Good day, ladies and gentlemen, and welcome to the Casella Waste Systems fourth quarter 2016 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require operator assistance during the conference, please press star and then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Joseph Fusco. Sir, you may begin.
Thank you for joining us this morning, and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems, Ed Johnson, our President and Chief Operating Officer, and Ned Coletta, our Senior Vice President and Chief Financial Officer. Today, we will be discussing our 2016 fourth quarter and full year results. These results were released yesterday afternoon. Along with a brief review of those results and an update on the company's activities and business environment, we will be answering your questions as well. First, as you know, I must remind everyone that various remarks that we may make about the company's future expectations, plans, and prospects constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K, which is on file with the SEC. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our views change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to today. Also, during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
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 in our investor slide presentation, which is available in the Investors section of our website at ir.casella.com. With that, I'll turn it over to John Casella, who will begin today's discussion.
Thanks, Joe. Good morning, everyone, and welcome to our fourth quarter fiscal year 2016 conference call. We are very happy with our fourth quarter results and certainly with fiscal year 2016 results. As reported in yesterday's press release, our revenues for the year were $565 million, up 3.4% from last year. Adjusted EBITDA was $120.6 million, up 13.7% from last year. Adjusted EBITDA margins were 21.3%, up 190 basis points from last year. Normalized free cash flow was $27.1 million. Our fiscal year 2016 results exceeded our updated guidance levels for revenues, adjusted EBITDA, and normalized free cash flow. We're thrilled to exceed guidance again after already beating and raising guidance three times this year for adjusted EBITDA. We've exceeded our budget in fiscal year 2016 due to our strong pricing execution, outperformance of operating efficiency programs, improving economic tailwinds, and strong overall execution on our key strategic initiatives.
Ned will go deeper into the numbers in a moment, but first, I would like to recognize that these strong results are tangible evidence of our commitment and continued execution against our key strategies. Our continued success and consistently improving results are a testament to 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 2013, 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. 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 plan and outlined for investors financial targets for the year 2018. This plan focuses on increasing landfill returns, driving additional profitability within our collection operations, creating incremental value through resource solutions, and reducing financial and operational risks while improving our balance sheet. We are tracking ahead of this multi-year plan, and we remain confident that our enhanced process discipline and continued focus on key operating strategies will further drive improved performance and increase free cash flow, enabling us to continue to de-lever our balance sheet. Our first major strategy is improving landfill returns through a focus on pricing discipline, sourcing incremental volumes at select sites, and driving operating and capital efficiencies.
As expected, our landfill volumes were down 70,000 tons in the fourth quarter, with the decline driven by the planned diversion at Southbridge and lower energy-related waste streams in the Marcellus Shale region. In fiscal year 2016, our landfill volumes were slightly down year-over-year. Excluding the planned diversion at Southbridge and the lower gas-related waste streams, volumes were actually up 262,000 tons or 6% year-over-year, with particular strength in C&D volumes. Disposal capacity continues to tighten in the Northeast as permanent site closures are reducing capacity, and stronger economic and construction activities are driving higher volumes. Given this supply-demand imbalance, we were able to successfully advance 2.1% pricing at our landfills in fiscal year 2016. We believe that this positive backdrop will continue into the future as additional site closures are expected over the next several years.
As we roll off multi-year contracts, we expect to advance pricing in excess of CPI on a larger percentage of our book of business. On the landfill development side, we've had significant permitting successes in 2016, including an annual permit increase at our Highland facility from 312,000 tons per year to 465,000 tons per year, a 13-year expansion at our Ontario County landfill, and a 14-year expansion, an annual permit increase from 180,000 tons a year to 417,000 tons per year of MSW at our Chemung County landfill. Underlying the success of each of these key permitting activities is our deep commitment to develop and run our landfill facilities to the highest environmental standards while maintaining strong partnerships with our host communities. This has been our recipe for success in developing long-term environmental assets in a challenging Northeast environment.
We are currently working on several other key landfill permitting projects and developments, including our expansion efforts at Juniper Ridge and Southbridge landfills. We are permitting to expand the state-owned Juniper Ridge landfill by roughly 9 million cubic yards to extend the life of the site to match our long-term operating lease agreement that goes through 2033. We continue to make slow progress in advancing our permitting activities for the next cells at the Southbridge landfill. Given these timing delays and challenges, we ramped down volumes at the site by roughly 31% in fiscal year 2016. Given the fact that we have only roughly 400,000 tons of remaining permitted capacity at the site, we plan to further reduce amortizable volumes to the site by 50,000 to 100,000 tons in fiscal year 2017.
We have reached an agreement in principle with MassDEP, the town of Southbridge, and the town of Charlton for the sharing of costs between MassDEP and us of up to $10 million, $5 million each between us and MassDEP, for the town of Southbridge to install a municipal water line in the town of Charlton. It is expected that the town of Southbridge will issue a bond for our portion of the water line cost. We would expect to amend our operating agreement to provide for us to reimburse the town for periodic payments under such bond. This water line will provide municipal water to certain Charlton residents. While we continue to pursue future expansion capacity at Southbridge Landfill, we currently do not have visibility on whether we will be able to develop this expansion capacity at an adequate risk-adjusted return.
It is possible that at some point in the future, we could conclude that closing the site is in the company's best economic interest. However, even if we are unsuccessful from a permitting standpoint at the Southbridge landfill, we remain confident that we can still achieve our fiscal 2018 financial targets that we first announced in August of 2015. In fiscal year 2016, we continued to make great progress with our second major strategy, improving profitability of our hauling operations. Our focus here is on core blocking and tackling, namely a focus on pricing programs, route optimization, and fleet standardization. In fiscal year 2016, operating income in the collection line of business was up 21% year-over-year, with margins up 320 basis points as robust pricing and operating efficiencies drove results.
Within the context of this rapidly improving marketplace, we have continued to advance hauling price increases in the residential and commercial lines of business with only limited price rollbacks. In fiscal year 2016, collection pricing growth was 4.5%, with residential and commercial collection pricing growth of 4.9%. On the operating side, we continued to advance a number of key initiatives to further improve our operating costs in the collection line of business. In fiscal year 2016, we improved our collection cost of operations as a percentage of revenue by 240 basis points year-over-year. This improvement is being driven by our strong pricing programs, coupled with positive cost impacts from our five-year fleet plan, maintenance initiatives, improving routing, and efforts to swap or divest underperforming routes. Moving to the third major strategy, creating incremental value through resource solutions.
Here we differentiate ourselves in the marketplace by offering value-added resource solutions. These solutions range from our customer solutions group, which provides professional services to large industrial customers, to our organics business that is the leader in organics processing and disposal in the Northeast, to our market-leading recycling business. In late 2016 and into early 2017, recycling commodity prices began to rebound off the multi-year lows and are currently hovering close to the 10-year average levels. From a numbers standpoint, our average commodity revenue per ton, or ACR, was up 45% year-over-year in the fourth quarter and is up another 9% sequentially from the fourth quarter through the end of January.
We generated a 14.3% return on assets in our recycling business in fiscal year 2016 through our successful efforts to reshape the recycling business model to generate an appropriate return on our infrastructure investment through all market cycles. This is up from 2.1% return on net assets that we generated in fiscal 2015. Also, we made substantial progress improving our balance sheet and reducing overall financial, operational, and financial risk in 2016. We continued to repay debt, reduce leverage, and in October, we completed a favorable refinancing of our highest cost debt with a new Term Loan B, lowering our interest cost by $11 million per year and improving financial flexibility.
With the work that we have done over the last few years, our balance sheet positions us well for the future, and we remain deeply committed to disciplined capital investment strategy with free cash flow primarily used to repay debt, or in select instances, for small plug-in acquisitions and growth investments within our core operations. With that, I'll turn it over to Ned to walk us through the financials.
Thanks, John. Revenues in the fourth quarter of 2016 were $143.8 million, up $3.8 million or 2.7% year-over-year. Solid waste revenues were actually down $800,000, or 0.7% year-over-year in the fourth quarter, with higher collection and disposal pricing and the rollover impact from the acquisition of several transfer stations, partially offset by lower solid waste volumes. Revenues in the collection line of business were up $1.8 million year-over-year in the fourth quarter, with price up 3.2% and volumes slightly down. Pricing was up 3.6% in our residential and commercial lines of business in the fourth quarter. We also advanced pricing 2.2% in the roll-off line of business. However, volumes were down slightly as we continued to focus on price over volumes, and we had a tough comparison to an unseasonably warm and dry November and December of 2015.
Revenues in the disposal line of business were down $2.4 million year-over-year in the fourth quarter, with higher pricing offset by lower volumes. We increased third-party reported landfill pricing by 2.7% year-over-year in the fourth quarter, with landfill prices up 3.8% in the eastern region as we continue to capitalize on the continuing disposal market. We have also begun to advance pricing in the western region, with pricing up 2%, with particular strength in the construction and demo material segment. We expect these same positive pricing trends to continue into fiscal 2017 as we recognize the rollover impact of pricing completed late in fiscal year 2016, and we advance further pricing increases in key markets. Our total landfill volumes were 1.1 million tons in the fourth quarter, down 70,000 tons year-over-year.
During the quarter, as John described, we continued to ramp down volumes at the Southbridge landfill, with volumes down about 60,000 tons year-over-year in the quarter. In total, we have reduced tons at Southbridge by 173,000 tons from fiscal year 2015 to fiscal year 2016. Further, we continue to experience headwinds in the Marcellus region as waste volumes associated with natural gas drilling activities were down 31,000 tons year-over-year in the fourth quarter. Excluding these two impacts, our other volumes were actually up 21,000 tons year-over-year, with strength across most waste types and sites. Recycling revenues were up $3.2 million year-over-year in the fourth quarter, with higher commodity pricing and volumes partially offset by lower tipping fees or processing fees.
Average commodity revenue per ton was up 45% year-over-year in the fourth quarter on higher fiber and metals pricing, partially offset by lower plastics pricing. Organics revenues were up $700,000 year-over-year in the fourth quarter on higher volumes as our team continues to source new streams of biosolids in the ever-tightening Northeast disposal markets. Customer Solutions revenues were up $700,000 year-over-year in the fourth quarter with continued growth in the industrial services segment. Adjusted EBITDA was $29.4 million in the quarter, up $1.6 million year-over-year, with margins improving 60 basis points to 20.4%. With revenues up $3.8 million and adjusted EBITDA up $1.6 million, that gave us a flow-through impact of roughly 44%. This is great evidence in our success of shedding less profitable, lower margin volumes, while at the same time we're securing pricing increases and cutting operating costs.
Solid waste adjusted EBITDA was $26.6 million in the quarter, up $900,000 year-over-year. We achieved 3.7% adjusted EBITDA growth on lower revenues in the business. Solid waste adjusted EBITDA margins were 25.4%, up 110 basis points year-over-year, reflecting strong pricing coupled with cost efficiencies, which offset volume declines. Hauling adjusted EBITDA was up $1.7 million in the quarter, with margins expanding 200 basis points. Recycling adjusted EBITDA was $2.6 million in the quarter, up $1.8 million year-over-year, with the improvement mainly driven by higher commodity pricing coupled with our improved revenue model. Cost of operations in the fourth quarter was up $1.2 million, but down 100 basis points as a percentage of revenue, with improvement as a percentage of revenue driven by lower transportation costs, lower direct labor costs, and lower vehicle maintenance costs.
General and administrative costs in the quarter were down $700,000 year-over-year, or if you exclude the proxy fight costs and the severance costs from last year, it was up about $800,000 year-over-year. This increase was mainly driven by higher incentive compensation costs this year on improved performance. Depreciation and amortization costs in the fourth quarter were down $900,000 year-over-year, largely due to lower landfill amortization expense associated with the Southbridge Landfill. We did incur a $900,000 environmental remediation charge in the fourth quarter as we trued up our accrual for the expected Potsdam scrap yard remediation planned in either late 2017 or early 2018. As John said, and I think the market knows quite well, in mid-October, we refinanced our ABL revolver due 2020 and our 7.75% senior sub notes due 2019 with a new $160 million revolving credit facility and $350 million Term Loan B.
As we previously discussed, we had great timing and great execution on the transaction, and we achieved an excellent outcome for our shareholders. The Term Loan B priced 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 to the Term Loan B where the interest rate will drop to LIBOR plus 275 when our consolidated net leverage ratio is 3.75 times or less. The revolver was initially priced at LIBOR plus 300 basis points with a pricing grid based on our consolidated net leverage ratio. We believe very strongly that this transaction positions us well to continue to execute against our strategic plan. It will reduce cash interest costs by about $11 million per year. It improves our financial flexibility and extends out our debt maturities.
The current quarter includes a $13 million loss on debt extinguishment related to this financing. As of December 31st, 2016, our consolidated net leverage ratio, as defined by our new credit facility, was 4.22 times, which was actually down 1.2 times in the last 24 months. Reducing leverage from the third quarter to the fourth quarter was a huge accomplishment, given that we incurred $14.3 million of cash transaction fees associated with the refinancing, including the call premium for the sub-debt, and we had accelerated cash interest costs associated with the sub-debt that would have normally been paid in February of 2017 that we paid on through November 16th. It's a really big accomplishment working down leverage for our team.
With our consolidated net leverage ratio at 4.22 times on December 31st, the pricing on the revolver will step down to LIBOR plus 275 in the first quarter of 2017. In the first quarter of 2017, we took two additional steps to further strengthen our balance sheet and reduce risk. One, we completed on February 1st the remarketing of $25 million of Finance Authority of Maine disposal revenue bonds. We had a great outcome on this remarketing, where we repaid our existing term rate bonds that had a 6.25% fixed interest rate and our existing variable rate letter of credit-enhanced bonds with borrowings from a new eight-year senior unsecured bond with a fixed rate of 5.25%. Further, in mid-February, we began our efforts to further manage long-term interest rate risk by entering to $60 million of floating to fixed LIBOR swaps that mature in four to five years.
After executing these interest rate swaps, roughly 32% of our debt is fixed rate today. Our normalized free cash flow was $12.2 million in the fourth quarter and $27.1 million in fiscal year 2016, which exceeded our updated guidance range of $22 million-$25 million as established in early November. As stated in our press release yesterday afternoon, we announced guidance for fiscal year 2017 by estimating results in the following ranges: revenues between $577 million and $587 million, which is up about 2%-4% year-over-year, adjusted EBITDA between $124 million and $128 million, which is up 3%-6% year-over-year, and normalized free cash flow of $32 million-$36 million, which is up 18%-33% year-over-year.
These ranges are tracking ahead of our multi-year strategic and financial plan that we laid out for shareholders in 2015 that had adjusted EBITDA of $122 million-$132 million and normalized free cash flow of $30 million-$40 million in fiscal year 2018. One item to note, our fiscal year 2017 guidance ranges are slightly dampened by our plans to further reduce volumes at the Southbridge Landfill. In fiscal year 2017, we plan to further reduce amortizable volumes by another 50,000-100,000 tons. This would put the run rate of Southbridge at roughly 225,000-275,000 tons in fiscal year 2017. This planned volume reduction would reduce revenues by about $3 million-$5 million and would reduce adjusted EBITDA by $2 million-$4 million. Both of these impacts are already contemplated in our guidance ranges that we announced. With that, I'll hand it over to Ed.
Thanks, Ed. Good morning, everyone. We finished the year strong. Operationally, we've made a great deal of progress. All of the key operational metrics we follow look good. As we celebrate a great year, there is still work to be done. We continue to focus on business fundamentals. I will stay brief in my comments today, I wanted to give you some idea of what our focus is for 2017. A quick recap of the results. We have continued to nick away at the cost of ops as a percentage of revenue, with the quarter showing a 100-basis point improvement over last year. For the full year, cost of ops declined from 70% of revenue in 2015 to 67.6% in 2016. A pretty dramatic 240-basis point improvement led by our collection and recycling operations.
This improvement is driven partly by price, partly by fleet improvements, and partly by our continued focus on the efficiency of our operations. On the landfill side of the business, we are finally starting to get price, and the market dynamics continue to move in our favor. Our operational focus this past year has been on increasing compaction. We had several operational training events last year on compaction, and we are starting to show success. Maximizing compaction is extremely important as our annual permits are based on tons, and the more tons we can fit into available airspace, the farther out we can push our cell construction capital. In the long run, free cash flow will benefit. Another thing we determined this past year is that with the rising cost of constructing airspace, it no longer makes sense to use anything but the maximum size compaction equipment.
Our heavy equipment plan has been modified accordingly, and we will be phasing out smaller compactors over time. On the collection side, it's all about safety, service, and route efficiency. We have a great safety record here, and that not only protects our employees and the public but saves cost and downtime. Consistent superior service is the key to being able to raise price as needed, and we have certainly performed better in that area. Going into 2017, we have a renewed focus on route efficiency and have been conducting basic ops training in this area on how to identify less efficient route days and implement a process for finding and mitigating root causes of that inefficiency. Recycling continues to be a great story for us.
As I mentioned last quarter, our financial results are affected both by the effectiveness of our processing, we can command premium pricing for cleaner material, and minimizing the variable cost per ton processed. We continue to focus on ways to improve both effectiveness and efficiency with incremental improvements to our technology. Other areas of the business are also looking forward to continued improvement, which remains our theme internally with organics and customer resource solutions, both looking at ways to capitalize on improving markets in the Northeast, focusing primarily on driving 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. We had a great quarter to finish a great year and look forward to an even better 2017.
With that, I'd like to turn it over to the operator for the Q&A session.
Thank you. Ladies and gentlemen, at this time, if you do have a question, please press the star and the number 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star and the number 1 to ask a question. The first question comes from the line of Tyler Brown from Raymond James, and your line is open.
Hey, good morning, gentlemen.
Good morning.
Good morning.
Morning, Charlie.
Hey, Ned. Thanks again for that color on the SG&A line. When I look at it historically here, it's crept up the past couple of years on a % of revenue basis. Is there anything outside of, call it, higher incentive comp that's kind of driving that? Really going forward, how should we think about that line?
Yeah, good question. We just came off probably arguably one of the best years in the company's history, and we outperformed in our bonus plans companywide. We had a very wholesome bonus accrual for the year. In years past, when we didn't perform as well as a company, we had a much lower bonus accrual. That's part of it there, definitely. There are not really a lot of other costs that are creeping up. Ed mentioned a minute ago that we are working on some early stages on our backbone, back office to take some additional costs out. As we develop those plans further, we'll get some guidance out to the street.
Okay. All right, great. Thank you. Kind of just a bit of a more broader question. In light of Waste Management securing the other half of the New York City transfer and disposal contract, and with its intention to send some of that volume out to Western New York, I'm curious on how you expect to see the disposal dynamics playing out in your Eastern region in light of this news.
I think with that contract, we don't know exactly where Waste Management will ship the waste. I think we heard as much as you did from the conference call and different comments around the industry that some of it will move down to Virginia. They have built an amazing rail offload facility at High Acres in Rochester, and we've seen them filling up their Chaffee Landfill as well. We do believe the same as you just said, that this will tighten New York further. There are always some puts and takes across the marketplace. We're starting to see more waste from the eastern part of our business, Massachusetts flow out to New York and starting to leapfrog out to Western New York. We just experienced a year with good economic activity in New York State, which further tightened landfills and allowed us to advance pricing in those markets.
Overall, we're feeling pretty good. Waste Management is a very rational player in the marketplace and runs great facilities and a very good integrated asset. I think it's an overall good move for the marketplace long term, and we'll be curious to see as that comes online, how they shift tons around.
Okay, great. Thank you. Nice quarter.
Thank you.
Thank you. Our next question comes from the line of Michael Hoffman from Stifel. Your line is open.
Hi. Thank you very much for the questions, John and Ned, Ed. Ned, on the NOL, given the pace of better-than-expected performance in 2016, pulling forward one year your plan into 2017, on a performance basis, how quickly are we running through the NOL if we hold the 2017 pace out 2018, 2019, 2020?
Yeah. At the end, you'll get this in the 10-K, but we have approximately $100 million of carry-forward NOLs at the end of 2016. From a tax standpoint, we've been putting policies in place for a few years here to try to use the NOL as quickly as possible, of course, so we're not taking accelerated depreciation and other steps like that. Also, our landfills, we manage our amortization in a way to maximize our pre-tax income so we can use the NOL as fast as possible. We're estimating that we're going to use the NOL in the next two and a half, to three years. So, in 2017, 2018, and 2019, and then in 2020, we'll have worked through the NOL. We'll start to adjust tax strategy during that period to allow us to offset taxes in other manner.
As you and I have discussed in the recent past, there's a lot of change maybe afoot in Washington that could slightly tweak this strategy as we get feedback.
Fair enough. Can you share with us your thoughts about how you would expect your reported price to progress through the course of the year?
Let's see if I can dig that out. Do you have that data, Casey?
While you're tackling that one-
Yeah
maybe John or Ed, how do we think about rising commodity prices versus the SRA? What's the balancing act there in the give back plus the benefit? Because the SRA was designed to protect on the downside. How do we think about this is your first time experiencing a real lift after you've done the SRA.
Michael, fundamentally, what will happen is the SRA fee will come down, but we will continue to be in a position to continue to improve the return until we get a satisfactory return on the invested capital from a recycling standpoint. As commodity prices go up, the fee will come down to our customers, but we will still be driving towards a bit higher return on the invested capital from a recycling standpoint. It still should be a net positive to us.
We should expect to see a positive flow through given the rise in commodity?
There's kind of two customers at a recycling facility. Our own trucks, coming from the collection side of the business where the SRA plays through, and then third-party customers. We've restructured over the years our third-party contracts to where when commodities fall below a threshold, customers pay dollar for dollar processing fee. As they get above that threshold, we give a revenue share. Not every dollar of commodity price drops to the bottom line because we're sharing some of it with our customers. It is a very positive to us. We're seeing about $0.60 on every dollar drop to the bottom line as commodity prices go up.
That's very helpful.
Coming back to your first question, looking at our budget for the year, we're budgeting in the front load and rear load to be about 2.5% price for the year. Generally kind of flat throughout the year. We advanced a number of pricing initiatives late in 2016 and early 2017. We have good visibility right now, and we don't see things climbing or falling through the year. It should be pretty even.
Okay. That's through the solid waste, so when I do it on a total reported company, that'll come in more like a 2.2%, 2.3%.
Yeah.
Okay. All right. That's good to know. Is your expectation, if you were to pull away whatever the level reduction of Southbridge would be, that the rest of the company will continue to report positive volumes through 2017?
Yes.
Yes.
Okay. To your credit, I mean, you did $12.5 million of EBITDA in 2015 from Southbridge. It's in the sevens in 2016. It's going to be down in 2017, and yet you're beating your plan. You've made up $5 million and then some.
That's right.
Yes.
Can you do that again in 2017? Is there room to make up, or is it been-
Our other key strategies, I think our collection strategy, we're firing on all cylinders there. We still have a lot of opportunity in our belief, especially we're focusing this year on roll-off profitability in our book of business. We're putting a lot of focus there, permanent industrial customers, temporary, getting better asset utilization. Ed can talk about the cost programs. We've got a lot of room there. On the landfill side, we're running a strategy into 2017 where we're a little bit more focused on price across the entire book of business. We advanced some pricing more aggressively in late 2016. Landfill capacity is hard to gain. It's hard to replace in the Northeast, and Southbridge is a great example of that.
The challenges we had over the last five years, advancing permits at Chemung and Ontario, we were successful, but it's valuable, and we need to generate a higher return on those assets. We're pushing a bit more price, which offsets some of that Southbridge decline.
Okay, on that vein, could we see an upselling in the mix where you might give up volume but get better price because that's the right strategy? I end up with one, maybe two tons out at a lower price, one ton at a much higher price kind of thing, and net, we're better off.
We're continuing to do that at all of the facilities in terms of looking at the lower-priced waste and trying to cycle that out for higher priced volumes, Michael. That's absolutely right.
Okay.
Yes.
Okay, that'll continue to have operating leverage. Yeah. Okay. I believe there was a meeting with the governor last week and an opportunity to sort of express a need to have them focus on what's happening with Southbridge. Do you think that they'll finally weigh in on this, or are they leaving it in the DEP?
I think that it's really in the hands of the DEP. I think the administration is certainly aware of capacity issues in the state, I think ultimately it'll be in the DEP.
Okay. All right. Thank you. One last question. You now are ahead of plan for 2018. What's the next three-year plan look like?
That's the exact question that the board asked us, Michael. We're in the process of going through and beginning to look at what is the strategy come 2018. We're beginning to look at that right now.
We should hear about that soon?
No. I said we're beginning to look at that right now. We're beginning to strategize what is the path in 2018? How do we create the next level of shareholder value? We're in the process of beginning that right now, over the next couple of quarters, probably we'll have that conversation with the board and get everyone's perspective, then we will come out with that plan. It's not something that we're going to come out with next quarter. I'd say it's probably a couple of quarters, two, three quarters away.
Okay. Fair enough. Thanks again.
You're welcome.
Thank you. Our next question comes from the line of Joe Box from KeyBanc. Your line is open.
Hey, good morning, guys.
Good morning.
Good morning, Joe.
I appreciate the overall comments on price and volume expectations in the release, and maybe I just want to drill into Michael's comments or questions a little bit more on the price and volume side, specifically for collection and disposal. If you could just maybe drill down into what your expectations might be by that different activity type, I think that'd actually be helpful for us.
You have that one sheet, Jason? Yeah. We're looking
Where's that one other sheet?
For the year, we're looking at about 2.5% to 2.7% price roughly on collection. On disposal, we're looking at a little bit north of 3% overall in the disposal line of business is our current plan. As we guided to yesterday, we're looking to blend in the solid waste group of 2.5% to 3.5% between those two segments.
Right. On the volume side for collection?
Yeah, on the volume side for collection, we're looking at is about 1% to 1.5%, you blend in the disposal side, we're looking at about negative four-ish percent. As we mentioned a little bit earlier, that's predominantly Southbridge. However, John did mention that we are advancing more price at the landfills, we have budget for some tons to be down at other sites as well, just taking a conservative tack here.
Got it. Thanks, Ned. That's helpful. I guess now that you guys have picked up a permit increase at Highland, what type of volume do you think that you could ultimately flow through the facility? Is that something that flows through over multiple years, or do you actually have a plan to maybe fill that up sooner rather than later?
I think that's really going to be over multiple years, Joe. We don't have a plan to fill it up. We're proactive in terms of getting the capacity from a regulatory standpoint in terms of permitting, but it will be over a number of years for us to fill it. We don't have a plan to fill it right away.
Okay. Great.
It'll kind of play out as things firm up with the New York City and what's going to happen with what waste is now going to take to upstate New York, that'll fold out over the next few years.
Maybe switching gears, I think you mentioned a $1.8 million EBITDA positive swing in 4Q for recycling. How should we think about what is baked into your 2017 guidance from recycling? And when you allude to an offset to Southbridge, is that largely coming from recycling?
Yeah. We are looking at recycling being up maybe about $2 million to $3 million. It really depends on where the markets go during the year, Joe. We actually budgeted, originally, for commodity to be flat to down. We have adjusted our budget slightly as commodity prices have ticked up sequentially from December to January. They are actually up about 9% from the fourth quarter through January. We are looking for some offset there to Southbridge from recycling and as we said earlier, advancing some additional price in other disposal sites and our other operating initiatives.
Sure. Just to be clear, most of that benefit is going to flow through in 1Q, and it is not like you are just doing a random walk or moving current prices forward for the rest of the year?
I am not sure if I understand your question. Is that related to recycling or other businesses?
That's recycling, Ned. It's not like you're just flowing through the current recycling price-
No.
-for the rest of the year.
You're 100% right.
Okay.
No one has visibility later in the year, we're getting a read on where we are in Q1. We're beating a little bit in Q1. It's making up for some of the weakness in Southbridge.
Got it. Okay, great. Thank you, guys.
Thanks, Joe.
Thank you. As a reminder, ladies and gentlemen, if you have a question, please press the star and the number one key. Our next question comes from the line of Al Kaschalk from Wedbush Securities, your line is open.
Hey, good morning, guys. Good finish to the year.
Good morning, Al.
Good finish to the year and the progress here. I wanted to just stay very broad, and maybe you could help us bridge the margin expansion on the EBITDA that you see from 2016 to 2017, particularly given the progress you made. When I mean bridge, it would be great to hear, I don't know if it's basis points or whatever, but what you're expecting in terms of that expansion. My math says there's 40 basis points at the midpoint, if I did my 2016 calc right. Commodities, overall pricing, the benefit you get on mix from volume, and then the outstanding things that are being done on the operations standpoint, if there's further benefit there to the margin.
Again, the question here is try to be as a little bit more broader as opposed to the specific markets, but if you could maybe step through that would be great.
Sure. I don't exactly have it built up that way, I'll just stay broad, Al. In 2017, much like 2016, we do expect positive movement as we've laid out in pricing and collection and the disposal line of business. In the operating team's efforts on cost of operations, we expect to hold that in check and not have inflation in our internal business that mirrors external inflation. We'll gain ground with our pricing programs again, and that'll help to improve margins. On the flip side, you know very well that when you shed landfill tons, those incremental tons might have as much as 70% or 75% margins. We'll be taking a bit of a step backwards in that part of the business, and that will weigh on our margins a little bit year-over-year.
Recycling, we've seen a tremendous improvement in our margins in the recycling business with our changes that we've made and with a little bit of the tailwind, but our operating income margins ended about close to 12% in calendar 2016. We see those margins going up a little bit more into 2017 with the early pricing data we've gotten here. We expect a little bit of improvement in overall company margins due to recycling business as well. That's generally it for the year. There's not a lot of other moving pieces.
Good. Okay. On interest expense, what are you suggesting for the full year? Whether it be the P&L or the cash interest expense?
Yeah. P&L interest expense, we expect around $25 million. Cash interest expense, we expect around $23 million for the year.
Okay. Broader question here on the financing that the company has done in 2016, it was good. I'd like to maybe just pose a question and hear how you're thinking about it. I heard earlier that you certainly [had million] in improvement on the balance sheet, why wouldn't you help leverage come down or accelerate the reduction to provide you even more further flexibility by potentially offering some shares to drive that leverage ratio down given where we're at in the environment?
It's a question we've been asked a number of times. We started to finally get some credit, I think, in the equity markets this fall. The stock has risen pretty dramatically over the last year on our execution. As we sit here as a management team, we just don't think it's accretive to shareholders. Our debt cost today is LIBOR plus 275, LIBOR plus 300. We've got cheap debt. We're managing some of the interest rate risks there. What are the uses for it? If we go out and dilute shareholders and we just pay down debt, we're just not sure that results in good value add. Further, we have a pretty big disconnect to the group today from a valuation standpoint, and we're executing on all cylinders here. We don't believe whatsoever that we should have such a big discount.
We believe strongly internally that our shares are way undervalued and we wouldn't issue shares at this price. We've done the analytical work, we've spoken to some of our banking partners, we've had conversations at the board level, and where we sit today, we don't think it's the right move for the company or shareholders.
Great. Thanks for taking my questions, and good luck, guys.
Thanks, Al.
Thanks, Tom.
Thank you. Our next question comes from the line of Jordan Gregov from Federated Investors. Your line is open.
Hey, guys. Thanks for the call. I just had a real quick question. What was your guys' interest coverage ratio as of 12/31?
Yeah. Give me one second. We'll put the K out later today so that the stats will be in there as well. Do we have that, Jason? The one number I don't have.
I think that was in [ the C].
I thought it was in this, too. Give me one second. Sorry.
No worries.
Interest coverage ratio was 3.75 times at 12/31/2016 against a minimum of 2.5 times. As I said earlier, our consolidated net leverage ratio was 4.22 times against a maximum of 5.375 times.
Awesome. Thanks, guys.
Thank you.
You're welcome.
Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Mr. John Casella for closing remarks.
Thank you. We continue to execute well against our key strategies 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 de-lever the balance sheet going forward. Thank you all for your attention this morning. We look forward to discussing our first quarter fiscal year 2017 earnings with you in early May. Thanks, everyone. Have a great day.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everybody have a great day.