Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Inc. Q1 2019 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's conference will be recorded. I would now like to turn the call over to 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 will be discussing our 2019 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 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 Factor section of our most recent Annual Report on Form 10-K, which is on file with the SEC. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to today. Also, during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures, to the extent they are available without unreasonable effort are available in the appendix to our Investor slide presentation, which is available in the Investors section of our website at ir.casella.com. And with that, I'll turn it over to John Casella, who'll begin today's discussion.

Thanks, Joe, and good morning everyone. We are pleased with the strong start to the year and a most challenging seasonal quarter. We continue to execute well against our key strategies as part of our 2021 plan and remain focused on driving further normalized free cash flow growth. As reported yesterday's press release, our Q1 revenues and adjusted EBITDA were up 11% and 8.1% respectively from last year. We also reaffirmed our 2019 guidance for revenue, net income, adjusted EBITDA and normalized free cash flow. Notably in the quarter, we completed an equity offering with net proceeds of just over $100 million. We are well-positioned to continue to grow the business in a disciplined manner, and yesterday, we announced our first acquisition in 2019 of MPC disposal located in Maine. This is a tuck-in great addition to the 10 acquisitions we completed in 2018, and we continue to see a robust pipeline in the North East. Overall, we remained focused on executing against our 2021 plan. The five key strategies are consistent with the plan as announced in August of 2017, which includes increasing landfill returns, improving collection profitability, creating incremental value through resource solutions and using technology to drive profitable growth and efficiencies, along with efficiently allocating capital for our strategic growth. 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. Our average landfill price per ton was up 6.6% in the quarter, as we advanced a strong pricing program in the early 2019. The pricing landscape continues to be favorable and we expect it to remain so into the foreseeable future, due to the continued disposal capacity constraints across the Northeast.…

Thanks John. Revenues in the first quarter were $163.7 million, up $16.2 million or 11% year-over-year with $11.9 million or 8.1% in net growth driven by acquisition activity a rollover impact year-over-year. Solid waste revenues were up $11.2 million or 10.2% year-over-year as a percentage of solid waste revenues with price up 5% and then 10.8% from the rollover impact of acquisitions and volumes down 4% year-over-year. Revenues in the collection line of business were up $16.6 million with price up 6% across all lines of business, volumes down very slightly a risk recovery fees up 2.4% and acquisitions up $11.3 million. Our disciplined pricing strategy has been working very well, balancing customer retention and new business growth with appropriate pricing levels to offset the building inflation across our operations. Revenues in the disposal line of business were down $4.2 million year-over-year with very strong pricing offset by volume declines and the closure of the Southbridge Landfill in November 2018. The closure of Southbridge resulted in a $2.2 million year-over-year decline in revenues. Disposal volumes had a tough year-over-year comparison as we had a one-time $3.5 million soils remediation project in the first quarter last year that did not repeat this year. And volumes were also negatively impacted by a $600,000 business interruption at a transfer station we're rebuilding after a fire. This transfer station is now open. Excluding these two factors, disposal volumes were actually up slightly. Economic activity remained strong across the region and landfills and waste energy facilities were generally at capacity throughout 2018. The tightness to the market has given us a great pricing backdrop for 2019. And in the first quarter, we increased reported landfill pricing by 4.2% year-over-year. And as John mentioned, we drove average price per ton up 6.6%. Excluding the Southbridge Landfill…

Thanks Ned and good morning everyone. Well, we had a very good start to the year. Our collection operations which generated about 50% of our revenue continue to grow and expand margins. And our recycling operations have almost fully recovered from last year's commodity market disruption moving to a pay-for-service model that minimizes commodity exposure. Additionally, our landfills and related transfer assets are well prepared to take advantage of great market conditions as we enter the busy spring summer season. Let me go through some of our key operational numbers. On a consolidated basis, our cost of ops as a percentage of revenue increased by 33 basis points in the quarter versus the prior year. This was driven by the landfills as we ran lower tonnage to save permit capacity for later in the year and to get caught up on what I will call preconstruction work to allow for early spring sell construction. As most of you know landfills have high operating leverage with minimal variable cost and a loss of volume flows through the margin. So, we expect this to reverse through the year as we crank volumes back up. Landfill demand remained strong and price was up 4.2% in the quarter and the more important average price per ton was up 6.6% indicating that we're being very selective on the tons we take in. Cost of ops as a percentage of revenue on our collection operations improved by a 108 basis points and this was driven both by price and operational efficiency. We achieved 6% in price growth for the quarter and our key metrics in each line of business within collection improved. We want to note here that this was not aided by acquisitions as the new operations had only a minor effect on the percentage…

Thank you. [Operator Instructions] And your first question comes from Sean Eastman with Keybanc Capital Markets. Your line is now open.

All right. Thanks, team. And Ned thanks for parsing out all the margin impacts in the quarter, that was helpful. I'd just like to start on the operational challenges at the Ontario landfill. If you guys wouldn't mind just providing a little more color on what those challenges are? And whether they're fully contained in the quarter? I'm just trying to get an idea of sort of margin progression here towards the 50 basis points of expansion that's embedded in the guide considering we sort of started the year at a kind of down year-over-year level?

Yeah. I think that it's -- clearly we had some challenges at Ontario and it really related to sludge going into the facility. I mean, there is a very little tolerance from an order standpoint. And quite frankly some of the issues that are associated with that were -- gas getting out of the front. And from an operational standpoint, as I said, Sean, it was all hands on deck where we've put the additional wells in. We've experienced that cost in the first quarter of significant number of additional wells and we're well on our way to having, as I said, back to the standards that we need to be at. It happened. We're not pleased with it. I think we've made the changes necessary make sure that it doesn't happen again. And we've spend the dollars obviously from an operating standpoint, both in terms of putting additional wells and to make sure that we control the issue and as well as additional work too. We always have a lot of work in the spring time at sites as well from the winter in terms of erosion. That also contributes to those issues. And you just -- you have those issues to clean up when you come out of the winter. But we did have the additional issues related to the sludge which we slowed down going into the facility as well. But the cost associated with that is in the first quarter.

Got it. All right. Thanks. So, I'm just wondering how the kind of margin trajectory should look from here. I assume it'll follow -- assuming the operational issues are contained. I assume that margins will ramp alongside the anticipated pickup in disposal volumes. So, I'm just wondering should that be pretty sharp upward swing into the second quarter or maybe this will be a more backend loaded year than usual?

Yeah. When we look at the forecast for the year, we're still tracking to be up 50 basis points, as we refreshed our forecast for the year. And we look at the progression throughout the year will be kind of flattish in Q2 and then gaining on a year in Q3, Q4. And as John said last year, if you remember we get out of the gates really fast with the landfills in Q1, probably took in too many tons. And then in November and December, we really struggled to find homes for those tons. So slowing tons earlier in year and really pushing our pricing strategy is a good strategy for the year. Some of it was due to these operational challenges, but we expect to comp higher margins later in the year.

Well, and also – I mean I think that we did have that really large project in the first quarter that didn't repeat. I mean, it's kind of serendipity and that we'll able to realize higher pricing towards the end of the year as opposed to in the beginning of the year. We just had – a very large project that that didn't repeat.

Okay. That's helpful. And just last quick one for me. I believe there are two landfill expansion permits in the works that could be received within 2019. So, I'm wondering, if we can get a quick update on those? And I know those particular landfills still do have some runway of permitted capacity. But with those permits coming in this year kind of change those disposal volume dynamics we're looking at this year?

I don't think that it's likely that those two permits – I think you're talking about Hakes in Waste USA….

Yeah.

…are likely to change the total volume this year. I think it's more a function of long-term capacity. The Waste USA facility as you know is a 20-year permit of a 50-acre expansion of that facility. So that's a very long-term expansion for the Waste USA facility. I do think that we will see that. It's hard to say exactly when but we've got 14 out of 15 permits there. We've got one permit left which is our 250 permit. The hearings are over and closed. At this point in time, we're just waiting for the 250 commission to write that permit. And then, the same thing with Hakes. Hakes is not as much capacity there. It's capacity for a few years, but it's not going to change the dynamics in 2019.

Super, super helpful. Thanks so much guys.

You’re welcome. Thank you.

Thank you. And our following question comes from Tyler Brown with Raymond James. Your line is now open.

Hey, good morning, guys.

Good morning, Tyler.

All right. Ned, so there might be a lot to unpack here, but I want to come back to the EBITDA bridge for this year. So I'm trying to parse out what changed versus the bridge that you laid out last quarter. So it feels like there's four things here. So number one recycling is maybe a smidge lower, if recycling prices hold maybe $1 million or so something like that. But two collection pricing was up 6%, which I believe was ahead of your guidance of 3.5% to 4%, so maybe some tailwind. Three you closed on some M&A which might give you a slight tailwind. And then four, Ontario as having some order issues and added costs. With those be the things that change can give any color on those pieces?

Yeah. I think you've really hit the nail on the head. Recycling is not going to be significantly off. It's really about $5 million. We had guided up $5 million to $6 million. We're probably tracking about $5 million. We were up $2 million in the quarter. Southbridge is tracking to about the same level negative $8 million. You look at our collection-wide business, we're up $6 million to $7 million we're probably tracking up more like $7 million to $9 million right now that range. And on the landfills, we're tracking more like $7-ish million maybe right now or slightly lower. And in acquisitions we've guided $8 million to $10 million up. This first acquisition is a smaller one. And as you know, in the first couple of quarters we're doing a lot of work to integrate the acquisition and drive long-term value. So yes it's not a big needle mover its mere $0.5 million or something in the year or less. And – but the big swing we're seeing right now is the reallocation between the other landfills and collection price. There is a good opportunity to recover on the other Landfill side because some of it's just volumes we intake in the first quarter that we will take this summer or this fall a little bit of it as well to its higher operating cost in the first quarter that we had to outperform and make up for.

Okay. Very helpful. Now one clarification, so you noted 6% actual pricing into the landfill, but I think it's 4% on a same-store landfill pricing, which number should we use when we compare that to the 3.5% to 4.5% pricing expectation you laid out last quarter?

It's the $4.2 million. So the $6.6 million rolled through a couple of different areas: one it's our intercompany price plays into today; and two it's blending in with the new volumes if we kicked out our customer. But it -- I think it really helps to illustrate the type of discipline we have where we're charging ourselves very high price increases getting that back to The Street through the collection line of business. And as Ed said, still expanding margins in the collection line of business. So our transfer pricing is working very well in the business.

Okay. And then clearly disposal prices are on the move given tightness, but it sounds like Chicopee has started its capping work, it's lated to close in June. John by all indications this could close maybe even as early as the end of this year. I mean I think you're talking another 0.5 million tons of disposal capacity in Massachusetts. But it's imminently slated to disappear. Do you think that North Eastern disposal pricing could actually accelerate into 2020?

I think there is a real possibility of that. I mean -- I think just look at what transpired in the Boston bids. I think that's clearly we could see it accelerated. I think that it's also -- we've received our additional permitted capacity at our transfer station in Holyoke. But with the activity of Chicopee until that's closed, we're not seeing any additional tons there at all. We're successful in getting the permit. But we're thinking that we should -- once that closes Tyler we should see additional tons going through Holyoke as well.

Okay. That's helpful. And then just real quickly back on recycling for a moment. So I think we can all appreciate SRA fees and the repricing of that handful of contracts Ned I think you mentioned 90% of recycling is covered. But is those larger contracts are renegotiated? Will that number actually go up, or when you renegotiate those contracts are you simply recalibrating them, so don't loose money in them? But they don't have an SRA fee, or how will that work?

No. We've have established a pretty strict standard that -- we call the SRA fee what we put on our collection customers that's floating like a fuel surcharge. But I think as you know about one-third of the tons that come into our processing facilities come from our own trucks, our own collection customers. And two-thirds of the tons comes from others whether they be municipalities or private haulers. And in those instances we call our contract structure revenue share structure, where if commodities fall below our fully-loaded processing cost as an appropriate return, our customers pay dollar-for-dollar of processing fee and the risk of commodities is transferred back to the customer. And we're using that structure with all new contracts. And as you know last year, we didn't have a few contracts under that structure it is painful for us. And it was a big headwind during the year. It actually laid out back when we gave guidance for the year, the step up year-over-year from 2018 to 2019 in recycling, a lot of it was driven by the reset of a couple legacy contracts that didn't have that risk being pushed back to our customers. So as we step through those resets that's how we start to get up to about 90% or more of our customers where the commodity risk is passed back to them. So with this recent decline, it's going to hit us a little bit. I'd would say like $0.5 million or so. But it's not a huge headwind to us, because we've put in very effective risk programs.

Right. Okay. Maybe my last one here. I want to come back to M&A. So John, you've been successful in New England market, but if assets both collection and disposal were to come up in markets say that were contiguous to your proverbial sandbox, would you entertain expanding the footprint geographically?

I think that we have said that we would look at contiguous. We have a presence in Pennsylvania as an example right now with McKean. And so I mean, we have facilities in Pennsylvania. So I think there are contiguous markets Tyler that we would look at and are looking at quite frankly. The vast majority of what we're looking at is over the top of the existing investments that we've already made as we said. But there are some things that are interesting from a Pennsylvania standpoint. We do have assets in McKean already in that market area. But certainly we're not -- we wouldn't be interested in -- we have no desire to step out of the Northeast region. That's -- you won't find us in Texas or California or the Midwest. We're not looking to do anything like that.

Right. Okay, no that’s very, very helpful. Thank you very much.

Thank you, Tyler.

Thank you. [Operator Instructions] Our next question is from William Grippin. Your line is now open.

Hi, thank you. Just one question. The $40 million of revenue for the deals under letter of intent, just wondering if that is contemplated in the guidance reiteration? And if so, are there some offsets to that benefit that you're seeing over the rest of the year, or should we think about these deals? Should they close as potential upside?

Yeah. So well we have not contemplated that in the guidance for the remainder of the year of the reaffirmation. Until we close the deal, we really don't have visibility. John and I and Ed had a few back and forth conversations about this because we don't typically talk a lot about acquisitions before they close. But we did raise equity and we raised it for a reason to fund acquisitions. And we've been working hard on bringing in a few acquisitions that are little bit more complicated and will be great fits to our business. And we just want to make sure people are updated where we're heading and how we plan to use the equity proceeds. But it's not in the revenue or EBITDA or free cash flow guidance at this point.

Got it. Thank you very much.

Thank you.

Thank you. And our next question comes from Michael Hoffman with Stifel. Your line is now open.

Thank you. Thanks for taking the questions.

Hi, Michael.

How you're doing? Good. It sound like you have a cold. Hope you get better.

I do.

So I know you don't put it in the guidance, but how should I think about what that $40 million could be on an annualized basis? And is -- think of it as 20%, 25% margin, so $8 million to $10 million is incremental contribution?

Yeah. So last year, we acquired a few transfer stations and that blended things down. This is more hauling than transfers. And the first year, we haven't closed these deals yet we're close. But it probably wanted to be more like the 20% level and then drive up from there.

All right. That helps. And then Boston's in the process of redoing all of their contracts on five-year rolling thing. If I am -- if I have my facts correct there were two companies didn't bid at all. You all did a no bid. So what's the status of that process? I'm assuming Boston got cut off guard? And what do you mean nobody wants to recycle for us? Where are we in that process? And then I have a follow-on about the Boston disposal contract.

Go ahead.

Yeah. So there are three people who went to the pre-bid. And one of the most important bidders decided not to bid. And they made a few public comments about it. It really had to do to with contamination in the City of Boston in the recycling stream. And we might have been very fearful as well if we weren't currently handling the streams. We're auditing them weekly, daily in many cases and we know where the issues are. When we put our proposal together for the City of Boston, we set up a real incentive for them to educate their residents and get contamination out. But I could see why some of the smarter players in the marketplace decide maybe not to bid with the levels of contamination in the city today. They are not doing a great job.

Okay. So will you expect to be awarded something? Are you planning to taking on all of it, or -- because I would have thought this is going to be divided up by two or three players.

No. We were handling all of it. We've handled all of it historically over the last five years, Michael. And I think that it's likely that we'll handle all of it to the extent that we're successful in negotiating the bid, which we're in the process of doing that right now. We'll in all likelihood handle all of it as we have done historically. But I think that we've -- we're very comfortable with where we are. As Ned said, we did the bid. We also gave them significant incentive to clean up the stream. The way that we bid it so there's obviously one cost if it's not cleaned up then there is another cost if they clean it up. So there is real incentives for the city to do a better job from an education standpoint. And certainly, we'll work with them to achieve -- a much higher level of quality coming to the facility so that we can continue to put real quality material into the markets. So -- but it's likely that we'll handle the entire stream.

Okay. And then the Boston disposal bids look like it was coming out with a nine handle on it. Can you talk about what that knock-on consequences to ongoing efforts to keep improving your disposal pricing?

I think it's very clear that that's a positive in terms of disposal pricing, but it's also a double-edged sword in that. Our cost for disposal at the facilities that we go to in Massachusetts are obviously going up as well. So it's a positive, but it's a double-edged sword. As you know in the quarter we had higher transportation cost, higher disposal cost internally as well.

Okay. And then with regards to Ontario so you've put in more landfill gas wells to be able to capture gas in orders some things of that nature. But you've reduced the sludge volume in the quarter. Will you be able to ramp back the sludge volume, or you have committed to just a lower rate of sludge?

We're going to be utilizing a lower rate of sludge, but that lower rate of sludge Michael is going to be at a higher price. So we'll get back some of that probably not all of it. But as you know the pricing from a sludge standpoint is very significant. So high price -- some of it will get back in higher price. But we won't get back all of it. We're going to be running lower amount of sludge at our facilities.

But this is in a trend that's unique to Casella. I think we've some of...

Across the Board.

Across the board some of our peers across the marketplace significantly reduced levels of sludge going into their sites. And it's an area that we have a lot of pricing power into that.

Yes. I get that. I agree. But just to be clear the 4.2% landfill price so also had to absorb the fact that you've reduced the sludge rate?

Yes. That's correct.

Right. So if you hadn't then the actual price you're going would assume greater...

Would been higher.

Yeah, right. Okay.

It's exactly right.

Okay. That’s all I got.

Okay.

Thanks, Michael. See you next week.

Thank you. And our last question comes from Steve Schwartz with First Analysis. Your line is open.

Well, good morning, gentlemen.

Hey, Steve. How are you doing?

I'll tell you what to ask the 10th question on M&A. The deals that are under LOI what's the probability typically that a deal comes to close while it's in the LOI stage? I know it's not a 100% obviously but if you could flavor that for me?

I think it's really difficult to flavor. I think they are all somewhat unique. I think that we get to that stage obviously, it's non-binding letter of intent, so it's really hard to give a factor. I mean obviously, we've had good success. We haven't gotten all of the deals done that we approached in 2018. But I think we've had a fairly high rate of success. But certainly until we're closed they are not closed.

In each of these transactions we've been working through a diligence on in progressing. So it's -- they're not immediately going to close, but there are things we've been working on for a period of time and we're in a constructive space and that's why we decided to give some additional commentary.

Yes. And they are to be clear. There are company's you worked along side for a long time right? Since they are in your geographic area.

Yes.

That's correct.

Yes, okay. And then – and Ned, I think when you answered William's question you did through a win a comment that these deals this year might be a bit more complicated than the deals we saw come through last year. Is -- did I hear that correctly?

Yes. They just -- there are a few transactions that have multiple sites and we're just -- part of it is -- we've been working really, really hard on integration as very deal we completed in 2018. And we're not a huge company, we don't have a huge team. So many of the same people who are working on integration also work on diligence and integration planning for new deals. So maybe I wasn't embracing it...

I mean appropriate pacing of those transactions as well to make sure that we get done what we need to get done from an integration standpoint as we continue to grow.

Yes. My choice of words maybe wasn't perfect. It's more of a metered approach is probably better.

Okay. And then certainly back on Boston is this a situation where they could handle it like many municipalities do with police and fire contracts? If July first comps can -- is there a possibility you continue working under old contract and the negotiation continues? I think in that case that would obviously push out your SRA recovery element and maybe some other things would push it out to later in the year or even into 2020?

No. That's not possible at this point in time. We have a long-term contract with Boston. We honored that contract. We will continue to honor that contract through the end of the contract. But we're not going to carry that contract into the rest of the year. We would continue to work with the City of Boston if they weren't -- if we weren't able to get to an agreement, if they would be providing -- if they -- we're willing to meet the bid that we've put in place. And we've continued to provide the service at the new price if they wanted us to do that while we continue to negotiate that would be fine. But we're not going to extend the existing contract. We can't afford to do that. We've -- we had the contract. We honored the contract to the end of the contract. It was the right thing to do. And now the contract is over. If they want us to continue to provide service they'll have to do it at the new price.

Got it. Good to hear that. Thank you.

Thank you. And I'm not showing any other further questions at this time. I would now like to turn the call back to John Casella for closing remarks.

Thank you very much. Thanks everybody for joining us this morning. We look forward to discussing our second quarter 2019 earnings with you in early August. 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 may all disconnect. Everyone have a great day.