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

Joe Box - KeyBanc Capital Markets Tyler Brown - Raymond James Scott Levine - Imperial Capital Corey Greendale - First Analysis Brian Butler - Stifel Al Kaschalk - Wedbush.

Welcome to Casella Waste Systems, Inc. Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions]. I would now like to introduce your first speaker for today Joe Fusco for opening remarks. You’ve the floor, sir..

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 a 2015 fourth quarter and 2015 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 SEC Safe Harbor Provisions, actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our prospectus and other SEC filings.

In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.

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

Also during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial tables section of our earnings release which was distributed yesterday afternoon and is available in the investors section of our website at ir.casella.com and now I will turn it over to John Casella who will begin today's discussion.

John?.

Thanks, Joe. Good morning, everyone and welcome to our fourth quarter 2015 conference call. We are very pleased with our fourth quarter and our fiscal year 2015 results.

Ned, will go through the numbers in detail in a moment but first I would like to recognize that these strong results are testament to management's commitment and continued execution against our key strategies. All despite ongoing headwinds from lower recycled commodity prices and lowered energy prices.

We hit the upper end of our adjusted EBITDA guidance and exceeded our free cash flow guidance for fiscal year 2015. If you remember, we first issued FY ‘15 guidance all the way back in June of 2014 and since that point we have raised our free cash flow guidance.

I would also like to note that the first quarter of 2016 is off to a solid start driven by continued positive pricing and volume trends and a more normalized winter to helping to maintain more consistent levels of economic activity and operational efficiencies.

Three years ago we laid out a comprehensive strategy to improve our financial and operating performance. We've diligently followed and executed against that plan as our results demonstrate. Pursuant to that plan we’ve refocused the company while simplifying our business structure.

We’ve reduced risk disposal by either divesting or closing operations that did not fit within this strategy and have refocused management attention and capital resources on our core operations and strategic business initiatives.

Going forward, we plan to continue to focus on increasing landfill returns, driving additional profitable ability at our collection operations creating an incremental value through resource solutions and reducing financial and operational risk while improving our balance sheet.

We are confident that our focus on the core operations will continue to drive improved performance and increased free cash flow enable us to continue to delever our balance sheet.

In mid-August we introduced our multiyear plan and announced our financial target for FY '18 including adjusted EBITDA target of $122 million to $132 million of free cash flow target of $30 million to $40 million and total debt to EBITDA target of 3.25 to 3.7 times debt to EBITDA.

Our plan is focused on driving pricing, volumes and operating efficiencies through our current asset base. It does not include any acquisitions or new development projects nor does it contemplate the recovery of recycling commodity prices, energy prices, or the construction market to help drive the achievement of these financial targets.

We believe that this plan is achievable in our execution over the last three years clearly demonstrates our ability to execute and drive sustainable growth. Further our fiscal year 2016 budget is in line with the multiyear plan.

As the Northeast disposal market continues to tighten due to permanent closures of various competitor disposal sites we further advanced our landfill strategy during fiscal year 2015 with higher pricing and increased volumes.

In FY ‘15 we increased the total landfill volumes by 133,000 tons per year through our focused landfill sales strategy building our special waste capabilities as well as our landfill assets positioning in the marketplace.

In addition, we increased average price per ton at our landfills by 3.7% as we advanced our focus on landfill pricing in select markets and improving the mix of customers and materials at key sites.

We expect these positive trends to continue for the next several years as disposal capacity constraints become more acute across our footprint and we remain focused on executing against our disposal strategy. Further, we received two important landfill permits that will help us to drive additional value.

In mid-January we received minor modification in our Highland landfill to expand the annual permit limits from 312,000 tons per year to 465,000 tons per year. This permit expansion provides us with an opportunity to further grow our landfill platform in Western New York at one of our lowest cost sites.

In late January the Ontario landfill received its final permit for 15.7 million cubic yard expansion which excretes an additional 13 years of aerospace.

The performance of the Ontario landfill was negatively impacted in fiscal year 2015 as we approached the end of our permitted capacity, it had to limit our intake of high-value special waste trains [ph] while we incurred heightened operational costs effectively manage the site.

With this new permit we received an immediate vertical expansion which had helped us get the site back to historical financial performance by late year 2016 or into the year 2017. We continue to make great progress on our second major strategy, improving profitability of our hauling operation.

Our focus here is on core blocking and tackling namely focus on pricing programs and route optimization and fleet standardization which Ed will discuss in greater detail. The disposal capacity constraints in the Northeast markets are also providing a positive backdrop for us to advance price increases in the collection line of business.

With disposable pricing across our markets increasing above CPI, haulers are experiencing higher inflation on disposal cost which is the largest cost line for a hauler and as such haulers are in turn advancing pricing to their customers to offset this inflationary pressure.

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 the fourth quarter, combined residential and commercial collection pricing was up 5.6%, the strongest price execution that we have experienced in the last 10 years. We have forecasted positive pricing trends to continue into fiscal year 2016 however we do expect pricing to moderate from these levels.

As far as our comprehensive hauling strategy, we have developed a plan designed to simplify our fleet and target truck replacements to maximize returns.

We are in the second year of our five-year fleet plan and we believe this plan will reduce our operating expenses through lower maintenance costs, improve our capital efficiency and improve our service levels through decreased downtime.

Our effort in this area was muted in fiscal year 2015 as we experienced significant delays with new truck deliveries. As such, in fiscal year 2016 we preordered the majority of trucks and took delivery of most all of our new trucks in the first week of January giving us a strong start to 2016.

Moving on to the third major strategy creating incremental value through resource solutions, here we differentiate ourselves in the marketplace by offering value-added resource solutions.

These solutions range from our customer solutions group which provide professional services to large industrial customers to our organic business that is a leader in organics processing and disposal in the northeast, to our market-leading recycling business.

Our customer solutions group continued to improve margins and returns through the fiscal year 2015, adjusted EBITDA margins improved by 100 basis points on continued operating and G&A leverage despite commodity pricing headwinds and much of the industrial services group.

Lower recycling commodity prices remain one of the largest challenges and we believe opportunities facing the solid waste industry today. The slowing global economy, lower oil prices and strong U.S. dollar weighed heavily on paper, OCC, plastic to metal pricing through fiscal year 2015.

We experienced a 19% decline in average commodity revenue per ton in fiscal year 2015 which resulted in an $8.8 million decline in recycling commodity revenues. However, we did not sit by idly and hope that the markets were going to recover.

We have taken concrete steps to earn an appropriate return on our recycling investment through all market cycles. This effort does include the implementation of higher [indiscernible] at our recycling facilities, another critical step that we have taken is the introduction of our new sustainability recycling fee for our SRA fee.

The SRA fee is similar to a fuel surcharge where it floats inversely and changes in recycling commodity prices. The implementation of the SRA fee has gone very well. With the fee now rolled out to all target collection markets with minimal rollbacks.

Our efforts have worked extremely well and I'm proud to say that we maintain flat operating income in the recycling business in fiscal 2015, despite the significant headwinds that we faced from commodity price standpoint.

This solid performance is a testament to our entire team and their effort to act quickly to reshape our recycling model, implement the SRA fee and educate most importantly educate our customers about its importance in assuring that we can continue to recycling services and invest in the necessary recycling infrastructure.

Also, we continue to make progress improving our balance sheet and reducing operational and financial risk. We have simplified our business by divesting and closing underperforming and noncore operations. Further, with the refinancing of our senior credit facility in 2015, our next major debt maturity is now seen subordinated notes due in 2019.

Fiscal year 2015 was an important year for Casella as we delivered positive free cash flow and began to pay down debt and reduce leverage. In fact, since the first quarter we have reduced our total debt by $23.6 million and reduced our average leverage by roughly 2/3rds of a term.

We are well-positioned for the future and we are committed to a disciplined capital investment strategy with free cash flow primarily used to repay debt or in selected instances we could consider small tuck-in acquisitions and grow investments within our core operations.

We continue to execute extremely well against the strategic plan that we laid out three years ago to improve our financial and operating performance. We are devoted to operational blocking and tackling with the focus on pricing strategies at the local level, improving our operational efficiencies and disciplined capital allocation.

We believe that these actions will further improve the company's performance and allow us to continue most importantly to delever the balance sheet going forward. With that I will turn it over to Ned to take you through the financials..

Thanks, John. Revenues in the fourth quarter 2015 were $140 million, up $6.5 million or 4.9% year-over-year.

Solid waste revenues were up $7.5 million or were up 7.7% year over year in the fourth quarter, which increase mainly driven by higher disposal volumes, higher collection and disposal pricing, partially offset by lower processing pricing environments, lower fuel surcharges on lower diesel prices and lower energy pricing and volumes in the landfill to gas energy business.

Revenues in the collection line of business were up $3.2 million-year over year in the fourth quarter, with prices up 5.3% and volumes up 0.6%. Our pricing programs in the commercial and residential lines of business continue to strengthen through the fourth quarter with pricing up 5.6% year over year marking our strongest pricing period in 10 years.

We also advanced stronger pricing in the roll-off line of business with pricing up 4.8% in the fourth quarter as we tested elasticity in select markets with strong volume trends as we experienced an unseasonably warm fall and early winter in the northeast.

Revenues in the disposal line of business were up $5.2 million year over year in the fourth quarter. Roughly 55% of this increase came from strong volumes at our landfills with landfills tons up 72,000 tons year over year in the fourth quarter with strength at most site and across most waste categories.

A portion of this growth was driven by the unseasonably warm late fall and winter with C&D tons up roughly 30 tons year-to-year.

Further as we discussed over the last several quarters, the remainder of the disposal revenue growth mostly came from higher revenues at the transfer station and in the transportation business driven by several new transportation and disposal contracts initiated over the last year.

With C&D contracts we typically subcontract the majority of the transportation work and as such revenues are grossed up to cover the increased cost of transporting a customer's waste from a transfer station to a landfill.

Total cash flow has improved from this additional [indiscernible] landfills although these additional pass-through costs slightly compressed the solid waste adjusted EBITDA margins.

We increased our overall average price per ton at the landfills by 3.1% in the fourth quarter as we continue to cycle out lower price customers, improve customer waste mix. We expect these same positive pricing trends to continue into fiscal year 2016 as we plan further pricing increases in key markets.

Our total landfill volume were roughly 1.2 million tons in the fourth quarter, as I said up 72,000 tons year over year despite headwinds at that Ontario landfill. As you recall several years ago we set our landfill strategy. We said we would source an additional 350,000 or 500,000 tons per year to our landfill.

We continue to execute extremely well against this goal and we actually are up 790,000 tons annually since we set that goal which has driven adjusted EBITDA by $17 million.

In the period recycling revenues were down $700,000 year over year, with the decrease driven by lower commodity pricing with our average commodity revenue per ton down 25% year over year in the quarter.

This is almost across all categories with lower fiber pricing, lower plastic and lower metals pricing, partially offset by hire tipping fees at our facilities and higher volumes.

Organics and customer solutions revenue were down roughly $300,000-year over year in the fourth quarter driven by lower volumes in organic business and the customer solutions line of business. During the fourth quarter, our revenues were roughly $300,000 lower from the divestiture of low margin hauling reps.

Adjusted EBITDA was $27.8 million in the fourth quarter and margins improved 150 basis points to 19.8%. So with revenues up $6.5 million and adjusted EBITDA up 3.4 million that gave us flow-through impact of 52%.

Solid waste adjusted EBITDA was $28.3 million in the fourth quarter, up $5 million year over year after neutralizing for any changes in the allocation of intercompany management fees. This correlates to a flow-through benefit of 65%. Hauling adjusted EBITDA was up $3.4 million up year-over-year with margins expanding 425 basis points.

Disposal adjusted EBITDA was up $1.6 million-year over year, all of this partially offset by lower performance in the energy and processing lines of business. Solid waste adjusted EBITDA margins were 26.9%, up 300 basis points year over year reflecting strong pricing coupled with cost efficiencies.

Lower fuel costs benefited margins by roughly 110 basis points. However, lower energy prices and higher intercompany recycling tipping fees were 100 basis point headwind in the period.

Recycling adjusted EBITDA was $1.2 million in the fourth quarter, up $600,000 year over year, with higher tipping fees to both third-party and intercompany customers offsetting the lower commodity pricing. Adjusted EBITDA was negative $1.7 million and other segment down $2.2 million year over year.

This decline was primarily due to higher G&A costs partially offset by gains in the customer solutions business. Cost of ops in the fourth quarter as a percentage of revenue is down 260 basis points. Ed will run through it in more details in a bit.

G&A costs in the fourth quarter were up $3 million year over year, mainly driven by $1.1 million of proxy contest expenses and $1.6 million in higher labor and bonus accruals. G&A cost in fiscal year 2015 were off as well with the majority of this driven by the proxy contest costs in the year.

During the fourth quarter, we recorded a $1.9 million contract settlement charge that relate to a favorable pending settlement of an obligate at our Juniper Ridge landfill. We estimate that this settlement will save us over $33 million over the next 18 years.

Further, during the quarter we recorded a $1.8 million non-cash charge related to the impairment of two historical cost method investment. Free cash flow was positive $8.7 million in the fourth quarter and positive $20.2 million for the fiscal year 2015 driven by higher operational results, lower capital expenditures and several asset sales.

We continue to use our excess cash to repurchase on the open market and permanently retired our high cost 7.75% senior sub notes due in 2019. During the fourth quarter we repurchased an additional $5 million of the bonds bringing our total repurchase bonds to $14.7 million in fiscal 2015.

As we previously described, our ABL Revolver allows us to pay down junior debt as long as we maintain a minimum threshold of availability on our revolver.

Paying down the seven 3/4% senior sub-debt is a great capital allocation decision because the interest cost on the senior to sub-notes is roughly 5% higher than the interest cost on the revolver enabling us to accelerate free cash flow generation and debt repayment.

We plan to continue to repurchase and retire senior sub notes in 2016 and we have already repurchased another $4.2 million of the bonds in January. On December 31, 2015, our total debt to EBITDA was 4.75 times down from 5.435 times on March 31, 2015, or down 0.68 times in nine months.

We remain focused on further reducing leverage and as we laid out in our multiyear plan we announced back in August, we're targeting leverage of 3.25 to 3.75 times by the end of 2018. Our efforts to improve our operating performance reduced risk and improved our balance sheet have not gone unnoticed.

Last week Standard & Poor's upgraded our corporate credit rating from B minus to B and our issue level ratings by one notch, bringing the rating on our senior sub notes to single digit. This is the third increase on this rating for this debt in the last three years.

In our Press Release yesterday afternoon, we announced guidance for fiscal year 2016 by estimating results in the following ranges. Revenues between $550 million and $560 million this is compared to the $546.5 million in fiscal year 2015. Adjusted EBITDA between $111 million and $115 million as compared to the 106 million in fiscal year 2015.

Free cash flow between $20 million and $24 million as compared to the $18.6 million of normalized free cash flow in fiscal year 2015 and CapEx of $46 million to $50 million. These ranges are ranges are in track with the multiyear strategic and financial plan that we laid out for shareholders in August 2015.

One item to note, we expect the same seasonal patterns to revenues, adjusted EBITDA and free cash flow that we experienced in calendar year 2015 to repeat into 2016 with the first quarter having the lowest revenues, lowest margins and negative free cash flow as we expense our lowest working capital point of the year.

Further, we’ve forecasted fiscal year 2016 G&A costs to be down on a $1 basis and down 60 basis points as a percentage of revenue. Several quarters ago we are asked by one of the analysts if we could achieve our fiscal year 2015 free cash flow guidance excluding the proceeds from asset sales such as cares and other associated assets.

We disclosed the normalized free cash flow statistic in our press release in an effort to eliminate these nonrecurring gains and losses to better demonstrate free cash flow an ongoing operations. In fiscal year 2015, normalized free cash flow was $18.6 million at the high end of our range.

Our revised range, mind you and up $9.3 million year over year. And with that I will hand it over to Ed..

Thanks, Ned. Good morning, everyone. As you can see by the numbers we continue to make progress. The fourth quarter come in strong and we finished the year hitting all of our financial targets.

As I take you through the key operating metrics you'll see that the steady improvement in the core business fundamentals support our results and also give us a pretty clear path to continued improvement. For the quarter cost of ops as a percentage of revenue improved 260 basis points year-over-year.

That strong finish brought the full-year cost of ops improvement to 170 basis points and as I go through each line of business you will see that this was led by our collections operations which still have room for improvement and overcame some temporary operational headwinds at one of the landfills on a significant drop in recycling commodity prices.

Collection operations accounted for 47% of our revenue for the quarter and cost of ops as percent of revenue improved 430 basis points over the fourth quarter last year. This was a sequential improvement from the third quarter, our strongest quarter seasonally of 50 basis points at a time when things are normally slowing down for the year.

I hate to break the cardinal rule for analyst calls but I'm going to say something positive about the weather in a minute.

I mentioned on prior calls that our fleet orders for the year had come in on time and we ended up -- had not come in on time, I'm sorry, and we ended up having to keep old trucks on the road through the summer, trucks that were supposed to been retired before the spring season.

This caused us reduced efficiency and a spike in maintenance costs as we had to invest in the old truck that we had not been planning to run.

While the new truck showed up in August, September and October and we’re on route fully in the fourth quarter, severe weather could have buried this benefit but the lack of weather challenges allowed us to show the improved efficiency of the new trucks.

We also continue to benefit from disposal cost savings, lower fuel costs and our ability to get price offset partially by the increase in our company charge for recycling tipping fees.

By the way, we will not be experiencing the fleet delays in 2016 as we preordered a substantial number of our budgeted trucks and most have already arrived and are being introduced into daily service as we speak, ahead of spring season.

The pricing environment continues to be strong as we are recouping for the years of market resistance to price in northeast. Our collection operation is generated 5.3% in price growth for the quarter, exceeding the 4.3% of last quarter and setting a new high-level mark.

Good services is the key to been able to improve your pricing and a dependable fleet and a customer oriented divisional management team are the keys to good service. John mentioned the SRA fee and this is the year-end call I wanted to go through it again.

This is a fair way to take commodity risks off the shoulders of the waste companies who are merely providing a service to the communities where they operate, particularly in markets where recycling is being mandated by legislation like in the Northeast.

For recycling to remain economically viable, someone has to pay the shortfall in the value of the commodities collected and processed. As we run our material recovery facility as merchant's facilities we charge tipping fees to third-party's and to our own hauling companies to cover that shortfall on the SRA fee's passes this cost to the street.

We were not able to fully implement all markets with the fee until the first quarter of '16 so collection operation did not fully recover the intercompany cost on this in 2015, but we are now there and the finance team, the recycling team, marketing and divisional sales team deserve special recognition for getting us over the [indiscernible] force.

Getting to those key operating metrics, we have improved our net revenue per hour for commercial services, 9.1% as compared to Q4 last year while our variable cost per hour has dropped 3.7%, significantly improving margin contribution from this line of business.

Similarly, the residential net revenue per hour was up 8.7%, as compared to an increase in variable cost per hour of only 3.4%. The resi numbers are higher on both sides partially due increased tipping fee for recyclables being passed through to the customers on the revenue line.

List per hour improved 6.7% in the fourth quarter year over year which continues to reflect progress with improved routing activities and our strategy to increase the use of automation as we implement the new fleet.

Our disposal line of business consisting of our network of landfills and transfer stations accounted for about 28% of our revenue for the quarter and the market dynamics continue to develop in our favor. We reported 120 basis points in price improvement from disposal on our price volume report in the press release.

As Ned mentioned, the more significant average price per ton figures which are more reflective of our strategy to move out lower price customers and to work towards a higher value mix of materials improved by 3.1%.

We experienced a short-term headwind in the cost of ops at the landfills as delays in our expansion permitting, outside of our control at the Ontario site caused us some unique challenges by forcing us to work on side slopes and on a diminishing open working phase.

The good news is that the permit was finally issued in January and immediately gave us approval for 30 feet of vertical expansion resolving our operational problem and providing sufficient build capacity to allow us time to build out new cells this coming year.

Our recycling operations continue to show improvement as our ability to manage tipping fees, both internal and third-party have allowed us to improve not only our margins but the actual dollar EBITDA contribution year over year and what has been a challenging environment for other waste companies.

Despite an increase in minimum wage at most of our facilities which has increased our variable cost per hour by 2.6%, the team was able to effectively manage price and increased volumes by over 10% to improve the adjusted EBITDA contributions by almost 50% over Q4 last year.

Customer solutions which includes our brokerage services and our industrial services offering also made progress during the quarter. As a reminder, these are lower margin but high rolling [ph] customers operating from multiple sites from within and outside of our footprint.

Although small, both a EBIT and EBITDA contributions from these customers improved year-over-year and we continue to use this group to drive business to our collection landfill and recycling operations within the footprint.

In closing, this was a strong end to a strong year and I'm happy with the trends and the progress we're making operationally and look forward to continuous improvement in 2016. I would like to now turn it back to the operator to facilitate the question and answer session..

[Operator Instructions]. Our first question comes from the line of Joe Box from KeyBanc Capital Markets. Your line is open..

A question for you on the free cash flow guide.

I'm just trying to understand what puts you at the low end of the range versus the high-end, I guess in light of the permit expansions you're talking about, should we think about the wide ranging incorporating some additional landfill investments? Just any color on that and just CapEx guide would be helpful too..

The CapEx guidance for the year is $46 million to $50 million and if you look at that range, some of it comes down to timing of landfill capital expenditures.

As you laid out we have a couple of expansions where we are working on Ontario with new aerospace and we will be working on building some new aerospace that are [indiscernible] landfill as well this year. There's always a little bit of variability there through the year.

To your point when you look at guidance for the year, our pricing programs are going very well. We have good visibility today where we advance pricing increases through late 2015 and into early 2016 and we feel like we have a pretty good visibility there.

But we’re pushing market elasticity especially in the landfill and the transfer line of business this year. But we put out slightly muted volume projection there, we shed some volumes. We will know we are hitting the elasticity point that's our goal for the year.

So we’re a little bit muted there if we work through the numbers but there's probably some upside if things go better than we had forecasted..

Actually that was my nest question, you know why isn't there more opportunity with respect to volume? So just to be clear it's not necessarily something you're seeing from an end market standpoint.

You’re not necessarily seeing an increase in churn just yet or increased competitive dynamic? It's more along the lines of you being cautious and you’re pushing price hard and expecting that could result in less volume but you are not seeing it yet?.

I think that’s a very fair statement, Joe. We are not seeing any changes in terms of churn from a landfill standpoint.

As Ned said we’re turning a bit out of the lower price so we are trying to move real value creation from a pricing standpoint, we are consistently doing that across the entire portfolio from a disposal standpoint but we really haven't seen any significant churn at this point..

Last one and then I will turn it over. Just curious on the Western markets. Clearly you've seen some capacity expansions there.

I know it's early in the DSNY [ph] process but I'm curious if you're starting to see anybody in the market start to posture for any displaced tonnage at this point?.

No. I do not think that we are seeing any unique activity that would be attributable to the New York situation. So I don't think we've seen anything at this point in time. The tons are beginning to flow to upstate New York to both facilities but we're not seeing anything that is very significant from an impact in the marketplace as yet.

We were pretty -- I think most importantly we are pretty comfortable with what we've laid out for plan in terms of the Western region landfills. I think we have a plan in place that we believe we can achieve in terms of the total tons to '18 that we've laid out in our plan..

And in Western New York and in New York State in general, construction [indiscernible] were really a laggard, we saw much more market activity there across several markets over the past few years and then in 2015 we start to see more of a recovery in New York State which is also helping by the capacity out there in Western New York..

Our next question comes from the line of Tyler Brown from Raymond James. Your line is open..

Ned, can you help me out a little bit just bridging the mid-point EBITDA guidance through the '15 EBITDA. So big picture, just can you talk about some of the puts and takes? I mean it sounds like you've got a pretty strong tailwinds and collection, it sounds like G&A will be down slightly.

The positive lapping on SRA but how should we think about disposal volumes and gas for recycling etcetera, basically I'm just looking at kind of some of the big puts and takes for next year..

Yes. Really the biggest puts are on pricing in the collection line of business, it's going to be a big positive mover for us in the year as you can see from the stats we put forward. Part of that we expect slightly to be muted through higher recycling tipping fees moved intercompany.

Landfill price, we are expecting that to be a positive mover as well in the year of a couple million dollars, when we look at other moving pieces in the year, we've actually put a flat to slightly negative volume stat into our solid waste forecast for the year and as John said it's not that we’re seeing anything in the environment today, we're just being conservative as we continue to advance strong price increases into the market.

As far as other negatives in the year, we expect energy at the landfill gas energy facility to be down another 5% or 10% this year which would will be continued headwind into the business and we expect some other just cost lines to be up as we increase facilities in few of the other categories across the business in the year..

And then just bigger picture, as we think about the three-year strategic plan and we've got the three buckets, so landfill, collection, resource solutions.

But how should we think about the contributions from those buckets over the next three years? So maybe I'm wrong here or maybe I am missing it but is 2016 going to more year benefit by collection with 2017 and 2018 be more landfill driven? Or how is it going to work over the next couple of years?.

We’re driving faster and further on the collection strategy than when we put this plan together back last summer. Even from where we started back in June if you look at our last call months' basis [ph], close to $6.5 million of our EBITDA gains during that period come from the collection line of business.

So we had buckets, landfill $10 million to $18 million over a three-year period, collection $11 million to $15 million and resource solutions $6 million to $7 million and as we've gone out of the gate with strategy, the biggest mover first mover was the collection line of business and as I said earlier into next year collection is going to be the biggest contributor again through pricing and moderating some of the costs for the efforts as making a vehicle maintenance and productivity.

Landfills, it's going to be a big price push in 2016. We are positive in our forecast for the year on EBITDA but as I said earlier we are forecasting to potentially shed some volumes. We would be looking into 2017 and 2018 to start growing volumes more significantly as we see the markets tighten further..

And then just lastly on the senior notes that you bought, where are those notes trading today? Are you able to buy those under par?.

Yes. So we have made a couple of trades today and the most recent trades in January we bought below par in the 96 range. They are trading 95 to 96 the last time I looked. So it is very accretive for us, further accretive beyond just the interest savings to be buying back those bonds with the overall dislocation in the high-yield market..

Our next question comes from the line of Scott Levine from Imperial Capital. Your line is open..

So following on the topic of the sub notes and the interest expense, I don't know if you have a breakdown of how much of the notes are outstanding versus your revolver.

Maybe a little more detail on the total debt outstanding and maybe if I can trouble you for guidance on interest expense given that mix and given what your debt repayment plans are for 2016 to try and get the model right?.

Sure. So as of December 31, we had $370.3 million outstanding on the senior sub notes and as I said a minute ago, we paid down another $4.2 million into January. So we are currently around $366 million. The revolver on 12/31 was at $57.4 million and we had availability of $64.1 million on the revolver.

So we have plenty of liquidity in the business today. And as you look out into next year, we expect interest expense on the income statement to be roughly $39.5 million, right around there. The trades we have conducted to-date to pay down the senior sub notes are the $18.9 million we paid down to-date saves us about $1 million a year in cash interest.

So some real meaningful benefit for shareholders..

And it sounds like your intention in terms of use of cash free cash flow continues to be paying down the sub notes for this year so can we expect the bulk of your free cash flow to be applied to debt repayment and/or are there any other things you guys are thinking about above and beyond tuck-ins that may come your way or you may not expect or anything else that would be a call on cash there..

No. I think that is exactly right. I think our utilization as cash is going to be to pay down debt, Scott..

A couple of other quick ones, I want to make sure I understood right.

Did you say, John that you saw a 100 basis point margin improvement year over year in the customer solutions business? Or did I not hear that right, does that include organics or other areas?.

That was in customer solutions business. Correct. Yes..

And I'm guessing you're still seeing, I know that the volumes were down and I think you indicated there but you are still seeing a positive margin trend with in that business in '16?.

Yes. The volumes are really down due to recycling commodity prices.

It's just way it runs through the system so it's a little bit of a misnomer where we have a lot of flow through revenues in that business where customer will have us handle their recycling strings from an industrial standpoint and then as recycling commodity prices have dropped we are selling them for less.

It's more of accounting system issue today where we don't do price volume mix in that line of business so it will be something we look to improve.

So their sales pipeline still remains strong and they continue to drive to new customers and we're just seeing some -- it's really recycling headwind that's impacting that stat but we expect to improve operating and adjusted EBITDA further in 2016..

Last one, so not to try to extract or inferred guidance for 2017 from your three-year financial targets, but you know, kind of assuming from the midpoint of your 2016 guidance to your three-year targets, you know informally is the expectation roughly some ratable improvement as you move towards those 2018 goals or is there anything else we should be thinking about preliminarily that might affect the trajectory as you guys execute towards those three-year targets?.

Yes. So we finished 2015 at 106.1 million of adjusted EBITDA at the midpoint of 2016 guidance, that's up $7 million year over year and if you look out to 2018, the plan we laid out, the midpoint that will be a $127 million of adjusted EBITDA.

So up $21 million over the three years and we expect it to come ratably each year as Tyler asked earlier the mix of where it is coming from we believe will shift a little each year. This is a big collection year, we think disposal will drive a bit more into 2017..

Our next question comes from the line of Corey Greendale from First Analysis. Your line is open..

I had just few quick follow-up and excuse my voice please.

So Ned, did you say that we should expect cash interest to be down $1 million in 2016 or can you just clarify that?.

Yes cash interest in 2016 is expected to be about $35.5 million and in 2015 we’re at right around $35 million. So it's generally flat, I think it's mixing in -- I might get back to you on that. It might be mixing in some of the new revenue bonds that’s that to stay somewhat flat and we’re taking cash interest cost out.

Our forward-looking model also had a LIBOR going up pretty significantly during in the year.

Do you know how much?.

500 basis..

We had in our forward model LIBOR going up a 100 basis points on the revolver. So those are probably the two countervailing trends where we’re taking cash interest cost out on the senior subs but we had a pretty steep forward curve on the floating rate debt and we're mixing in more industrial revenue bonds over the year..

Okay. I appreciate that and maybe we should follow up off-line.

Has anything changed relative to your expectation of the long-term plan you laid out as far as cash interest savings in 2018?.

No..

Second question I had, just digging a little more on the dynamics underlying the collection price increases, is the concept that you’re kind of raising price to residential collections and commercial customers across the board by 5% or is the concept that some are flat -- a significant number are flat and there are some customers who are raising price by 15% or something like that because the returns have not been good..

Well I wouldn’t go as far as saying any of them are flat. I think we're raising everyone's something but obviously this is a local market business and there are some markets where we have pushed price a little harder or had to push price harder than in other markets so it all averages out to the 5.3%.

But I don't think there is anyone that is on a flat price..

No. You are just looking at profitability by customer and then appropriately making those decisions, pricing standpoint..

I was trying to get a sense of standard deviation if it was an asset range or in general everyone is getting 3% to 7% or something like that?.

I think it's everybody getting more the 3% to 5% to 7%..

Okay.

And then since Scott asked you about 2017 I want to ask you about 2019, one of the questions I've been getting is about -- the question is more conceptual that you are making great progress on this plan and you've got this improvement plan in place but what's your headcount at the end of 2018, do you think you are more industry growth rates as far as EBITDA and free cash flow or are there still some more outsize kinds of things to go from there?.

We laid out this multiyear plan and looked at the key strategies of what drives the business and I think from our vantage point there will be more strategic options open to us at that point in time.

We will have leverage well within where we want to be and whether there are some acquisitions later that that could drive more growth, and integrate with assets, could be a question that could come up.

So we haven't not really mapped out from 2018 on but frankly, Corey everything we are doing is driving to that point where we believe that getting the leverage out of business and focusing on blocking and tackling and optimizing our current assets drives the most shareholder value in this period.

When you get past that we will still have excess capacity at our Western New York landfills that plan never to fill those landfills. We will still have 300,000 to 400000 tons to excess capacity and some ability to continue to grow there.

And I can't quite forecast pricing or other savings that far out but down at those levels that leveraged level, that free cash flow production level we will have a lot of opportunity as the business grows in other manners as well..

Okay.

And just one last quick one for me, since Ed, broke the cardinal rule on weather, I'm going to ask about the economy, mixed signals at a macro level in the northeast what are you seeing in terms of the economy?.

I think we're seeing a pretty strong economy in the Eastern region but I think the economy is still struggling in the Western region..

And the other thing that might be worthwhile to mention too just from a seasonal standpoint you have to remember in '15 in January and February we had very, very significant impacts from a weather standpoint and I think it kind of average itself out with a mild November and December this year in 2015.

So I think those two things were offsetting a bit too from a weather standpoint..

Our next question comes from the line of Brian Butler from Stifel. Your line is open..

First one, how should we think about book and cash taxes in 2016 and then how to think about those ramping up going forward?.

The cash taxes will remain quite low in 2016. We have in our model around $1.5 million of cash taxes and cash taxes were roughly $300,000 in 2015. We still have a $80 million roughly NOL in the business to-date and we project the next five years not working through all of the NOLs.

So there are nondeductible items both at a federal and state level that cause to still to be a small cash taxpayer. But we will have continued leveraged their over the next few years through our free cash flow where we just don’t expect to pay cash taxes at least out through 2019..

How about on the book side? What should we look like trying to get through the model?.

Yes. On the book side it's going to be more of the same where we will expect book taxes to be pretty much around a $1 million or $1.2 million, we ended this year at $1.3 million, there is non-deductible items and what not that causes us to have a small book tax there even with the negative pretax which will be coming in dramatically further in 2016..

Okay.

And then on the free cash flow guidance, I just want to be clear that doesn’t include any divestiture proceeds in 2016?.

No. It does not. During the year we do see some small sales of assets or small sales of routes and that's kind of ongoing business but as far as a larger sale being in the guidance it's not there..

Okay. And what assumptions do you’ve built in there if any on where working capital swings? I mean you had about a $5 million benefit in '15 from working capital.

What's kind of embedded in the $20 million to $24 million for 2016?.

There is not much they are. It's pretty neutral year over year. Some of the benefit in '15 to '16, there is just big moving pieces as we change our year-end and each of those have generally resolved themselves and we will be into a more of a neutral position year over year..

Okay. And then just real quick on the SRA fee that you guys have now rolled out more or less I think I heard it was fully rolled out in the first quarter? But you still have recycling revenues that are going to be down 2% to 7%.

Is that just not offsetting the magnitude of the rollover impact of lower commodity prices or your forecast for 2016 including additional pressure on commodity pricing coming down?.

So our forecast for 2016 has commodity prices coming down further. But we have seen due to pretty week market in January we believe February will resolve a bit, but year-over-year January was down.

And we will continue to push tipping fees in lower markets to third-party customers and intercompany, if they go to intercompany hauling divisions we will increase the SRA fee as necessary. So there is an offsetting factor..

So the SRA fee's is not quite offsetting the full commodity pressure at this point?.

The SRA fee plus increased tipping fees to third-party customers exiting 2015, at an exit run rate was offsetting the full impact and we expected to do so into 2016. It did not fully offset in 2015 but at an exit run rate we are offsetting all of the negative impacts..

So if that’s offsetting the commodity what's pushing it down 7% to 2% for the recycling?.

I'm sorry. So this is where the money shows up. When we sell the commodities in the recycling business we book the revenue there, we expect to have lower commodity revenues there and then we book the revenue for the SRA fee through the hauling business and when we report price volumes stat we don't report the intercompany price stat.

So the revenue is showing up through the hauling business and those stats are all presented third-party and not total revenue, if that makes sense..

All right. Just so that I heard this right. So recycling business is down because of lower commodity prices but you're making that up in the hauling because you’re going to see the fee there..

Yes..

Our next question comes from the line of Tyler Brown from Raymond James. Your line is open..

I just have a quick follow up, Ed, just out of curiosity, how big is the fleet today and what is the average age?.

The fleet today is about 740 trucks. We are still going through a purge as we brought in quite a few trucks over the past six months. We brought in all of 2015 trucks and most of 2016 trucks. So we have still not purged out our older trucks and so the average age is running around eight years..

Okay.

And is this including frontline and spares or is it just frontline?.

It's frontline and spares..

Okay.

And so as -- the second year into a five year plan, I mean where do you expect that the average age to ultimately pan out?.

The target is to get the average age to 6.5 at the end of the five year plan..

Our next question comes from the line of Al Kaschalk from Wedbush. Your line is open..

I have a little bit broader question first on the capacity comments that I think you said, I don't know if it was '19 or '20 but I want to focus on 2016 and 2017 but the availability of capacity -- across your landfill portfolio, how much is there and just trying to get a sense of the pricing dynamic that you may be able to be position for..

So we have roughly 600,000 tons of excess capacity in our landfill portfolio today with the majority of that been out in Western New York and Pennsylvania. But if you look back to the multiyear plan we put out we said we drive 200,000 tons to 400,000 tons of incremental volumes.

So that's was what I was saying to Corey was even within the context of that plan we still have excess capacity to drive additional value..

So is the 200,000 tons to 400,000 tons is that because of known closures forthcoming or is that additional economic activity that you expect to benefit from given the positioning of the landfills?.

Well there are some known closures.

There's a small landfill that’s within miles of one of our landfills in Western New York that will be closing in the next year and we believe we are in a great position to bring in some of those additional volumes and as everyone knows the dynamics are shifting in New York State and we believe we are in a good position to continue to get additional tons and as I said earlier on the call, we've seen slightly improved C&D trends in New York State finally and that’s driving a little better performance.

So we see some sustained activity there that could help as well..

As with last year, there will be different transfer stations out to bid, there will be bidding opportunities for different volumes or tonnage that will be coming in through municipal contracts or through transfer stations as well..

Okay. Second, you have talked about in the past about strategically operating some of the landfills and collections meaning swaps and whatnot. You just commented about the shifting dynamics in New York.

Are there opportunities as a result of the announced transaction that looks like it's well on track to close by June 1 for some opportunities to pick up some volume there or to participate in some type of swaps that can benefit you strategically?.

We don't see a significant opportunity there. I think that our perspective is keeping our head down and continuing to drive our plan to execute against that plan.

I think certainly we will look at swaps and if there are opportunities to improve our performance and get more tons to the facilities, etcetera then we will certainly look at all of that but we don't anticipate anything significant coming out of the transaction..

[Operator Instructions]. And that is all the questioners that I have in the queue at this time. So I would like to turn the call back over to management for closing remarks..

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

Ladies and gentlemen, thank you again for your participation in today's conference. This now concludes the program and you may now all disconnect your telephone lines at this time. Everyone have a great day..