs represent as a portion of your total costs.

Ed Johnson

Of course it varies by market. There are some select markets, where there has been a driver shortage, but we offer competitive benefits and we have been able to backfill the shortfall, and our total -- on the collection line of business only, the labor with benefits and everything is running about 14% of revenue. That's the most meaningful statistic I think, because that's our most labor intensive area.

Jack Burgess - PineBridge Investments

Great. Thank you very much.

Operator

Thank you. And this concludes our question and answer session for today. I would like to turn the conference back for any closing comments.

John Casella

Thank you very much. Thanks everyone for joining us today. Look forward to having you on our call in early December to -- when we report our second quarter. Thanks everyone, 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.

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Source: Casella Waste Systems' (CWST) CEO John Casella on Q1 2015 Results - Earnings Call Transcript
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