Casella Waste Systems' (CWST) CEO John Casella on Q4 2016 Results - Earnings Call Transcript

| About: Casella Waste (CWST)

Casella Waste Systems, Inc. (NASDAQ:CWST)

Q4 2016 Results Conference Call

March 02, 2017 10:00 AM ET

Executives

Joseph Fusco - VP

John Casella - Chairman and CEO

Ed Johnson - President and COO

Ned Coletta - SVP and CFO

Analysts

Charlie Wohlhuter - Raymond James

Michael Hoffman - Stifel

Joe Box - KeyBanc Capital

Al Kaschalk - Wedbush Securities

Jordan Gregov - Federated Investors

Operator

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Fourth Quarter 2016 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference is being recorded.

I'd now like to introduce your host for today's conference Mr. Joseph Fusco. Sir, you may begin.

Joseph 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 2016 fourth quarter and full year 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 as well.

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

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

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

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

John Casella

Thanks, Joe. Good morning, everyone, and welcome to our fourth quarter fiscal year 2016 conference call. We are very happy with our fourth quarter results and certainly with fiscal year 2016 results. As reported in yesterday's press release, our revenues for the year were 565 million, up 3.4% from last year. Adjusted EBITDA was 120.6 million, up 13.7% from last year. Adjusted EBITDA margins were 21.3, up 190 basis points from last year. Normalized free cash flow was 27.1 million. Our fiscal year 2016 results exceeded our updated guidance levels for revenues, adjusted EBITDA and normalized free cash flow. We're thrilled to exceed guidance again after already beating and raising guidance three times this year for adjusted EBITDA.

We exceeded our budget in fiscal year 2016 due to a strong pricing execution, our performance of operating efficiency programs, improving economic tailwinds and strong overall execution on our key strategic initiatives. Ned will go deeper into the numbers in a moment, but first I would like to recognize that these strong results are tangible evidence of our commitment and continued execution against our key strategies. Our continued success and consistently improving results are a testament to a dedicated team and the process and discipline we’ve established throughout the organization to focus time and capital resources and the key drivers of our business.

In early 2013, we laid out a comprehensive strategy to improve our financial and operating performance. Pursuant to that plan, we’ve refocused the Company while simplifying our business structure. We’ve reduced the risk exposure by either divesting or closing operations that did not fit within the strategy, and we’ve refocused management's attention and capital resources on our core operations and strategic business initiatives.

Given our progress and success executing against the plan, in August 2015 we refreshed our comprehensive plan and outlined for investors' financial targets for the year 2018. This plan focuses on increasing landfill returns, driving additional profitability within our collection operations, creating incremental value through resource solutions and reducing financial and operational risk while improving our balance sheet. We're tracking ahead of this multiyear plan and we remain confident that our enhanced process discipline and continued focus on key operating strategies will further drive improved performance and increased free cash flow enabling us to continue to de-lever our balance sheet.

Our first major strategy is improving landfill returns through a focus on pricing discipline, sourcing incremental volume to select site and driving operating and cash flow efficiencies. As expected, our landfill volumes were down 70,000 tons in the fourth quarter with the decline driven by the planned diversion at Southbridge and lower energy related waste streams in the Marcellus shale region.

In fiscal year 2016, our landfill volumes were slightly down year-over-year excluding the planned diversion at Southbridge and the lower gas related waste streams, volumes were actually up 262,000 tons or 6% year-over-year with particular strength in C&D volumes. Disposal capacity continues to tighten in the Northeast, as Permian site closures are reducing capacity and stronger economic and construction activities are driving higher volumes.

Given the supply and demand imbalance, we're able to successfully advance 2.1% pricing at our landfills in fiscal year 2016. We believe that this positive backdrop will continue into the future as additional site closures are expected over the next several years; and as we roll off multiyear contracts, we expect to advance pricing in excess with CPI on a larger percentage of our book of business.

On the landfill development side, we've had significant permitting successes in 2016, including an annual permit increase at our Highland facility from 312,000 tons per year to 465,000 tons per year, a 13 year expansion at our Ontario County landfill and a 14 year expansion in annual permit increase from a 180,000 tons a year to 417,000 tons per year of MSW at our Chemung County landfill.

Underlying the success of each of these key permitting activities is our deep commitment to develop and run our landfill facilities to the highest environmental standards, while maintaining strong partnerships with our host communities. This has been our recipe for success in developing long-term environmental assets in challenging Northeast environment.

We are currently working on several other key landfill permitting projects and developments excluding our expansion efforts at Juniper ridge in Southbridge landfill. We are permitting to expand the state owned Juniper Ridge landfill by roughly 9 million cubic yard to extend the life of the site to match our long-term operating and lease agreement that goes through 2033.

We continue to make slow progress in advancing our permitting activities for the next Southbridge landfill. Given these timing delays and challenges, we ramped down volumes at this site by roughly 31% in fiscal year 2016. And given the fact that we have only roughly 400,000 tons of remaining permitted capacity at the site, we plan to further reduce amortizable volumes to the site by 50,000 to 100,000 tons in fiscal year 2017.

We have recent agreement in principle with MassDEP at the town of Southbridge and at the town of Charlton for the sharing of costs between MassDEP and us of up to $10 million, $5 million between us and MassDEP for the town of Southbridge to install a municipal waterline in the town of Charlton. It is expected that the town of Southbridge will issue a bond for our portion of the waterline cost. We would expect to amend our operating agreement for us to reimburse the town for periodic payments under such bonds.

This waterline will provide municipal waters certain Charlton shops and residences. While we continue to pursue future expansion capacity itself at landfill, we currently do not have visibility on whether we will be able to develop this expansion capacity and then adequate risk adjusted return and if possible that in some point in the future, we could conclude that closing the site is in the Company’s best economic interest.

However, even if we are unsuccessful from a permitting standpoint at the Southbridge landfill, we remain confident that we can still achieve our fiscal 2018 financial targets that we first announced in August of 2015. In fiscal year 2016, we continue to make quick progress with our second major strategy improving profitability of our hauling operations. Our focus here is on core blocking and tackling namely a focus on pricing programs, route optimization and fleet standardization.

In fiscal year 2016, operating income in the collection line of business was up 21% year-over-year with margins up 320 basis points, as robust pricing and operating efficiencies drove results. Within the context of this rapidly improving marketplace, we have continued to advance hauling price increases in the residential and commercial lines of business with only limited price rollback. In fiscal year 2015, collection pricing growth was 4.5% with the residential and commercial collection pricing growth of 4.9%.

On the operating side, we continued to advance a number of key initiatives to further improve our operating costs in the collection line of business. In fiscal year 2016, we improved our collection cost of operations as a percentage of revenue by 240 basis points year-over-year. This improvement is being driven by our strong pricing programs coupled with positive cost impact from our five-year fleet plan, maintenance initiatives improving routing and efforts to swap or divest underperforming route.

Moving to the third major strategy creating an incremental value from resource solutions, here we differentiate ourselves in the marketplace by offering value-added resource solutions. These solutions range from our customer solutions group which provides professional services to large industrial customers to our organics business that is leader in organics processing and disposal in the Northeast to our market-leading recycling business.

In late 2016 and into early 2017, recycling commodity prices begin to rebound of the multiyear lows and are currently hovering close to the 10 year average levels. From a numbers standpoint, our average commodity revenue per ton or ACR was up 45% year-over-year in the fourth quarter and is up another 9% sequentially from the fourth quarter through the end of January.

We generated a 14.3% return on the assets in our recycling business in fiscal year 2016 through our successful efforts to reshape the recycling business model, generating an appropriate return on our infrastructure investments through all market cycles. This is up from 2.1% return on net assets that we generated in fiscal 2015.

Also, we made substantial progress improving our balance sheet and reducing overall financial operational and financial risk in 2016. We continue to repay debt, reduce leverage and in October we completed a favorable refinancing of our highest cost that was a new term loan B, lowering our interest cost by $11 million per year and improving financial flexibility.

With the work that we’ve done over the last few years, our balance sheet positions us well for the future and we remain deeply committed to discipline capital investment strategy with free cash flow primarily used to repay debt or in select instances for small tuck-ins acquisitions and growth investments within our core operations.

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

Ned Coletta

Thanks, John. Revenues in the fourth quarter of 2016 were $143.8 million, up $3.8 million or 2.7% year-over-year. Solid waste revenues were actually down $800,000 or 0.7% year-over-year in the fourth quarter with higher collection and disposal pricing and a rollover impact from the acquisition of several transfer stations partially offset by lower solid waste volume.

Revenues in the collection line of business were up $1.8 million year-over-year in the fourth quarter with prices up 3.2% and volumes slightly down. Pricing was up 3.6% in our residential and commercial lines of business in the fourth quarter. We also advanced pricing 2.2% in the roll-off line of business. However, volumes were down slightly as we continue to focus on price over volumes, and we had a cost comparison to unseasonably warm and dry November and December of 2015.

Revenues in the disposal line of business were down $2.4 million year-over-year in the fourth quarter with higher pricing offset by lower volumes. We increased third-party reported landfill pricing by 2.7% year-over-year in the fourth quarter with landfill prices up 3.8% in the Eastern region, as we continue to capitalize on the continuing disposal markets. We have also begun to advance pricing in the Western region, with pricing up 2%, with particular strength in the construction and demolition material segment.

We expect these same positive pricing trends to continue into fiscal 2017, as we recognize the rollover impact of pricing completed late in fiscal year 2016, and we advanced further price increases in key markets. Our total landfill volumes were 1.1 million tons in the fourth quarter, down 70,000 tons year-over-year. During to quarter as John described, we continue to ramp down volumes at the Southbridge landfill with volumes down about 60,000 tons year-over-year in the quarter.

In total, we've reduced tons at Southbridge by 173,000 tons from fiscal year 2015 to fiscal year 2016. Further, we continue to experience headwinds in the Marcellus region as waste volumes associated with natural gas drilling activities were down 31,000 tons year-over-year in the fourth quarter. Excluding these two impacts, our other volumes were actually up 21,000 tons year-over-year with strengths across most waste types and sites.

Recycling revenues were up $3.2 million year-over-year in the froth quarter with the higher commodity pricing and volumes partially offset by lower tipping fees or processing fees. Average commodity revenue per ton was up 45% year-over-year in the fourth quarter and higher fiber and metals pricing partially offset by lower plastics pricing.

Organic revenues were up $700,000 year-over-year in the fourth quarter and higher volumes as our teams continue to source new streams of bio solids in the ever-tightening Northeast disposal markets. Customer solutions revenues were up $700,000 year-over-year in the fourth quarter with continued growth in the industrial services segment.

Adjusted EBITDA was $29.4 million in the quarter, up $1.6 million year-over-year with margins improving 60 basis points to 20.4%. So, with revenues up $3.8 million and adjusted EBITDA up $1.6 million, that gave us a flow-through impact of roughly 44%. This is great evidence in our success of shedding less profitable low margin volumes while at the same time we're securing pricing increases and cutting operating costs.

Solid waste adjusted EBITDA was $26.6 million in the quarter, up $900,000 year-over-year. We achieved 3.7% adjusted EBITDA growth and we lowered -- on lower revenues in the business. Solid waste adjusted EBITDA margins were 25.4%, up 110 basis points year-over-year, reflecting strong pricing, coupled with cost efficiencies which offset volume declines.

Hauling adjusted EBITDA was up $1.7 million in the quarter with margins expanding 200 basis points. Recycling adjusted EBITDA was $2.6 million in the quarter, up $1.8 million year-over-year, with the improvement mainly driven by higher commodity pricing coupled with our improved revenue model.

Cost of operations in the fourth quarter was up $1.2 million, but down 100 basis points as a percentage of revenue with improvement as the percentage of revenue driven by lower transportation costs, lower direct labor costs, and lower vehicle maintenance costs.

General and administrative costs in the quarter were down $700,000 year-over-year or if you exclude the proxy flight costs and the severance costs from last year, it was up about $800,000 year-over-year. This increase was mainly driven by higher incentive compensation costs this year on improved performance.

Depreciation and amortization costs in the fourth quarter were down $900,000 year-over-year largely due to lower landfill amortization expense associated with the Southbridge landfill. We did incur a $900,000 environmental remediation charge in the fourth quarter as we trued up our accrual for the expected Potsdam Scrap Yard remediation plan in either late 2017 or early 2018.

As John said and I think the market knows quite well, in mid October, we refinanced our ABL revolver due 2020, and our 7.75% senior sub notes due 2019 with a new $160 million revolving credit facility and $350 million term loan B. As we previously discussed, we had great timing and great execution on this transaction, and we achieved an excellent outcome for our shareholders.

The term loan B priced at 99.5 of the principle amount with an interest rate of LIBOR plus 300 basis points with a 1% floor. In addition, we added a rate step down for the term loan B where the interest rate will drop to LIBOR plus 275 when our consolidated net leverage ratio is 3.75 times or less.

The revolver was initially priced at LIBOR plus 300 basis points with a pricing grid based on our consolidated net leverage ratio. We believe very strongly that this transaction positions us well to continue to execute against our strategic plan. It will reduce cash interest cost by about $11 million a year. It improves our financial flexibility and it extends out our debt maturities.

The current quarter includes a $13 million loss in debt extinguishment related to this financing. As of December 31, 2016, our consolidated net leverage ratio specifying by our new credit facility was 4.22 times, which was actually down 1.2 times in the last 24 months. Reducing leverage from the third quarter to fourth quarter was a huge accomplishment given that we incurred $14.3 million of cash transaction fees associated with the refinancing including the call premium for the sub debt and we had accelerated cash interest costs associated with the sub debt that would have normally been paid in February of 2017 that we paid on through November 16. So, it's a really big accomplishment working down leverage for our team.

With our consolidated net leverage ratio of 4.22 times on December 31st, the pricing on the revolver will step down to LIBOR plus 275 in the first quarter of 2017. In the first quarter of 2017, we took two additional steps to further strengthen our balance sheet and reduce risk. One, we completed on February 1st, the remarketing of $25 million as Finance Authority of Maine Disposal Revenue Bonds with a great outcome on this remarketing where we repaid our existing term rate bonds that had a 6.25% fixed interest rate in our existing variable rate, letter of credit enhanced bonds with borrowings from the new eight year senior unsecured bond with the fixed rate of 5.25%.

Further in mid-February, we began our efforts to further manage long-term interest rate risk by entering into a $60 million of floating to fixed LIBOR swaps that mature in four to five years. After executing these interest rate swaps, roughly 32% of our debt is fixed rate today. Our normalized free cash flow was $12.2 million in the fourth quarter and $27.1 million in fiscal year 2016, which exceeded our updated guidance range of $22 million to $25 million as established in early November.

As stated in our press release, yesterday afternoon, we announced guidance for fiscal year 2017 by estimating results in the following ranges. Revenues between $577 million and $587 million which is up about 2% to 4% year-over-year, adjusted EBITDA between $124 million and $128 million which is up 3% to 6% year-over-year, and normalized free cash flow of $32 million to $36 million, which is up 18% to 33% year-over-year. These ranges are tracking on ahead of our multiyear strategic and financial plan that we laid up for shareholders in 2015 that had adjusted EBITDA of $122 million to $132 million, and normalized free cash flow of $30 million $40 million in fiscal year 2018.

One item to note, our fiscal year 2017 guidance ranges are slightly dampened by our plans to further reduce volumes at the Southbridge landfill. In fiscal year 2017, we plan to further reduce amortizable volumes by another 50,000 to 100,000 tons. This will put the run rate of Southbridge of roughly 225,000 to 275,000 in fiscal year 2017. This plant volume reduction would reduce revenues by about $3 million to $5 million and would reduce adjusted EBITDA by $2 million to $4 million. However both of these impacts are already contemplated in our guidance range that we announced.

And with that, I'd hand to over to Ed.

Ed Johnson

Thanks, Ned. Good morning, everyone. We finish the year strong and operationally we've made a great deal of progress. All of the key operational metrics we follow look good, but as we celebrated great year there is still work to be done, and we continue to focus on business fundamentals. I will say brief in my comments today, but I wanted to give you some idea of what are focuses for 2017.

First, a quick recap of the results, we have continued to nick away at the cost of ops as a percentage of revenue with the quarter showing a 100 basis points improvement over last year. For the full year cost of ops decline from 70% of revenue in 2015 to 67.6% in 2016, a pretty dramatic 240 basis points improvement led by our collection and recycling operations. This improvement is driven partly by price, partly by fleet improvement and partly by our continued focus on the efficiency of our operations.

On the landfill side of the business, we are finally starting to get price and the market dynamics continue to move in our favor. Our operational focus this past year has been increasing compaction with several operational training events last year on compaction, and we're starting to show success. Maximizing compaction is extremely important as our annual permits are based on tons and the more tons we can fit into available airspace, the further out we can push our cell construction capital. So, in the long run, free cash flow will benefit.

Another things we determined this past year is the with the rising cost of constructing airspace that no longer make sense to use anything but the maximum size compaction equipment, so our heavy equipment plan has been modified accordingly and we will be phasing out smaller compactors over time. On the collection side, it's all about safety, service and route efficiency.

We have a great safety record here and that not only protects our employees and the public, but saves cost and down time. Consistence superior service is the key to being able to raise price as needed and we're certainly performing better in that area. So, going into 2017, we have a renewed focused on route efficiency and it's been conducting basic ops training in this area on how to identify the less efficient route days and implement a process refining and mitigating group causes of that inefficiency.

Recycling continues to be a great story for us, as I mentioned last quarter, our financial results are affected both by the effectiveness of our processing, we can command premium pricing for cleaner material and minimizing the variable cost per ton process. We continue to focus on ways to improve both effectiveness and efficiency with incremental improvements to our technology.

Other areas of the business are also looking forward to continued improvement, which remains our theme internally with organics and customer resource solutions, both looking at ways to capitalize on improving markets in the Northeast, focusing primarily on driving volumes to our landfills, material processing facilities, and to our collection operations. Administratively, we continue to invest in improvements to our processes and systems to do things more efficiently. So, we had a great quarter, to finish a great year and look forward to an even better 2017.

With that, I'd like to turn it over to the operator for the Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Charlie Wohlhuter from Raymond James. And your line is open.

Charlie Wohlhuter

Ned, so thanks again for that color on the SG&A line and kind of when I look at it historically here it's kind of cracked up the past couple of years on a percent of revenue basis. Is there anything outside of call it in higher incentive comp that's kind of driving that? And then really going forward, how should we kind of think about that line?

Ned Coletta

So, we just came up probably, arguably, one of the best years in the Company's history, and we outperformed in our bonus plans companywide. And as we had a very wholesome bonus accruals for the year, in years past when we didn't perform as well as the Company, but we had much lower bonus accruals. So, that's part of it there're definitely, there're no really a lot of other costs they're creeping up. Ed mentioned a minute ago that we're working on some early stages on our backbone, back office to take some additional cost out as we develop those plans further we'll get some guidance out to the street.

Charlie Wohlhuter

And then kind of just bit of a more broader question. In light of waste management securing other half of the New York City transfer and disposal contract and with its intention to send some of that volume out to West New York, I'm curious on how you expect to see the disposal dynamics playing out in your Eastern region in light of this news?

John Casella

So, I think with that contract we don't know exactly where waste management will shift away. So, I think we heard as much as you did from the conference call and different comments around the industry. Some of that will move down to Virginia. They have built an amazing rail offload facility at high acreage at Rochester and we've seen them filling up the Chelsea landfill as well. So, we do believe the same as you just said that this will tighten New York further. There're really some puts and takes across the marketplace.

We're starting to see more waste from the eastern part of our business Massachusetts pull out to New York and trying to leapfrog out to Western New York. We just experienced a year with good economic activity in New York State which further tightened landfills that allowed us to advance pricing in those markets. So, overall, we're feeling pretty good. Waste management is a very rationale player in the marketplace. It runs great facilities and a very good integrated asset. So, I think it's an overall good move for the marketplace long-term, and we'll be curious to see as that comes online how they shift tons around.

Operator

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

Michael Hoffman

Ned, on the NOL given the pace of better than expected performance in '16 pulling forward one year your plan into '17 on a performance basis, how quickly are we running through the NOL, if we hold '17 phase out, '18, '19, and '20?

Ned Coletta

Yes. So, we at the end -- you will get this in 10-K, but we have approximately a $100 million of carry forward NOLs at the end of ’16. And we are looking -- from a tax standpoint, we’ve been putting policies in place for a few years here to try to use the NOL as quickly as possible, of course, but we are not taking accelerate depreciation and other steps like that, and also our landfills we managed our amortization in a way to maximize our free tax income. So, we can use the NOL as fast as possible.

We are estimating that we are going to use the NOL in the next 2.5 years to 3 years. So, in 2017, 2018 and 2019 and then in 2020, we’ll become -- we'll work through the NOL. But we’ll start to adjust tax strategy during that period to allow us to offset taxes in other manner. And as I have discussed in the recent past, there is a lot of change, maybe a foot in Washington that could slightly tweak the strategy as we get feedback.

Michael Hoffman

Fair enough. And then, can you share with us your thoughts about how you would expect your reported price to progress through the course of the year?

Ned Coletta

See, if I can dig that out.

Michael Hoffman

Are you tackling that one? Maybe John or Ed, how do we think about rising commodity prices versus the SRA? What’s the balancing act there in the give back plus the benefit as because the SRA was designed to protect on the downside? How does -- how do we think about -- this is your first time experiencing a real lift as after you’ve done the SRA?

Ed Johnson

Fundamentally, Michael, what will happen is the SRA fee will come down, but we will continue to be in a position to continue to improve the return until we get a satisfactory return on the invested capital from a recycling standpoint. So, as commodity prices go up, the fee will come down to our customers, but we will still be driving towards a bit higher return on the invested capital from recycling standpoint. So, it still should be a net positive this.

Michael Hoffman

So, we should expect to see a positive flow-through given the rising commodity?

John Casella

Yes, so the way this is kind of two customers at the recycling facility, our own trucks, still coming from the collection inside of business where the SRA plays through and then third party customers. And we restructured over the years our third party contracts to where when commodities fall below threshold, customers pay dollar per dollar processing fee. And I think above that threshold, we give a revenue share. So, not every dollar commodity price drops to the bottom line because we're sharing some with our customers. But it is a very positive to us, we're seeing about $0.60 on every dollar drop to the bottom line as commodity prices go up.

Michael Hoffman

That’s very helpful.

John Casella

And coming back to your first question, looking at our budget for the year, we're budgeting in a frontloaded rear load to be about 2.5% price for the year, and generally kind of flat throughout the year, we advanced the number of pricing initiatives late '16 and early '17. So, we have good visibility right now, and we don’t see things climbing or falling through the year that should be pretty even.

Michael Hoffman

And that's through the solid waste when I do it on a total reported company that will come in more like a 2.2, 2.3?

John Casella

Yes.

Michael Hoffman

Okay. All right, that’s good to know. And then, is your expectation, if you were to pull away whatever the level of reduction of Southbridge would be that the rest of the Company will continue to report positive items through 2017?

John Casella

Yes.

Michael Hoffman

Okay. And to our credit, you did 12.5 million of EBITDA in 15 from Southbridge, it's in 7s and '16 is going to be down and '17 and you at your beating about your plan. So you made up 5 million and then some?

John Casella

Yes, that’s right.

Michael Hoffman

Can you do that again in 2017, is there a room to make up or in?

John Casella

Our other key strategies I think, our collection strategy, we're firing all cylinders there where we've done a lot of opportunity, and our belief especially we're focusing this year on roll off possibility. In our book of business, we're putting a lot of focus their permitting industrial customer, temporary getting better utilization. Ed, can talk about the cost program, you've got a lot of room there.

And on the landfill side, we're running a strategy into 2017 where we're a little bit more focused on price across the entire book of business, and we've advanced some pricing, more aggressively in late 2016.

Landfill capacity is hard to gain, it's hard to replace in the Northeast, and Southbridge is the great example of that. The challenges we had over the last five years, advancing permits at Chemong in Ontario. We were successful, but it's valuable and we need to generate a higher return on those assets. So, we're pushing a bit more price which offset some of the Southbridge decline.

Michael Hoffman

Okay, and on that vein, I mean, could we see an up-selling in the mix where you might give up volume by get better price because that’s the right strategy end up with, one maybe 2 tons out at a lower price, 1 ton out of much higher price kind of thing and net-net were better off?

Ed Johnson

We're continuing to do that at all of the facilities in terms of looking at the lower price waste and trying to cycle that out for higher priced volumes, Michael. So, that's absolutely right.

Michael Hoffman

Okay. And then, I believe there was a meeting with the Governor last week and an opportunity to express the need to have them focus on what’s happening with Southbridge. Do you think that they're finally waiting on this or are they leading in a DEP?

Ed Johnson

I think that it's really in the hands of the DEP. I think the administration is certainly aware of capacity issues in the state, but I think ultimately it will be in the DEP.

Michael Hoffman

Okay, all right. Thank you. Well, one last question. You now ahead of plan for 2018, so what’s the next three year plan look like?

John Casella

That’s the exact question that the Board asked us, Michael. We're in the process of going through and beginning to look at what is the strategy come 2018. So, we're beginning to look at that right now.

Michael Hoffman

We should hear about that soon?

John Casella

No. As we're beginning to look at that right now, we're beginning to strategize what is, what is the path in 2018? How do we create the next level of shareholder value and we're in a process of beginning that right now. And over the next couple of quarters, probably, we'll have the conversation with the Board and get everyone's perspective. And then we'll come out with that plan, but it's not something that we're going to come out with next quarter. I'd say it's probably a couple of quarters two to three quarters away.

Operator

Thank you. And our next question comes from the line of Joe Box from KeyBanc Capital. Your line is open.

Joe Box

So, I appreciate the overall comments on price and volume expectations in the release, and maybe I just want to drill into Michael comments or questions, a little bit more price and volume side specifically for collection and disposal, if you could just maybe drill down into to where your expectations might be by the different activity type, I think that actually would be helpful for us?

John Casella

Yes, so we're looking positive.

Ned Coletta

So, for the year we're looking at about 2.5% to 2.7% price roughly on collection; and on disposal, we're looking at a little bit north of 3% overall in the disposal line of business is our current plan. And as we guided through yesterday, we're looking to blend in the solid waste group of 2.5% and 3.5% between those two segments.

Joe Box

And on the volume side for collection?

Ned Coletta

Yes, on the volume side for collection, we're looking at -- it's about 1% to 1.5%, and you blend into disposal side, and we're looking at about negative 4-ish percent. And as we mentioned a little bit earlier that's predominantly Southbridge; however, John did mention that we're advancing more prices at the landfills, and we've budgeted for some tons to be down at other sites as well, just taking a conservative path here.

Joe Box

Got it. Thanks, Ned. That's helpful. And I guess now that you guys have picked up a permit increase at Highland. What's if volume, do you think that you could ultimately flow through the facility? And is that something that flows through in over multiple years? Or do you actually have a plan to maybe filled that up sooner rather than later?

John Casella

I think that's really going to be over multiple years, Joe. We don't have a plan to fill it up. We're proactive in terms of getting the capacity from a regulatory standpoint in terms of permitting, but it will be over a number of years for us to fill up. We don't have a plan to fill it right away. We'll play out as things firm up with the New York City and what's going to happen with what waste is now going to take up state of New York. That we will pull out over the next few years.

Joe Box

So, maybe switching gears, I think you mentioned $1.8 million EBITDA positive swing in 4Q for recycling. How should we think about what's baked into your '17 guidance from recycling? And when you allude to an offset to Southbridge, is that largely coming from recycling?

John Casella

Yes. We're looking at recycling being up, maybe about 2 million plus to 2 million to 3 million. It really depends on where the markets go during the year, Joe. And we actually budgeted originally for commodity flat to down with we've adjusted our budgets slightly as commodity prices have ticked up sequentially from December to January. They are actually up about 9% from the fourth quarter through January. So, we are looking for some offset there to Southbridge from recycling; and as you said earlier advancing some additional price in other disposal sites and our other operating initiatives.

Joe Box

Sure. And to just to be clear, its most of that benefit is going to flow through in 1Q, and it’s now like you’re just doing a random wall or moving current prices for to the rest of the year?

John Casella

I’ll make sure, if I understand your question. Is that related to recycling or other businesses?

Joe Box

That’s recycling. So, it's not like you’re just flowing through the current recycling price.

John Casella

No.

Joe Box

For the rest of the year?

John Casella

Right.

Joe Box

Okay.

John Casella

So, we don’t have -- no one has visibility later in the year, so we're getting a read on where we're in Q1, but we're beating a little then in Q1, it’s making up for some of the weakness in the Southbridge.

Operator

Thank you. [Operator Instructions] And our next question comes from the line of Al Kaschalk from Wedbush Securities. Your line is open.

Al Kaschalk

Hey, good morning, guys. Good finish to the year and the progress here. I wanted to just stay very broad and maybe you could help us bridge the margin expansion on the EBITDA that you see from '16 to '17, particularly given the progress you made. When I mean bridge, it would be great to hear -- I don't know if it's basis points or whatever, but what you are expecting in terms of that expansion. My math says there's 40 basis points at the midpoint, if I did my 2016 calc right, but commodities, overall pricing, the benefit you get on mix from volume and then the outstanding things that are being done on the operations standpoint if there's further benefit there to the margin. Again, the question here is tried to be as a little bit more broad as opposed to the specific markets, but if you could maybe step through that, that would be great.

John Casella

Sure, I don’t exactly have built up that way, so I'll just stay broad out. In 2017 much like 2016, we do expect positive move as we lay down pricing and collection into disposal line of business. And I am adding operating teams' effort on cost of operations, we expect to hold that in check and not have inflation in our internal business that mirrors external inflation. So, we will gain ground with our pricing programs again, and now we'll hope to improve margins. On the flip side, you know very well that when you shed landfill tons, those incremental tons by have as much as 70% or 75% margins. So, we will be taking a bit of step backwards in that part of the business and that will weigh on our margins a little bit year-over-year.

On recycling, we’ve seen a tremendous improvement in our margins in the recycling business from with our changes that we’ve made and with the little bit the tailwind, but our operating income margins ended about close to 12% in calendar ’16, and we see those margins going up a little bit more in ’17 with that early pricing data we've gotten here. So, we expect a little bit of an improvement in overall company margins to recycling business as well. And that’s generally, it for the year, there is not a lot other moving pieces.

Al Kaschalk

On interest expense, what are you suggesting for the full year whether it'd be the P&L or cash interest expense?

John Casella

Yes. So, the P&L interest expense, we expect around 25 million, and then cash interest expense we expect around $23 million for the year.

Al Kaschalk

Broader question here on the financing that the Company has done in '16, it's good. I would like to maybe just pose a question and then in then hear how you are thinking about it. I heard earlier that you certainly had an improvement on the balance sheet, but why wouldn't you help leverage come down or accelerate the reduction to provide you even more further flexibility by potentially offering some shares to drive that leverage ratio down, given where we are at in the environment?

John Casella

It’s a question we been asked a number of times on, we started to finally get some credit, I think that the equity markets just fall. And the stock had risen pretty dramatically over the last year on our execution. But as we sit here as a management team, we really don’t think it's accretive to shareholders. Our debt cost today is LIBOR plus 275, LIBOR plus 300. We have got to achieve that. We're managing some of the interest rate with there. So, what are the uses for it, so if we out and dilute shareholders and we just pay down debt, we’re just not sure that, we don’t thing good value add.

Further, we have a pretty big disconnect to that group today from a valuation standpoint, and we're executing on all cylinders here. We don’t believe whatsoever that we shouldn’t have such a big discount, and we believe strongly and internally that our shares are way undervalued and we wouldn't issue shares at this price. So, it's not -- we've done the analytical work, we've spoken this to some of our banking partners, we've had conversations at the Board level. And where we sit today, we don’t think it’s the right move for the Company or share holders.

Operator

Thank you. And our next question comes from the line of Jordan Gregov from Federated Investors. Your line is open.

Jordan Gregov

Just had a real quick question. What was your guys' interest coverage ratio as of 12/31?

John Casella

Yes, give me one second and we'll put a K later today so that the stats will be in here is well. We have that stat in here. The one number, I don’t know have in the stat.

Ned Coletta

Give me one second. Interest coverage ratio was 3.75 times at 12/31/2016 against the minimum of 2.5 times. And as I said earlier, our consolidated net leverage ratio was 4.22 times again some maximum of 5.375 times.

Operator

Thank you. And at the time, I’m showing no further questions. I’d like to turn the call back over to John Casella for closing remarks.

John Casella

Thank you. We continue to execute well against our key strategies to improve our financial and operating performance. At levels of the organization, we're devoted to operational blocking and tackling with a focus on pricing strategies at the local level, improving our operational efficiencies and disciplined capital allocation. We believe these actions will further improve the Company's performance and allow us to continue to de-lever the balance sheet going forward.

Thank you all for your attention this morning. We look forward to discussing our first quarter fiscal year 2017 earnings with you in early May. Thanks everyone. Have a great day.

Operator

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

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