Good day, ladies and gentlemen, welcome to the Casella Waste Systems, Inc. first quarter 2016 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to turn the conference over to 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 first 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'll 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 SEC's Safe Harbor provisions. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our prospectus and other SEC filings.
In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change, and therefore, you should not rely on those forward-looking statements as representing our views as of any date subsequent to today. During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial table section of our earnings release, which was distributed yesterday afternoon and 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 first quarter 2016 conference call. We are very pleased, obviously, with our first quarter results. As you saw in yesterday's press release, our revenues for the quarter were $125.4 million, up 7.6% from last year. Adjusted EBITDA was $19.3 million, up 33.1% from last year. Normalized free cash flow was up $2 million from last year. We also reaffirmed our 2016 guidance ranges. Ned will go deeper into the numbers in a moment. First, I would like to recognize that these strong results are tangible evidence of our commitment and continued execution against our key strategies. We have established the process and discipline throughout the organization to focus time and capital resources on the key drivers of our business.
The winter in the Northeast was quite mild this year, in contrast to the historically cold and snowy winter that we experienced in 2015. As you can imagine, with a milder winter, our operational costs were lower year-over-year. More importantly, we saw economic and construction activity remain more consistent throughout the winter. While 2016 is off to a very strong start, we believe that it's too early in the year to estimate how much of the typical spring ramp-up was pulled forward into the winter months versus the benefits of tightening disposal markets, economic growth in the Northeast, and our strategic execution. In fact, these strong growth trends began to moderate slightly in April. 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 with this strategy. We have refocused management attention and capital resources on our core operations and strategic business initiatives. Going forward, we plan to continue to focus on increasing landfill returns, driving additional profitability at our collection operations, creating incremental value through resource solutions, and reducing financial and operational risks while improving our balance sheet. We are confident that our enhanced 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. As the Northeast disposal markets continue to tighten due to the permanent closure of various competitors' sites, we further advanced our landfill strategy during the first quarter with higher pricing and increased volumes.
In the first quarter, we increased total landfill volumes by 152,000 tons year-over-year through our focused landfill strategy, as well as our landfill asset positioning in the marketplace that allowed us to attract new customers and volumes. In addition, we increased our disposal pricing by 1.3%, with particular strength in the eastern region, where we increased price by 2.8% as we further capitalized on the tightening disposal markets across this market area. We expect these positive trends to continue for the next several years as the disposal capacity constraints become more acute across our footprint. We remain focused on executing against our disposal strategy.
We have forecasted landfill volumes to be down slightly for the remainder of the year due to our planned volume reduction at the Southbridge Landfill as we push out low-priced soils and other lower-priced volumes to give us more time to complete the permitting process for the next cells at the site. We've also seen natural gas drilling activity come almost to a halt in the Marcellus Shale region, as such, we have reduced our volume forecast for this material through the remainder of the year. We continue to make excellent progress on our landfill permitting over the last several months. As we discussed in early March, we received our minor modification at our Highland Landfill to expand the annual permit from 312,000 tons per year to 465,000 tons per year.
In late January, the Ontario landfill received the final permit for a 15.7 million cubic yard expansion, which creates an additional 13 years of space at this site. We are currently building out a new cell at this important site, we believe that we will be able to ramp special waste volumes and operations back to historic levels in 2017. We continue to make great progress on 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, which Ed will discuss in greater detail. The disposal capacity constraints in the Northeast markets are also proving a positive backdrop for us to advance pricing increases in the collection line of business.
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 the first quarter, combined residential and commercial collection pricing was up 6.7%, the strongest pricing execution we've experienced in the last 10 years. We have forecasted positive pricing trends to continue through the remainder of 2016. We do expect pricing to slightly moderate from the levels we achieved in the first quarter. We advanced roll-off pricing 7.3% in the quarter, with our roll-off pulls up 8.3% year-over-year, with over half of the increased pulls coming from industrial customers and the remainder from temporary construction customers. This increased industrial activity is the result of both new industrial customers and services and higher industrial activity across the Northeast.
As part of our comprehensive hauling strategy, we instituted a five-year plan in mid-2014 that we believe will reduce our operating costs through lower maintenance costs, improve our capital efficiency, improve our service levels through decreased downtime. Obviously, you can begin to see that this quarter. Ed will comment in more detail. 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 a leader in organics processing and disposal in the Northeast, to our market-leading recycling business. Our Customer Solutions Group continued to improve margins and returns through the first quarter.
Adjusted EBITDA margins improved by 90 basis points on continued operating and G&A leverage, despite commodity pricing headwinds in much of the Industrial Services Group. Lower recycling commodity prices remain to be one of the largest challenges and opportunities facing the solid waste industry today. The stagnant global economy, lower oil prices, the strong U.S. dollar weighted heavily on paper, OCC, plastics, and metal pricing throughout the first quarter, with our average commodity revenue down about 20%, price per ton down about 20% year-over-year. Despite the significant decline in commodity prices, we actually improved our operating income in the recycling business by $1.1 million year-over-year. This improvement was driven by the steps that we have taken to reshape our recycling business model to earn an appropriate return on our infrastructure investments through all market cycles and our continued efforts to reduce our variable processing costs.
This effort has included the implementation of higher tipping fees at our recycling facilities and the introduction of our Sustainability Recycling Adjustment fee or our SRA fee. The SRA fee is similar to a fuel surcharge, where it floats inversely to changes in recycling commodity prices. The implementation of the SRA fee has gone very well, with the fee now rolled out to all target collection markets with minimal rollbacks. We continue to make progress improving our balance sheet and reducing operational and financial risk. During the first quarter, we repurchased and permanently retired $4.2 million of our senior subordinated notes, demonstrating our continued commitment to reduce leverage and accelerate free cash flow generation by retiring our highest cost debt. In early April, we completed the acquisition of 3 transfer stations in Vermont from Advanced Disposal Services to further solidify our leading transfer station network in the Northeast.
We are well-positioned for the future, we are committed to a disciplined capital investment strategy with free cash flow primarily used to repay debt or in selected instances, we would consider small tuck-in acquisitions and growth investments within our core operations. With that, I'll turn it over to Ned to take us through the numbers.
Thanks, John. Revenues in the first quarter of 2016 were $125.4 million, up $8.9 million year-over-year. Solid waste revenues were up $8.5 million or up 10.1% year-over-year in the first quarter, with the increase mainly driven by higher disposal and collection volumes, higher collection and disposal pricing, partially offset by lower processing volumes, lower fuel surcharges on lower diesel prices, and lower energy pricing and volumes in the landfill gas to energy business. Revenues in the collection line of business were up $4.5 million year-over-year, with prices up 6.7% and volumes up 2.3%. Our pricing programs in the commercial and residential lines of business continued to strengthen through the first quarter, with pricing up 6.7% year-over-year in these lines of business. As John mentioned, we also advanced stronger pricing in the roll-off line of business, with pricing up 7.3% in the first quarter.
Revenues in the disposal line of business were up $4.5 million year-over-year, with roughly 55% of this increase driven by strong volume growth at our landfills. We increased third-party reported disposal pricing by 1.3% year-over-year in the quarter, with disposal prices up 2.8% in the eastern region as we continue to capitalize on the tightening disposal markets. As John mentioned, we expect these same positive pricing trends to continue through 2016 as we plan further pricing increases in key markets. Our total landfill volumes were 925,000 tons in the quarter, up 152,000 tons year-over-year, or up 19.7%. A good bit of this increase was driven by strengthening C&D volumes, which were up 85,000 tons year-over-year, with the unseasonably warm winter weather driving strong construction activity in the Northeast.
It's not yet clear how much of the strength is due to continued improvement in building trends versus the pull forward from the normal spring construction ramp-up. We continue to drive incremental value by maximizing landfill capacity utilization. Over the last 12 months, landfill volumes were up roughly 940,000 tons per year as compared to our fiscal year 2013, when we first launched this strategy. Recycling revenues were up $300,000 year-over-year in the first quarter, with our average commodity revenue per ton down 20.4% year-over-year on lower fiber, plastics, and metals pricing. The decrease in commodity prices was more than offset by higher tipping fees at our facilities and higher volumes. Recycling volumes were up 8.2% on new contracts and continued organic growth.
Organics and Customer Solutions revenues were flat year-over-year in the quarter with higher multi-location brokerage revenues and higher Industrial Services revenues in the Customer Solutions business offsetting lower organics revenues. During the quarter, our revenues were roughly $300,000 lower from the divestiture of low-margin hauling routes. Adjusted EBITDA was $19.3 million in the quarter, up $4.8 million year-over-year, with margins improving nearly 300 basis points to 15.4%. With revenues up $8.9 million and adjusted EBITDA up $4.8 million, that gave us a flow-through impact of 54%. Solid Waste adjusted EBITDA was $19.1 million in the quarter, up $5.2 million year-over-year after neutralizing for changes in allocation of management fees. This correlates to a flow-through benefit of over 60%. Hauling adjusted EBITDA was up $2.3 million year-over-year, with margins expanding 200 basis points. Disposal adjusted EBITDA was up $3.9 million year-over-year.
Solid Waste adjusted EBITDA margins were 20.6%, up 410 basis points year-over-year, reflecting strong pricing coupled with cost efficiencies. Lower fuel costs benefited margins by roughly 90 basis points, while lower energy prices were a 60-basis-point headwind, and increased intercompany recycling tipping fees were a 75-basis-point headwind. Increasing the intercompany recycling tipping fees is important to ensure that the full cost of recycling services are passed through to our collection and transfer customers. Recycling adjusted EBITDA was $200,000 in the quarter, up $1.1 million year-over-year. This was driven on 3.5% lower variable operating costs per ton and higher tipping fees to both third party and intercompany customers. Cost of operations in the quarter was down 320 basis points year-over-year as a percentage of revenues. Ed will run through this in much more detail.
General and administrative costs in the quarter were up $1.8 million year-over-year, with incentive compensation accruals up a million dollars on better performance and professional services fees up a half a million dollars, mainly due to timing differences. Depreciation and amortization costs were up roughly $700,000 year-over-year, largely due to higher landfill amortization on higher volumes. During the quarter, we continued to opportunistically repurchase on the open markets and permanently retire our high-cost seven and three-quarters percent senior sub notes due in 2019. During the quarter, we repurchased an additional $4.2 million of the bonds at below par, bringing our total repurchased amount of bonds to date to $18.9 million. 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 seven and three-quarters percent senior sub notes is a great capital allocation decision because the interest cost on the senior sub notes is roughly 5% higher than the interest cost on the revolver, enabling us to accelerate free cash flow generation and debt repayment. On March 31st, 2016, our total debt to EBITDA was 4.64x , down from 5.43x on March 31st, 2015, or down 0.79x in 12 months. We remain focused on further reducing leverage, as we laid out in the multi-year plan we announced in August 2015, we are targeting leverage of 3.25x- 3.75x by the end of 2018. As expected, given the operational and working capital seasonality of our business, normalized free cash flow was negative $8.3 million in the first quarter.
This was actually up $2 million from the same period in 2015 on better operating results. Free cash flow is projected to be positive each quarter for the remainder of the year, we plan to allocate the majority of this cash to the permanent retirement of our senior subordinated notes. Further, we generally expect the same seasonal patterns to revenues, adjusted EBITDA, and free cash flow that we experienced in calendar 2015, with our first quarter having the lowest revenues, lowest margins, and negative free cash flow. As we stated in our press release yesterday afternoon, we reaffirmed our revenue, adjusted EBITDA, and free cash flow guidance for 2016, we remain on track with our multi-year strategic and financial plan that we laid out to shareholders in August of 2015. With Ed, I'll turn it over to Ed.
Thanks, Ed. Good morning, everyone. We had a very strong quarter, no doubt, and we are obviously happy to start off the year this way. For the quarter, cost of ops as a percentage of revenue improved 320 basis points year-over-year, even better than the 260 basis points improvement in the fourth quarter. As you can imagine, the key operating metrics that I follow are all very positive, I don't think it makes too much sense to spend time on them today on the call. What I would like to talk about is some of the fundamental practices we have in place that are driving our success and about our focus on continuous improvement. Let's start with price.
We have worked very hard to provide outstanding service to our customers, investing in reliable equipment, assuring a superior customer care experience, and providing an attentive sales force, among other things. We know that puts us in a position to get price, but that's only half the story. We have also established a proven process to ensure that our price increases happen as scheduled and are intelligently applied to the customer base. I personally review and approve each market's PI worksheet each month, making sure it fits our strategy for that particular market. I also track very closely our new and lost business reports to make sure we are being appropriately aggressive in each market without overdoing it. This process is working very well, and we've been successful in instituting a strong level of discipline in this area.
We also continue to update our technology to make the process easier, improving customer profitability analytics, and our ability to identify lost customers that are truly due to price. The results are very apparent. During the quarter, we achieved 6.7% price growth in the collection line of business, what I believe is a record for Casella and certainly the highest I've seen in my career. Another area in which we have made significant improvements is in our fleet. We have talked about this before, but I think we're just starting to see the benefits. As you might recall, the fleet plan we adopted a couple of years ago called for improved standardization of our equipment, a move towards quality in the purchases we made, and a focus on automation.
In 2015, we were challenged by late delivery of our budgeted trucks, most of which did not arrive until after the busy spring and summer seasons. This required us to put money into older trucks that had to stay in the fleet longer than planned, hurting us in vehicle maintenance expense. We changed our process and pre-ordered our 2016 budgeted trucks in the fall, and most of those trucks were in very early in the first quarter. In addition, having the discipline to stick with our standardization philosophy has taken significant pressure off of our maintenance shops and off of our drivers. We still have a ways to go to eliminate inefficient equipment and increase our standardization, but the heavy lifting is done, and we expect continued improvement as the fleet plan progresses. These are just a couple of examples of where we are striving for continuous improvement.
Continuous improvement has become our mantra internally, as this drives our commitment to improve our operating results from all aspects of the business. We are certainly ahead of plan on getting price and are happy with the progress to date on increasing our operating efficiency, but we retain our sense of urgency as we continue to strive towards meeting or exceeding the targets laid out in our multi-year plan. Before I wrap it up, I want to make a comment on the economic conditions in the Northeast from our perspective. Our ability to get price increases in landfill volumes, particularly construction and demolition materials, and our analysis of roll-off pulls may be giving us an indication that the economy is showing signs of improvement.
As many of you know, waste companies classify roll-off pulls as to whether they relate to permanent customer sites, such as a school or industrial site or other long-term customer, or to a temporary project like construction or demolition job. Temporary pulls were up 8% over the prior year first quarter. Well, that could be partially due to milder than normal winter weather, as construction and demolition jobs were able to continue through the winter, or it could be due to improved economic activity or some combination of both. What is interesting is that the permanent pulls were up 9%. Not definitive, this is a pretty good indicator of improving economic conditions, as our permanent customers are generating more waste and requiring additional service. The trend is even more prominent in our eastern region, where the larger population base is.
We're off to a very good start, and I'm looking forward to the next few quarters as we get into our prime season. I'd like now to turn it back to the operator to facilitate the question and answer session.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star then one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, you may press the pound key. Once again, if you do have a question, please press star then one. The first question is from Tyler Brown of Raymond James. Your line is open.
Hey, good morning, guys.
Good morning.
Morning, Tyler.
Hey, very nice quarter. I wanted to talk a little bit about the collection pricing. It clearly continues to garner tremendous traction. Can you talk a little bit about how much the SRA fee benefited that number? And you guys mentioned that it would moderate through the year. I'm assuming that some of that is from lapping the SRA, but can you give us some flavor of what we should expect?
The SRA fee was 2.4% of the 6.7%. If you remember, as you mentioned, we're going to start lapping it. We implemented this a little over a year ago. I've tried to figure out how much of the SRA fee, if it had been fully established a year ago, what that benefit would've been, and it would've been a little less than 1%.
Okay.
I look at that as true price, right? Because we didn't have an SRA fee before.
Right. Okay. Slight step down, but nothing super dramatic.
Right.
On the landfill volumes, obviously, they were off the charts. We saw waste, we saw connections. It's certainly understandable. You guys have talked a little bit about starting to see some moderation here in Q2. Can you just talk about a little bit about what you are seeing specifically through the first four or five weeks of the quarter, at least as it relates to disposal tonnage?
Yeah, as we said, it's moderated slightly. I think that's a very fair perspective, Tyler. I think that, as we indicated in the call, some of what we've done purposefully is to move out lower priced material at our Southbridge facility, which makes a great deal of sense in terms of the progress that we made on volumes in the first quarter, to try to enhance the price at the facility. It also gives us a bit more time from a permitting perspective as well. Just the reality is in terms of what we're seeing with regard to the Marcellus and McKean.
To be clear, are landfill volumes down year-over-year in April?
Slightly, yes.
Okay.
Yeah. If you think about last year, Tyler, we had this terrible winter in the Northeast and not much was getting done in January, February, and March, and the winter broke in early April, and we were off to the races in April. Whereas this year, there was a more consistent level of construction throughout the winter.
It's difficult. We really do believe that we had some April business pulled forward into the first quarter.
Yeah. No, totally understandable. Okay. All right. That's good. John, I'm just going to leave this as an open-ended question, but can you just give us broadly an update on where we are with the Southbridge permitting and maybe how much life you do have there currently?
Sure. We have about two years of capacity there right now. We're in permitting for an additional four years currently. We're in the process of our NEPA permit right now. Once we have that, we'll be in DEP permitting. We expect that we'll be through that process probably in a year and a half or so.
Okay. Good. Ned, how much did you guys spend on the three transfer stations?
It was just under $3 million. These were transfer stations that give us good internalization benefit going forward, and as you know, we have the leading network of transfer stations in the Northeast, and it really allows us to access third-party customers and route them to our landfills.
Okay.
It's also important to, with regard to Southbridge, we also have additional permitting activity and additional capacity that we'll be permitting after the two and a half years of capacity that we have in permitting right now, too, Tyler. It's important to point that out as well.
Yes. Okay. All right. Understood. Ned, my last one here. On the last call, you guys noted that your notes were actually trading under par. I'm not sure, I think maybe you got upgraded by one of the agencies this quarter, but again, I'm not sure on that. Can you talk a little bit about where those notes are trading today? If they're closer to par, does that change your aggression on buying those notes?
Yeah, great question. We've repurchased some bonds at 96 and three-quarters last quarter, which was great. We had a nice entry point to the market. I wish we'd gotten more, but as you know, Q1's a low free cash flow quarter, so we bought as many as we could. Coming into Q2, we've seen our bonds trade up above 102. They're trading above our call price of 101.9. We'll continue to be active throughout the year, buying down those bonds. We still have a strategy to buy back roughly $20 million of the bonds during the year. If we can do better than that, then we will. It's still a great capital allocation decision to buy back those bonds versus paying down the revolver, which is currently at LIBOR plus 225.
Once our leverage drops below 4.5x , we actually move down the pricing grid on the revolver to LIBOR plus 200, the decision becomes even better at that point in time.
Okay, great. Nope, great quarter. I appreciate the time.
Thank you, Tyler.
Thanks, Tyler.
Thank you. The next question is from Al Kaschalk of Wedbush Securities, your line is open.
Hey, good morning, guys.
Good morning, Al.
Good morning.
Just to clarify, Ned, when do you expect to get leverage under 4.5x ?
Yeah, this fiscal year, we expect by the end of the year to have leverage below 4.5x . Whether it happens in Q3 or Q4 really depends on the timing of some of our cash outlays with the landfill construction projects. We're on track to get below 4.5X this year.
Is that more of a function of EBITDA growth or the cash outlays to repay? A combination thereof?
It's a combination, we're focused on absolute debt repayment. We're not just de-levering through EBITDA growth. Q1, our reduction in leverage was through EBITDA growth. Over the last year, we've paid down absolute debt and taken leverage out of the business, and you'll see the same thing through 2016.
Okay. I want to ask a broad question. I guess I wanted to try and take your pulse on where you believe the margin performance is on the SWO part of the business, given the others have probably a little bit more appropriate metrics to look at than the EBITDA margin. Given your price and the volume pickup, are you trending? Have we still plenty of room to grow to drive that margin? How do we talk about where we're at, given all the moving pieces you've had in the past and the positive trends you're seeing?
Well, one thing I expected is much steadier improvement on the hauling side than we've had in the past, where it's been bouncing around. Now we're a lot more stable. We have a more standardized fleet. We have better process and discipline in place. On the disposal side, really, we're starting to see movement. We're certainly seeing it on the east side, and as you know, there's a few macro things that are going on in the western landfills that I think will, at some point, will pop for us. We're seeing good improvement on the east, slow improvement on the west, and we expect at some point that will accelerate.
Okay. Just a final, I think, Ned, you may have mentioned it, could you just clarify again, SG&A cost was a little bit higher than we had thought. I don't know if that was a period thing because of comp cost, but maybe you could just address where that is relative to historic. Where you're trending. Yeah, let's leave it at that.
Sure. We were a little bit low last year on our incentive compensation accruals. As you remember, we came out of Q1 of 2015 a little bit behind budget with a tough winter. We made it up through the rest of the year. We really did a great job to get back on track, our incentive comp accruals were a little bit lower last year. This year, we came out of the gates gangbusters, and our incentive compensation accruals are a little bit higher than budget in Q1 because we beat our budget numbers. The variance there was about $1 million on that one item. There are some differences in professional services fees year-over-year, about a half a million dollars higher this year. Some of that's timing differences that will resolve through the remainder of the year.
There's nothing else really going on there in the quarter besides those two factors.
Okay, we've, I guess, eliminated, for lack of better word, or don't have the distraction from some of that prior costs we had at the end of last year.
Yeah. There was no spend in the quarter on a proxy contest or the like. The professional services fees I was talking about were just some additional legal fees on various matters and timing differences on accounting and auditing fees, but nothing allocated towards the same matters last year.
Okay. The reason why I asked is that the rate of growth there in SG&A was greater than the revenue growth, and obviously there was something there, and that seems to take care of it. Appreciate it. Goodbye.
Thank you, Al. Thanks, Al.
Thank you. The next question is from Corey Greendale of First Analysis. Your line is open.
Hey, good morning.
Morning, Corey.
Morning, Corey.
Very nice job on the quarter. First, just a clarifying question. The year-over-year increases you were giving in roll-off pulls, was that pulls per day, or does that include a benefit from the extra day in the quarter?
That includes the extra day.
That would include the extra day. Yeah.
Okay. Basically take one over 91 or something like that.
Yeah. We can probably do that math for you offline, give you the metrics on that, Corey.
Okay. All right.
How much of that was from the extra day?
Yeah, that would be great.
Yeah.
Maybe you don't have this either, but given that, do you have any estimate of what the impact was of the extra day on overall volume or on EBITDA on the quarter?
Yeah, we didn't really look through that, Corey. I apologize. We can run some numbers afterwards and circle back to you.
Okay, that's fine. Then, this may be splitting hairs a little too fine, but when you suggested that kind of the key metrics will see the same seasonal pattern this year as we have in past years, that sort of implies that Q1 wasn't that aided by weather. I just want to clarify, are you assuming that there was not much of a benefit in the guidance now, or how are you viewing that?
Yeah, I think it was more of a point of Q3 is typically our best quarter of the year, Q2 our second best, Q4 our third best, and Q1 our lowest performing quarter. Furthermore, when you look at free cash flow, and probably more of my comment was directed to that, you expect the same progression through the year, where Q1, our changes in assets and liabilities is a negative drag in Q1, mainly because of the large biannual interest payment on our senior sub notes. Q2 will be a positive free cash flow quarter, much like last year. Q3, a positive, but once again, slightly impacted by that interest payment. Q4 will be a strong free cash flow quarter as well. I don't think I was implying that we'll see that the ramp-up will change per se, given the weather.
I think we think the ramp-up will be a little bit less this year, just more of our quarter should stack up the same way as they normally do from a top to bottom standpoint.
Okay. Also on the guidance, there seem to be some puts and takes, Q1 was particularly strong, maybe that was weather, you've got kind of the ramp down that you're doing at Southbridge. You reiterated the guidance. I presume you're still confident in it, could you just address that and given how much of these things were factored into the guidance and how much is a surprise?
I think that we're very confident with the guidance, Corey. We have other facilities that are overperforming, besides just the negatives that we discussed that are going to impact volume slightly through the end of the year. We're very confident in the guidance at this point.
Okay. John, I think, please correct me if I have this wrong, I think Chemung is the other one where you're in kind of a nearer term permitting process. Is that right? Could you give us an update?
That's very true. We expect our permit from DEP or DEC rather from New York probably within the next few weeks, which gives us the time to get constructed in Chemung. At this point in time, we don't anticipate any issues, but we have not received that permit yet, but we do expect it probably within, as I said, the next few weeks.
That permit's kind of a two-part permit. It's, one, a total airspace increase, which gives us another 15+ years of life, which is great at the site. It also allows us to increase our annual tonnage intake at the site from 200,000 tons a year to roughly 417,000 tons a year. We don't plan to utilize that in the near term, but it'll be a great option value for us and for shareholders as the market tightens more and it gets more constrained, we'll have a permit already issued that we can access to put more tons in.
Yeah, it's also important, Corey, to talk about the fact that we've been in the permit process there for over four and a half years at this point in time as well. We're at the tail end of it. As I said, we expect to get the permit probably in the next few weeks to a month.
Great. That's all I needed. Thanks. Congratulations again on a good quarter here, too.
Thanks, Corey.
Thanks, Corey.
Thank you. The next question is from Joe Box of KeyBanc Capital Markets. Your line is open.
Hey, good morning, guys.
Morning, Joe.
Morning, Joe.
I want to ask a similar question just a little bit differently. I want to drill into the landfill tonnage comments a little bit more just to try and understand what a normalized number could look like. You're talking about a 20% growth rate in 1Q, kind of going to a negative growth rate in 2Q. What I want to dig into is, if you X out that C&D number, which is probably your most seasonally sensitive business, and you X out the actions at Southbridge, are you still seeing decent MSW and special waste growth X these items?
Yeah. X both those items, we expect X Southbridge and X McKean, we expect positive volume growth in Q2. Even with some of our perspectives of some pull forward to Q1. Much more moderate, though, in the single-digit percentage range, not the double-digit percentage range in our model. I think you got to remember too, in 2015, we had a really warm and unseasonably nice Q4 as well. We had some really nice volume trends late in 2015. As we sit here today, we just don't want to get ahead of ourselves. Great Q1. We've got visibility on a lot parts of our business. As you know, the disposal market, construction and demo, special waste jobs, you only have visibility out several months.
I think your point's really well taken in terms of we are anticipating, at this point in time, a normal winter, October, November and December, and that's not what we had last year, obviously. We closed out the year very strong because of the weather as well.
Got it. Specifically, how should we think about the EBITDA impact from taking less tonnage in at Southbridge, but obviously getting better mix?
The McKean and Southbridge moves hit our budget about $2 million to $3 million for the year. However, as John said, we're outperforming in other areas of our business that make up for that headwind, more than make up for that headwind. No negative impact to guidance at this point in time. In McKean, we were taking in some really nice price tons from the drilling. These were tons we were solidifying at the landfill, and they were value-added services. Our expectation is that some of the oil and gas companies who are in the Northern Marcellus, they will come back, that there's some great areas, they own a lot of property, and there's upside in the future there.
Ed, I want to go back to your lost business reports that you alluded to earlier. Are you seeing increased churn at all on that 6.7% collection price that you're getting? Maybe what are you finding relative to where your pricing is shaking out in the market relative to some of your peers?
We have a report that we get daily that's really become more meaningful when the month is complete because a lot can happen in the first and last day of the month. What we're seeing in that, I compare to a year ago, I compare to how much price we're getting one year versus the other. Right now, we're about seeing the same churn that we saw a year ago. We're basically staying even on new versus lost customers while we're getting significant price in the market, which is a great sign.
Right. Maybe where you're at positioned relative to your competitors? Are you a premium player? Are you in line?
We have two kinds of markets in the Northeast. We're playing in the urban markets like Massachusetts, Boston, Bangor, Maine, Portland, Maine. We also are in very rural markets. Our competition is different in those two types of markets. Obviously, in the more urban markets, we have the bigger players, Republic Services, Waste Management, and smaller companies that are sizable, but they're smaller than the nationals or regionals. In the Western markets, we're more competing with one, two, three truck haulers that have a totally different cost structure. Now, as far as our pricing in those different markets, I would say our pricing in the urban markets is in line with the big players, like Waste Management and Republic Services, who have discipline in their pricing models. In the smaller markets, we're definitely the premium service.
What we've seen over time is when customers leave us and go with one of these small haulers, there's a strong tendency they're going to come back to us because they can't get the service that they were getting with us.
Another thing, we've talked about this before, Joe, I know you've done a lot of research in the area, is the tightening disposal markets greatly impact our ability to push price in the hauling side of the business? You flash back 5 years ago, it was hard for us to advance pricing increases in the hauling line of business because a small independent who didn't have their own landfill, they could shop around their tons, look for a low price disposal option. Now that the market's becoming so tight, we see every disposal option pushing price up, that there are no more of those discounts. Furthermore, with the recycling business, that's causing additional inflation for small haulers, where a few years ago, they were getting rebates at MRF. Today, they're having to pay tipping fees to bring their materials in.
It gives us a great backdrop for these pricing programs, and it causes a little bit less of activity of small haulers trying to gain volume at the expense of price.
The other contributing factor to that as well is that we were successful with our relationship with Wheelabrator last year in filling their capacity in the wintertime, and we re-upped that program with them for another 3-year contract. The capacity that would normally be available to a lot of folks in the wintertime is no longer in the market, where we filled their capacity during their winter months, and we're going to continue to do that for the next 3 years. That's also another positive factor in the pricing story.
Got it. Just lastly, real quick, if you look at recycling, you guys are up $1.1 million in operating profit year-over-year. Is that producing a positive EBIT for you guys in the quarter? What do you think needs to be done to get you guys back to the type of returns that you need to be at for that business?
Yeah. We were right around break even EBIT in the quarter. However, for the full year, we're projecting EBIT to be positive and get us to about an 8%-10% return level. We're not quite to where we want to be, but we're getting close, and that assumes our forecast for the year that recycling commodity prices don't bounce back. We've made up for a lot of headwinds here. As we said last year, we had a negative $8.8 million headwind from commodity price. This quarter, $1.3 million. Right over $10 million of headwind, and we're improving operating income through that period. It's a pretty big accomplishment for us, and we really have shifted our business model to offtake the risk.
Got it. Thank you, guys.
Thank you, Joe.
Thanks, Joe.
Thank you. As a reminder, if you do have a question, please press the star, then one key on your touch-tone telephone. The next question is from Brian Butler of Stifel. Your line is open.
Good morning. Thanks for taking my question.
Hey, Brian.
Hey, Brian.
First one on the working capital and how you talked about the seasonality. First quarter was a big use of working capital, and going back to 2015, it looks like second quarter was a positive, third quarter a negative, and fourth quarter a positive on the working capital. Is that the right way to think about that again, going into 2016?
We are very similar in Q1 on our use of working capital. As you know, one of the biggest uses in Q1 is the payment on the senior sub-note. Q2, we actually worked that down quite a bit, and we expect the same processes here where year to date last year, we were still slightly negative, but we had nice positive working capital in Q2. Q3, as we stated, we had negative changes in assets and liabilities again, as we made that large interest payment on senior sub-notes, and Q4 positive. The same trend through the year. As we talked about last quarter, we do expect slightly negative to neutral working capital for the full year. We don't expect as big of a benefit as we had in 2015. Some of what we experienced in 2015 was just timing differences.
When we changed our fiscal year-end, various accruals broke in different times, and it gave a bit of an unusual pickup at the end of the year. This year should be a more normal pattern.
On capital spending, how is that trending versus your guidance of the $46-$50? Are you still on track for that?
Yeah, we're still in the guidance range. We're probably tracking a little bit towards mid to upper right now within the guidance range, just given some of the acceleration of landfill development projects that we're doing. We're building out at Ontario right now, a multi-year platform there to expand the landfill. We're well within our guidance range, but probably a little mid to upper right now.
Okay, great. Can you give some color on just kind of landfill pricing kind of by region in between the contracted or spot?
Well, as I said earlier, on an overall basis, our price was up about 1.3%. We were up 2.8% in the eastern region, so significantly better price in the eastern region. We're beginning to see positive price in the west as well.
Is that across both contracted and spot volume?
Our contracted volumes, each one of them has price escalators, and they range from CPI indexes to negotiated rates. On spot volumes, we're actually seeing better increases than CPI in almost all cases, where we're following the same pricing mantra that we have in other parts of the business. We've particularly seen that in sludges in the Northeast right now. That market's getting very tight with some of the incinerators shutting down. We're seeing some nice PIs there in the sludge business.
If you remember, Brian, in our 2018 plan, we didn't anticipate any significant price in the western region until 2017. Even then, it's still pretty moderate price. When you look at 2016 and our plan to 2018, we didn't anticipate that we were going to see significant price at all in the western region. Obviously, we're able to increase tons, 152,000 tons, though, as we previously discussed in the first quarter. We're pretty positive about where volume is, even though the slight decline to the end of the year.
Okay, great. Last one, I think we kind of touched on it, on the recycling business, obviously making good progress with the SRA fees offsetting the price pressure, what's the right way to think about growth and margin in this kind of through 2016 and maybe going forward?
I think that to the extent that the business model improves, we'll be able to improve our returns in terms of commodity prices. To the extent that we have more offsets in terms of lower prices, we're going to recover that dollar for dollar. I think that we're in a terrific place from our perspective, and I think that we have a model that really fixes the recycling business model for the industry, which is it's a value-added service, and in our markets, it's a service that's mandatory service. We need to get a return on the invested capital, and I think we've got the path and have demonstrated the ability to really solidify the position with regard to recycling. It's proven itself over the last year or so.
We finished calendar 2015 with around 11%, 11.5% adjusted EBITDA margins. We're driving north of 15% this year, roughly. If you flash back in time, we were in the high teens from a margin standpoint in high commodity markets, and our goal is to be in the mid to high teens in lower commodity markets as well. We're well on our way to that goal.
Okay, great. Thank you very much for taking the questions.
Thanks, Brian.
Thank you.
Thank you. I do show we have another question from Tyler Brown of Raymond James. Your line is open.
Hey, just a quick follow-up. Hey, John, on sludges, how important do you think the curtailment of shipments to Big Run has been? Do you think that those tons are finding homes locally?
Well, I think that there's a tremendous difference in our view in terms of what's happened with sludge over the last six months or so. I think that that's had an impact. There are other impacts that are in the marketplace as well as Big Run. I think that with the capacity constraints, there's less sludge that can be taken to the facilities. In terms of the total amount of sludge, you can only put so much sludge in the facility by volume. That market has tightened pretty considerably.
Okay. Very interesting. This is a big picture question, since you guys laid out your longer term plan, it looks to me that Big Run stopped taking tonnage, Covanta announced another plant impairment, which I assume means another shutdown. Tullytown is shutting down. Is it crazy to think that this market may actually tighten even more than what you had originally anticipated?
I think when we had originally started talking about the tightening of the market, the announcement from Covanta wasn't there, Big Run wasn't there, and Tully wasn't there. I think that there's certainly the possibility that that could happen. Keep in mind, to put disposal capacity in place, it's long-lived assets. I think that it's not likely that we're going to see any new development. If there is a new development for disposal capacity, it's probably a four- or five-year lead time just from a permitting standpoint. I think that we are going to see tightening. As I said before to Brian, we didn't anticipate that we were going to see it in 2016. We think that it's a 2017 and 2018 issue in terms of even more tightening in the marketplace.
Right. Okay, good. Just lastly, can you give any update on McKean regarding the rail?
Yeah, we still have the DOT grant. We're going to have that extended for another year. We're in the process of extending our permit right now at McKean. We had that five-year permit. The five-year permit expired. We're in the process of renewing that permit. We'll probably have that done in the next six months or so. It's still a big option for us in that we're not going to build out and put any capital in unless we get a long-term contract for 200,000 to 300,000 tons a year of waste. There are several opportunities that the landfill team is working on. There's nothing that we have currently, Tyler, but it is an option that we have, and there are some circumstances where we think that there may be some municipal contracts that potentially we could attract to McKean.
Okay. Interesting. I lied, one last one.
Go ahead.
Sorry. Ed, do you know how much maintenance and repairs was down in the quarter?
About, as a percentage of revenue, Hold on, let me. Instead of going off of memory, let me take a quick look.
About 30 basis.
Yeah, about 30 basis points down.
Okay. Interesting. All right. Thanks, guys.
Thanks, Tyler.
Thanks, Tyler.
Thank you. At this time, I'll turn the call back over for closing remarks.
Thank you. In conclusion, I think it's pretty clear that we continue to execute extremely well against the strategic plan that we laid out three years ago to improve our financial and operating performance. We've established the process and discipline throughout the organization to focus time and capital resources on the key drivers of our business. We believe that these actions will further the company's performance and allow us to continue to delever the balance sheet going forward. With that, thank you very much for your attention this morning. We look forward to discussing our second quarter earnings with you in late July. Thanks, everyone. Have a great day.
Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Good day.