Good day, ladies and gentlemen, welcome to the Q2 2016 conference call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session, instructions will be given at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Joe Fusco. 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'll be discussing our 2016 second quarter results. These results were released yesterday afternoon. Along with a brief review of those results and an update on the company's activities and business environment, we will be answering your questions as well. 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. 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 that 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. Now I'll turn it over to John Casella, who will begin today's discussion.
Thanks, Joe. Good morning, everyone, and welcome to our second quarter 2016 conference call. We're quite pleased with our second quarter results. As reported in yesterday's press release, our revenues for the second quarter were $144.7 million, up 0.7% from last year. Adjusted EBITDA was $34.8 million, up 13.3% from last year. Adjusted EBITDA margins were 24%, up 270 basis points from last year, our highest margin in five years. Year to date, we are ahead of our adjusted EBITDA plan through our strong pricing and operating efficiency programs. As such, we have increased our adjusted EBITDA guidance range for the year. While operating results are outpacing our plan, we have maintained our free cash flow guidance range for the year, as capital expenditures are higher than planned due to time-sensitive construction schedule at Ontario County Landfill that faced significant permitting delays in 2015.
Ned will go deeper into the numbers in a minute. First, I would like to recognize that these strong results are tangible evidence to our commitment and continued execution against our key strategies. Our continuing success and consistently improving results are a testament to our dedicated team and the process and discipline that we have established throughout the organization to focus time and capital resources on the key drivers of our business. Just over three years ago, we laid out a comprehensive strategy to improve our financial and operating performance. Pursuant to that plan, we have refocused the company while simplifying our business structure. We have reduced risk exposure by either divesting or closing operations that did not fit within this strategy and have refocused management attention and capital resources on our core operations and strategic business initiatives.
Going forward, we will continue to focus on increasing landfill returns, driving additional profitability at our collection operations, creating incremental value through resource solutions, and reducing financial and operational risk while improving our balance sheet. We're confident that our enhanced process discipline and continuing focus on key operating strategies will further drive improved performance and increased free cash flow, enabling us to continue to delever our balance sheet. As expected, we did experience volume headwinds at the landfills during the second quarter, with tons down 8.4% year-over-year, as unseasonably warm weather in the Northeast winter resulted in a pull forward of volumes from the second quarter to the first quarter. Our efforts to improve price at selected sites has dampened volume growth, and planned diversion at Southbridge reduced volumes into the site. Energy-related waste streams were down in the Marcellus Shale region as well.
With that said, landfill volumes were still up year-over-year, 2.6%, or 51,000 tons year-over-year. This improvement was predominantly driven by higher construction and demolition volumes in select markets. We increased our disposal pricing by 1.9%, with particular strength in the eastern region, where we increased price by 3.1% as we further capitalize on tightening disposal markets across the region. We expect these positive pricing trends to continue into the future as the disposal capacity constraints become more acute across our footprint. We remain focused on executing against our disposal strategy.
During the remainder of the year, we have forecasted landfill volumes to be down due to our continued volume reduction at the Southbridge Landfill as we push out low-priced soils and lower-priced volumes to give us more time to complete the permitting process for the next cells to be developed at the site, and continued weakness in energy volumes in the Marcellus Shale. We made excellent progress on landfill permitting over the last several months. As we discussed last quarter, we received a minor modification at our Highland Landfill to expand the annual permit from 312,000 tons per year to 465,000 tons per year in January. Running at current levels, this gets us close to 45 years of capacity, or if we were able to increase annual volumes up to the new permit level, we would have over 30 years of capacity.
In late January, the Ontario Landfill received its final permit for a 15.7 million cubic yard expansion, which creates additional 13 years of airspace at that site. In June, the Chemung Landfill received its permit for an 8.2 million cubic yard expansion, which creates additional 14 years of airspace at that site. The permit also included an increase in annual tonnage from 180,000 tons per year to 417,000 tons per year of MSW. Including construction and demolition waste, the total annual permit limit is 437,500 tons per year. We continue to make great progress with our second major strategy, improving the 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.
The disposal capacity constraints in the Northeast markets are also providing a positive backdrop for us to advance pricing increases in the collection line of business. With 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 the second quarter, combined residential and commercial collection pricing growth was 5.3%. Roll-off price moderated slightly from the first quarter to the second quarter, with roll-off pricing at 3.7% in the second quarter. This moderation was due more to the mix between permanent and temporary roll-off pulls versus any significant changes in the marketplace or a change to our pricing strategy. On the operating side, we continue to advance a number of key initiatives to further improve our operating costs in the collection line of business.
In the second quarter, we improved our collection cost of operations by 360 basis points year-over-year. This improvement is being driven by our strong pricing programs, coupled with the positive impacts from our five-year fleet plan maintenance initiatives, improved fleet 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. Customer Solutions Group continued to improve margins and returns through the second quarter.
Adjusted EBITDA margins improved by 215 basis points and on continued operating and G&A leverage, despite commodity pricing headwinds in much of the industrial services group. Our organics group had a very good quarter, improving adjusted EBITDA margins by 450 basis points as we effectively capitalize on the rapidly changing disposal and regulatory environment for biosolids across the Northeast. While the recycling commodity prices have trended up over the last several months, prices are still well below 10-year averages, creating one of the largest challenges and opportunities facing the solid waste industry. Even with this backdrop, we have continued to improve results in the recycling line of business, with adjusted EBITDA margins up 510 basis points year-over-year on higher processing fees and higher commodity pricing.
The margins in the recycling line of business were roughly at the same levels as 2012, when commodity prices were roughly 40% higher than they are today. These results are a clear indication of how we have effectively reshaped the recycling business model to generate an appropriate return on our infrastructure investments through all market cycles. This effort has included the implementation of our higher tipping fees at our recycling facilities and the introduction of our Sustainability Recycling fee, or SRA fees. We continue to make progress improving our balance sheet and reducing operational and financial risk. Over the last two months, we repurchased and permanently retired another $20.5 million of our senior subordinated notes, demonstrating our continued commitment to reduce leverage, accelerate free cash flow generation by retiring our highest cost debt.
We are well positioned for the future and committed to a disciplined capital investment strategy with free cash flow primarily used to repay debt, or in select instances, we may consider small tuck-ins and growth investments in our core operations. We continue to execute extremely well against the strategic plan that we laid out in August 2015 to improve our financial and operating performance. At all levels of the organization, we are devoted to operational blocking and tackling, with a focus on pricing strategies at the local level, improve our operational efficiencies, and discipline 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. With that, I'll turn it over to Ned to walk us through the financials.
Thanks, John. Revenues in the second quarter of 2016 were $144.7 million, up a million dollars, or 0.7% year-over-year. Solid waste revenues were actually down $1.7 million, or down 1.5% year-over-year in the second quarter, with higher collection and disposal pricing, higher collection volumes, and the acquisition of three transfer stations offset by lower disposal volumes and lower energy pricing in the landfill gas to energy business. Revenues in the collection line of business were up $3 million year-over-year in the second quarter, with prices up 4.8% and volumes up 0.5%. Our pricing programs in the second quarter in the residential and commercial lines of business continued to be robust, with pricing up 5.3% year-over-year. The roll-off line of business had a tough year-over-year comp as we experienced pull forward from the second quarter to the first quarter in 2016 due to the unseasonably warm winter in the Northeast.
In 2015, we experienced the exact opposite pattern, with a harsh winter driving less activity in the first quarter and then more activity in the second quarter as spring arrived. Even with this shift in seasonality year-over-year, we still advanced roll-off pricing by 3.7% year-over-year, and our volumes were slightly up. Revenues in the solid waste disposal line of business were down $4.7 million year-over-year in the second quarter, with over 50% of this decline driven by lower landfill volumes and the remainder driven by lower pass-through transportation costs on T and D contracts or transportation and disposal contracts. We increased third-party reported solid waste disposal pricing by 1.9% year-over-year in the second quarter, with solid waste disposal prices up 3.1% in the eastern region as we continue to capitalize on a tightening solid waste disposal market. We expect these same positive pricing trends to continue through 2016 as we plan further price increases in key markets.
Our total landfill volumes were 1.1 million tons in the second quarter, down 100,000 tons year-over-year. Year-to-date, landfill volumes were up 51,000 tons on particular strength in construction and demo volumes, which were up 124,000 tons year-to-date, year-over-year. Recycling revenues were up $1.4 million year-over-year in the second quarter, with the improvement driven by both higher processing fees and higher average commodity revenue per ton. With average commodity revenue per ton up 7.9% year-over-year on higher fiber pricing, partially offset by lower plastics and lower metals pricing. Organics services revenues were up $1.3 million year-over-year in the second quarter on higher volumes as our team continued to source new streams of biosolids in the ever-tightening northeast solid waste disposal markets. Customer Solutions Group revenues were flat year-over-year in the second quarter, with continued growth in industrial services revenues partially offset by lower recycling revenues.
During the second quarter, acquisitions net of divestitures added $600,000 of revenues. Adjusted EBITDA was $34.8 million in the quarter, up $4.1 million year-over-year, with margins improving 270 basis points to 24%. With revenues up $1 million and adjusted EBITDA up $4.1 million, that gave us a flow-through impact of over 400%. What's happening here is we're shedding less profitable volumes or low margin volumes, while at the same time, we're securing pricing increases and cutting operating costs. Solid waste adjusted EBITDA was $30.8 million in the quarter, up $2.6 million year-over-year. We achieved this strong adjusted EBITDA growth on lower revenues. Solid waste adjusted EBITDA margins were 29%, up 280 basis points year-over-year in the second quarter, reflecting strong pricing coupled with cost efficiencies.
Lower fuel costs benefited margins by roughly 70 basis points, while this was partially offset by lower energy prices in the landfill gas energy business of negative 35 basis points and increased intercompany tipping fees. When you net these three factors together, we had about a 25 basis point tailwind, a small piece of the 280 basis point improvement in the quarter. Hauling adjusted EBITDA was up $3.2 million year-over-year, with margins expanding 360 basis points. This was partially offset by slightly lower solid waste disposal adjusted EBITDA and lower performance in the landfill gas energy business. Recycling services adjusted EBITDA was $1.5 million in the quarter, up $800,000 year-over-year. Adjusted EBITDA was $2.5 million in the other segment, up $700,000 year-over-year. The increase was driven by higher performance in both the organics services and the Customer Solutions Group lines of business.
Cost of operations in the quarter was down $3.5 million or 290 basis points year-over-year as a percentage of revenues. G&A costs in the quarter were flat year-over-year, while D&A costs in the quarter were down $400,000 year-over-year, largely due to lower landfill volumes in the period. As John mentioned, we continue to opportunistically repurchase and permanently retire our high-cost 7.75% senior subordinated notes during the quarter. During the second quarter, we retired an additional $15.5 million of the bonds, and on July 1st, we retired another $5 million of the bonds. Including the bonds retired on July 1st, this brings the total repurchased bonds to $39.4 million in the last four quarters. As we have previously described, our ABL revolver allows us to pay down junior debt as long as we maintain a minimum threshold availability on the revolver.
Paying down the 7.75% debt is a great capital allocation decision because the interest cost on the senior sub-notes is roughly 5% higher than the interest cost of the revolver. This enables us to accelerate free cash flow generation and debt repayment. On June 2nd, we completed an offering of $15 million in New York State EFC solid waste tax-exempt bonds due in 2044. The bonds were initially sold in a term rate mode with a fixed interest rate of 3.125% fixed for 10 years. A great offering for us. On June 30th, 2016, our total debt to EBITDA was 4.43 times. This is down from 5.42 times on December 31st, 2014, or down almost exactly one turn in 18 months.
We remain focused on further reducing leverage. As laid out in our multi-year plan we announced last August, we are targeting a leverage level of 3.25-3.75 times by the end of 2018. On June 30th, we actually crossed through a really important leverage level as our total debt to EBITDA dropped below 4.5 times. This allowed us to step down a notch in the pricing grid on our ABL revolver facility. With this step down in the grid, our interest rate has dropped from LIBOR plus 225 to LIBOR plus 200 basis points. As expected in the quarter, given the operational and working capital seasonality of our business, free cash flow was positive $18 million in the quarter or a positive $9.8 million year to date.
Free cash flow is projected to be positive in both the third and fourth quarters and will generally follow the same pattern as 2015, with free cash flow lower in the third quarter as we pay the semiannual interest payment on our senior sub-notes and landfill capital expenditures are up sequentially. As stated in our press release yesterday afternoon, given our strong pricing and cost efficiency execution year to date, we have increased our adjusted EBITDA guidance range from the previously announced range to an updated range of $113 million-$116 million for the year. We reaffirmed our revenue and free cash flow guidance ranges for 2016. We do, however, expect capital expenditures to be up for the year between $50 million-$54 million in total for 2016.
This is up from the previously announced range, with the increase primarily driven by higher than anticipated construction costs at the Ontario County Landfill, as delays in our permit issuance caused us to expedite construction and incur heightened costs this summer. In closing, we remain on track with our multi-year strategic and financial plan that we laid out for shareholders in August 2015. With that, I'll turn it over to Ed.
Thanks, Ned. Good morning, everyone. Things continue to go well. At the risk of sounding like I'm repeating my comments from last quarter, cost of ops as a percentage of revenue improved 290 basis points year-over-year, we continue to improve pricing, with 4.8% of price increase in collection services, led by a 5.3% in the core residential and commercial lines of business. As you can imagine from the financial results, all of the key operating metrics that I follow continue to reflect positive trends. We're happy with where we are at the halfway point of the year. We have good momentum operationally, our focus is on the continuous improvement of processes and systems to allow that momentum to continue.
Well, it takes a lot of ingredients to bake a cake, I cannot overemphasize the importance of the fleet plan that we adopted in August of 2014 as an underlying basis of our success today. In just two years' time, we have made great strides towards standardizing our fleet around a few quality manufacturers, resulting in less complex maintenance shop requirements, increased automation, more dependable service and higher customer satisfaction, leading to a better ability to get price. With less operational fires to fight, we are now able to focus on incremental improvements, systems and process improvements intended to make us more efficient and effective in meeting our financial goals. I thought you might be interested in some examples. To protect our fleet investment and support operations, we've established a simple internal reporting platform that tracks preventive maintenance practices and efficiency and effectiveness of each maintenance shop.
I call this my early warning system, as it tells us when there is an issue brewing at a division. We're rolling this out to all the collection operations and hope to have this implemented in the landfill shops in the near future to cover heavy equipment. The P.I. processes continue to improve as we find new ways to raise the market and tighten up our estimates of profitability at the customer level. This is all about having a disciplined process and making smart decisions on who and how we raise price. We've implemented a new CRM or customer relationship management tool this year. CRMs are all about increasing the efficiency and effectiveness of your sales force by capturing and retaining more data on customers and prospects, feeding prioritized leads to our sales personnel, preventing what I'll call attention gaps when a salesperson leaves the company.
It's just easier to plug someone new into a system with all of the pertinent prospects and customer information, as opposed to starting from scratch, trying to figure out what the person that left was working on. One of the keys to operational efficiency on the collection side of the business is routing, and we've certainly been able to make a lot of progress in this area over the past few years, and the progress continues. Routing opportunities come about from improved automation, densification, sales efforts, driver experience level improvements, and individual customer service changes over time. This is pretty much a constant process at each division.
Routing is dependent not only on the best sequence to service customers, but on type of service, type of equipment used, days of service, quantities of waste or recycling material picked up at each stop, distance from disposal outlets, distance and traffic obstacles between stops, et cetera. In other words, there's a lot of variables, many of which are estimates or averages. We do a pretty good job with routing, we're primarily focused now on improving the accuracy of the assumptions that the ops teams use for routing. Some of this through automating data collection, performing ride along route audits, and continual driver trainings as to what opportunities to spot on a route. Those are just a few examples of what we're focusing on, and I can tell you, it sure is a pleasure to be doing a lot less firefighting and a lot more process improvement.
Keeping my comments short, we're happy with the quarter. We continue to improve. The third quarter is off to a good start, and we look forward to finishing the year off as well as it has started. I'd like now to turn it back to the operator to facilitate the question and answer session.
Thank you. Ladies and gentlemen, at this time, if you have a question, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Corey Greendale from First Analysis. Your line is open.
Thank you. This is Ken Wang on for Corey.
Hey, Ken.
Hi, how are you guys?
Good, Ken. How you doing?
Can you elaborate a bit more on the volume headwinds you saw at some of your landfills during the quarter? I think we know that some of this can be explained by the mild winter and the pull forward into Q1. Given that pricing gains are a key component of your strategic plan, it would be really helpful to hear your thoughts on the pricing opportunity at those landfills, where volume's lost, maybe specifically relating to the pricing elasticity and the demand environment.
Well, I think that clearly it's our view that we had fairly significant pull forward from the second quarter to the first quarter. Across the footprint, we have different, obviously much stronger pricing in the eastern region than we had in the western region, but we were able to get some price in the western region as well. I think that our view, Ken Wang, is that we're really I think the majority of that pull forward is really the impact from a volume standpoint. We are pushing out some of the lower priced material in the east region, as we indicated at Southbridge, to just give us more time from a permitting standpoint. We're pushing out lower priced soils, lower quartile pricing customers, at those facilities. That's really where we're actually being a bit aggressive in terms of pushing out the lower priced material.
Is there any capacity coming out of the market that would lead you to be more confident, or maybe bolster your confidence?
Well, yeah. That's a great question. We continue to see capacity coming out of the market. There was just an announcement that Covanta is going to shut down the Pittsfield, MA incinerator. There's a number of facilities that are coming out in the next few years. We've got several hundred, I think it's about 400,000 tons coming out of the Massachusetts market in the next year. There's a number of facilities that are closing. The Chicopee facility in 2017 or 2018. As I said, the Pittsfield facility, waste-to-energy facility is closing. Then there's several other facilities that are closing as well. We're going to continue to see the same dynamics that we've seen through the last year, we think, out for the next few years.
Okay, thanks. That's very helpful. Just switching gears a bit, what assumptions are you making around commodity pricing, and have the recent improvements on that front been factored into your estimates?
Actually, our commodity pricing assumptions for the rest of the year are probably a little bit lower than we saw in late June. We typically refresh our forecast leading up to earnings. We did that in mid to late June, some of the strength we've seen in fibers over the last four weeks are not fully included in that forecast. We learned a long time ago to not expect commodity prices that go up to make your numbers for the year. We typically forecast a declining pattern through the remainder of the year. As we discussed earlier, in these lower markets, we're actually doing quite well. We only have one contract, if you can believe it, out of our network of contracts that doesn't have the ideal revenue share formula.
As commodity prices decline, if they do, we recover now dollar for dollar through processing fees on all of our customers but one. We've done a great job rolling over that portfolio. The SRA fee applied to our collection customers offsets any sort of declines in commodity markets. We feel very good from a downside protection through the remainder of the year. If we do see commodity prices increase or even stay at current levels, it could give us a slight boost for the rest of the year.
Excellent. Thanks. Very helpful. That's all I had.
Thank you.
Thanks.
Thank you. Our next question comes from the line of Al Kaschalk from Wedbush Securities. Your line is open.
Good morning, guys. Congrats on the progress and execution.
Thanks, Al.
Thanks, Al. Good morning, Al.
Morning.
Thank you.
I have a relatively simple question, I guess, from the standpoint, I want to just dig a little deeper on the volume headwinds and the market dynamics in terms of the capacity. Specifically, can you maybe talk about the organic growth or the moderation in organic growth on volumes and then, or if there's more of the acceleration on specifically there, I'm talking about the energy side. Secondly, in conjunction with that, I guess your strategic moves that you're doing because of the profitability or the return metrics that maybe some of the prior waste streams you're not capturing because whether it's pricing or you want to fire a particular customer. In light of that, I ask that because of what's going on with some of the capacity reduction that you've said, the accelerated CapEx that you're doing because of the timing at Ontario.
Could you maybe just add a little color around that in terms of how much.
Yeah
I guess you are walking away from?
Al Kaschalk, good question. Just starting with disposal revenues in general, about half of the volume decrease in disposal revenues was through our transportation group. We talked about this a lot last year, where we had onboarded several new customers, especially in the Marcellus Shale, who required us to transport their waste streams and dispose of them. Great volumes coming into the landfills, we had pass-through revenues where we were getting paid to transport those materials, hiring third-party providers to transport those materials, but not making any margin. Part of what we've seen this period is we've lost some of those shale-related volumes coming into the landfills, which is a negative. On the flip side, it's a little bit margin accretive because we've shed those no-margin pass-through transportation volumes.
As John Casella was describing a minute ago, it's kind of two different things going on with landfill volumes. If you X out three different things, generally our volumes are up across the board. If you take out the lost volumes in the Marcellus Shale, that's one negative on the business. If you take out the Southbridge planned diversion as John Casella described, where we've pushed out all of the low-price soils and the lowest quartile customers. From a special waste standpoint, we saw some seasonality there and we've also just had a little bit of trouble in one market getting some approvals, which is resolved now, and that was giving us a bit of a headwind. If you look across the rest of the business, construction and demo tons are very robust. MSW tons are up across the business.
It's really just a couple factors, and one of them is something we're doing on purpose, diverting tons at Southbridge over the next two years.
Okay. That's all I have. Appreciate it. Good luck, guys.
Thanks, Al.
Thanks. Thanks, Al.
Thank you. Our next question comes from the line of Michael Hoffman from Stifel. Your line is open.
Good morning. This is Brian in for Michael today.
Hey, Brian.
Good morning, Brian. How are you?
I'm good, thanks. First one, just on the margins, you guys made tremendous progress in the second quarter with your adjusted EBITDA margins getting to that 24% range. When you think about this and the guidance that you gave kind of going in the second half, are there some headwinds there that are going to be pulling you back from that 24% range?
Well, I think that when you look at last year, we're going to have a tough comp in the fourth quarter because of the warm weather that we had last year. We had a very mild end of the year last year, and we're not anticipating that we're going to see that. We really believe we're going to go back to a normalized winter. We're going to have a tough comp in the fourth quarter.
We're not seeing anything remarkably change either with our business environment or with our strategy today. I think it's just more of the same from us where we've had a great first half of the year. We're performing above our budget, and we're trying to be conservative halfway through the year. We're still firing on all cylinders, and there might be a little bit of opportunity there, I think, in our view. As John said, it's hard to see the fourth quarter today and understand the tough comps from a roll-off standpoint and landfill volumes and get too far ahead of yourself.
Okay. Well, maybe just stepping back and just kind of looking at it on a little bit longer scale. Getting to a 24% margin in the second quarter here. You think about what you have left and some of your best practices and as you kind of continue to move forward on those, what's the timeline of getting? Can you get to 24% margins? Is that a 2017 where you get that for the full year, or is there really some additional steps that have to happen here, getting to those kind of numbers?
I don't think in our plan we quite get there in 2017. Hold on one second. We don't quite get there in 2017, but the building blocks are definitely coming in place. As you know, we do have some aspects of our business that cause us to blend down a bit from our peer group, such as our organics group and our resource solutions, Customer Solutions Group. They're slightly lower margin businesses. The organics group, for instance, is about 10% of our revenues. It has 13% EBITDA margins, but only requires about 2%-3% of revenues in CapEx. A very nice cash flow producing group, but it blends us down a little bit. The solid waste group this quarter had margins of roughly 29%, our integrated solid waste group. We're tracking in that group to be north of 26% next year, 27%. Doing very well there.
As a full business, we're not tracking to get to 24% next year, but it's definitely a goal for us over time.
Okay. let's see then, just looking at the service upgrade cycles that you guys have been seeing on the commercial side of the business, can you just give some more color on how that's progressing and if you're seeing any kind of regional weakness from any customers on service upgrades?
No, I think that it's steady as you go. I think we've seen rollout pulls continue to be up, business from a commercial standpoint continues positively. We're not seeing any change in trend at this point in time at all.
Okay. Good to hear.
Yeah.
On Southbridge, when you look at the permitting process, you talked about 2 years of delays or diverting volumes. Is that the timeline for a new permit? What is the alternative if the permit does not occur? Is that something that
There's several alternatives. We could move waste to, as we are, to other of our facilities, partially. We move to other facilities in the area as well. There's also the potential, long-term, from a rail standpoint, in addition. Our sense at this point is it is probably a 2-year process, in terms of pushing down the total tons going into the facility from a permitting standpoint. We expect to do that next year as well, just to make sure that we've got enough capacity to get through the permitting process. Permitting process is very difficult, unpredictable, and very difficult to get through. However, we've had tremendous success in the last year with what I talked about earlier in terms of Ontario, Highland, and Chemung, very major permitting efforts that we got through.
I think we're confident, but we also want to put ourselves in a position where we give ourselves as much time as we can.
John, something to point out is, many years ago, you pioneered a model in the Northeast of partnering with communities, and this has been a model that's been really a big winner for us, where Ontario and Chemung, the communities own those landfills, and we have long-term operating lease agreements with them. It really helps from a public-private partnership standpoint to help develop airspace that's both beneficial for our municipal partners and us. In Southbridge, we have the same business model there, where we have a strong partner in the community. They actually own the landfill, own the permit, and it really helps to differentiate the facility and work through permitting challenges.
Okay. On Southbridge, when you think about those volumes that you're diverting, when the permit comes through, what's the timeline for recovering those? Is that very quick, or is that going to be another two years of trying to re-ramp and those volumes?
It's our view it's going to be very quick. The disposal capacity in that area is really Some of it is being transferred to other facilities that we have. I think that we also have supply and demand What's that, Ned?
The waste is coming through our transfer stations, a lot of it, right?
Yeah, right. That's the other Good point. Also, Ned pointed out that the waste is going through our transfer stations as well, we have control of the majority of that waste that we're diverting to other facilities. Once we get the permit, we think we'll ramp up. The other thing that sits over the top of it, Brian, is that we have this supply and demand constraint in that market, and it's not going away anytime soon. I think that once the capacity comes on, we're not anticipating difficulty getting the tons back into the facility.
Okay, one last one, just on the balance sheet. When you talk about, obviously, the de-leveraging process that you're going through, what's the level, I guess, of ability or appetite to accelerate that beyond the pace you're at right now?
I think that if there were an opportunity for us to do that, we'd certainly look at any opportunity that made sense. As you know, we've looked at other opportunities in terms of ways that we can de-lever the balance sheet, I think certainly we'll keep an open mind in that regard.
Okay, great. Thank you very much.
Thanks, Brian.
Thank you. Our next question comes from the line of Charlie Wohlhuter from Raymond James. Your line is open.
Hey, good morning, guys.
Hey, good morning, Charlie.
Just kind of staying on that balance sheet topic here for a second or so. Ned, you mentioned the crossing over that four and a half leverage threshold with your ABL pricing being reduced a bit. Aside from maybe not call it paying down or aggressively paying down those senior sub-notes, could there be some sort of opportunity to refi debt as opposed to maybe kind of slowing down on the pace of retirements?
Yeah. Great question. We continue to talk to our bankers and monitor the markets very closely because there is an opportunity today to go to the markets. Our performance has been strong. Our cash flows are improving, leverage is coming down, and there have been several open market windows to redo the senior subordinated notes due 2019. However, when you look at capital strategy more broadly for us, it's very tough to take our highest cost debt and put a new debt instrument in today that would be a non-call instrument. If we replace the senior sub debt with another senior subordinated note or a senior unsecured note, it would be non-call for 3-plus years.
We would be left with a balance sheet that's still a little bit more leverage than we would like it to be, and our only debt we could really be paying down, the only pre-payable debt left in our capital structure would be the ABL revolver, which is LIBOR plus 200. When we look at strategy over the next several years and the last factor there is our debt's callable today, but it's callable at 101.9. We still feel like our best use of cash is just actively using excess cash to go into the open market or to call our senior sub debt and just do it piece by piece. When we reach the par call date in February of 2017, things start to change.
I really don't want to put a huge piece of non-callable debt in place when we're not to our ideal capital structure. We don't feel like we're in a huge rush. Market windows open and close, I realize that, we're sticking to our strategy. We're producing cash. As each quarter goes by, our credit ratings are improving. We've had three upgrades from S&P in the last two years, so the agencies are really paying attention to what we're doing as well and debt holders. We're staying the course for the time being.
Okay. All right. That's great color. Thank you. My last question is, can you kind of talk about the big puts and takes when bridging EBITDA into 2017? I know it's still early, I'm not really asking for any specific guidance. With the SRA benefit lapping, I would expect to see some collection pricing possibly slowing, the benefits from a presumably tighter Northeastern disposal market beginning to materialize. Just kind of any sort of big picture items we could think about next year?
This is Ed. A couple of things come to mind, right? The SRA is kind of lapping now. It's starting to lap. We're still going to continue to be fairly aggressive on price, and we're trying to get smarter and smarter by improving the data that we have on customer profitability as to how we get price. Although I don't think we'll get price like you saw last quarter that was over 6%, we're going to have continuing strong price going into 2017. Also the efficiency programs we have on the operating side are continuing. As we improve our data that we use to do our routing activities, as we incorporate additional fleet additions, we expect to take additional cost, maybe from 80 to 120 basis points in margin out of the cost of the collection operations.
I think that we're pretty confident that we're going to meet the plan that we laid out, our 2018 plan in terms of price. Obviously, so far we're a bit above the plan or where we thought we would be from a price standpoint in the plan. We're pretty confident we're going to meet or exceed the guidance that we have in the 2018 plan from a price standpoint.
If you look at the 2018 plan, there were 3 major buckets, one on the landfill side, one on the collection hauling side, and one on the resource side. Where we sit today, we're ahead on the collection side, and we're performing very well. We're right on target or slightly slower on the landfill side and above target on the Resource Solutions side. We always said this isn't a hockey stick plan. You don't have to wait 3 years as a shareholder for this to come. It's coming ratably. We're tracking very well this year, and there's nothing that we expect, given where we are today, that disrupts that linear pattern into 2017.
Okay. All right. Thank you.
Okay. Thank you.
Thank you. Again, if you would like to ask a question, please press star then one on your touch-tone telephone. At this time, I'm showing no further questions. I would like to turn the call back over to John Casella for closing remarks.
Thank you. Thanks, everyone, for your attention this morning. We look forward to discussing our third quarter earnings with you in early November. Have a great day, everyone. Thanks.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the programming. You may now disconnect. Everyone, have a great day.