Casella Waste Systems - Earnings Call - Q3 2016
November 4, 2016
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Incorporated Q3 twenty sixteen Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr.
Joe Fusco. You may begin.
Speaker 1
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 Johnston, our President and Chief Operating Officer and Ned Coletta, our Senior Vice President and Chief Financial Officer. Today, we will be discussing our twenty sixteen third quarter results. These results were released yesterday afternoon. Along with a brief review of those results and an update on the company's activities and business environment, we will be answering your questions as well.
But first, as you know, I must remind everyone that various remarks that we may make about the company's future expectations, plans and prospects constitute forward looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10 ks, which is on file with the SEC. In addition, any forward looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. These forward looking statements should not be relied upon as representing our views as of any date subsequent to today.
Also during this call, we will be referring to non GAAP financial measures. These non GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliations of the non GAAP financial measures to the most directly comparable GAAP measures to the extent they are available without unreasonable effort are available in the appendix to our investor slide presentation which is available in the Investors section of our website at ir.casella.com. I'm Joe Fusco and I approve this message. With that, I'll turn it over to John Casella who will begin today's discussion.
Speaker 2
Thanks Joe and good morning everyone and welcome to our third quarter twenty sixteen call. We're obviously very pleased with our third quarter results. As reported in yesterday's press release, our revenues for the third quarter were $151,100,000 up 3.4% from last year. Adjusted EBITDA was $37,100,000 up 12.2% from last year and adjusted EBITDA margins were 24.6%, up 190 basis points from last year, highest margins in six years. Year to date we're well ahead of our plan due to strong pricing, operating efficiency programs and continued execution against our key strategic initiatives.
As such, we have increased our adjusted EBITDA and free cash flow guidance ranges for the year and indicated that we would be at the high end of our revenue guidance range. Ned will go deeper into the numbers in a moment, but first I'd like to recognize that these strong results are tangible evidence to our commitment and continued execution against our key strategies. Our continued success and consistently improving results are a testament to our dedicated team and the process and discipline we have established throughout the organization to focus time and capital resources on the key drivers of our business. In early twenty thirteen, we laid out a comprehensive strategy to improve our financial and operating performance. Pursuant to that plan, we have refocused the company while simplifying our business structure.
We have reduced risk exposure by either divesting or closing operations that did not fit within this strategy. And we have refocused management's attention and capital resources on our core operations and strategic business initiatives. Given our progress and success executing against the plan, in August 2015, we refreshed our comprehensive strategic plan and outlined for investors financial targets for 2018. This plan focuses on increasing landfill returns, driving additional profitability within our collection operations, creating incremental value through resource solutions and reducing financial and operational risk while improving our balance sheet. We are confident that our enhanced process, discipline and continued focus on key operating strategies will further drive improved performance and increased free cash flow enabling us to continue to delever our balance sheet.
In the third quarter, our operating income in the disposal line of business which represents the first of our key strategies increasing landfill returns was up 16.3% with margins up two zero five basis points as pricing offset slightly lower volume. As expected, our volumes in the disposal line of business were down 3.1% in the third quarter as we planned as the planned diversion at the Southbridge Landfill reduced volumes into this site and energy related waste streams were down in the Marcellus Shale region. While we expect these specific volume headwinds to persist into 2017 until we anniversary tough comparables, all other landfill volumes were up 103,000 tons or 10.3% year over year with strong volume trends in the Eastern Region and C and D volumes which were up 15.1% and heightened activity. Disposal capacity continues to tighten in the Northeast market as permanent site closures are reducing capacity and stronger economic and construction activities are driving higher volumes. Given this supply and demand imbalance, we were able to successfully advance 2.7% price at our landfills in the third quarter, our strongest pricing in the last five years.
We believe that this positive pricing backdrop will continue into the future as additional site closures are expected over the next several years. And as we roll off multiyear contracts, expect to advance pricing in excess of CPI on larger percentage of our book of business. On the landfill development side, we've had several significant permitting successes in 2016, including an annual permit increase at our Highland Landfill from 312,000 tons per year to 465,000 tons per year, a thirteen year airspace expansion at our Ontario County Landfill, and a fourteen year airspace expansion in annual permit increase from 180,000 tons per year to 417,000 tons per year of MSW at our Chemung County landfill. Underlying the success of each of these key permitting activities is our deep commitment to develop and run our facilities to the highest environmental standards while maintaining strong partnerships with our host communities. This has been our recipe for success in developing a long term environmental asset in a challenging Northeastern environment.
We're currently working on several other key landfill permitting and development projects including our expansion efforts at the Juniper Ridge and Southland Hills. We are permitting to expand the state owned Juniper Ridge landfill by roughly 9,000,000 cubic yards to extend the life of the site to match our long term operating and lease agreement that goes through 02/1933. We continue to make slow but steady progress in advancing our permit activities for the next landfill sale at Southbridge. We have intentionally slowed volumes since the site by roughly 33% in 2016 to give our team additional time to complete permitting activities over the next three years. We currently have permitted capacity through 2019.
Further, we have been working with key community leaders and developers to define a long term strategy for the next stages of development at the site. Second strategic initiative, improving profitability from our hauling operations. Our focus here is on core blocking and tackling, namely a focus on pricing programs, route optimization and fleet standardization. Operating income in the collection line of business was up 24.5% with margins up three twenty basis points as pricing and operating efficiency drove results. Within the context of this rapidly improving marketplace, we have continued to advance falling prices in the residential and commercial lines of business with only limited price rollback.
In the third quarter, combined residential and commercial collection pricing growth was 4.2%. On the operating side, we continue to advance a number of key initiatives to further improve our operating costs in the collection line of business. In the third quarter, we improved our collection cost of operations as a percentage of revenue two fifty five basis points year over year. This improvement is being driven by our pricing programs coupled with positive cost impacts from our five year fleet plan maintenance initiatives, improved fleet routing, and efforts to swap or divest underperforming routes. Resource solutions, third strategy.
Moving into the third strategy, incremental value through Resource Solutions. Here we differentiate ourselves in the marketplace by offering value added resource services. These solutions range from our First Customer Solutions Group, which provide professional services to large industrial customers to our organic business that is leader in organic processing and disposal in the Northeast to our market leading recycling business. While recycling commodity prices are up 16% sequentially from the second quarter to the third quarter, our average commodity revenue per ton is still roughly 40% below multi year highs experienced back in 2011. However, despite recycling prices being 40% below multiyear highs, our third quarter operating income margins and returns were almost at the same level.
These results are a clear indication of how we have effectively reshaped the recycling business model to generate an appropriate return on our infrastructure investments through all market cycles. This effort has been this effort has included the implementation of higher tipping fees at our recycling facilities and the introduction of our sustainability recycling adjustment fee or SRA fee. Balance sheet and risk, we also continue to make substantial improvement in our balance sheet and reducing operational and financial risk. On October 17, we completed the refinancing of our senior subordinated notes and revolver with a new credit facility in Term Loan B. This is a very favorable transaction for our shareholders which will create substantial value through reduced cash interest costs and improved financial flexibility.
We are well positioned for the future and committed to a disciplined capital investment strategy with free cash flow primarily used to repay debt or in select instances we may consider small tuck in acquisitions and growth investments within our core operations. We continue to execute extremely well against the strategic plan that we laid out in August 2015 to improve our financial and operating performance. At all levels of the organization, we're devoted to operational blocking and tackling with a focus on pricing strategies at the local level, improving our operational efficiencies and disciplined capital allocation. We believe these actions will further improve the company's performance and allow us to continue to delever the balance sheet going forward. With that, I'll turn it over to Ned to take us through the financials.
Speaker 3
Thanks, John. Revenues in the 2016 were $151,100,000 up $4,900,000 or 3.4% year over year. Solid waste revenues were up $2,300,000 or 2.1% year over year with higher collection and disposal pricing and the rollover impact from the acquisition of three transfer stations in the second quarter partially offset by lower solid waste volume. Revenues in the collection line of business were up $2,000,000 year over year, with price up 3.7% and volumes down 0.5%. Pricing was up 4.2% in our residential and commercial lines of business in the third quarter.
We also advanced pricing 2.6 in the roll off line of business. Our volumes were down slightly in this line of business as we continue to focus on price over volume. Revenues in the disposal line of business were up point $2,000,000 year over year or $200,000 year over year with landfill and transfer revenues up $1,300,000 while transportation revenues were down $1,100,000 Transportation revenues are typically at lower margins and represent mainly pass through transportation costs associated with transportation and disposal contracts, or as we say T and D contracts. We increased third party reported landfill pricing by 2.7% year over year in the third quarter, with landfill prices up 3.6% in the Eastern Region as we continue to capitalize on the tightening disposal market. We have also begun to advance landfill pricing in the Western Region with landfill pricing up 2.1% with particular strength in the construction and demolition material segment.
We expect these same positive pricing trends to continue through the rest of 2016 and into 2017. Our total landfill volumes were 1,200,000 tons in the third quarter, up slightly year over year. As John said, during the third quarter, we continue to ramp down volumes at the Southbridge Landfill with volumes down roughly 70,000 tons. Further, we continue to experience headwinds in the Marcellus region as volumes associated with natural gas drilling activities were down roughly 27,000 tons year over year. Excluding these two impacts, our volumes were actually up 103,000 tons year over year or 10.3%.
Recycling revenues were up $1,700,000 year over year in the third quarter with the improvement driven by higher commodity pricing. Average commodity revenue per ton was up 21.1% year over year on higher fiber pricing, but this was actually partially offset by lower plastics and metals pricing in the quarter. Organics revenues were up $05,000,000 year over year in the third quarter on higher volumes as our team continued to source new streams of biosolids in the ever tightening Northeast disposal market. Our customer solutions revenues were up $05,000,000 year over year in the third quarter with continued growth in the industrial services business unit. Adjusted EBITDA was $37,100,000 in the quarter, up $4,000,000 year over year with margins improving 190 basis points to 24.6%.
So with revenue up $4,900,000 and adjusted EBITDA up $4,000,000 that gave us a flow through impact of roughly 82%. This is direct evidence of our success in shedding less profitable volumes or low margin volumes, while at the same time we're securing price increases and cutting operational costs. Solid waste adjusted EBITDA was $33,900,000 in the quarter, up $3,600,000 year over year in the quarter. We achieved 11.9% adjusted EBITDA growth on 2.1% revenue growth. Solid waste adjusted EBITDA margins were 30.1%, up two sixty five basis points year over year in the third quarter.
This reflects strong pricing coupled with cost efficiency. Lower fuel costs benefited margins by roughly 50 basis points in the period, while increased recycling tipping fees were 15 basis point headwind. Netting these two factors, we had about 35 basis points of tailwind, a small piece of the two sixty five basis point margin improvement. Hauling adjusted EBITDA was up $2,300,000 year over year with margins expanding two fifty five basis points. And disposal adjusted EBITDA was up $1,600,000 year over year with margins expanding close to 200 basis points.
Recycling adjusted EBITDA was $2,600,000 in the quarter, up $1,200,000 year over year with the improvement mainly driven by higher commodity prices coupled with processing operational improvement. Adjusted EBITDA was slightly down in the other segment as higher G and A costs mainly driven through higher incentive comp accruals. Cost of operations in the quarter was down $900,000 or two eighty basis points year over year. General and administrative costs, as I said earlier, were up 1,300,000 year over year with all of this increase driven by higher incentive compensation accruals on better performance. Moving on, as John mentioned, on October 17, we refinanced our ABL revolver due 2020 and our 7.5% senior subordinated notes due 2019 with a new $160,000,000 revolving credit facility and $350,000,000 Term Loan B.
We had great timing and great execution with this transaction. And we achieved a very good outcome for our shareholders. Leading up to this transaction, we had received a ratings upgrade from Moody's from a corporate family rating of B3 to B2. This helped to affirm our continuing progress in improving our operating results and reducing leverage. The term loan B was significantly oversubscribed and we're able to price at 99.5% of the principal amount with an interest rate of LIBOR plus 300 basis points with a 1% floor.
In addition, we added a rate step down for the Term Loan B where the interest rate will drop to LIBOR plus two seventy five basis points when our consolidated net leverage ratio drops to 3.75 times or less. The revolver is initially priced at LIBOR plus 300 basis points with a pricing grid based on our consolidated net leverage ratio. We believe this transaction positions us very well to continue to execute against our strategic plan by reducing our cash interest cost by $11,000,000 a year. It also improves our financial flexibility. The term loan B is prepayable at par which allows us to continue to delever the balance sheet and we extended our debt maturity.
As of September 3036, our consolidated net leverage ratio as defined by our new credit facility was 4.23 times. This is down 1.19 times in just twenty one months. We're doing a great job taking leverage out of business. Pro form a for the refinancing, our leverage clicks up a little bit. If you look at it pro form a for September 30, it would have been 4.41 times.
We do expect to record a loss on debt extinguishment of approximately $13,600,000 during the fourth quarter associated with call premium on the redemption of the sub notes, the write off of deferred financing costs, and the unamortized original issue discount on the subnotes along with certain other transaction costs. We do remain focused on driving leverage down. We are targeting a leverage level of 3.25 to 3.75 times by the end of twenty eighteen. As expected in the third quarter, given our operational and working capital seasonality, normalized free cash flow was $5,100,000 and $14,900,000 year to date. As stated in our press release yesterday afternoon, given our strong pricing and cost efficiency execution year to date and our increased visibility into the remainder of the year, we have increased our adjusted EBITDA and normalized free cash flow guidance ranges for the year and we expect our revenue to be towards the upper end of our previously announced range.
We adjusted our we increased our adjusted EBITDA guidance for the third time this year to a range of $116,000,000 to $118,000,000 Our original guidance that we first went out with back in March was for 111,000,000 to $115,000,000 We also increased our normalized free cash flow guidance from the previous range of 20,000,000 to $24,000,000 to a new range of $22,000,000 to $25,000,000 As we announced in late September, given the refinancing, we shifted our free cash flow guidance this year to a normalized free cash flow guidance range to eliminate cash interest timing differences related to the refinancing of the subnotes. Previously, interest was due on the subnotes on February 15 and August 15 each year. As such, in our plan for the year, we had assumed we would accrue interest from August 15 to December 31 and then pay this cash interest on February 1537. However, as part of the refinancing, we had to pay $6,800,000 of accrued cash interest on October 17 when we issued the redemption notice for the bonds. This was not an increase in cash interest costs, merely a change in timing.
So with the normalized free cash flow metric, this will give an apples to apples view of free cash flow for the year. And with that, I'll turn it over to Ed.
Speaker 4
Thanks Ned. Good morning everyone. We had a great quarter and I certainly want to congratulate our operating teams on their success. As we go through our budgeting process for 2017, our focus now is on how we continue to improve. So I thought I would spend a little time today talking about some of the initiatives and focus areas.
But first and foremost, we need to celebrate our successes. We did a little research and this was the best quarter on both an EBITDA and net income from continuing operations basis in ten years, the farthest we could look back without doing a lot of accounting work. Our service has improved, our pricing dynamics have improved, and the operational improvements from a well thought out fleet improvement plan have all contributed to the success. Add to this, our highly successful strategy is demanding a return on investment on our recycling assets and educating the customer that this is a value added service worth the cost. It's amazing what can be accomplished when you determine and focus on your core activities.
We are fundamentally a much better company and poised for the next leg up. So what are we looking at for operational improvements going forward? Let me start with the landfill operation. This is a business where the cost of developing the sites and building new cells has become more and more expensive and the markets are just now starting to accept improved pricing. Our focus is to get an adequate return on the investments we have made and continue to make and we will do this by continuing to improve our price management and the efficiency of our placement and compaction activities at each site.
Understanding the core of this business is very important to getting financial improvement, so I thought I'd explain a few fundamentals on how the business model works and how our costs are generated and profits are made. Of course, we have environmental, regulatory and engineering challenges to address every day and this is the rising cost of entry. Over the past two years, we have made substantial improvements in all three areas and have solid teams in place to help us develop future airspace in the best economic way while protecting the environment. But the simple core of the business model, once you have the airspace, is selling capacity on a per ton basis to fill space that is built on a per cubic yard basis. So the variables are price per ton and the ultimate cubic yards required to landfill those tons.
Sounds simple, but it gets a little more complicated when you realize that not all material coming in is the same and operational approaches to compacting this material can greatly affect future cash flows, which translates into the timing of building new cells. So there are two key components to our strategy going forward, a differentiated pricing model and operational improvements designed to increase compaction. Differentiated pricing compensates for the differences in material and prevents non dense or poorly compactable material from coming in too cheaply. As Ned mentioned, we improved our disposal pricing by 2.7% in the third quarter and most of this came from general market conditions, But differentiated pricing will play a bigger role as we move forward. The second component is our compaction equipment and technology.
We have a long term heavy equipment plan designed to put the most effective compaction equipment at each site, minimize any unplanned downtime of that equipment, and minimize our long term cost. We are also introducing improved technologies to assure the operators are as effective as possible in meeting our compaction goals and that we can better measure our performance. The collection operations are a little easier to understand and we've talked about the key factors at length on prior calls. We continue to focus on the fleet plan, which calls for standardizing equipment at the division level and increasing automation where possible. On improving the effectiveness of our maintenance shops to minimize both downtime and cost pricing and customer profitability management and most importantly, having strong management teams at every location and developing young talent for the future.
Safety and service remain our top priorities as long as we stay and as long as we stay focused on these, we believe we will continue to enjoy a favorable pricing environment in most of our markets next year. Recycling is a great story for us. We may be the only ones in the industry that are getting an adequate return on our investment in this line of business during a difficult time in the commodity markets. But how do we get continued improvement? So this business is not just about charging an appropriate price for processing, I.
E. A tip fee. Our results are also affected by improving the effectiveness of our processing. We can command premium pricing for cleaner material and minimizing the variable cost per ton process. Every year, the management team provides us with ways to improve both effectiveness and efficiency with incremental improvements to our technology supported by strong IRRs, which we track and we track the results and prove out the investment the following year.
This coming year is no exception as they have already come up with the recommendations and they look promising. Other areas of the business are also looking forward to continued improvement, which remains our theme internally with organics and customer resource solutions both looking at ways to capitalize in improving markets in the Northeast, focusing primarily on driving volume to our landfills, material processing facilities and to our collection operations. Administratively, we continue to invest in improvements to our processes and systems to do things more efficiently. So we had a great quarter, but there remains plenty of room for improvement. We feel we have outstanding operational management in place throughout the company with a culture of positive engagement that generates a great deal of internal excitement and drive to continue the process.
With that, I would like to turn it over to the operator for the Q and A session.
Speaker 0
Thank you. Our first question comes from Cory Greendale with First Analysis. Your line is open.
Speaker 5
Hey, good morning.
Speaker 2
Good morning, Cory.
Speaker 5
Congratulations on a nice quarter and all the continued progress. First of all, I just wanted to So So ask about the near term just stating a mathematical fact, EBITDA guidance now for the full year implies kind of a not in substantial step down in EBITDA from Q4 of last year. I know that it was a relatively easy weather quarter last year, but can you give us anything else we should be thinking about that would drive EBITDA down year over year in Q4?
Speaker 3
Yes, Corey. We have put out a conservative estimate for Q4. It does reflect EBITDA going down year over year for the guidance range. We did this for two reasons. One, which you just stated, we had a really great weather in the Northeast in Q4 of twenty fifteen.
It was sunny. It was dry. Construction continued. We didn't have operational challenges from ice, snow, the normal stuff. So we believe there's an easier comp.
Also, our landfill sites ran very strong this summer into early fall and were governed by annual permit limits at our sites. So we expect to be ramping down a bit in tons as we get through the remainder of the year. But there's nothing off track with our pricing programs, our operational programs. Everything's tracking exactly as it has been and we're very confident in those elements of the quarter.
Speaker 5
And in terms of the point about the landfills, obviously that's something you can't control if you're you've had a good year to date. But can you help us think about that a little bit, year over year impact of having to ramp down at the landfills? How much that would hit EBITDA from last year?
Speaker 3
Yes. So it's all blended together in our model where we're looking at sensitivities. So we haven't you know, we don't have a number to give on that, but we will be ramping down tonnages. And as you know, incremental tons at landfills have very high margins. So, you know, as much as half of that delta is due to that ramp down.
Speaker 5
Okay. And then on a similar note, just given the $11,000,000 in cash interest savings sort of mathematically it would look like it would be pretty tough for you not to hit the 2018 free cash flow target in 2017. Maybe part of the answer to this is what Ed was talking about some of the initiatives, but what should we be thinking about in terms of it? Could there be some substantial ramp up in CapEx for kind of temporary reasons that would offset so that we should not expect you to hit the 2018 range in 2017?
Speaker 3
Yeah. You and I had this conversation right after we announced the refinancing. We're working on capital budgeting right now. And we have a range of opportunities in our business to put a little bit more money to work to accelerate either say our fleet plan. We've won a couple new contracts.
And we didn't mention this earlier, but in early September we won three new large municipal contracts in Massachusetts that will put a little capital to work in. That will be a great growth opportunity for us. So I think our we're still working on budgeting for the year. That's why we didn't give any perspective for next year. But generally our perspective is yes, we want to pay down more debt.
But we're also looking to put a little bit more money to work in the business that had high returns.
Speaker 5
Okay. And then on the point about residential, you broke out the price by different lines of business. I think you aggregated residential and commercial. Just curious what's happening in residential specifically and if you're seeing more competitive pressures there?
Speaker 3
Give me one second.
Speaker 4
So
Speaker 3
our residential price was 4.3 percent and our commercial price was 4.2%. They're right on top of each other. We typically get a little bit more from a residential business, but Ed is running some very effective pricing programs in the commercial line of business, and we're seeing some of the best stats there we've seen in a couple of years.
Speaker 5
Okay. And I'll ask one more housekeeping, and I'll turn it over. The and if you want to discuss this offline, Ed, that's fine. But as you get to a point where you're sort of it looks like sustainably net income positive, how should we be thinking about GAAP taxes? And I assume it's going be quite a while before you're paying cash taxes, but thoughts on that as well?
Speaker 3
Yes. I need to look at the model a bit. But from our standpoint, you know, we have close to 80,000,000 net operating loss. So we will not be a cash taxpayer until say 2021 maybe, give or take a little bit. We have a large valuation allowance that will reverse at some point in time.
So there'll be a large pickup to net income in a period. But when we expect it to happen, we'll give some guidance on that. As far as kind of coming into next year, I got to look at the models a bit and see where we'll be.
Speaker 5
Great. Not a problem.
Speaker 2
Then it will be a number of years before we're going to be a taxpayer.
Speaker 5
Yes, understood. Again, nice work and thanks for the help.
Speaker 3
Thanks Corey. Thank you.
Speaker 0
Our next question comes from Tyler Brown with Raymond James. Your line is open.
Speaker 6
Hey, good morning guys.
Speaker 2
Good morning Tyler. Hey,
Speaker 6
great quarter, fantastic job on the execution. But Ned I've got to ask you, so when you guys laid out your goals back last year, had talked about kind of pro rata growth in 2016, 1718 to get to that high 20 EBITDA, high $120,000,000 EBITDA range. But given the really good traction this year, my guess is again, this is my guess that you guys would be tracking towards the low end of that range in 'seventeen. But how should we start to think about the ultimate endgame here? Mean, that just a rung on the ladder?
Or should we still be thinking about that range for 2018?
Speaker 3
Yes. I think we made a pretty unusual step as a company last summer when we gave three year guidance. And, you know, it was something we felt necessary to do. We were in the proxy contest, and we wanted shareholders to see what we were seeing and our board was seeing and where some of our programs were. And it's not really our intention to roll the 2018 plan each year or roll it forward.
As you said, we're tracking really well against it and there's some opportunity to beat it. But we sat around the table and discussed this the other day. We're not going to keep on updating that plan. That's not really our game plan. But you can see how well we've achieved against it in the first year.
That the interest savings are a bit better than we expected. So we're in a great trajectory to hit that plan.
Speaker 6
Okay. No, very, very helpful. And then just quickly for modeling purposes, what is a good quarterly interest run rate post the refi? And how much of that will be cash versus non cash, if any non cash? Do you have a number, Casey?
Speaker 2
Just take a second, Tyler.
Speaker 6
Sure. I'm thinking maybe $8,000,000 or so a quarter.
Speaker 3
So cash interest, the run rate is $6,000,000 a quarter run rate.
Speaker 7
It's about the
Speaker 3
24,000,000 for the year, 23,000,000 to 24 ish range. And income statement interest is looking about $27.5 ish, dollars 27,000,000 to 28
Speaker 2
Okay. All right. Great.
Speaker 6
And then just real quick again on the incentive comp, what are you guys looking for on that accrual? Is it going to be like 120% of normal? Or any color there on the incentive comp for this year?
Speaker 3
So the vast majority of our managers in our company are incentivized through economic value added. So as they improve EBITDA year over year, they get a share of that. And many of those managers are tracking very well against their bonus targets for the year. The senior management team is targeted on free cash flow and EBIT goals for the year. And we're tracking very well against those goals.
We're established really building off the 2018 plan last year. And we're tracking towards very well today against this target.
Speaker 6
Okay. That's helpful. Then John, I don't want to stir the pot here but I am curious because I'm simply confused. But what exactly is going on in the main waste market? How do you guys kind of envision yourself as a part of that, call it waste ecosystem in 2018 and beyond?
Speaker 2
You know, with regard to, you know, from what perspective?
Speaker 6
Well just with Yes, with fiber rights.
Speaker 2
Potential development? Well I mean I think that, you know, we, you know, with the expansion that we're our amended permit and expansion is under review right now which is 9,000,000 cubic yards which takes us out to the end of the O and L agreement with the state of Maine to 02/1933. I mean I think that, you know, there's the fiber rate technology is new technology. It's, you know, certainly potentially going to be in the market. Keep in mind that we have a very limited amount of MSW that's going to our Juniper Ridge facility today.
We're limited by about I think it's about 80,000 approximately 80,000 tons. So there's a tremendous amount of waste. There's over 300,000 tons of waste that's currently going to the Burke facility. So we believe that, you know, we're going to we should be the beneficiary of some portion of that. But again, we're going through the permitting currently.
There's going to be fairly significant disruption in 2018 and I think that we'll play a role in terms of providing services, you know, out into the future for some of those communities.
Speaker 6
Okay. No, that's very helpful. And just real lastly on Southbridge. So I think I heard you correctly that you're expecting that, is that 70,000 tons down this year?
Speaker 7
That's correct. About
Speaker 6
32%. And so your life is good through 2019 at today's run rate?
Speaker 2
At today's run rate, we'll make it to 2019, not necessarily end of twenty nineteen. Somewhere beginning to mid-twenty nineteen with current capacity. Okay. And in all likelihood too, Tyler, we're probably going to move it down again even this more than what we did in 'sixteen. We're going to move it down in 'seventeen as well to give ourselves a bit more flexibility from a timing standpoint with regard to permit.
Speaker 6
Okay. That answered my question. All right. Thank you.
Speaker 2
You're welcome.
Speaker 0
Our next question comes from Joe Box with KeyBanc Capital. Your line is open.
Speaker 8
Hey, good morning, guys.
Speaker 2
Hey, good morning, Joe. How are you?
Speaker 8
Doing good. Thanks. Just on landfill pricing. One, I just want can you hear me okay by the way?
Speaker 4
Yes, we can hear you.
Speaker 8
Okay, great. So just want to confirm on the landfill pricing side, are you actually getting price increases pushed through or are we seeing maybe a little bit of a favorable mix issue as you guys flow control some of your landfills? And then two, I'm curious, have you guys seen any impact from a more disciplined player in your Western Region? Sounds like you got a nice increase in that market.
Speaker 2
I think that we're clearly seeing a more disciplined player in the market. I think that there's a it's very clear in terms of what the strategy is. I think they've been very clear about that strategy. I think that we're seeing very good pricing particularly on the C and D side in the Western Region. So all in all, we're beginning to see positive impacts in terms of the marketplace both from a pricing standpoint and also just overall discipline in the market.
Speaker 3
And those statistics I gave earlier, Joe, those were not average price statistics, but they were actual price statistics. So there's no mix component there. So the 2.7% meant on a same customer, service, that will be increased price year over year. So if you think about this, you know, upwards of 60% or 70% of our book of business is contracted. And many landfill contracts have CPI like increases.
So on the uncontracted clients or spot contracts, we're being much more aggressive than that level.
Speaker 8
Sure. Okay, great. I appreciate that. That's helpful. And then, Ned, just curious, obviously, you guys gave an adjusted EBITDA guide back in September when you introduced the debt refi.
So I'm curious what was maybe the difference between what you saw back then and what you see today to drive the increase again on the EBITDA guide?
Speaker 3
Yes. We beat our numbers in September. So that was really the drive where we're probably maybe even being a little bit conservative. It's somewhat atypical to adjust guidance in a quarter. We're going out to market securities.
We're doing the refinancing and we wanted to get adequate information to public investors in the term loan about where our performance was and where we expected it to be for the year. And we ended up doing even a little better in September than we thought.
Speaker 8
Okay, got it. Look, the recycling business is obviously getting a little bit better. I guess, I'm curious, are we at the point where you're starting to share in profit with some of your customers? Or are we at the point where it's turning profitable, but yet it's not hitting some of those thresholds where you actually have to share with the customer? Any color
Speaker 4
would I think
Speaker 2
the way to look at it is basically what's happened Joe is with the SRA fee, the SRA fee because commodity prices have come back and again, keep in mind they're not back to they're still 40% below where they were a couple of years ago. But prices have come back which means that our fee has gone down and will continue to go down as if pricing continues to improve then the SRA fee will continue to go down and could go to zero.
Speaker 8
Okay, got it. That's it for me. Thanks guys.
Speaker 7
Okay, thank you.
Speaker 0
Our next question comes from Michael Hoffman with Stifel. Your line is open.
Speaker 2
Hey Michael.
Speaker 7
Hey John, how are doing?
Speaker 2
Doing terrific. How are you?
Speaker 7
I can't complain. I have a gorgeous weather down here in Virginia.
Speaker 2
It's nice up here too in Vermont. It's not too bad actually today.
Speaker 7
You have a good color?
Speaker 2
Little sun, little sun, which is nice. We don't need the well we need the rain but we don't need the rain from a landfill construction standpoint.
Speaker 7
Need rain in Virginia unfortunately.
Speaker 2
I think everywhere.
Speaker 7
Yes. And on Southbridge, a couple of questions with regards to that. My memory serves the permit is currently about 400 or $5,000 a year. Of that 405,000 how much do you actually have to play with at your discretion to be able to manage the timing of this permitting process?
Speaker 2
Well, we pushed out about 60,000 to 70,000 tons in 2016 and we'll probably push out more next year to give ourselves more flexibility from a permitting standpoint. So mean, do you
Speaker 3
have specific numbers? We're running about 315,000 tons per day amortized? About
Speaker 2
300,000 now and we may move down a little bit more next year Michael to give ourselves more time.
Speaker 7
So basically there's about 300 that's under contract and you've got 100 to play with and you're two thirds 200?
Speaker 2
No, I wouldn't characterize it that way. I think that what we've done is to push down, I think we can push down more to the extent that we wanted to. Okay.
Speaker 7
There's pretty good hosting there, isn't there, into the community?
Speaker 2
Very positive host fee, yes.
Speaker 7
So while I get the political backdrop of the previous governor wanted to go to zero landfill and all that and the current governor's favorable and all of the people who showed up who don't even belong But that hosting is a big deal of the community. So it would be a pretty meaningful political negative for somehow this
Speaker 2
It really would obviously. We're a very big contributor to the overall budget for the community. We are a very big participant. So it's very meaningful. And so, you know, clearly it would be very difficult without the facility for the town for sure.
Speaker 7
Okay. Switching gears from that for a second and Ed talking, I get constantly modifying the 'eighteen target. But think about it in a different way. The 'eighteen target was to establish a basis for credibility around your efforts to generate cash and delever. Now that you've refinanced into the Term B, how do I think about the pace of the deleverage?
Speaker 3
The pace, we've been hitting at a pretty fast pace over the last year, Michael. So whether we haven't finished our budgeting for 2017, but we do have another leg here as we talked about earlier. We have lower cash interest costs that they're lower than we expected in that plan.
Speaker 2
Yes. And nothing's really changed, Michael. I mean, the vast majority of our
Speaker 1
free cash flow is going to
Speaker 2
go to pay down debt. And the great job that Ned and the finance team did on the financing allows us to pay that debt down with the term loan B. So the vast majority of our free cash flow is going to go to making sure that we meet or exceed our 2018 plan.
Speaker 7
For the track you're on, looks like you'll be below three times sometime in or at least exiting 2017.
Speaker 3
I don't think we'll quite get below three times then. So we clicked up a little bit of leverage with the refinancing. So we ended Q3 at 4.23 times. And with the refinancing, all the various fees and call free, we've gone
Speaker 5
to 4.4.
Speaker 3
So we've been deleveraging at a pace of about 0.9 turns or so a year. So that puts us into the mid-3s or maybe high-3s in 2017 if you're just pro rata ing through. So we're running a little bit ahead of our plan, but we're still very committed to deleveraging and both, as John said, focus free cash flow in that area.
Speaker 7
Okay. That's very helpful. And then underlying I have a
Speaker 6
buying question in the context of
Speaker 7
the on a same store basis, the vast majority of your business is showing some nominal level of volume growth in the collection side. Is that an accurate statement?
Speaker 4
Yes. But one of the things we've really focused on, Michael, is moving away from customers where we weren't making a profit for a decent margin. So we've improved the quality of our revenue versus focusing on the revenue growth. That's a major driving piece.
Speaker 7
Of volume. Yes, get that. That's what I was asking basically. If I stripped away, you forced the churn, you're either going to pay me a good margin or you're not I don't want to do you service you, that all of the rest of the business was showing positive volume?
Speaker 4
Depends on the market. So in our growth areas in the East we're having positive volume growth. In the Upstate New York markets, less volume growth.
Speaker 2
But still on a positive, slightly positive. Not negative certainly, not as positive as we're seeing in some markets.
Speaker 3
And then we also said on the landfills, if you add South Of Marcellus and the Southbridge, we are very positive.
Speaker 7
We're up
Speaker 2
to Up ten one hundred thousand tons. Yes.
Speaker 7
Right. And if I focus to just on MSW and those between both your own trucks and the third party, it's still positive. I'm teasing out here while the growth of the economy is slow and the consumerism is slow, there's still positive trends and it's translating into volume through your business model.
Speaker 2
That's correct.
Speaker 7
Okay. All right. And then in your current price that you report 2.3, when I think about trends entering into 2017 and beyond, are there any one time fee numbers that you anniversary that have think about in the context of what you're reporting? Or asked differently or more specifically, should we be comfortable that you're at positive 2% for the foreseeable future Yes. In this economic
Speaker 3
There's about 40 basis points in that number today related to the SRA fee. That's still giving a little bit. We've anniversary ed almost every customer that's gone on to the fee, but there's still a tiny bit in that number. But the run rate's generally good.
Speaker 7
And the full anniversary of that 40 happens by when?
Speaker 3
It happens in Q1 'seventeen.
Speaker 7
1Q 'seventeen, okay. All right. So if we were to see something in a 1.7 to 1.9 price book, that's we're not supposed get alarmed, oh my gosh, you're giving a price. That's the underlying normal rate unless you've improved your core going into that.
Speaker 3
Yes. That's fair. We haven't finished our budgeting for 2017. We're working on strategies and markets and working through our book of business.
Speaker 7
Fair enough. But we also shouldn't interpret your pricing is going down if that's the underlying base rate and you're continuing to try to walk it up.
Speaker 3
Yes, that's correct.
Speaker 7
All right. That's what I was looking for. Thanks.
Speaker 3
Thank you, Michael.
Speaker 0
And I'm showing no further questions at this time. I would like to turn the call back over to John Casella for closing remarks.
Speaker 2
Thank you. Thanks everyone for your attention this morning. We look forward to discussing our fourth quarter earnings with you in early March twenty seventeen. Have a great day everyone. Thanks.
Speaker 0
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.