Good day, ladies and gentlemen. And welcome to The Casella Waste Systems Inc Q4 2018 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 Mr. Joe Fusco, Mr. 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; Ned Coletta; our Senior Vice President and Chief Financial Officer; and Jason Mead, our Director of Finance. Today, we'll be discussing our 2018 fourth quarter and full year results. These results were released yesterday 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 that various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements. As a result of various important factors, including those discussed in the Risk Factors section of our most recent Annual Report on Form 10-K, which is on file with the SEC. And 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 to today. Also, during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures to the extent they are available without a reasonable effort, are available in the appendix to our investor slide presentation, which is available in the Investor section of our Web site at ir.casella.com under the heading events and presentations. With that, I'll turn it over to John Casella.

Thanks Joe. Good morning everyone. We’re pleased with our fourth quarter results and our results for fiscal year 2018. 2018 was an exciting year in which we continued to execute well against our key strategies and our 2021 plan. We meaningfully grew the business through 10 acquisitions with $77 million in annualized revenue, opportunistically refinanced our credit facility, successfully implemented our new ERP system and in January of 2019, we completed an equity offering with $100 million in proceeds. Pulling all those off as we did with the true team effort and all in all we positioned ourselves very well for 2019 and beyond. Our 2018 execution is [Technical Difficulty] as reported yesterday. For the year, we grew revenue over 10%. We grew normalized free cash flow by over 21%. We drove down our consolidated net leverage ratio down to 3.62 times. And we increased adjusted EBITDA of $9 million. This is particularly impressive given that during the same period, we experience an $8 million adjusted EBITDA headwind from recycling. So the rest of the business improved by $17 million, which highlights the strength and performance within our solid waste, customers solutions and organic businesses. Fiscal year 2018 results beat our guidance ranges that we increased in the third quarter for revenues and normalized free cash flow, while we were within our revised guidance range for adjusted EBITDA, so great accomplishment for the entire team. Looking out over the next several years, we are well-positioned to drive additional shareholder value into the business. Given the strength of our cash flow growth our robust acquisition activity to-date, we are on track to outpace our normalized free cash flow growth targets set as part of our 2021 plan. We’re increasing our normalized free cash flow target range for fiscal year 2021 to…

Thanks John. Revenues in the fourth quarter were $174.7 million, up $23.5 million or 15.5% year-over-year with roughly $13.4 million of increase driven by acquisition activity. Solid waste revenues were up $17.9 million or 16% year-over-year as a percentage of solid waste revenues with price up 4.5%, volumes flat or volumes 0.5% excluding the business interruption during the period. Revenues in the collection line of business were up $15.3 million year-over-year with price up 5.6% across all lines of business, volumes flat, risks recovery fees up $1.6 million and acquisitions up $9.9 million. Our disciplined pricing strategy has been working very well, balancing customer retention with new business growth with appropriate levels of pricing to offset the building inflation across many aspects of our operations. Revenues in the disposal line of business were up $3.2 million year-over-year with the growth driven by strong pricing, $3.5 million of acquisition activity and higher landfill volumes. This was partially offset by lower transfer station volumes and the closure of the Southbridge landfill in early November. Disposal volumes were negatively impacted by $600,000 during the quarter due to a business interruption at a transfer station that we were rebuilding after a fire forced us to close the facility in late June. The Southbridge landfill closure resulted in $1.8 million decline in disposal revenues during the period. As we discussed last quarter, we had to slow times at our landfills in the fourth quarter to ensure that we did not exceed our annual permit [Indiscernible] sites. Economic activity remains very strong across the region and landfills and waste to energy facilities were mainly at capacity in 2018. This tightness in the market gives a great pricing backdrop coming into 2019. We increased our reported landfill pricing by 3.7% year-over-year and importantly, we increased our average…

Thanks Ned. Good morning everyone. 2018 was a significant transitional year for the company. After years of focus on operational improvements, strengthening our daily process and discipline and driving performance to acceptable levels, 2018 became a year to refocus on growth. We exceeded our expectations. But before I get into the details of our transformation, let me walk through the cost of ops results for the quarter. Our consolidated cost of ops as a percentage of revenue was up 70 basis points in the quarter versus the same quarter last year. Recycling and our other non-solid waste business had only a minor effect on this percentage in Q4, but we are starting to anniversary the commodity price drops of the years ago. Recycling has become a processing for a fee type business now, so we expect financial performance going forward to be more stable. Focusing on our solid waste business components. Our collection operations generated a little over 47% of our revenue in the quarter. Cost of ops as a percentage of revenue increased from the same quarter last year by about 41 basis points. On last quarter's call, I mentioned that acquisitions can affect your metrics during the transition period and certainly that's the case here. Factoring out the acquisitions to get to a same base basis, our cost of ops improved by 40 basis points. As we assimilate the acquisitions, they will come in line with our existing operations. Our disposal segment includes landfill operations and transfer station operations. The landfills generated 13.3% of our revenue and the transfer stations, which are effectively disengaged for the landfills produced another 10%. The landfills by themselves had another great quarter, driven by strong pricing 3.7% and on an even stronger average price per ton improvement of 5.6%. And our costs…

[Operator Instructions] Our first question comes from Tyler Brown of Raymond James. You may proceed with your question.

Ned, super helpful on the EBITDA bridge, one clarification though on the negative $8 million from Southbridge. Is that net of redirecting ways or is there a possibility to soften that number either this year or over time?

Yes, there is a possibility overtime. If you look at all other disposal sites being up $7 million to $9 million with about 3.5% to 4.5% of price and then some disposal volume growth, some of that growth is going to come from our own tons. About two years ago, we got a permit increase at our Chemung landfill from 200,000 tons a year to 437,000 tons a year. And then in late 2018, we got a permit increase at our Clinton landfill from 75,000 tons a year to 250,000 tons a year. We've actually held back some of this capacity for this day to come where we would be also redirect some of our volumes from Southbridge out to New York State to take care of our customers. Not all this is going to go there, some of it's going to stay in Massachusetts is going to third-party sites. So there is a little bit of that in our landfills from Southbridge. We are spending more money though transporting that waste out to New York State. We are driving some additional hires third-party volumes to Chemung and Clinton in the year as we access that additional capacity coming online. Longer-term as we work through permitting at North Country, there is probably even more of an opportunity to drive value integrating a few more Massachusetts times into that site as well.

A quick verification on the free cash side, so I know when the normalized free cash flow you exclude the $12.5 million on the land closure the remediation expenditures. You have that back. But will that expenditure flow through cash from ops and will that largely go away in 2020?

So I was running long on my script, so I decided to just hold back. The net cash flow provided by operating activities noted in our guidance is pretty flat year-over-year. And the reason is because we’re taking down current accruals for landfill capping closure, the remediation at Potsdam. All those reside as liabilities in our forecast for our budget for 2019 that cash goes out the door as we complete those activities. So net cash provided by operating activities is really skewed in the year by close to 12.5% to $13 million through these activities. And this is going to be a big year at Southbridge. After we get through this initial tapping and the big year of closure, we will come to a point where we spend $5 million or $6 a year, the year after and then they'll drop to a couple million dollars for the year or two after that. Potsdam is a site that was acquired in the late 90s. We've been working with the EPA from probably 15 years where this is -- unfortunately part of this site we acquired had a old metals business, and there were some remediation efforts that need to happen. And it’s taken this long along with our partners, Niagara Mohawk and Alcoa to come to a conclusion with the EPA to have a remediation plan. And we believe that work will finally take place in 2019 to cleanup that site appropriately. So that’s appropriately accrued, but it's been a short-term accrual over the last year that will reverse out and hit our free cash flow. That’s a pretty large swing and that’s why we’re calling that out as non-routine.

And then same type of question on the $8.5 million of added CapEx, will that abate also going forward or should we expect that to continued M&A?

So a good bit of that associate with M&A, we really as we buy businesses, we of course have pro formas for a multiyear period of time looking at the entire fleet and other capital needs of where replacements need to come. But in the first six months to a year of an acquisition, we're really focused on integrating it with our business and there might be some facility changes, equipment upgrades, you name it. And there is heightening level of CapEx. And we really view that in many ways as part of the purchase price to get the assets integrated. So we are calling that out. And you will see, as we do acquisitions, maybe we should give a little bit more visibility as well as what's coming in the near term.

And then interesting commentary on the NOLs, but at this point when would you expect to become a meaningful cash taxpayer?

So bonus depreciation stays at 100% through 2022. And what’s interesting is we’re getting a double benefit, because as we acquire businesses, especially through asset and acquisitions, we're taking 100% bonus depreciation on their assets as well, and everything we’re buying except for landfill assets. So we fill that over 100% of our pretax income in 2018 through bonus depreciation. Bonus depreciation stays at 100% through 2022 then drops to 80% and it comes down over the next five-year. So tax loss stays the same. Our NOLs just take us out through 2024 or even later with our current planning where we’re not going to be a meaningful cash tax payer.

And then my last question here for John. On the M&A side, you guys obviously have a lot of powder on the balance sheet. You talked about exceeding the $20 billion to $40 billion target. But curious should we still expect to see small one-sie, two-sies, or could there be something more midi, I guess in the acquisition pipeline?

I think you'll continue to see the smaller activity. I think that there are a few opportunities similar to what we did in Rochester, other markets that are within our footprint that we're not in prior that could be a little bit more meaningful than $8 million or $10 million acquisition. But you’re really going to see more of the same as opposed to anything really different from an acquisition standpoint.

Thank you. And our next question comes from Michael Hoffman of Stifel. You may proceed with your question.

City of Boston, if I have my data right is in a rebating mode of all three major contracts, collection, the disposal, the recycling. So this has multiparts to it; one, can you share your current direct exposure; two, what do you think happens to the disposal price versus the last round? If memory serves, the last round was in the low 70s plus cost escalators; and the third part of that is if this comes out with number with a 90 handle on it. How’s that trickle through for you? Is it as obvious if we ended at 80 and they go to 90, and that's 12% increase. Do you get to raise all your prices 12%?

So the only direct exposure we have right now to City of Boston contract is on the recycling side. And we've been talking for the last year about a few contract where we’re upside down. One was with independent where we [Technical Difficulty] dollars on that one that we reset that on January 1st to current market rates, and it will be a pickup of almost $2 million a year on that one contract. And then stepping contract we're underwater on with the City of Boston. We did bid on that contract. It’s in process right now and we stayed to make money and to reduce our risk profile. So we feel pretty positive about that, some of the competitors in the market…

With the swing on the Boston contract…

Yes, if we win at current rates, it will be about $3 million a year swing, positive swing for us. And that will be awarded for July 1st. So we could take up about half a year on that. So some of that really is in our numbers for the year of our recycling why it's improving year-over-year even through we’re modeling commodities to be flat. The City of Boston several people did bid on the trash, including republic, small parts of Covanta on all of that and we look greater on small parts today. And there is some visibility yesterday on the bids coming from the market. It really won’t impact us. Our ways doesn’t flow through the city of Boston. We’re not holding for the residential customers in the City of Boston either. But it will be a market signal that's pretty important.

And do you think it's right a t90 bucks?

So the bids, they're anywhere from mid 80s to mid 90s, the best we can tell.

And is it fair to say that we're ending it somewhere of high 70s, low 80, so whichever one wins, let's say the midpoint $90. Does that percent change? Can you do that type of percent change just radically across your network? Because that sets the direct call number and then the rolling number going out to you. So if you have a $5 number somewhere, can you raise it 10%, could you raise it $5 bucks?

So if you look at our price increases, those on the hauling side and on the disposal side. They are really very blended numbers. If you get on to the hood, they might range from anywhere 0% or 1% or 2% increase is all the way up to 15%, 20% increase, because there are number of contracts that reside in that book of business. So if you look at any one of our landfills as customers are rolling off contracts depending upon how long ago they entered those contracts, they could be seeing a 10% increase, a 20% increase or more depending on where they sit and where the other advantages are n the market. John, you said in your script we’re entering in very short-term agreement right now.

I think there is no question they are going to see double-digit inflation in Massachusetts market. I don’t think there is question about it. It’s also a lot of pressure from transportation standpoint as well.

Second question for me, we've watched you meaningfully improve the cash conversion of the model. And I think because of your mix of other revenues, which are lower margin part of the right way to think about this is the percent of EBITDA. So what’s the probability you could get to 40% or better cash conversion? You’re in the 30s now. And what's it take to do it and how long would it take it?

So our free cash flow as a percentage of revenue is slightly dilutive to our organics business, in many ways has a lot of brokerage components and our customer solutions business has a large degree of brokerage revenue. So our revenues are grossed up and our direct costs are grossed up, so it's a little bit less margin flowing through those businesses, but nice cash conversion as you laid out. So looking at free cash flow as a percentage of EBITDA is important. And as we've said, we've got a game plan over the next several years to add over 200 basis points to that conversion rate, we're working hard at that. The pathway to get it into the 40s is a little further out. We haven't laid that out for investors. But if you look at the numbers we laid out yesterday evening $65 million to $70 million free cash flow by 2021 that gets us to -- I’m not sure if I've got a percentage of in front of me, Jason, but that gets us more into the high 30s…

Yes, high 30s…

It's pretty close to 40%. So we’re in a trajectory. It is something we’re very focused on, Michael.

And last one for me, what's the probability that you can drive SG&A to 12% and will not work you and your finance team to death. But what’s the probability you can get to 12%.

So we do have a multiyear plan on the technology side. We’re quite inefficient today in the back office. And no fault of anyone, it's a solid waste business, its complex, every customer got a different pricing structure, its different billing structures there is a lot going on. And we have a lot of paper that moves in all elements of our business. So we made the first step with the ERP implementation in 2018 with NetSuite. I would like to say where we are today a year later is we’re just about as efficient we were beforehand. We've got a lot of work, especially on the digitization side of taking paper, taking approval steps, taking manual intervention out over the work. We will be very focused on that over the next year plus. The side business where we really start to gain more leverage is when we upgrade our billing, work order management and routing systems, both on the G&A side and on the operating side. We are six months into product selection process on that side. And remarkably, there is not a lot of amazing solutions out there for the solid waste business. There are a lot of people who have built solutions for small like HVAC type businesses where you have maybe 10 service calls in a day. But service management solutions with 400, 500, 800 stops in a day are not out there as much. So we’re still evaluating next steps for there and it is part of our management plan to take 75 to 100 basis points out by 2021. And there is no reason to stop if we can get more and more efficient, and we will gain some scale as well. You saw it in 2018 with the acquisition work, we expect in 2019 where we’re not adding people at the same pace as revenues.

I think Ned and the finance team, Michael, did a great job of getting us to a new platform with NetSuite in the cloud. We've been on it now for six months, the transition is full. But we’re starting now, will be starting to bring out and bring in the efficiencies of moving to that platform from a platform that we've been on for 35 years. I think the execution on-time on budget in terms of getting to NetSuite in the cloud and getting to the next generation of software was really well done. But we haven't gotten the efficiencies it will take probably this next year to really get additional efficiencies from the ERP program to say nothing of stepping into a new program from a routing and billing perspective. I think we’re moving to the future very rapidly. And I think most importantly, we're going to be a lot easier for our customers to do business with when we get that implementation, the five-year technology plan implemented. I think it's going to bring a lot of productivity and efficiency to the organization, and we’re at the beginning stages of that. First thing we had to do is getting on the new platform. And that’s really exciting because we’re going to have one database for the entire company and that's a real step in the right direction.

Thank you. And our next question from Sean Eastman from KeyBanc Capital. You may proceed with your question.

I just wanted to start on the acquisition pipeline. I’m just trying to get a sense for the potential this year. I know you guys said that you will do above the original target. But just wondering how we should be thinking about that $77 million you guys added in 2018. Was that really an outsized number or does this pipeline turn it's course…

I think it's clear to say that there was a bit of pent up demand. It was a first year we get started and we got a little bit of activity out in front. But I mean I think that we've said that we've got -- we’re tracking with LOIs for the upper end of the range around $40 million right now that we're working on. We've got good visibility. So we think that we’re going to be certainly at or target from acquisition standpoint, but necessarily say that we’re going to repeat '18, but certainly we are going to be at the upper end. And that's where we are in terms of the visibility with LOIs that we're working on right now.

But based off of where [Indiscernible] a bit, I think it would be fair to say integrations more important than getting the deal done in many ways. So Ed talked about people earlier and adding a few key resources and making sure we get the work done on integration. So we’re running on a few deals right now, jogging on in a few others, making sure we get integration work done from 2018 acquisition.

So to my next question, you guys did speak to it in the prepared remarks. But just wondering how to think about the challenge ahead on integration considering '18 came in so much above the initial expectations. Maybe just a bit more color on the teams that are in place and some of the measures there to get the synergies?

It's really exciting. I mean, one of things that we've done is we've added some talent from an accounting standpoint, particularly in the western region with Dennis Pantano and Michael Stehman. We've added an additional regional controller there, gives Michael little bit more opportunity to help on the integration side. He was the regional controller. Now, we brought in another controller to free up Michael from an integration standpoint as well as Dennis. And we brought in some new talent from a controller standpoint for that market. We've done some things from an operating standpoint additional support there with Ed from an operating standpoint with Sean. So I think as we identify those areas that we need additional resources, we are executing on that and putting additional talent in place to make sure that we integrate those businesses appropriately, quickly and get the integration behind us as quickly as we can.

And typically in integration, we’re talking something into existing business. Within months you’re running pretty close to efficiency and six to 12 months you’re all the way there. Rochester, we’re putting forth standalone businesses together, so lot of logistics there. And as we laid out -- as we did these acquisitions, it's going to be a year and half to we're fully integrate and up and going in that market, so lot of work, tons of opportunity as well for us.

And actually going to be over a couple year period of time in that some of the existing disposal contracts don’t roll off for another year and half. So we won’t be able to internalize some of that waste until probably two years out. But that’s all incorporated into our plan, incorporated into the performance that’s how we performed it. So no surprises there at all. But it will take a little bit more time as Ned said with regard to the full integration of the Rochester market. So a little more complex than a normal tuck-in into an existing facility there, we’re taking four businesses and putting them together.

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Mr. Fusco for any further remarks.

I would like to turn the thank you over to John for closing remarks.

Thanks everybody for your attention this morning. We look forward to discussing our first quarter 2019 earnings with all of you in early May. Thanks everyone have a great day.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a wonderful day.