Good morning. My name is Tasha, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Casella Casella Waste Systems, Inc. Q1 2018 Call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question and answer session. Thank you. I'd now like to turn the call over to your host, Mr. Joe Fusco. Please go ahead.
Thank you for joining us this morning and welcome. With us today are John Casella, Chairman and Chief Executive Officer, Casella Waste Systems Ed Johnson, our President and Chief Operating Officer Ned Coletta, our Senior Vice President and Chief Financial Officer and Jason Mead, our Director of Finance. Today, we will be discussing our 2018 Q1 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. And with that, I'll turn the call over to John Casella, who will begin today's discussion.
Thanks, Joe, and good morning, everyone, and welcome to our Q1 2018 conference call. I couldn't be more pleased with our Q1 results. As reported in yesterday's press release, our revenues for the quarter were up 10.2% from last year. Adjusted EBITDA was up 6.4% from last year and we continue to drive strong cash flow conversion with our normalized free cash flow up 6 $100,000 year over year. The continued execution of our strategies is evident in our numbers as we experienced the banner quarter for solid waste price and volume.
We maintain discipline and focus on our solid waste pricing programs given the continued threatening tightening, excuse me, of the Northeast disposal markets. Our strong financial performance in the solid waste group was muted by the recycling commodity price headwinds. Despite the recycling pressures, we remain confident in our ability to continue to execute well across all other segments, and we've reaffirmed our guidance ranges for 2018. We are executing well against our 2021 plan that we first laid out last August in 2017. With the 2021 plan, we continue to focus on our core strategies, which have been working exceptionally well.
These strategies include 3 key areas: increasing landfill returns, driving additional profitability with our collection operations and creating incremental value through resource solutions. In addition, we introduced 2 new areas of focus as part of our new 2021 plan, reducing G and A costs and improving efficiencies and allocating capital to balance delevering with smart growth. We continue to enhance landfill returns through price execution, operational programs, the sourcing of new volumes at higher prices and our efforts to advance key permits. During the Q1, we increased landfill pricing by 4.9% and increased landfill tons by roughly 19% year over year. Both of these metrics underscore the tight disposal dynamics across the Northeast.
We had 1 landfill permitting wind during the quarter in March. The DEP approved 182 month or about 18 months excuse me, about 1.5 years, 182 months extension of our Jupiter Ridge permit to dispose of roughly 82,000 tons per year of non bypass in state municipal solid waste at the site. We're continuing to work with the state on a permanent solution given the ongoing need for long term MSW capacity in Maine. This gives us a great opportunity to continue that work. Expanding permitted landfill capacity is an ongoing challenge for all solid waste operators in the Northeast.
Northeast has one of the toughest regulatory and political environments in the country. The good news is most of our landfills have over 15 years of permitted capacity. We continue to fire on all cylinders in our hauling business with another strong quarter of price execution and continued focus on operational efficiencies. I will let Ed run through the details on Holling, but our teams have been doing a great job working to cover off the recycling commodity headwinds with the SRA fee, while still working to advance key long term operational programs. The financial gains in the solid waste business were partially offset by greater than expected headwinds in the recycling business due to China's ban on mixed paper and lower contamination standards.
Our average commodity revenue per ton was down roughly 50% year over year with mixed paper pricing down over 90% during the same period. The risk mitigation programs that we put in place over the last several years are working well and offset most of the commodity price decline during the quarter, but these programs include our revenue share contracts that share commodity revenues above a threshold with our customers or below the threshold as customers pay dollar for dollar processing fee, Our net average commodity rate formula that allows us to pass back increased cost to sell commodities, including higher labor or equipment costs to make new quality standards and our floating SRA fee that works like a fuel surcharge for our hauling customers where the SRA fee goes up when commodity prices drop to ensure that our customers are covering the true cost to recycle. We remain confident about our risk programs and our ability to improve recycling financial performance even in these historically low markets. Ed will run through further details on how we can further improve our financial performance for recycling in these low commodity price markets. Recycling as we know it today appears to be changing rapidly before our eyes due to geopolitical dynamics with China.
We operate in a highly regulated industry, especially in the Northeast where politicians and regulators have dictated what needs to be recycled and established bans on certain items in the landfills. As I've said before, we do not set public policy in the solid waste industry. Politicians and regulators set policy. It's our job to provide safe, environmentally secure waste and recycling services that comply with laws, including recycling laws. As such, Casella and other industry need to work to provide our customers with economically viable services to meet these laws, which means that as an industry or as a company, we cannot take on recycling commodity risk, and we need to pass back the true cost of recycling to our customers.
We also need to innovate and improve recycling processing, find new uses for recyclables, work with manufacturers to develop more responsibility for their streams and certainly work with our customers to clean up the stream before it hits the MRF. With our G and A strategy, we've set a goal to reduce G and A cost by 70 to 100 basis points as a percentage of revenues by 2021, and more importantly, to reorganize our resources and invest intelligently to drive long term profitable growth. We are pleased with the early progress we have made, which includes successfully closing our Q1 2018 books with our new NetSuite ERP system, which was launched recently essentially on time and on budget. Just a tremendous effort by our entire team to make that happen, really terrific, terrific effort. This marks a key step as part of our technology plan and significantly furthers our ability to increase back office efficiencies over time.
Moving on to our strategy of balancing delevering with Smart Growth. We have set a goal to grow revenues by $20,000,000 to $40,000,000 per year through acquisition or development activities for the next 3 years and we're off to a tremendous start. During the Q1, we closed 2 acquisitions. And over the last 4 months, we have acquired approximately $20,000,000 in revenues. This is comprised of several small tuck in operations and more notably, the acquisition of Complete Disposal, an integrated solid waste company in Western Massachusetts.
As we have highlighted in the past, we view the Complete acquisition as a great strategic fit with our operations and long term plan. Complete provides us with truck and rail transfer capabilities in the market that will see 800,000 tons of landfill capacity permanently closed in 2018. The acquisition pipeline remains robust. We believe there to be over $500,000,000 opportunities across our Northeast markets that could be direct tuck in or great strategic fit. And we are actively working on a number of acquisition targets that we hope to bring on board over the next year.
Our acquisition and development framework ensures continued discipline through alignment of strategy, financial returns and our resources. We are focused on opportunities that will generate returns well above our cost of capital, enhance our vertical integration, drive operating and G and A synergies, will either be immediately delevering or have a path to a fast path to recognize synergies and cash flows to delever. Ultimately, we believe that we are in a unique position to grow our free cash flow at 10% to 15% per year or more, given our organic growth opportunities and the range of acquisition and development opportunities in our pipeline. As highlighted last quarter, another area of focus for our team is on building and retaining key employees. Trucking companies across the country are struggling with attracting and retaining drivers and mechanics.
We welcome a new VP of Human Resources to the company about 6 months ago and are working on new programs to build career paths for key roles in the company. We have done a great job over the years of developing and retention of key management roles, but it's important to extend this to the entire population. I would like to create career paths for drivers, mechanics to grow their career and earnings potential. And from there, 1st and foremost, to drivers and mechanics and from there throughout the entire company. Kelly's focus, our new VP of HR is to really spend all of his time for the 1st year or so building career paths as Jerry Gormley, our VP of HR is still with the company and is taking care of the day to day that are the day to day requirements of human resources.
So it really gives Kelly an opportunity to have a jump to get a lot of that work done over the next year. Wrapping up, as reflected in our guidance, our 2018 plan is on track with our 2021 plan and displays continued execution of our key strategies with a goal of driving additional shareholder value. We expect the continued strength in solid waste pricing and volumes to offset recycling headwinds. And as I mentioned, our acquisition pipeline is very robust and provides us with a great upside opportunity. And with that, I'll turn it over to Ned to walk through the financials.
Thanks, John. I wanted to start the call today by thanking my finance and IT teams for their extremely hard work and unwavering dedication of bringing the NetSuite Financial ERP system online in mid February. We completed the full upgrade of our financial ERP system in 11 months start to finish. This is a remarkable achievement and we believe that the new NetSuite cloud based financial system will serve as a strong foundation for our 5 year technology plan to enable profitable revenue growth and drive operating and back office efficiencies. Now on to the quarter.
Revenues in the Q1 of 2018 were 147,500,000 dollars up $13,700,000 or 10.2 percent year over year. There were a few mix changes in the quarter that grossed up our revenues, including a soil remediation project for a large customer and a new organic sludge in transportation and disposal contract. Excluding these two items, our revenues were up $8,200,000 or 6.2 percent year over year. Solid waste revenues were up $15,800,000 or 16.8 percent year over year with higher collection and disposal pricing, higher solid waste volumes, our risk recovery fees up 1,200,000 dollars and the rollover impact from acquisitions of $4,100,000 Revenues in the collection line of business were up 6,600,000 or 11.1 percent year over year with price up 4.8%, volumes up 0.5%, risk recovery fees up 2% and acquisitions making up $2,300,000 Price was up across all lines of business. Revenues in the disposal line of business were up $9,000,000 year over year with the growth driven by strong pricing, higher volumes and $1,800,000 of acquisition activity.
We increased reported landfill pricing by 4.9% year over year and more importantly, we increased average price per ton at the landfills by 5.9% as we improved our mix of customers and volumes. We increased our average price per ton by 8.1% in the Western region as we continue to focus on advancing pricing ahead of volumes. We expect the same positive pricing trends to continue throughout 2018 as we recognize a rollover impact of price increases already completed and we advance further pricing increases in key markets. Disposal volumes were up $6,000,000 year over year with roughly 40% of this increase driven by higher landfill tons and roughly 60% driven by a $3,500,000 soil remediation project for a large customer. Our customer wanted a single vendor to manage this full project.
So our revenues were grossed up as we needed to hire 3rd party vendors to complete all of the soils excavation, screening, metals recovery and transportation work. Total cash flows improved with these additional tons to our landfills, although the pass through costs compressed its adjusted EBITDA margin 15 basis points. Our total landfill volumes were 1,000,000 times during the quarter, up roughly 19% year over year with strength across all waste categories. Recycling revenues were down $6,500,000 year over year with $7,300,000 lower commodity pricing, dollars 1,800,000 of lower volumes, partially offset by $2,700,000 of higher third party tipping fees. This does not account for the higher intercompany tipping fees.
Average commodity revenue per ton or as we say ACR was down $59 a ton or 46% year over year in the quarter, mainly on lower fiber pricing. Sequentially, commodity prices continue to drop throughout the quarter and they were down 37% from December through March with most of this decline driven by lower paper and cardboard pricing. Overall, mixed paper prices are down 90% from April of 2017 to April of 2018 and OCC prices are down over 50% during the same period. This negative trend has actually continued into April with commodity prices down another 17% from March to April as paper pricing dropped further. However, please note that the lower April commodity prices have been built into our guidance for the remainder of the year and we have actually modeled commodity prices to stay flat for the rest of the year.
Organics revenues were up $3,000,000 year over year on higher volumes. This was mainly associated with a new 2 year sludge contract. This was a T and D contract that negatively impacted adjusted EBITDA margins by roughly 15 basis points in the quarter as we pass through 3rd party transportation and disposal costs. But please note that this contract requires no CapEx, has very strong free cash flow and high returns. During Q1, we initially internalized about 40% of the volumes and there's an opportunity to internalize more of this stream through the remainder of the contract to drive additional value.
And customer solutions revenues were up $1,300,000 year over year due to several new multi site retail customers and continued growth in our industrial services group. Adoption of ASC 606 or revenue recognition guidance reduced our reported revenues and cost of operations by roughly $1,500,000 each during the Q1 as compared to how we would have historically booked these transactions. To be clear, this accounting change did not impact the dollar amount of our operating income, adjusted EBITDA or cash flows. It just had a negative margin impact of rough I'm sorry, a positive margin impact of roughly 15 basis points. Adjusted EBITDA was $24,600,000 in the quarter, up $1,500,000 year over year with margins down 60 basis points.
The negative pressures from recycling weighed on margins by roughly 230 basis points overall during the quarter. The contaminated soils project, the new organic T and D sludge contract negatively weighed our margins by about 30 basis points in total. And as I just mentioned, revenue rec improved our margins by about 15 basis points. Solid waste adjusted EBITDA was $24,900,000 in the quarter, up $6,000,000 year over year with strong pricing, higher volumes, partially offset by higher intercompany recycling fees and also higher operating costs. Increased fuel costs were fully recovered by our floating energy and environmental fee during the period.
Recycling adjusted EBITDA was down $4,500,000 year over year with the decline driven by lower commodity prices, lower volumes, higher operating costs, partially offset by $6,000,000 of higher tipping fees and lower rebates. Our operating costs were up by about $2,300,000 year over year as we had to slow processing speeds at our MRFs in an effort to meet tighter quality standards. Residue costs were up as we pulled more waste out of the stream and third party disposal rates were also up. And our transportation costs nearly doubled during the period as we sought to seek new markets such as India or Vietnam. Think about this, there are really no backhauls to the markets like we had to China.
Adjusted EBITDA was $1,800,000 in our other segment, up roughly $100,000 year over year with increase driven by improved performance in the customer service group and higher organics volumes. Cost of operations was up $11,100,000 year over year with the increase in cost mainly driven by higher volumes, acquisition activity and inflation in select cost categories. General and administrative costs were up $2,200,000 year over year. This increase was mainly driven by higher labor and related benefits, higher equity compensation accruals and a tough bad debt comparison with a large recovery in the previous period. Depreciation and amortization costs were up $2,100,000 year over year, mainly due to higher landfill amortization costs on higher volumes.
The Q1 included several unique charges, including a $2,100,000 contract settlement charge related to asset of a recycling brokerage contract. I want to note that this is a positive move for the company as we bought out of a contract for roughly a 50% cash return. We also booked a $1,600,000 Southbridge Landfill closure charge with approximately $1,200,000 to the charge related to a reserve established for the expected settlement with the town of Charleston. And we also had a $300,000 development project charge associated with costs around the North Country Landfill as part of our expansion efforts. Our normalized free cash flow was $7,200,000 in the quarter, up $6,100,000 year over year.
This increase was driven by improved operating performance, positive changes in assets and liabilities, slightly lower CapEx, mainly due to timing differences and slightly lower payments on landfill operating lease contracts. As of March 31, 2018, our consolidated net leverage ratio as defined by our credit facility was 3.77 times, which is down 1.65 times this December 31, 2014. Our total debt was $514,100,000 which is actually up $16,400,000 from December 31, 2017. Our debt is up sequentially as we completed 2 acquisitions in the quarter for total cash purchase price of $18,800,000 and we paid $2,100,000 to exit that recycling brokerage contract. As we lay down our 2021 plan, we remain focused on further reducing leverage in the business with a goal of getting leverage down to 3 to 3.25 turns through continued capital discipline, balance with smart growth investments and acquisitions.
Our actions to reduce leverage, reduce debt and improve cash flows has not gone unnoticed. And on February 26, Sander and Poor's increased our corporate credit rating from a single B to B plus with a positive outlook. And on March 2, Moody's increased our corporate family rating from a B2 to a B1. Just after the quarter on April 2, we completed 2 small tax exempt bond offerings. We successfully remarket our existing $16,000,000 of senior unsecured VITA tax exempt bonds into a new 10 year term rate bond at 4.5 8 percent fixed interest rate during that period.
We also completed the drawdown of a $15,000,000 senior unsecured tax exempt bond with FAME for 7.5 year term at 4.38 percent fixed for that period. Given the current historically low recycling commodity markets and our expectation that commodity pricing will not rebound in the foreseeable future, we now expect recycling adjusted EBITDA for the year to be off budget by about $6,000,000 Despite the significant budget headwind, we reaffirmed our revenue, adjusted EBITDA and normalized free cash flow guidance ranges for the fiscal year, given the strength in other parts of the business. Please note though that our 2018 guidance does not include the impact from any acquisitions that haven't been completed. However, it does include the rollover impact from acquisitions completed during 2017 early 2018. With that, I'll hand it over to Ed.
Thanks, Ned, and good morning, everyone. From an operational standpoint, we had a very good start to the year. Our hauling and disposal segments performed very well, as did our customer solutions and organics groups. Our overall numbers are masked by what is going on in recycling. So let me walk you through some simple math before I continue.
Our consolidated cost of ops as a percentage of revenue increased by 95 basis points in the quarter versus the prior year. In the recycling segment, as with everyone else in the industry, our revenue from commodity sales dropped and our cost increased as we slowed the lines and added labor to meet new market demands for cleaner products. Factoring out the negative impact of recycling, our cost of ops improved year over year by 126 basis points for the rest of the business. I'll get back to recycling in a minute, but there are a few key points I want to hit on regarding the hauling landfill operations. On the landfill side, demand is very strong.
We are managing volumes to our permit limits and sell construction cycles, which means we are limiting tons by pushing price. Price was up 4.9% and we still saw volume up 18.7%. The new DOT electronic logging rules have shortened the distance that truckers can haul waste from the heavily populated Eastern communities to western landfills. Most of our landfills are within the turn times that the 3rd party haulers are looking for, driving demand up for us. Collection had equally strong price performance as our process and discipline are well established.
We achieved 4.8% in price growth for the quarter. It should be noted that our SRA fee is treated the same as the fuel surcharge. So fluctuations in commodity prices passed to our customers in this manner are not included in the 4.8% price result from the quarter. Our industry is challenged by shortages in mechanics and CDL drivers. We have implemented programs in the Q1 to improve our recruitment, training and career development paths for our mechanics and we'll be implementing a similar program for our CDL drivers in the 2nd quarter.
We have also adopted market specific pay rate program. We believe these programs will give Casella competitive advantage in the Northeast for attracting and retaining the workforce we need to be successful. When I was at Waste Expo last week and listening to some of the other waste company calls this week, I realized that we don't talk as much about our safety program. Here at Casella, safety is our first priority with customer service being a close second, and it's the first thing we talk about internally at company meetings or events. As a result of our focus on safety, our workers' comp mod rate is currently 0.83.
And during the Q1, our workers' comp claims were down 26% from Q1 last year. 0.83% compares to 1.0% for the industry average. And to give you some insight, our acquisitions last year were at a 2.8 mod rate prior to us taking over and implementing our programs. We absorbed their past performance or a mod rate prior to the hit we took for acquisitions was a remarkable 0.73 in 2017, and we expect to get back to that once the acquisitions are assimilated. I want to thank everyone in the company for doing a great job in this fundamental area.
Getting back to recycling, there are some significant differences in the Northeast market in which we operate versus what you might see in other areas of the country. The biggest difference is that recycling is mandated by the states and each state has their own list of materials that are banned at the landfills or other disposal sites. In this environment, we implemented several programs a few years ago to pass commodity risk to the consumer, including the SRA fee and changes to the structure on how we bid municipal contracts. And these programs have been highly successful. But I want to add a few notes to this program.
One, there is a lag. Rapid changes in the market are not immediately recovered, but we catch up over time and benefit during times of rapid improvement in commodity prices. When commodity prices produce an ACR above our processing cost threshold as they did a year ago, we share in the upside with our municipal customers, usually fifty-fifty. That extra margin is not recoverable in the risk pass through mechanisms. The comp issue will resolve itself quickly as the ACR went below contractual thresholds levels throughout 2017.
Our labor costs increased during the quarter due to market demands for cleaner material. We are implementing technology and to automate some of that labor and we'll continue to look at additional improvements to bring the labor back down. Other higher variable costs, including higher shipping costs to new end markets other than China, are not fully recoverable in many of our current customer contracts. We are improving our contracts going forward to allow full recovery, while we continue to work towards reducing these costs and exploring new markets for the material we produce. Our older municipal contracts don't reflect our new risk model, so things will automatically improve quite substantially as they roll off.
And finally, as all our processors have slowed as all the processors have slowed throughput to meet higher quality specs, capacity has come out of the market. We are not aware of any new capacity coming online and the economic situation should be an effective deterrent to impact. So the Northeast market is a bit unique. As long as recycling is mandated by state laws and with no new processing capacity coming into the market, we see a supply and demand imbalance similar to the landfill capacity imbalance. The shift will right itself over the next 6 to 12 months.
With that, I would like to turn it back to the operator to start the question and answer session.
Thank you. Our first question today comes from the line of Tyler Brown from Raymond James. Your line is open.
Hey, good morning guys.
Good morning, Tyler.
Hey, Ned, just a quick clarification, it may have been my phone, but you broke up on the remediation project. So it was $3,500,000 in revenues. Did you say it was at a 15 basis point margin? Or was it a 15 basis point drag to margins?
It was a 15 basis point drag to margins. To margins. We don't typically go on to sites and excavate or screen or we do move materials sometimes through transportation and disposal contract. But this is a really important customer to us and they wanted us to manage the whole project. So we decided to do that.
But we had higher third party costs as part of doing that and we had a 15 basis point drag overall as a company. But it was a great project overall. Yes. Because it's been under the land, Bill. Yes.
Okay. Sorry. It was just it broke up. I apologize on that. And was that anticipated in the guide from last quarter or was it kind of a surprise?
We expected the project to happen, but we were still working through if we were going to provide all the services or not.
Okay.
Okay. And it is completed, correct?
There's a little bit of it that goes into Q2.
Okay. Okay.
Perfect. And it's completed now. Completed now.
Yes. Okay. All right. So please don't laugh at me here. But if you were to strip away rev rec, sludge and the remediation project, is there any way to isolate what solid waste margins did ex that noise?
Yes. So solid waste margins, if you take away well, REP did not hit any of our solid waste margins. It was really in recycling and customer solutions.
Okay.
And sludge doesn't hit the solid waste margins. So our solid waste margins were up 2 50 basis points year over year. And if we had about 20 basis point drag from the contaminated soils projects. We're up about 2 70 basis points. But it's even better than that because as you know, we pass through market based rates from our recycling business to our hauling and transfer businesses.
So while commodity prices are dropping, we're increasing tipping fees intercompany and their SRA fee goes back to the curb to recoup that. Well, we got a little backwards as Ed said because the SRA fee trails. So we actually had about 100 basis point headwinds as well from recycling and solid waste. So it's just an absolute seller period for solid waste.
Wow, wow, wow, wow. Okay, great color on the recycling side. But I think last quarter you noted that you expected on a year over year basis to be about a $2,000,000 to $3,000,000 headwind. And I'm a little unclear, you noted $6,000,000 Is that what you expect the full headwind to be this year? Or is that on top of the $2,000,000 to $3,000,000
Sorry. So we missed budget by 2 And so that In the Q1. In the Q1. And now we're saying we expect to miss budget by about 6 for the full year and you have to add the 2 to that. So it's about 8 plus 1,000,000 for the full year year over year impact.
We had guided for the year to say we'd be down about 2. We're about $6,000,000 off that plan today. Ed laid out a bunch of things that we're doing to improve our position, But we just held commodity prices flat for the rest of the year at these low levels and we haven't put into forecasting any of these improvements, but we're working like heck to do them.
Well, we'll get an improvement as our AV.
Yes. We'll probably hopefully we'll be a little conservative, but I don't think there's any other way to do it today.
Okay.
And then on the variable cost, it's obviously a major theme amongst all the players. John, I think you touched on this, but is it correct to assume that you have protection on it sounds like maybe some of the variable sorting cost increases, maybe labor, but not, say, transportation?
I think that's a fair perspective. We the technology pieces, we've completed well, we completed one technology change at our Ontario facility, and it was done basically on a labor basis. We justified the capital on a labor basis, but it absolutely gives us the ability to get to the new spec. So and then on and from Ontario, we moved to our Rutland facility where it's the same thing. The capital was justified on the basis of labor, but again, we're going to clean up the material as part of the capital that we spend.
The place where we don't have any ability to impact is obviously transportation costs, particularly shipping costs.
If you flash back in time, we've been updating our risk programs as we learn more. And you're right about one thing. One concept we never really realized until about a year, year and a half ago was that our cost structure could change very rapidly in the recycling business. But things never change that fast in the garbage business, now they are. And we always look at slight inflation on labor or slight inflation on transportation, but our cost structure is changing very, very rapidly.
So in our most modern day contract structures, we have the ability to pass that back to customers if they change from when we entered the contract. With some of our legacy contracts, we don't have that. So we're eating some of that higher cost with those contracts.
Okay.
But one
of the other things that we're doing too, Tyler, is that we have very few contracts left from a recycling standpoint. There's a handful of them, and we're taking a pretty aggressive role with regard to force majeure, embargo, other terms that are in those contracts that have negotiations with the municipalities to fix that.
Okay. And then on the backhaul comment, Ned, so basically you're saying that sending boxes to China was effectively, I'd say, free, but very low cost because that's a highly imbalanced lane, it's a backhaul lane. But places like Vietnam and India, those are headhaul markets, so they're going to cost you a lot more.
Double. Yes. Double the shipping costs to go to those markets than it was to go to China.
Okay. And this may be a classic dumb Tyler question, but even if the slower belt speeds can't get you to the 0.5% contamination, why are you slowing them down? I mean, why not just run them as usual and produce a normal product? I thought you weren't really even selling to China. So are your buyers asking for a cleaner product?
Or why is there this big push to improve quality if you can't meet the standard anyway?
Yes, because this is Ed. Yes, the whole market in general, so now China is pulled out of the market. So now you're trying to find homes for your product and the other buyers are getting a bit more picky about who what waste they're going
to take.
Absolutely. What material they're going to take. So it's got to be cleaner. Okay. Okay.
Okay. Standards
are impacted for every market, Tyler, because of what China has done.
Okay. Okay, great. And then maybe my last one here, just shifting gears. Disposal pricing, it looked like up $4.9, dollars 5.9 per ton. I think that's correct.
But it's a little unclear again there. Is that inclusive of the remediation?
No, that project did not flow through landfill pricing statistics. That would have been treated just as volumes. If you see our volume statistic is up $6,000,000 year over year. That project we look at disposal volumes as including transportation, transfer stations and disposal and we wrap this project through the volume line there.
Okay, perfect. I'm going to go ahead and jump back in queue, but thank you.
Thanks Tyler. Thanks Tyler.
And our next question comes from the line of William Griffin. Your line is open.
Hey, good morning, guys.
Good morning, Will.
I just had a question on the tuck ins. So in the press release, you noted you had $20,000,000 of acquired revenue year to date. I see the $20,000,000 spend in 1Q, but based on some basic math, it seems to imply that to get to that $20,000,000 of acquired revenue, you must have had something chunkier close in April or May. Am I thinking about that right?
Yes. In the 1st couple of days of the year, we completed the complete acquisition for $16,500,000 We had an acquisition that happened the 1st day of the year, small tuck in in Vermont, a hauling company. And then on March 30, we had another tuck in acquisition in Upstate New York that tucked into several of our business and gets us close to about $20,000,000 of revenues.
All right. So that seems to imply fairly favorable multiples on those acquisitions then?
They were. I mean tuck ins, if done right and you drive synergies, route values, we're driving after tax on levered returns of north of 20%. The complete deal will take a year or more to generate all of the synergies like driving internalization, but it's well on track to drive the value we expect from that deal as well.
Got it. And just one quick one on recycling. So just over the course of the rest of 2018, would you guys expect sequential improvement in recycling revenues as the SRA fee kind of catches up?
So the SRA fee actually runs through the hauling business. So it's recognized through our other fee line. So you see fuel and other fees running through solid waste. We do expect it to be higher because it trails 1 month, it looks at the previous month's commodities values to set the price in the next month. We do expect it to be a little bit higher into Q2 than Q1.
Okay. But okay. So the recycling line doesn't reflect any collections on the SRA fee then? It's just the straight like
price?
Yes, exactly. I mean things get a little confusing because it's intercompany stuff that moves behind the scenes. But what we do is we charge our businesses a tipping fee to come into the Merx, a processing fee. And it doesn't show up in the statistics, but it shows up in the dollars in the recycling business of their profitability.
Got you. Thank you. That's helpful. Jump back in queue now. Thank you.
Thanks, Bob.
And our next question comes from the line of Corey Greendale from First Analysis. Your line is open.
Hey, good morning. Really nice job on the quarter. So I thought Tyler's question was totally reasonable, but I may have some dumb Corey Greendale questions. So on the internal growth that there's always internal growth. So first of all, I just want to clarify that the soils sorry if you said this, the soil project, did that impact price at all or was it totally through volume?
Through volume? We give 2 different pricing stats. So we give in our press release a price volume statistic and the price statistic is same customer, same type of weight they have to be a customer at the beginning of the period and how do we change their rate year over year. And then any new volumes will come through volumes like this new customer. But many times we also give an average price per ton statistic.
And the average price per ton takes all of the revenues at a site or at the company and divides it by the total tons period over period and you look at the change in that. And what's funny is that soils remediation job actually blended down our average price per ton slightly, but was a very positive project that showed up in our $6,000,000 year over year gain in volumes and disposal. Okay.
So the number you put up for the overall price obviously was really good. Is that and it sounds like a lot of it is just the dynamics in the market. So there's reason again, I apologize that you might have commented on this already, but it sounds like that should be sustainable. Is that accurate?
It's our view that it is. When you roll out with price increases, we're netting any rollbacks against a number. It's not like some sort of grossed up number. It's a true price. So as we've gone to the street with price increases, they've been sticking and it gives us good visibility through the remainder of the year.
We don't expect anything to materially change.
I think that we've certainly said historically over the last year or so that we think that we're we've got an opportunity probably for the next 3 or so years, Corey, because I think that we had another 800,000 tons of capacity coming out of the market at the end of this year. There's another 800,000 coming out over the next couple of years. So there's substantial amount of additional capacity coming out of the market for the next few years. And consequently, I think that we're going to be in a position to continue to move out all of the lowest priced waste that we have going into the facilities.
Yes. So this is probably stating the obvious, but given kind of moving you're reiterating the guidance, but the pieces that get there are totally different. So it seems pretty likely that you'd be talking about something above the original, probably both price and volume growth that you gave for the solid waste business at the beginning of the year. Is that fair?
Yes.
Okay, good. And then you've already talked somewhat about or maybe more than somewhat about the moving pieces on recycling. But is there a way to if you're getting too granular, is it possible to quantify the year over year impact on recycling EBITDA specifically of higher processing and transportation costs kind of splitting that out versus the effect of just lower prices?
$2,300,000 the heightened cost from processing and higher transportation year over year in total. And it's hard to separate it from the other programs because some of our pricing programs, as we said earlier, have cost recovery elements. Some of our historic legacy contracts do not. So it all kind of melds together. But you think about it, we had headline commodity price declines, but then we're moving up tipping fees or processing fees both to third party customers and intercompany.
We're reducing rebates and then we had some higher costs. So when you put that all together, we're a little bit backwards.
Yes. That's really helpful. And then looking at the free cash flow is also strong. Is that and keeping your guidance, are you still assuming $65,000,000 in CapEx for the year?
Yes. We probably got off to a little bit of a slower start with CapEx than we had forecasted. The winter has been really really good about the full year.
We're not quite sure whether winter has left us or not. We're not taking any bets yet. It was the 80 days yesterday, but we're not taking any bets for the rest of the week. We still getting more may get more snow, I don't know.
Yes. Well, I'm highly empathic sitting here in Chicago, so I get it. Maybe just a last one. In others, both at Expo and earnings calls this week, have said that they've seen somewhat of a recent recovery in OCC prices, particularly it sounds like you haven't seen or are you just being conservative and not assuming that?
I don't. I think that we haven't seen it. I think that our perspective is that we don't see any reason to raise prices. We see more of a reason to have our projections for the rest of the year be at the levels that we're at now rather than projecting that we're going to see price increases. I don't we just don't see anything that gives us a sense that we're going to see any significant price increases at this point.
In fact, I think that there's a potential that things could get more difficult if India, China excuse me, India, Thailand and Vietnam get saturated with mixed paper, could get a little bit more difficult.
Got it. By the way, I just have to say, having covered CXELA for it's probably like 15 years, I never thought I would have heard the word Vietnam mentioned on one of your calls. But I guess that's the world right now. So again, nice job on the quarter.
Thank you. Thanks, Corey.
And our next question comes from the line of Brian Butler of Stifel. Your line is open.
Good morning. Thanks for taking my questions.
Good morning. Hey, Brian.
Just I guess a couple more on recycling because well, why not ask some more. On the so it sounds like it's $8,000,000 total headwind now we're talking about with pricing staying at current levels and the SRP kind of running as it's currently structured. You talked about possibly having some additional ways to improve that. Can you give a little bit of magnitude? I mean, can that cut that $8,000,000 in half?
Or is it really just more of maybe reduces it from $8,000,000 to 7,000,000
dollars Yes. So the big moving pieces might not fully get resolved this year. So if you kind of break up the buckets of where we're behind, a part of it is transportation as we've talked about. And if we have legacy contracts that don't allow us to pass all that back, there's no way until they roll off to fix that issue or higher processing costs. We have made a couple of small investments in a test method to see if we can strip some labor out and get a little more efficient.
You look at things like a few legacy contracts that we're backwards on. As John talked about earlier, we're working with these customers on solutions. But the good news is that handful of contracts
We haven't put that into the guidance. Yes, they're not there. But that would be upside to the guidance if we're able to renegotiate some of those. There's a handful of contracts, 3 to 5 contracts that are in place that we're renegotiating right now because of the magnitude and because of the force majeure issue and embargo issue with China not taking mixed paper at all, banning mixed paper. So we're working through that.
That would represent some upside to the numbers for sure. It's not been incorporated into our guidance for the rest of the year, but it would represent some upside if we were to renegotiate some of those contracts.
Okay. And then just can you remind us or maybe it's changed a little bit the sensitivity if prices come up from the current levels? If they're up 10% or $10 a ton, what kind of impact that would have on that 8,000,000
dollars Yes. So for each $10 move in commodity prices at current levels, it's about $800,000 of EBITDA or operating income or $0.02 a share. And as you know, our programs are not completely linear. So depending on where you are in the recovery, it moves around a little bit. Ed made a point earlier that was a complex one, but if we are ever above our threshold, we're sharing more of the profits above our threshold levels, dollars 0.50 on the dollar with us and our customers.
So part of that Q1 headwind in recycling year over year was we were above thresholds in 2017. So as we fell below them, we lost $0.50 on every dollar in that first piece and then you fall below the thresholds, we start recovering more. So it kind of depends on where you are. Where we are right now, Brian, it's about $800,000
Okay, great. And then on the landfill side, can you talk a little bit about the new tons that are coming in? Are those completely replacing the tons that are already there at a higher price? Or would you are those being additive in the sense that you have more capacity to sell? And how should we think about that going into the second half of 'eighteen or into 'nineteen on how much more room you have for either upselling the volume that's there or adding more volume?
I mean, I think that we have about just under 1,000,000 tons of excess capacity. So we have excess capacity in the Western region. I think that we're probably in the 5th inning 4th or 5th inning in terms of moving out the lower priced waste that we have coming into the facilities under contract. We still have some larger contracts that are in place that are, in our view, below market that will roll begin to roll off over the next year or so. So I think we're probably in the 4th or 5th inning in terms of where we are with regard to opportunity.
Okay, great. And then on the organic solution, can you give a little bit more color on the strength there and just kind of how that
plays out
for the rest?
Yes, sure. Ned kind of laid it out in his remarks. Organics was up $3,000,000 on a new contract that just went into place, new T and D sludge contract. And then customer solutions was up $1,300,000 And that's various new industrial customers, new retail customers, multi site retail customers. So I mean both really great job from the organics team and a great job from the from revenue standpoint, new customers.
Okay. And then 2 more. Is Holoc Shipping to Casella's Landfills and kind of the expansion there? Any color?
Not yet. Not yet. I think well, two things. So, we've got favorable contracts in place right now, both from a truck and transportation standpoint as well as from a rail perspective. Those contracts are very positive contracts.
We will internalize that waste probably over the next few years. And the permit application, we've begun the process from a permit expansion standpoint. Current permit is at 750 and we're going to 1250. So, and I think we've got good support from the community, good support from Mass DEP. One of their strategies is to ship waste out of state as some of their solid waste strategy.
So we've got support, both probably most importantly for the from the community, but also from DEP as well. So it will take us some time to get through that probably over a 6 month period of time. I think we'll probably have our permit, should have it by the end of the year, beginning of next year, permit expansion. But it will be a year or so before we begin to internalize that material to our Western region sites. But I mean, the good part about it is we will be able to get that waste to several of our facilities we can meet.
We can get it to Clinton. We can get it to Chemung, to Ontario, to Highland. We can get it to pretty much all of our facilities in the West. So it's a terrific strategic facility for the company to help us utilize the additional 1,000,000 tons of capacity that we have in the Western region.
It becomes really critical next year because Southbridge will be closed. Right. So we got to get some of that tonnage out of Massachusetts and most likely out to New York.
Okay.
And then just the last one, you mentioned the cost of capital. What number do you guys calculate for your cost of capital right now? So
our weighted average cost of capital depending on what assumptions you use is somewhere in the 5% to 6% range. You have to risk adjust these things though. And when you're looking at opportunities, whether they be development opportunities or acquisitions, there's some level of risk when you're doing anything. So depending on what it is and how it fits with our assets, we're typically looking at trying to get after tax unlevered returns in the high teens, low 20s, mid 20s depending on the opportunity and if it fits well.
Great. Thank you very much.
Thanks, Brian. Thanks, Brian.
Our next question comes from the line of Tyler Brown from Raymond James. Your line is open.
Hey, guys. Thanks for the follow-up.
No problem.
Hey, Ned, I apologize, I'm still unclear. But the 5.9% disposal pricing, does that include the remediation project? I mean, I thought you said it's basically revenue over tons.
Yes. So the 4.9 is third party price recognized at the landfill and same customer, same store. But the 5.9 actually does include the remediation times. And what I said a little earlier is that remediation project actually slightly weighed on that 5.9% rate for the period. It was a slight decline to that, but not anything too big, but it was a big project and a soils project, which is a little lower rate typically than straight MSW or CND in a site.
Yes, exactly. Okay. That was okay, what I was looking for. Ed, so I love the color on ELDs and turn times. So, are you specifically talking about your Western New York landfills out of Massachusetts that those are doable in a day?
Yes. Particularly in Western Mass like where Holyoke is where we bought that's a transfer station now.
Okay. Also, Tyler, keep in mind that at Chemung, we have a permit increase there to go from $200,000 to $400,000 It's an option that's in place currently, permits in place. It's an option with the host community to move that facility from 200,000 tons a year to 400,000 tons a year. And obviously, we will do that at the end of the year and run that facility much harder as we close Southbridge.
Okay.
And we have obviously have the Holyoke transfer station to move some of that waste, which is it's a great round trip from Holyoke to the Chemung facility.
Right. Where I'm just curious, but where is that what I'm going to call event horizon, meaning where is the physical day turn limitation on those trucks? Is it before or after the Finger Lakes?
So it depends on where it's coming from, right?
Mostly out of Western Mass.
Western Mass, it would go past the Finger Lakes. Yes. It would. Okay. And we're going underneath the Finger Lakes with our routes anyway.
Right, right. A lot of waste also in this Western New York landfills come up from the Greater New York City area today and it makes it to Chemung round trip very well, Ontario, Hakes and then Highlands a little bit further away. It's a little bit tougher to take it to that site. But all those sites are very good transportation lanes. And there's one other like small nuance is if you're a trucker, do you want to run 6 hours in a day or do you want to run 10 to 12 hours in a day?
Our routes are kind of that 10 to 12 hours a lot of them which is perfect asset utilization for truckers and really fits a lot of good lanes.
Yes. Okay. Agreed there. So one last question on recycling, but I want to kind of come at it from a glass perspective. So if I'm not mistaken, the largest glass recycler in the Northeast shuttered.
What happens, and I'm just guessing here, but say to the 1,000,000 tons of glass that was being recycled, I mean, does that ultimately going to end up in an already landfill constrained market?
There's a potential to do that. Some of it will be used as beneficial reuse. There's a number of construction companies that are trying to figure out whether they can substitute for aggregate. Politicians and regulators are looking at specifications to incorporate it into Department of Transportation specs, because they have no choice at this point in time. We've been talking to them for years about doing it, Tyler.
But I think that if they want to continue to recycle glass, it's going to have to be they're going to have to look at specifications. We're going to have to find some other uses as aggregate or in base coat from a paving perspective. They've got to reset the specs though in order to be able to do that because the specs currently are too stringent and won't allow it to get done in a commercially viable manner. So I think there are going to be some changes there. And if not, then there is the potential that glass will go back into will go into the landfill.
Okay. Well, listen, you guys have
been super generous with your time. Great quarter. Appreciate it.
Thank you. Thanks, Tyler.
And there are no further questions at this time. I turn the call back over to the presenters for closing remarks.
Thanks everyone for being on the call this morning. We look forward to discussing our Q2 2018 earnings with you in early August. Thank you very much.
Thank you, ladies and gentlemen, for your participation. This concludes today's conference. Have a wonderful day.