Joe Fusco - VP, Communications John Casella - Chairman & CEO Ed Johnson - President & COO Ned Coletta - SVP & CFO.

Scott Levine - Imperial Capital Joe Box - KeyBanc Capital Corey Greendale - First Analysis Michael Hoffman - Stifel Nicolaus.

Welcome to the Casella Waste Systems Second Quarter Transition 2014 Conference Call. [Operator Instructions]. I would now like to hand the conference over to Joe Fusco. Please go ahead..

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

Today we will be discussing results from our second quarter of our eight month transition period ending December 31, 2014. These results were released yesterday afternoon. Along with a brief review of those results and an update on 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 measures to the most comparable GAAP measures is available in the financial table section of our earnings release which was distributed yesterday afternoon and is available in the investor section of our website at ir.casella.com. And now I'll turn it over to John Casella who will begin today's discussion.

John?.

Thanks, Joe. Good morning and welcome everyone to our second quarter transition period 2014 conference call. Today we will discuss our second quarter results and provide you with an update on our midterm strategy. I'll start as usual with a brief overview, Ned will take us through the numbers and Ed will review our operations.

Our solid performance continued through the second quarter with the results driven by execution in key areas in particular our landfills performed well by continuing to add incremental volumes and driving improved financial performance.

Our team remains focused on the key strategies that we laid out 18 months ago to improve our core operation, increase our financial performance and improve shareholder returns.

The strategies are a source incremental landfill volumes, improve collection route profitability, further our long term eastern region strategy to improve our business positioning and margins, and lastly drive high return revenue growth through our customer solutions offerings.

On the first strategy, sourcing incremental volumes, during the quarter we did a good job sourcing additional volumes to the landfills with volumes up 110,000 tons year-over-year. In total we have increased annual landfill volumes by 590,000 tons over the last 18 months up from 3.6 million tons per year to 4.2 million tons per year.

Landfills have high fixed costs and as a result these incremental volumes added significant margin with disposal adjusted a bit up 12.4 million over this 18 month period. This was a true team effort and many people throughout the company contributed to this success.

The additional tons in the quarter were mainly a result of four new long term municipal transfer station contract, closure of competitive sites in certain markets and continued execution of our focus landfill sales strategy.

During the first quarter, we started operations associated with four new long term transfer station contracts, Brookline, Mass., Schoharie, Oswego, Tompkins counties, New York. Combined these contracts represent roughly 110,000 tons a year of new volume into our disposal network. Transfer station function as a satellite gate to our landfills.

They operate roughly breakeven where their real value is driving additional cash flows at the landfill. We believe that parts of our market area are in the early stages of multiyear shift in competitive dynamics.

Over the last 18 months seven disposal facilities with 1.9 million tons of annual disposal capacity have permanently closed within our operating footprint.

Further we estimate that an additional 1.1 million tons of annual disposal capacity will permanently close in the next several years what does this mean? We believe we're well positioned to capture our fair share of this volume and our in market facilities have a transportation advantage over moving ways to distant sites.

As a result of these improving market dynamics, we have begun advancing landfill pricing across several of our sites. The second strategy is to improve collection route profitability.

Ed has been leading that effort to improve the profitability of our hauling business with a strong focus on driving price increases, improving route profitability, standardizing and upgrading our fleet. Over the last few months we have been focused on directed price increases in the hauling business to cover the decline of recycling commodity prices.

Historically, rebates from our recycling facilities to our hauling companies helped to offset the cost of providing residential and commercial recycling services.

Today with average commodity prices down roughly 40% over the last two years, recycling commodity sales do little to offset the cost of providing this valued service to our customers and as such we've been working to pass along appropriate price increases in our hauling business, particularly over the last quarter as we look back at that particular impact.

We continue to focus on the core blocking and tackling in the hauling line of business. Our team is driving selective price increases dynamically optimizing routing, improving route density and seeking equipment efficiency and standardizing our fleet.

The third strategy was furthering our eastern region strategy to improve our business positioning and margins. Our efforts to improve our operating and financial performance in the eastern region have borne fruit over the last two years as we continue to make progress on a number of initiatives and asset repositioning.

Our progress in the eastern region is clearly marked by the dramatic increase in adjusted EBITDA margins up from roughly 15% just two years ago to over 21% today. We expect to advance margins further next year as we continue to grow revenues and reduce costs.

Most notably the exploration of our Ogden put-or-pay disposal contract on December 31, 2014 will yield roughly 3.7 million per year of cost savings. In addition the landfill gas treatment at our Juniper Ridge landfill is expected to come online this month and should reduce operating costs at the landfill in 2015.

The last strategy was driving high return revenue growth through our customer solutions offerings. Last quarter, we spent some time on the conference call discussing this strategy and the financial results for our rapidly growing customer solutions group.

This theme is focused on leveraging our full suite of offerings to provide environmental and resource solutions to industrial, municipal, institutional and multi-location retail customers. Our customer solutions group experienced strong growth again in the second quarter with revenues up 28.3% year-over-year led by our industrial services offerings.

As we discussed last quarter, this rapidly growing professional services group had scaled up certain G&A costs in advance of on boarding several large new customers during the late spring and into the summer.

These customers now have come online and combined with operating efficiencies resulted in operating income for this group being up a $0.5 million sequentially from the first quarter to the second quarter.

We expect to further drive operating and back office cost synergies over the coming quarters as we further scale the business and introduce lien processing improvements.

While we continue to make progress against our key strategic initiatives, we still have quite a bit of work to do as a team to drive our higher cash flows and returns for our investors.

An area of increased focus is on proving our operating efficiency and cost of service in the hauling line of business through fleet upgrades, improving routing and on route selling.

We remain on track to deliver materially higher free cash flow in calendar year 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.

And with that I'll turn it over to Ned to take you through the numbers..

Thanks, John. To recap the quarter revenues in the second quarter were 141.3 million up 9 million or 6.8% year-over-year. Solid waste revenues were up 3.7 million or 3.6% year-over-year with increase mainly driven by higher disposal volumes, customer solutions growth and higher collection pricing and volumes.

Revenues in the collection line of business were up $1.6 million year-over-year with price up 1.4% and volumes up 0.9%. Our pricing programs in the commercial and residential lines of business remain positive with pricing up 2% in the quarter.

Roll off polls remain robust through the second quarter with strength mainly concentrated in the more urban Markets in our eastern region where we are experiencing improved construction trends through the summer and into the fall. Revenue in the disposal line of business was up $2.3 million year-over-year.

Landfill and transfer price were each up 0.4% while transportation pricing was down slightly due to mix. Our landfill volumes were roughly 1.2 million tons in the quarter up 110,000 tons year-over-year.

Over the last 18 months, we have increased our annual landfill volumes by roughly 590,000 tons per year which is driven annualized adjusted EBITDA up roughly $12.4 million per year.

Recycling revenues were up $1.8 million year-over-year or 15.3% with the increase driven by 13.3% higher volumes on the newly expanded City of Boston contract and the recent win of the Rockland County MURF operations; and the acquisition of the Tompkins MURF partially offset by lower commodity pricing.

The year-over-year decrease in commodity prices was driven by lower fiber prices partially offset by increase in plastics pricing. Other revenues were up $3.7 million year-over-year with organics revenues up $700,000 on higher volumes and customer solutions revenues up $3 million on strong growth in the industrial segment.

During the quarter we recognized $2 million of revenues from the rollover impact of acquisitions net divestitures. Adjusted EBITDA was $30.7 million in the second quarter up $1.5 million year-over-year or up $2.5 million year-over-year excluding the $1 million headwind this quarter from the closure of the Worcester landfill.

We expect to complete the final grading and shaping and closure of the Worcester landfill in early 2015. Solid waste adjusted EBITDA was 28.2 million up $700,000 year-over-year with an increase mainly driven by higher landfill volumes. Excluding the headwind from the Worcester landfill, the disposal business was up $1.8 million year-over-year.

The hauling business was down slightly year-over-year mainly on higher direct labor costs, higher healthcare costs and higher maintenance costs. The recycling adjusted EBITDA was $1.5 million in the quarter up $500,000 year-over-year with gains driven by higher volumes and lower operating costs.

We've made great progress in the recycling business over the last several quarters making small strategic investments to improve the processing efficiency and costs of several of our larger MURFs. We have actually brought the variable processing costs per ton down by 6% in the last year.

Adjusted EBITDA was $1 million in the other segment up $300,000 year-over-year with higher customer solutions performance offsetting slightly lower organics results. In addition, we've improved customer solutions adjusted EBITDA by over $500,000 sequentially from the first quarter as we gained operating and back office cost synergies.

Cost of ops was up $7.7 million year-over-year with a majority of the dollar increase resulting from higher direct cost on revenue growth and higher healthcare costs. Healthcare costs were up nearly $1 million year-over-year on experience with a majority of the increase flowing through cost of operations.

G&A costs were up slightly year-over-year with increased healthcare costs and the costs associated with our change in fiscal year-end driving the increase. Depreciation and amortization costs were up $400,000 year-over-year largely due to higher landfill amortization on increased volumes.

As expected, free cash flow was negative $14.8 million year-to-date. This decline was due to mainly two factors. One, the planned cash out flow is associated with the capping and closure of the Worcester landfill, the final clean up in site improvements at main energy and biofuels.

As outlined in our press release table's year-to-date we've spent roughly $4.9 million on these projects and we expect the remaining cash out flows to be roughly $1.6 million in the eight month transition period. Increased capital expenditures associated with new contracts and projects also amounted to $8.6 million year-to-date as expected.

As we have previously discussed, we had planned for heightened capital expenditures during the eight month transition period as we've on boarded several new municipal contracts, constructed the new Lewiston Main Zero-Sort MURF and installed the gas treatment system at the Juniper Ridge landfill.

As reported in our press release on a normalized basis free cash flow was negative $1.3 million year-to-date, slightly down year-over-year. We are estimating free cash flow for the eight month transition period ending December 31 between negative $14 million and negative $17 million.

We do, however, remain on track to materially improve free cash flow in calendar year 2015 when we estimate that we will produce between positive $14 million and $18 million of free cash flow on higher operating results and a normal capital and working capital cycle. For 2015, we expect CapEx to be roughly 8% to 9% of revenues.

As expected in the quarter, our leverage was up slightly with total debt to bank EBITDA at 5.16 times, total debt at 525.1 million and true availability of 54.3 million. This increase was mainly driven by our heightened spending on closure, site improvements, remediation and growth capital expenditures as just described.

In October, we completed $11 million offering of New Hampshire BFA senior unsecured disposal revenue bonds at a 4% fixed rate for five years and we just announced two weeks ago a $25 million offering of New York State EFC senior unsecured revenue bonds. This offering is expected to close in mid-December.

The net proceeds of the New York bond offering will be used to pay down the revolver and finance upcoming capital needs in New York State. Our next major debt maturity is a $227.5 million senior secured credit facility due in March of 2016. As of October 31, we had 144.3 million borrowed on the credit facility and $27 million of letters of credit.

We started to work on the refinancing of the credit facility over the last few months and we are expected to complete the refinancing of this indebtedness ahead of its going current in March of 2015. With that I'll turn it over to Ed. Thanks..

Thanks, Ned. Good morning, everyone.

We are just about finished with our eight month transition period to a calendar fiscal year and the completion of the capital projects and other operational projects that we undertook to get the company to where we need it to be, a company with meaningful cash flow generation and continual sustainable improvement and profitability.

We reconfirmed our guidance for calendar year 2015 and remain on track for 2015 to be a break out year for us. It's an exciting time because it's been a long road to get here and we're really happy to see our plans start coming together.

I want to talk this morning about some of our accomplishments during this transition period, provide some insight as to what is going on and cost of ops and how we look at it and then go over the key things we are looking forward to in 2015 and how the calendar year works for us. There has been a lot going on over the past six months.

Some is very tangible and easy to talk about, others go into the category of boring fundamentals but believe me, they are very important to our future success. Let's start with the Lewiston MURF. We completed construction and started ramping up operation a few weeks ago.

With the capacity that we have now, our focus will be on getting better pricing at the street. As John stated, commodity prices on average have dropped about 40% in the past two years.

Our MURFs operated as merchant facilities so our basic contracts with municipal and third party haulers are structured to protect us from commodity price drops, however about a third of our volume comes from our own trucks and customer expectations continue to be that recycling pays for itself.

We’re launching a customer education campaign and are aggressively increasing prices for our recycling collection customers particularly on the residential service to cover the decline in commodity prices.

We do not anticipate needing any further investment in processing capacity in the foreseeable future and our strategy will be to drive increasing cash flow. One of our other projects was the construction of a gas treatment system at the Juniper Ridge landfill in May.

The construction period was tight but we will have that plant completed prior to year-end. This plant which is similar to the one that we run successfully at another facility has a high IRR and will save us significant operating costs over the commodity-based treatment system we are using currently. It will also improve our ability to sell the gas.

We do not have any similar requirements at any of our other landfills so future investment of this type is unlikely. Last quarter, we discussed the ramp up of our customer solutions group and that we had good success in growing our revenues but we were struggling to streamline our cost structure.

The team has done a great job returning the group to profitability this quarter and we’re making significant progress streamlining the back office support for these customers. By the end of this month we will have substantially completed the closure work on the Worcester landfill.

The final decommissioning work on our closed Maine energy facility, our obligations relating to the sale of biofuels and should be pretty much wrapped up with any obligations on closing Cares, our water treatment business. These are all one-time hits to cash flow for previously accrued costs.

We’re working through any other clean up items to make sure that we enter 2015 with a clean start. Most of you are aware that our cost of ops percentage has drifted up over the past few years. Some of this has a revenue mix issue, some is due to pricing and some is related to rising equipment operating costs, down time and related labor inefficiency.

Because it is an important metric in some lines of business but not a key metric for other lines, I thought it would be helpful to give some perspective on the operating cost trends for each business line and what our expectations are going forward.

Cost of ops in our landfill operations are highly fixed and as a percentage of revenue fluctuate with volume. As we have increased volume into the landfills, you would expect cost of ops to decline as a percentage of revenue and from landfill only standpoint, that has happened.

However we have made some very positive business moves that result in a higher revenue and higher direct cost for the company as a whole but inflate cost of ops as a percentage of revenue, so let me explain that.

A good chunk of the new tons we have sourced to the landfill has come from our success in bidding long term management and disposal contracts for several municipal transfer stations including the four transfer stations that John mentioned.

Tipping fees at the transfer stations which are booked as our revenue are high enough to cover the cost of operating the transfer station, the transportation cost to get it to the landfill and an attractive disposal fee for the landfill.

So even though we're better off from a profit contribution standpoint we record higher revenue and higher costs by taking the volume through transfer stations, diluting margin.

So when we look at the success of our landfills, cost of ops as a percentage of revenue is less important to us than EBITDA and cash flow contribution, so going forward if we can secure steady volume sources through transfer stations we will continue to do it without regard to the cost of ops optics.

Our customer solutions business has been a strong source of new revenue for us and has grown from 8% of revenue a year ago to 9.6% this quarter particularly with our new industrial solutions offerings. This is a low investment but low margin business the way it is structured now.

The reason the margin percentages are low is that certain customer costs are being managed by us and through us inflating revenue and expense. The team has been working to transition our customer offering to pass more of the costs back to the customer reducing revenue and costs equally but leaving us with the same profit and improving the margins.

So cost of ops as a percent of revenue should decline going forward as we continue to grow the business under the new approach. After an increase in operating costs in our recycling operations last year, I tasked the management team to find ways to operate more effectively in severe winter conditions and to improve processing efficiency.

The team has made a lot of progress, implementing several changes that should protect us more from unusual weather events and have lowered processing costs by 6% this quarter. Controlling operating costs in our collection operations has been a challenge. The key component driving costs up have been labor, healthcare, and maintenance.

The healthcare cost issue was a national issue being felt by all but as a result the industry as a whole will need to be taking a more aggressive stance on pricing and certainly that's the approach we are taking now. The labor and maintenance cost increases are related to the fleet issues that I've talked about in previous quarters.

Last quarter I talked about our long term float plan and I notice this seems like a boring fundamental but I'm pretty excited with the fleet changes we have started to make and I anticipate we will be able to exceed our operating cost reduction targets next year.

Another thing I spoke about last quarter was the IT plan and I think that that might have been a little misunderstood by some. I announced that we had completed a long term IT plan and hired a new CIO and I heard back that some of you were concerned that this meant a significant long term investment.

New systems that would end up-taking longer and costing more than anticipated. The point of a long term IT plan is to foresee where you want your support systems to be long term so that you manage your investment a lot better in the short-term.

Our projects are all evaluated and prioritized by return expectation and we’re not wasting money on things that don't have a high return or don't fit into our long term vision. Two years ago, we started an initiative to assure we had had the right people in the right place in the organization.

If you recall, quite a few positional changes were made and we continue to feel good with the team we've put together. The fleet plan and the IT plan provide people with the right tools to do their jobs efficiently and effectively.

The last piece is training and development and although we've done a fair job in the past, we are stepping up there as well at all levels of the organization particularly for maintenance and operations personnel.

So yes, these are boring fundamentals but we believe this is the key to building the type of company that can produce the financial results we’re looking for and that makes this an exciting time to be with Casella. As a final comment I wanted to walk through what the changes in fiscal year do for us and what you might expect for the quarters.

The biggest operational benefit is that we now approve our budgets in December and can order our trucks and containers which have long lead times for the arrival before the spring season begins. It also puts us in-line with the rest of the industry so our seasonality is a little more predictable.

By grouping January, February, and March into the first quarter, our most challenging operating months are behind us early and by putting April with May and June, the timing of the arrival of spring weather and the related construction season in the North East is less important to us.

So although we do not provide quarterly guidance, expectations are that the first quarter will be our weak quarter, the second quarter will be our second strongest quarter. The third quarter will be our best quarter and the fourth quarter will wind down through December.

From a cash flow standpoint with the bond interest payments due in February and August and with equipment purchases skewed to the beginning of the year, the first quarter is expected to produce negative cash flow. The second and third quarter stronger positive cash flow and the fourth quarter is expected to be the strongest.

We remain comfortable with our 2015 guidance. The next call we will be reporting on the eight months ending December 31, adding just two months to what we are reporting today. With that, I would now like to turn it over to the operator to open up the lines for questions..

[Operator Instructions]. Our first question comes from the line of Scott Levine from Imperial Capital..

Hoping for maybe a little bit more color with regard -- you're affirming guidance here, results a little bit above where we were for EBITDA.

Can you give a little bit more color about how the quarter played out relative to expectation fundamentally and maybe whether you have increased conviction, you can achieve the higher end and also some color eastern versus western, sounds like the eastern region the macro trends there are stronger, a little bit more detail with regard to the break down there..

Sure, Scott. We did reaffirm guidance for both the eight month transition period and for calendar 2015.

We’re trending towards the high end of each range currently and we have good conviction but I think as you've seen from our team over the last two years we're trying to be conservative from a guidance standpoint and we enjoy outperforming guidance, so we’re trending towards the upper range.

Next year things are stacking up well for us and we would like to be in a position if we can outperform to outperform through the year. When you look at the business and where we perform to plan, where we exceeded plan, we did better than plan at the landfills again.

We drew in more tons, especially in the eastern region where we're starting to yield some price in certain markets.

The western region had some challenges in the collection line of business, that was probably one area where we missed our plan in the quarter and we'll get into that in a little bit more detail probably as the call goes on but generally, we were not pricing as effectively as we could in certain markets and we've advanced a plan this fall to push higher price to both residential and commercial customers into next year..

Okay. And you mentioned as well that you're beginning to push price at certain landfills.

Is that really a landfill by landfill type of decision or is it regional in nature? A little bit more color with regard to the disposal pricing environment and how much improvement we can expect there going forward?.

I think it clearly is a site by site, Scott and I think it is related to the dynamics in each of those markets.

So if you look at Massachusetts with our Southbridge facility where the facility is running at capacity it's a very different dynamic than in the West where we have some of the facilities where we still have capacity available to the marketplace so it is on a site by site basis but we are pushing pricing at all of the facilities probably with the exception of Western New York.

Let me explain that a little bit further. I think that it's fair to say that we're actually pushing pricing across the board but I think it is specific to the market dynamics around the individual facilities..

So if you take that a step further though, John and if you look at where the site closures are, they are across Massachusetts, Maine, New Hampshire and Vermont and that's where we've actually grown tons most significantly over the last 18 months.

We said that we grew tons on an annualized basis by $590,000 tons per year and around 70% of those gains come in those markets where we're seeing competitor sites reach the end of life so we're able to gain some market share and we're beginning to be able to advance pricing selectively in those markets and we believe we're in the early stages of what will be a multi-year pricing opportunity..

So with regard to the western region, a function of that market is starting to tighten and maybe as the New York City contract has more impact there and volumes improve maybe cyclically or otherwise, do you expect similar trends to follow in the West?.

I think that's a fair perspective on the West. We don't have anything incorporated into our plan for 2015 from New York City. So net-net that could be a benefit to us.

Also with regard to the transfer stations that we were able to add in the West, we were able to advance pricing there in terms of being able to move out the lowest quartile pricing that we had in those western landfills when we brought those transfer stations in as well.

So I think as I said I think it's across the board but Ned really articulated where the real strength is and it's across Vermont and New Hampshire, Maine and Massachusetts..

And the one last one I had really with regard to Ed's comments about the transfer stations and the customer solutions business, depressing margins but being good for earnings and cash flow.

I don't know if I missed or can you quantify in basis points maybe what the impact was there and in terms of that improving, would that be gradual or what should we think about going forward?.

Yes, I don't have the numbers in front of me to quantify the exact numbers but just walking through simple math.

We brought on new volume through transfer stations and say a transfer station has an $80 fee, that $80 has to cover say $30 or $35 in trans and operating the transfer station, so that ends up in our cost and it reduces the cost of ops or increases the cost of ops as a percentage of revenue which was the point I was trying to make but the landfills end up getting higher price at the landfill.

Now because that ends up being internal, because we have to eliminate it and consolidation, so it doesn't show up in our price numbers for the landfill, it ends up as new volume..

So it's an inter-company accounting issue effectively?.

Yes..

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

So I appreciate the comments earlier that your disposal business outperform plan but I guess one thing I want to dig into is it looks like revenue actually declined in 2Q from 1Q which is definitely the first time in a while.

Can you maybe give us the background on that sequential decline? Was there a large special waste issue that kind of crept into 1Q or any color there would be helpful..

I think we were up consolidated from 1Q to 2Q..

Yes, the issue, Joe is that more of the revenue was through transfer station so --.

And looking at the disposal line of business from Q1 to Q2, Joe or is it consolidated?.

Yes I'm looking at disposal going from basically 40 million to 39.6 million..

Yes, so that's reported third party revenues.

So we had an interesting trend happening where we're bringing more and more revenue through our hauling businesses and through our transfer stations so landfill revenues third party are actually dropping because we're having more vertically integrated internalized tons which is an interesting trend as Ed just laid out where it negatively impacts margins but we're getting higher cash flows and higher operating income as a company because of that move, that shift..

In addition obviously we have control of that for the five year period of time that we have that under contract as well. So obviously it's exactly what we want to do is get more waste on our trucks and long term contracts going to our disposal facilities..

Ned, you mentioned earlier that you could have a price true up in the western collection business.

I'm curious was there a disconnect between maybe where you were at versus some of your peers on pricing or is it more a function of you didn't have the right cost escalators in there and you weren't covering cost inflation?.

I think when you look at the business especially in the western region, we probably were not pushing enough to the street from a recycling rebate standpoint where the recycling markets have cycled as everyone knows over the last 10 years and we've been in a down cycle for two years now and inter-company we push rebate adjustments to our hauling companies but we haven't pushed enough of that back to the customer base and it was most acute through the last six months.

We're getting more aggressive there and we're educating our customer base as Ed said that recycling is not free, it's not a cost savings measure, it's a value-added service that cost money especially in these commodity markets.

So that’s part of it and I think part of it as well is just cultural, it's something Ed has been working on for two years where we need to advance pricing to cover our increased costs and we provide great service and we need to continue to do that as a business..

Okay, and that's going to show up on the hauling side though to be clear not on the recycling side?.

Yes exactly..

And with the changes that you guys are making to your customer solutions business, can you give us a sense of maybe what the right EBITDA and what the right EBIT margins could be for this business and maybe how long until we get to those levels?.

So there is two major parts to this business. There is the multi-site retail and then there is the industrial services. The multi-site retail is more of like a smaller margin business pass through and then the industrial business is kind of a 10% to 15% margin business..

That's EBITDA?.

EBITDA..

And where we’re at now relative to those targets?.

This quarter, we are roughly 2%..

Okay.

And I guess maybe what's the mix of that multi-site small retail versus industrial?.

I don't have that in front of me. It's probably 2/3rd multi-site, 1/3rd industrial. I'll take a look and see but essentially we still are growing into the overhead as we grow the industrial business. As we said we grew a half a million dollars of operating income sequentially and we have further gains we expect into next year..

Okay. Maybe I could circle up with you offline on some of the particulars. I'll leave it at that. Thank you, guys..

Thank you. And our next question comes from the line of Corey Greendale from First Analysis..

So I had a couple questions.

Just to be clear, the 2015 free cash flow guidance, is that comparable to what you're currently calling free cash flow or are you adjusting that for anything like the normalized free cash flow?.

No adjustments. The only reason we put the normalized free cash flow out this quarter was just to get visibility on those one-time items that we've been disclosing. The 14 to 18 positive next year will be per our standard definition..

Okay and then a lot of the or a significant piece of the improvement for next year comes from the fact that you're talking about CapEx at 8.5% to 9% of revenue for 2015.

So can you just talk about how sustainable is that and how much is that because there is some stuff getting pulled forward into 2014 and in 2015 do we go back to 10% to 11% of revenue?.

Actually it's a good question, an interesting question because with the fleet plan, with all the projects we've had in place and the cleanup items we've had to get through, we're in a great position right now and we are actually dedicating a little more of our capital to fleet and to fundamental assets of running the business.

So we feel we're in pretty good shape. It's a sustainable level of CapEx and it's more around maintenance CapEx because our growth CapEx is pretty minimal. The areas of the business that we're growing require very little capital..

Okay.

So in other words, the industry kind of knowledge, the wisdom is that 10% of revenue is the standard and you're saying at least for a while you shouldn't have to be up at that level?.

Yes..

And then, not to beat this horse totally to death but I just want to understand what the transfer station -- so when you say that Q1 to Q2 third party landfill volumes were down, are you saying that mix shift into other words there are specific volumes that you were getting at the landfill that you're now getting through hauling and transfer or is it two separate things that you are adding hauling and transfer volumes and there are other third party volumes at the landfill that you've lost for some reason?.

No, your comments exactly right where revenues, more revenues are getting recognized at transfer and hauling companies in the second quarter versus the first quarter versus directly at the landfill. We're taking more through our system versus getting third party tons either spot or contracted at the landfill..

And you're saying that's preferable because these are longer term contracted volume as opposed to more spot volume?.

Yes that's true. Both they're longer term and internalized tons are preferable as well for vertical integration and cash flow impact..

Okay.

And then can you give us some of the other things like not that mix shift but just the third party tons you're getting at landfills, what the pricing is on that so in other words independent of your pricing action and raising price just what your mix is doing to your price?.

I'm not sure if I understand the question, Corey..

What I mean is that if you look at your mix of volumes, are the volumes -- is the price on that volume higher or lower. So I'm talking about -- forget the fact that you're trying to raise price.

I'm just asking, is mix shifting toward special waste volumes that are lower priced or anything along those lines?.

So in the quarter we saw increases in C&D third party, increases in special waste streams third party and MSW was kind of flat and we saw more significant growth inter-company in MSW volumes. So the MSW volumes are coming through transfer stations that are traditionally some of your highest priced tons.

So we're recognizing those revenues at the transfer station..

Okay I think I understand. I might follow-up for more specifics but I think that's fine for the moment. Thank you..

Thank you. And our next question comes from the line of Michael Hoffman from Stifel Nicolaus..

On the free cash flow target -- so I'm assuming that there is a pretty significant working capital improvement needed in 2015 to make the free cash flow goal, if you sort of follow the path of your guidance on sales and EBITDA and where you are in your capital spending and you start thinking about the cash flow statement, the real lever here has got to be in working capital.

Is that the right place to be focusing is the next leg up?.

Yes..

Okay.

And is it collect your money faster or pay your bills slower or a combination of both?.

It's more a combination of in calendar year '14, we've had some changes to our free cash flow that are causing us to be more negative than a normal cycle. Most notably we have a number of liabilities that we're paying down as we've discussed accruals for closure and site remediation Worcester Biofuels Maine Energy.

Furthermore we've discussed several quarters now where we've brought our payable cycle back to what we consider to be more of a normal timing, whereas we were probably a little bit long last year. This negative headwind will not repeat next year, so that’s weighing on our numbers this year as well.

We've also seen a little creep up in DSO as we've grown revenues in several of our lines of business and we expect that to normalize into next year..

Okay.

So Ed at simplest level you'll collect your money faster and you pay your bills slower?.

We're not expecting to pay our bills any slower next year than we do this year. We just expect there not to be a negative change from calendar '14 to calendar '15 whereas in calendar '14 there is a negative change to the year before.

But as the change occurs this year, next year we’re assuming conservative plan where our DSO, our DPO, our changes in assets and liabilities just follow more normalized pattern. So there is not a negative headwind next year..

So again following if you just take guidance as the starting point and then the capital spending numbers you've talked about today, basically the free cash flow guidance ends up being the working capital swing, it's $14 million to $18 million is that the right conclusion?.

Well if you look at it, if you just walk through it we're a negative $15 million say roughly for the eight month transition period. You have about $15 million of non-recurring items in that number whether they will be higher CapEx associated with the new projects.

You also have about $5 million to $6 million of the final capping [ph] closure site remediation.

So you're around $15 million or $16 million so you get to about breakeven and then from there, we've put together a forecast that has EBITDA up say $7 million at the midpoint and we also expect working capital to improve for the remainder of the bridge to the free cash flow and as I said it's not that we're assume a more aggressive working capital position.

We're just assuming less changes year-over-year..

Okay.

And then do you expect all of that incremental EBITDA to convert to cash or typically there is a percentage of your EBITDA converts to cash?.

Yes, so there is of course CapEx associated with that at a level of let's say 35% to 45%..

Okay, which leads me to my next question.

In the aggregate you're spending something that looks more like 50% of EBITDA today and next year if you take the high end of your capital spending percent of sales but the midpoint of your EBITDA range you're kind of at 48% but that's still well above the peer group which is running kind of at 35% of EBITDA is capital spending and if I follow the path of all of the successes you're having in that cycle of EBITDA growth, you still end up paying a fairly high percentage of your EBITDA conversion.

How much of that is in your mind structural and therefore can't be avoided versus maybe there is another leg on this and let's not be fixated on percent of revenues but how much of the EBITDA you have to spend capital on to support?.

So at the midpoint next year the plan is right around 43%, so it's starting to get down to that level.

Is there probably are some small structural differences in the North East being that our landfills are slightly more expensive from a regulatory standpoint to construct but I think this is a lot of what you've been seeing from the management team over the last couple years.

We're very focused on capital projects that return but we're very focused on maintaining our fleet and producing more significant free cash flow. So I think we'll get additional leverage there Michael over the next several years as part of our strategy of course to maintain a reasonable amount of CapEx and grow EBITDA..

Okay. New York City, I appreciate that the midpoint 105 doesn't have any expectation that New York City had influenced that, but with the city putting up the progressive bid back for rebid if you assume the worst case scenario and somebody else wins it and at this juncture Covanta sort of had in, that volume wouldn't go to New York.

So what's Plan B in the context of the asset utilization in the West and that looking for that volume dislocation that would have ultimately helped pricing?.

Well none of the New York City volume is in our forecast..

I appreciate that.

The 105 doesn't have that but if I start thinking about '16 and '17 what's Plan B as you look out in your multiyear plan if New York City doesn't come -- if the only part that goes up there is Niagara Falls and nothing else goes there?.

Well then it just leaves us basically in the same position we're in although the Niagara Falls volume is going to help us and we know that's coming. That's contracted or arguably help progressive because that will, they will then handle Canadian Waste coming down that's being cut off by the incinerator potentially..

Yes, that's the nice lever that Progressive has is they can bring volume down from Canada which they did a few years ago and then they ended up being able to fill the site without a lot of that Canadian volume so they've got a lever to pull that they can pull..

So if I'm following this because Covanta talked about this now, it's the volume that will be pushed out is all Canadian, it goes back to Canada, Progressive -- following the simple logic Progressive gets its hands-on it, brings it down to Seneca, Seneca is run basically full and it displaces volume and that volume works its way towards Ontario and so on and so forth that's how to think about it?.

Yes but I think also our Western landfills can benefit because Covanta may be saying all their volumes are coming from Canada but some is coming through companies that we have relationships with in that market and they're bringing their volume to Covanta plants and transfer trailer trucks now and they could simply go another hour and a half and get down the island..

Okay, and then just to be clear, if I remember all these numbers right, your solid waste EBITDA margin was 27.7 in Q1. So you clearly showed an improvement at 28.2 in Q2, so that is the proper and appropriate directional trend. I was a little bit surprised though it might have been better just because Q2 is typically such a strong period.

You basically did 121 million of revenues in the aggregate in the first quarter and you're doing 100 million in the second quarter. I thought you might be a couple million dollars better and I modeled it and did it wrong but why wasn't it better? Usually it is. Usually there is a sequential bump..

Yes, so two things happened I think most notably. The second quarter had a $1 million year-over-year headwind from the closure of Worcester, so the first quarter had very little hundreds of thousands of dollars. So sequentially there is a bid of --.

$100 million worth of healthcare cost in the second quarter as well sequentially..

Well that's cost side but I'm just thinking on revenues. I would have just thought you had been 100 million goes to 102 million sequentially and you're kind of flat..

Yes, the first quarter was a bit stronger than normal seasonal trend and volumes -- I mean most of our landfill metrics we saw our tons up year-over-year, we saw revenues up year-over-year, we saw other seasonal work like roll-off pulls up year-over-year so those trends were intact.

The first quarter probably was a little bit stronger than normal because of late winter and we had some pull through from kind of the March-April timeframe that ended up in May timeframe..

Okay.

And then you were making a point I guess on costs that there is a $1 million of cost that’s in 2Q, that’s not in 1Q for Worcester and that the health care number -- the healthcare number a onetime and it covers the whole year and just absorbing it in that quarter? So I could smooth it or it's now healthcare is higher now and permanently higher each quarter going?.

We're self-insured and so we true-up each quarter from actuarial standpoint of what our experience is and what our vision is into the remaining quarters and our experience clicked up significantly in the second quarter. So our costs -- our accruals were up, but looking for the remainder of the year, Michael..

Okay, so that's a onetime that I could call theoretically could have smoothed over a year is the way to think about it?.

We don't think that that's going to reoccur at this point in time..

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

Thank you all for your attention this morning. Our next earnings release and conference call will be in late February when we will report our eight month transition period results. Thanks everyone and have a great day..

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..