Casella Waste Systems Inc
NASDAQ:CWST
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Good ladies and gentlemen and welcome to The Casella Waste Systems Incorporated Second Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to introduce your host for today's conference Joe Fusco, Vice President of Communications. Sir, you may begin.
Thank you for joining us this morning and welcome.
With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ed Johnson, our President and Chief Operating Officer; Ned Coletta; our Senior Vice President and Chief Financial Officer; and Jason Mead, our Director of Finance.
Today we'll be discussing our 2018 second quarter results. These results were released yesterday afternoon and along with a brief review of those results and an update on the company's activities and business environment, we will be answering your questions as well. But first, as you know I must remind everyone the 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 these 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 if 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 today.
Also during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures to the extent they are available without a reasonable effort are available in the appendix to our investor slide presentation, which is available in the Investor section at our Web site ir.casella.com.
And with that, I'll turn it over to John Casella who'll begin today's discussion.
Thanks Joe. Good morning everyone and welcome to our second quarter 2018 conference call.
We are pleased with our second quarter results and our continued execution against our key strategies. Strong operating performance continues to be driven by robust solid waste price and volume trends combined with the execution against our acquisition strategy. The continued tightening of the Northeast disposal markets coupled with our disciplined pricing programs has led to favorable solid waste pricing trends and we advance solid waste price of 4.3% in the quarter-to-date and year-to-date.
From an acquisition perspective, we have acquired two businesses this year with a combined annual revenues of roughly $90 million and we're well on pace to exceed our targeted range given the depth of our near term pipeline. We're actively working on acquiring several businesses with combined annual revenues of over $40 million. We're excited about the growth opportunity that this presents.
Our strong financial performances solid waste, organic, customer solutions was again muted by recycling commodity price pressures. However, we remain confident in our ability to offset this headwind through continued outperformance and strength through the remainder of the business. Therefore, we have reaffirmed our adjusted [indiscernible] and normalized free cash flow guidance ranges for 2018. We announced our 2021 plan one year ago on our earnings conference call. And I'm pleased to say that we are tracking well against this long-term plan. One of the key financial targets in this plan is to grow normalized free cash flow by 10% to 15% a year. And for the six months year-to-date, we've exceeded this target range with our growth at roughly 20%.
Our first strategy in our 2021 plan is increasing landfill returns. We continue to enhance returns through price execution, operational programs, the sourcing of new volumes at higher prices and our efforts to advance key permits.
During the second quarter, we increased our average landfill price per ton by 6.7% and at the same time increased landfill tons volume by roughly 3.6% year-over-year. The increase of these often opposing metrics highlight the continuously tightening disposal dynamics across the northeast and our disciplined pricing strategy. We believe that we are positioned well to benefit from these capacity constraints by way of the positive pricing backdrop it provides coupled with the potential to use our excess annual landfill capacity as more ways moved from East to West and the internalization value of our recent and targeted acquisitions.
Expanding permitted landfill capacity is an ongoing challenge for all solid waste operators in the Northeast. The northeast is one of the toughest regulatory and political environments in the country. The good news is most of our landfills have over 15 years of permitted capacity and we continue to make progress advancing key permitting activities.
Our second strategy in our 2021 plan is driving further profitability within our hauling business. Ed will run through more details, but we continue to outperform and execute well against our pricing and operational strategies. Our risk mitigation SRA and EVC programs worked well to offset higher recycling commodity and fuel price costs during the second quarter although these cost recovery fees dilute margins.
Our team has done an excellent job in integrating several acquisitions this year which is and will be a key ingredient to drive high free cash flow growth and additional shareholder value. The third strategy of our 2021 plan is creating incremental value through resource solutions. We continue to advance profitable growth in our customers' solutions and organic businesses, while the recycling business remains a large headwind.
Our average commodity revenue per ton is down 55% year-over-year and down 12% sequentially from the first quarter to the second quarter. If these revenue headwinds weren't enough we have seen our variable costs increase by almost 25% as we have had to slow processing lines to improve quality, while incurring higher transportation costs to deliver commodities to new markets.
Given these factors recycling adjusted EBITDA was down roughly 3.3 million year-over-year in the second quarter. With commodity prices stabilizing in June and into July, we're pleased that our trailing SRA fee is now fully recovering higher recycling costs in our hauling operations albeit the program is designed to recover cost and as a result margins. However, only one-third of our volumes coming into our recycling facilities are from our own trucks with the remainder coming from third parties. We have an appropriate risk mitigation programs on many of our third-party processing customers and these have worked well were applied to offset much of the commodity price decline. However, we are still absorbing all of the commodity risk on several legacy third-party contracts which is driving much of our year-over-year decline in recycling performance.
Looking forward to 2019, we expect recycling to provide a positive tailwind even if commodity prices stay at historically low levels. As some of the largest third-party recycling processing contracts will reset over the next 12 months.
Our fourth strategy in the 2021 plan is using technology to drive a profitable efficient growth. Over the last year, we've developed along [Technical Difficulty] to enhance our profitable revenue growth and drive efficiencies across our operations and back office administration. We believe there is a lot of room for improvement in how we interact with our customers', self-services, rail and trucks, run our integrated operations and manage our back office administrative functions.
As we further develop our tech technology plan strategy we will likely enhance our goal to reduce G&A cost with sales and operating targets. We continue to be pleased with the early progress we made against this strategy which includes successfully closing our books over the last few quarters on our new NetSuite ERP system. This marks a key foundational step as part of our technology plan and significantly furthers our ability to increase back office efficiencies over time.
I might add that I'm really pleased with the effort of Ned and the finance team as well as Debbie and payable folks project was developed on-time, on-budget and it's a real privilege to those people and the efforts that they made to get that done.
Moving onto our final strategy in our 2021 plan, which is allocating capital to balance to delevering with smart growth. As I mentioned, we were very pleased with the execution against our strategy thus far. As part of our 2021 plan, we set a goal to grow revenues by $20 million to $40 million per year through acquisitions or development activity for the next three years. Year-to-date we've acquired over $90 million in revenues and we are actively working on another $40 million of potential revenues to be acquired in our near term pipeline.
Overall, our mid-term acquisition pipeline remains robust and we believe there are over $500 million of acquisition opportunities across our Northeast footprint that could be great strategic fit as direct tuck-ins, our new market opportunities. As you all know there is a tremendous amount of pressure on the business model from a disposal inflation standpoint, from a recycling placement standpoint, driver wage inflation. So the opportunity from an acquisition standpoint is as robust as we thought it would be.
Our acquisition and development framework ensures continued discipline through alignment of strategy, financial returns and our resources. We're focused on opportunities that would generate returns well above our cost of capital enhance our vertical integration, drive operating and G&A synergies will either be immediately delevering or have a fast path to recognize synergies and cash flows to delever.
One area that is not specifically outlined in our 2021 plan, but is very important to our continued long-term success and underlies all of our initiative is a focus on further building our team with the help of our recently hired -- Kelly Robinson our recently hired VP of HR. We've initiated implementation of career path programs for maintenance, technicians and drivers and we'll be pushing that out through the entire organization in terms of having career paths, identified and laid out for every position in the company.
The career path program incentivize key roles to enhance both their skill and earnings potential by giving them a measurement and transparent path to advancement. We believe that the program will improve our employees satisfaction help recruit reduce turnover and ultimately the higher productivity and lower safety incidents. Very excited about this program and very excited about the rollout of the program as we rolled it out now to all of our maintenance folks and we're in the process of beginning to roll that out to our driver -- through all of our drivers throughout our operating divisions.
Wrapping up our guidance is on track with our 2021 plan and displays continued execution of our key strategies with the goal of driving additional shareholder value. We expect to continue to strengthen the solid waste pricing and volumes to help offset recycling headwinds while also anticipating a tailwind from recycling next year several key contracts we set over the next 12 months.
And as I just mentioned, our acquisition pipeline is very robust and provides us with a great upside opportunity.
And with that, I will turn it over to Ned to walk through the financials.
Thanks John.
Revenues for the second quarter of 2018, were $165.6 million up a 11.6 million or 7.6% year-over-year. With 3.2% or $4.9 million of the increase driven by the rollover impact of acquisitions.
As with the first quarter, there were a few mix changes that grossed up our revenues during that period including a soil remediation project for a large customer and a new organic sludge transportation and disposal contract or as we say T&D contract.
Further, our cost recovery fees that SRA and E&E fees these were up $2.9 million or 1.9% year-over-year. Excluding these mixed changes and cost recovery fees, our revenues were up only $5.1 million or 3.3% year-over-year.
Solid waste revenues were up $13.3 million or 11.8% year-over-year as a percentage of solid waste revenues. Revenue from the collection line of business were up $8.3 million year-over-year with price up 4.9%, volumes up 0.8%, risk recovery fees up 4.4% and acquisitions up $2.4 million or 3.7%.
Price was up in the residential, commercial and roll-off lines of business. Revenues in the disposal line of business were a $5.1 million year-over-year with the growth driven by strong pricing, higher volumes and $2.4 million of acquisition activity.
We increased our reported landfill pricing by 4.1% year-over-year and more importantly we increased our average price per ton at the landfill by 6.7% as we improved our mix of customers and volumes. We expect the same positive pricing trends to continue through 2018 as we recognize the rollover impact of price increases already completed and we advance further pricing in key markets.
Landfill tons were up 3.6% year-over-year with roughly 20% of the increase driven by the completion of the soil remediation project that we started in the first quarter. The remainder of the increase was driven by strength across all waste categories. Recycling revenues were down $6.6 million year-over-year with $7.2 million lower from high pricing, $2.4 million lower volumes partially offset by $3 million of higher third-party tipping fees. This doesn't count the higher tipping fees into our company.
Average commodity revenue per ton was down $59 per ton or 54% year-over-year in the quarter mainly on lower fiber pricing. Mixed paper prices were down 90% year-over-year and cardboard OCC was down over 55% year-over-year. Organics revenues were up $3.6 million year-over-year in higher volumes mainly associated with a new two-year sludge T&D contract. This contract negatively impacted adjusted EBITDA margins by roughly 10 basis points in the quarter as we passed through third-party transportation and disposal costs. But the contract requires no CapEx, has very strong free cash flow and high returns. And the customers' solutions groups revenues were up $1.3 million year-over-year on several new multi-site retail customers and continued growth in industrial services group.
Adoption of ASC 606 or revenue recognition guidance reduced our reported revenues and cost of operations by roughly $1.6 million each during the second quarter as compared to how we would historically book these transactions. To be clear this accounting change did not impact the dollar amount of operating income adjusted EBITDA or cash flows just impacted margins.
Adjusted EBITDA was $37.1 million in the quarter up $1 million or 2.8% year-over-year with margins down 100 basis points to 22.4%. The negative pressures from recycling weighed on margins by roughly 105 basis points during the quarter. Our cost recovery fees SRA and E&E negatively weighed our margins by approximately 40 basis points in total while the adoption of the new revenue recognition guidance benefit margins by about 20 basis points.
So excluding these factors, margins would have been up roughly 25 basis points. Solid weight adjusted EBITDA was $35.8 million in the quarter up $4.1 million year-over-year on strong pricing, higher volumes, partially offset by higher operating costs.
One of these higher operating costs is increased intercompany recycling tipping fees. These are mainly offset by the higher SRA fees also higher fuel in the period was mainly offset by a floating E&E fees, Energy and Environmental fee.
Solid waste adjusted EBITDA margins were 28.5% up 30 basis points year-over-year. Higher cost recovery fees negatively impacted these margins by roughly 65 basis points year-over-year. Recycling adjusted EBITDA was down $3.3 million year-over-year with the declines driven by lower commodity prices, lower volumes and higher operating costs. This is partially offset by $7.1 million of higher tipping fees and lower rebates in the business.
As John mentioned variable processing costs were up roughly $1.5 million as we slowed processing speed at the smurfs, our residue costs were up as we call more waste from the stream and our transportation costs nearly doubled to reach new markets.
Adjusted EBITDA was $2.5 million in other segment up $200,000 year-over-year with an increase driven by improved performance in the customer solutions group and higher organic volumes.
Cost of operations was up $9.3 million year-over-year with increasing costs mainly driven by higher volumes, acquisition activities, inflation in select cost categories and higher recycling processing and transportation costs. General and administrative costs were up $2 million year-over-year. This increase was mainly driven by higher labor and related benefits, higher equity and compensation accruals and a higher bad debt expense on several customer bankruptcies.
Depreciation and amortization costs were up $1.5 million year-over-year mainly on higher landfill amortization expense, on higher volumes and higher depreciation or higher truck and equipment purchases.
The second quarter included several unique charges including $349,000 of expense related to the write-off of costs associated with previous self-registration and acquisition related costs. We also took $172,000 Southbridge landfill closure charge, this is primarily related to ongoing legal expense at the site and the $7.4 million loss on debt extinguishment primarily related to the refinancing of our senior secured credit facility.
Our normalized free cash flow was $16.1 million year-to-date up $2.7 million or 19.8% from last year. This increase was driven by improved operating performance, positive changes in assets and liabilities partially offset by higher CapEx. The CapEx is really a timing issue due to faster spend on landfill construction this year and slightly higher expenditures on revenue growth.
As of June 30, 2018, our consolidated net leverage ratio as defined in our credit agreement was 3.68x, which is down 1.74x since December 31, 2014. Our total debt was $515.9 million, which is up $18.2 million since December 31.
Our debt is up sequentially mainly an acquisition activity in the refinancing. As we laid out our 2021 plan, we remain focused on further reducing our leverage with the goal of getting leverage down to 3 to 3.25 turns.
On May 14, we successfully completed the refinancing of our $510 million senior secured credit facility with a new $550 million senior secured credit facility including a revolver term loan A.
The new facility has the number of benefits aligned very well with our long-term strategic plan including reducing cash interest costs which was [indiscernible], a new pricing grade that allows us to further reduce our interest costs as we reduce leverage, additional availability, increased acquisition flexibility, a new five year maturity.
During that quarter, we also continued our efforts to reduce our floating interest rate exposure by entering into another $85 million of floating to fixed LIBOR swaps. We now have fixed our interest rates on roughly 55% of our debt.
Moving on to guidance for the year, given the further deterioration in fiber prices during the second quarter and our expectation of fiber prices remain at the current historically low prices for the foreseeable future, we now expect recycling adjusted EBITDA for 2018 to be roughly $9 million below our budget for the year or down roughly $10 million year-over-year. Despite the significant headwind, we reaffirmed our adjusted EBITDA and normalized free cash flow guidance ranges for 2018.
We have increased our revenue guidance range for the year given our higher cost recovery fees and the higher organic clients on the new T&D contract.
And with that, I will hand it over to Ed Johnson.
Thanks Ned, and good morning everyone.
So we are at the mid-year point of the year and we're continuing to perform well. Hauling and disposal operations are ahead of plan as our customer solutions group and our organics group overcoming the headwind from commodity prices in the recycling segment.
Our consolidated cost of ops as a percentage of revenue was up 80 basis points in the quarter versus the prior year and this was directly related to the recycling situation. Our solid waste segment produced the 30 basis point improvement in cost of ops. And if you adjust for the margin muting effect of the SRA and E&E cost recovery fees that Ned mentioned, we actually achieved 95 basis point improvement. So we keep moving -- making progress in the areas that we can directly affect.
We're also making progress in working through the recycling commodity market issues but that takes time and I'll give you a little more detail in a minute.
Few quick comments regarding the hauling and landfill operations. Landfill demand continues to be very strong. We're doing a good job of managing volumes between our sites to balance our permit limits and our solid construction cycles. Limited capacity in the market is also allowing us to continue to push prices. We reported the price was up 4.1% and as Ned mentioned, this is actually 6.7% if you look at overall per ton pricing.
As I mentioned in the past, our landfill are geographically in the sweet spot for New England most within a one day term time for truckers to reach us from the dense population areas in the east where disposal capacity is rapidly declining. Collection had equally strong price performance as we achieve 4.9% in price growth for the quarter. This is on top of any fluctuations in the SRA fee or fuel surcharge, which are passthroughs and not included in our pricing steps.
We have been very effective in educating our customers as to increasing costs in our industry. And I think that played a big part in our ability to get price. Our labor cost, however have also gone, fortunately the strong price increases have allowed us and flexibility to meet market demands for attracting and retaining drivers and mechanics.
Last quarter, I mentioned our various HR initiatives and I think the team has done a great job on fine tuning our understanding of local market pay rate helping us adjust our pay scales accordingly to keep our wages competitive and developing and as John mentioned implementing new career path programs for our employees to keep them engaged and give them incentives to stay with Casella. You might think this is a little lot that I focus on this. But it's important to understand this is a significant challenge to our industry. We have recognized that challenge and are being proactive to solve.
Back to recycling, due to the well publicized Chinese policy decisions and the related effect on commodity prices and demand -- market demands for cleaner products, our recycling revenue has declined about 40% year-over-year and our processing and labor costs have gone up about 14%.
Although recycling is less than 6% of our revenue, it is integral to our business and the current challenges are a primary focus. So it's important that what we are focusing on. About a third of the volume that we've processed comes internally from our own trucks. Our SRA fee which is a floating fee based on commodity prices and our cost of process is now fully effective and passing through the true current costs of recycling including a fair return on assets.
The remaining tons that we process are from a combination of municipal customers and other haulers. Most of the third party haulers are charged to floating tipping fee, but some are on longer term contracts as are most of the municipal customers.
In recent years, the market allowed us to introduce flexible formulas to pass the commodity risk back to the municipality, however, we still have some older contracts that we are suffering through.
Our focus has been on talking to our municipal customers and trying to renegotiate and we have had some limited success. The good news is that the bulk of these contracts will expire in the coming year. So we continue to be optimistic that our recycling operations will start to rebound.
Our other focus has been on upgrading processing and equipment to meet higher standards without increasing labor. And of course, as you probably all are, we are monitoring the evolution of how China is going to meet its needs from material and how that might affect the global distribution of further processing of that material. So that enters China in the form they are demanding.
With that, I would like to turn it back to the operator to start the question-and-answer session.
Thank you. [Operator Instructions] Your first question comes from Tyler Brown of Raymond James. Your line is open.
Hey, good morning guys.
Good morning, Tyler.
Hey, Ned. So I want to reconcile some of the free cash commentary, so I appreciate that you reaffirmed the 42 to 46. But if I'm not mistaken it looks like cash is better. I mean the way I read it is you raised the cash from ops guide by say $3 million at the midpoint, but you increased CapEx by 9. And I'm rounding here, I think 6 of that is related to the new customer wins. But did you also increase core CapEx say $3 million which is why you're affirming the guide and not raising it. Is that correct?
Yes. As we look out over a three-year period of time for each of our landfills, we're looking at a billed cycle. And with some of the mix shift and some of the new acquisitions, we're bringing up online. We're advancing some of our landfill construction game plan in 2018 to get ahead of ourselves for 2019 to position ourselves well. As we talked about, we have got a couple of acquisitions in the near term pipeline and we're trying to also prepare so we can vertically integrate those quickly.
Okay. So if I parse it out, the $6.5 million for the new customers that is basically like doing a small acquisition. I mean would that give you some annualized EBITDA benefit.
Yes. So just to be clear. So we have carved out -- and what Tyler talking about is, we reconciler our normalized free cash flow for the fiscal year guidance and the table in the press release and we're indicating that we're going to have about $6.5 million of non-recurring CapEx. About $4.5 million of that either associated with acquisitions that we've completed to-date or associated with. We had one competitor go bankrupt Chapter 7 [indiscernible] and we had to put some capital work very, very quickly, new trucks, new containers just to bring on some additional work. It happened about a month ago. There's about $2 million in that $6.7 million associated with the transfer station that unfortunately burned and we're rebuilding. We actually expect to get insurance recovery. But right now that timing of that is unclear. So what we're trying to do is say hey we had a plan for the year. That plan did not include some of those acquisition CapEx or the recovery of this transfer stations they're just normalizing that out. But to your point, every one of those dollars of CapEx will lead to higher EBITDA and free cash flow down the line.
Right, exactly. Okay good. And then, I know it's a little early to look into '19, but I was just hoping you can indulge me with some of the bigger buckets for next year. So hopefully we should get some organic growth but then we should probably think about taking something away for Southbridge. I think there's a ramp down next year. Maybe we give back something for these third party recycling processing contracts even if recycling doesn't get better you maybe have some roll over from these new customers et cetera. Maybe there's something on G&A, we could talk about that.
And then maybe fingers crossed something comes in on the M&A side. But is there any other big buckets we should think about next year pluses or minuses.
Yes. We haven't budget for next year yet. So we'll just talk broad kind of brush strokes, it will of course, guide to next year in the future. But, you're right, Southbridge, we plan to close late this fall and it's running at a little over $6 million of adjusted EBITDA this year. And we expect that all to go away next year. However, we do expect to move tonnages around our franchise. We have a great opportunity in New York State. We expect the permit increase at our Clinton landfill in the relatively near term to increase our permit by 75,000 tons a year. And something we haven't talked about a lot is we got a permit increase that our Chemung landfill two years ago to go from 200,000 tons a year to 437,000 tons a year.
And as part of that we left our capacity idle, we'll owe the community an additional option payment when we bring that online an additional angle payment. So we haven't exercised that capacity, but we do plan to bring that online in 2019.
So if you look at ramping some additional tons in New York City online we hope to offset the month of Southbridge next year by doing that. John talked about it, and Ed talked about it as well where we have several legacy recycling contracts that we expect to reset in late 2018 and into 2019. And that will give us a positive tailwind into next year. I don't want to get ahead of myself because we haven't negotiated these contracts yet, but it's going to be millions of dollars of that is to into next year. We'll put a finer number to that when we guide for next year.
And as you mentioned, in all of our pricing trends, volume trends, other positive operating initiatives are all firing on all cylinders and we remain confident that we will try at the same level of growth there into next year.
Okay. Fantastic. And then, maybe my last one here on the balance sheet. So you did enter into this new credit agreement. If I'm not mistaken it brought your rate down. So first, can you talk about what the new rate is, what the expected interest rate savings are and then maybe how does the grid work? When's the next step down?
Yes. So we did negotiate a new credit agreement. We had a revolver and a term loan being previously. We now have a revolver and a term loan A which is at all bank facility and then one thing we do is, increase our availability a little bit on the revolver from $160 million revolver up to $200 million. And that's really -- just to give us a little more flexibility as we're looking at acquisitions. If you look at the pricing grid, we went from LIBOR plus 275 on the revolver down to LIBOR plus to 200 and on the term loan B to the term loan A, we went from LIBOR plus 250 down to LIBOR plus 200.
The new facility has a grid that allows us to get pricing down to LIBOR plus 125, if we get our leverage down below two in a quarter terms. So we've a little waive off, but there's a number of steps that occur if we -- if we get our leverage below three and a quarter terms, our rate was down to 1.75%, if we get below 2.75 turns, we get down to 1.5% on a LIBOR spread. And then, of course, we get below two and a quarter, we get down to 1.25%. So this is great long-term for us because as we continued to execute both acquisitions strategy we've got more flexibility and as we continue to leverage out the business we will work our rates down as well.
So you maintain that $25.5 million interest rate expense guide in relief I believe. So I'm just curious as to why wouldn't that come down?
Well, we've layered on some LIBOR swaps, so we use a little bit of that $2 million of savings, the annualized numbers while a few million dollars. But, we used about half of that to layer on some LIBOR swaps and had some risk. And then, we're probably being a little conservative there with some acquisition activity, probably a little conservatism as well.
Okay. All right. Well, great quarter guys. And I appreciate the time.
Thanks Tyler.
Thank you. Your next question comes from Corey Greendale with First Analysis. Your line is now open.
Hey, good morning.
Good morning, Corey. How are you?
I'm good. How are you doing?
Doing good, doing very good.
Great. Nice continued to work on everything that is within your control. So mostly a couple of follow up questions on things Tyler was raising, so honor me, on the underwater or the legacy recycling contract and I know don't want to get into what the resets might look like? But can you give us a sense just what the drag is, if that those contracts didn't go away? How much EBITDA benefit, you will get?
Yes. What we would currently charge in a market, if we're able to get those rates, the drag is somewhere around 5 plus million dollars a year.
Okay. And if you look at the dollar amount of EBITDA or negative EBITDA in the recycling business, it gotten better in Q2 even though commodity prices got worse in Q2. What drove that? And was there some offset from like a catch up from the SRA or can you just dig into that?
Yes. Few things, someone at the [indiscernible] that SRA fee is a trailing fee, so looks at the previous month to charge for this month to our clashing customers. And then, we sell commodities, of course, the current month rate. So when you see a very, very steep decline. We've got climbed down than that fee.
Also our revenue share contracted, Ed was talking about with third-party customers at our Smurfs, which is very important as well as two thirds of our volumes, if those were kind of trailing index as well. So, we started to stabilize pricing in late the second quarter which allowed our fee to start cash out.
We've also had a lot of operating focus in that business to try and improve our cost structure. And you'll start to see in the third and fourth quarter, our teams did a great job renegotiating a few big municipal contracts. We don't have full relief but we've gotten some relief which plays into our guidance for the rest of the year.
Good. And then, jumping around a little bit, the insurance recovery that you mentioned is that baked into your guidance at all?
No way. It isn't in. So we are reporting how to transfer station burn and we only have a $100,000 deductible on our property insurance. But, I'm a little uncertain at timing. We want to get that thing rebuilt as fast as possible. So that's why our CapEx is grossed up a little by $2 million and we have 2 million back in our normalized, which will give a reconciliation of that, if that does happens over time.
Okay, good. And since that's not in there and I'm actually not totally sure how you could account for it, but the cash flow from ops guidance is up even though the EBITDA guidance is unchanged. What's driving the cash flow from ops guidance though?
Hey, Corey. Its Jason. As we kind of looked out through the remainder of the year, we probably budgeted the year a little bit conservative from a working capital perspective. So there's a little bit of improvement there over the rest of the year that's probably driving a portion of that. Aside from that kind of from a EBITDA perspective, we're obviously flat in the same kind of range that we projected out in the beginning of the year. So it's mostly working capital update in the forecast.
Okay. And as you look at the leverage target, there is a pretty reasonable chance kind of if you look at the trajectory of things and given what you think are -- stoppage next year, if you could hit the 20, 21 target like by the end of 2019, as I'm looking at it. So first of all, when you say I'm looking at that wrong? And second of all, if you do hit that in 2019, is this kind of a permanent, I assume you're comfortable in this range kind of forever or would you look to delevering or what would you see is the highest uses, if you do hit the 3 to 2.5 early.
I think that we're pretty much committed obviously to get our leverage down to that three handle if you will. And I think that we're going to continue to look at that in light of the opportunities that we have from an acquisition standpoint. So I think at about 3x or a little around that area, we're going to continue to obviously -- continue to grow through acquisitions because of the opportunities that are in front of us. So I don't think that we need to go significantly below that. I think probably we were comfortable right around 3x Corey.
Okay. So, we shouldn't be -- I understand and even made decision, but we shouldn't be modeling and I think in 2020 there could be a dividend or repurchase, just think of it is as primarily acquisition related most likely?
I think it's probably more related to growth than it is dividend and that will be a decision that we'll make at that point in time along with the board. I mean I think that it is our view at this point in time sitting where we are today, the opportunities in front of us are more robust than what we thought because of all of the activity in terms of inflation for smaller hauling companies whether it's disposal inflation, recycling inflation, wage inflation, the difficulty everyone has faced with the same issues in terms of finding drivers keeping drivers et cetera. So there's a lot of pressure on the smaller companies and I think that, so I think it's our sense that we want to create more shareholder value by continuing to grow. But that remains to be seen and we'll have to make that determination at that point in time with the Board.
Yes, understand it. Just one last one. Totally understand the pressures on wages and labor availability, are those pressures and when you say they're accelerating or would you say you're kind of -- that's been through for several quarters and you're still thinking?
I think that we've been through it for several quarters. We've seen inflation we're above what we thought we would be in terms of wage inflation this year. But I think that is -- from our standpoint, we've put ourselves in the position where we've adjusted to market rates throughout the entire company when Kelly first started we went through the entire company. We've already made those adjustments. Those numbers are already in our numbers so I don't think that we're going to see anything accelerate from here. But I think we're going to continue to see pressure from here. But we've already made the market adjustments to make sure that we're competitive from a wages standpoint.
Got it. All right. Thank you very much.
You're welcome. Thank you.
Thank you. [Operator Instructions] Your next question comes from Michael Hoffman Stifel. Your line is open.
Thank you very much, John, Ned and Ed for taking the questions. So last time we talked…
Good morning, Michael. How are you?
I'm good. Sorry, are you finally having summer up there because the last time we were having this conversation you were still fighting winter in the middle of May.
No. We are good. It's pretty -- we had a terrific July, it's just outstanding, summer has been really good.
Terrific.
It's a little overcast today, but it's been beautiful.
You should come down here. We've had 20 inches of rain in the last 12 days. What's happening to third party users of your transfer and landfill their business, if they had recycling exposure. You alluded to one that failed. Are you seeing an acceleration of those failures and this that an opportunity that -- yet be fully discovered, but could lead to a lot more business coming your way because small players got upside down on dump recycling and they're failing?
I think it's across the board, Michael. I think all of the third-party companies are feeling the pressure. The $1 million, $5 million, $10 million and then even the larger $40 million companies in our market area are also feeling the pressure. And in those cases, in some cases they've got municipal contract where they took the risk and they got the bond behind that contract. So the complexity, even for more sophisticated companies is significant and inflation is affecting all of them.
So I think that the opportunities are certainly as robust as we thought they would be and maybe even a little more so.
So we shouldn't be surprised if we discover there's some market share gains here at the expense of these vulnerabilities?
I think that's a fair perspective. I think that people who may have been on the margin in terms of whether they want to sell their business or feeling more pressure. So I think that's going to add to the opportunities that we have in front of this. I think the other thing that we have going is that we know most of the people in the marketplace. We've been in the marketplace for a long time. And so a lot of those folks have done business with us either at the transfer stations, the recycling facilities or at the disposal facilities. So I think that's a positive for us as well.
Okay. Ned should you be more specific -- how should we think about what the actual interest cost as from a modeling standpoint in 3Q and 4Q?
So, yes we've got about $6.5 million-ish of cash interest in Q3 and Q4, give or take a little bit.
Probably a little bit conservative maybe based on live work as well.
And then, reported [indiscernible] discounts and all that stuff, so it's more like 6.7, 6 8 amortized issuer cost all that stuff?
Yes. So we're looking at -- on the income statement more like, yes, 6.7 is probably a pretty good number.
Okay. Thanks. Labor, I just want to disaggregate the issues on labor. Are you seeing faster wage inflation on your straight time rates, or are you seeing faster overall labor costs because you're incurring more overtime to meet the needs and how are you sort of combating the two?
It's really -- we did this fine tuning of the markets study. So every market we looked at what's our pay scale, what's taken in to bring in new people. But, the real focus was our current people underpaid. So we're at risk losing them. So there were certain markets that were below scale and those markets happened to be our highest turnover market. So we made those adjustments. So we had an adjustment as the overall rates and now we're where we want to be, I think.
Where we need to be.
Okay. Where you need to be. So with the result of that now how do you think about what underlying wage inflation tracks versus overtime because I'm assuming you're ending, I'm having to do more overtime to meet some of this strong demand given the tight overall labor marketplace.
So on the driver side, Michael you have to understand the drivers are limited by VOT hours. So we haven't spiked their overtime from what it's been.
Okay.
Their hours haven't gone up.
But we run over 4% driver wage inflation this year and historically we have been somewhere between 2.5% to 3% over the last couple of years. So that's in direct correlation to us doing some adjustments. Now whether we can reset to that 3-ish range. We think so because it's a lot of kind of one-time movement being made.
All right. And then, on the mechanics side, is it worse?
No, I wouldn't characterize it as worse. As Ned said, we did the same market evaluation in terms of our wage rates from a mechanic standpoint and I think that we've made those changes as well, we're at market rates now across the board from a holding company standpoint. And we also have taken the time to put career paths in place, so somebody comes in, they understand how they can go from $18 an hour to $35 an hour. What the steps are, what levels of technical expertise they have to get? How they go through and get that? So that when we have the first conversation with them, it's not when they've been offered another dollar an hour, they already know what their career path is at Casella and what the opportunity is.
And I think it's already. We've already seen in the last few quarters about a 20% reduction in our overall mechanic turnover. Early stages probably not statistically valid at this point in time, but certainly directionally we're moving in the right direction there.
So I think that we've got -- we still have a lot of work to do. We still have challenges in terms of attracting people. We are doing a lot of work with -- you know with a lot of the agencies, we're doing work with the military, we're doing a lot of different things with recruitment schools et cetera, mechanic training programs, all of the above.
The other thing is, we're looking at our own self-inflicted policies in terms of driver age. Those kind of things. We're making real changes that I think are going to really help us to find the drivers when they come out of high school et cetera.
And can you move to some levels of technology, whether it's autonomous -- not autonomous vehicles, ASLs things of that nature that widen the employment pool too so that.
No, question about that it. I mean that's exactly -- I mean one of the things that Ed has done with the fleet plan is to try to get the right truck in the hands of our people that have the most efficiency. But we still have work to do there. And the other issue too is, we've more women in the trucks as well.
Right. Right. That's ASL allow the action, you have to get out and physically lift can, things of that nature. But shifting gears, Holyoake, you have a permit expansion and it works. As those contracts expire and you can redirect tons but you can increase the throughput, status report on it?
Just -- it's in the works, we are making progress there probably expect it to have permit probably towards the end of the year beginning next year.
Okay. And then, lastly, I know you're not in guidance, but if I look at the trends within the organic piece that you control in solid waste. Are we reading the tea leaves correctly that you're on a pace that looks like 3, 3.5 in price for next year and 1 to 2 in volume, x any special waste? And that's the starting place.
Yes. That's pretty reasonable.
Okay. Thank you very much. Enjoy the rest of your summer.
Thanks Michael. You as well. Safe drive.
Trying. Drizzling north.
Thank you. [Operator Instructions] And I am showing no further questions at this time. I'd like to turn the call back over to John Casella for closing remarks.
Thanks, operator, and thank you all for your attention this morning. We look forward to discussing our third quarter 2018 earnings with you in early November. Have a great day everyone. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you all may disconnect, everyone have a wonderful day.