Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Inc., Second Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host Jason Mead, Director of Finance. You may begin.

Thank you. And thank you for joining us this morning and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ed Johnson, our President and Chief Operating Officer; and Ned Coletta, our Senior Vice President and Chief Financial Officer. Today, we will be discussing our 2019 second quarter results. These results were released yesterday afternoon along with a brief review of those results and an update on the Company’s activities and business environment. We will be answering your questions as well. 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 the 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 With that, I’ll turn it over to John Casella who’ll begin today’s discussion.

Thanks Jason. And good morning and welcome to our second quarter 2019 conference call. We are pleased with our results and continued execution against the key strategies of our 2021 plan. As reported yesterday in the press release, our Q2 revenues and adjusted EBITDA were up 13.2% and 8.9% respectively for the year. Given the continued strong performance of our solid waste recycling customer solutions operations coupled with the acquisitions we have completed so far in 2019. We have raised revenue, net income, adjusted EBITDA guidance for fiscal year 2019. Overall, we remain 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, using technology to drive profitable growth and efficiency and allocating capital for strategic growth. Our first strategy in our 2021 plan is increasing landfill returns. We continue to enhance returns through price execution, operational programs, the source of new volumes at higher pricing, and our efforts to advance key permits. Landfill price per ton was up 6% in the quarter as we advanced robust pricing throughout the first half of the year. At the same time, Southbridge we drove higher volumes into our sites with landfill volumes up 8%. This speaks to the Northeastern disposal of dynamic of continued capacity constraints. As we drive price on existing volumes, we are also replacing lower price streams with higher price customers, which blends up overall pricing and enhances our returns. That said, we did experience a couple of notable adjusted EBITDA headwinds in the second quarter related to higher [indiscernible] cost due to a very wet spring, particularly in May and June. And these costs have moderated into Q3 as things have begun…

Thanks John. Revenues in the second quarter were $187.5 million, up $21.8 million or 13.2% year-over-year with 8.9% of this growth being driven by acquisition activity. Solid waste revenues were up $17.4 million or up 13.8% year-over-year as a percentage of solid waste revenues with price up 5.1%, volumes up 0.4% and 11.8% growth from the rollover impact of acquisitions. Revenues in the collection lines of business were up $17.5 million year-over-year with price up 5.5% across all lines of business and volumes slightly down and acquisitions up $13 million. Our disciplined pricing strategy has been working very well balancing customer retention, new business growth with appropriate levels to offset building inflation across our operations. Revenues in the disposal line of business were up $900,000 year-over-year, despite the closure of the Southbridge Landfill in November 2018, resulting in a $3.7 million year-over-year revenue headwind. The landfill pricing environment remains very strong and we increased reporting landfill pricing by 6% year-over-year. And in addition, we increased our average price per ton at the landfill was 5.9% as we continue to improve and mix of our customers and volumes. Excluding the Southbridge Landfill closure, landfill tons were up 6.3% year-over-year as we start to ramp capacity online for the higher price summer months while still maintaining strict pricing discipline. Recycling revenues were up $900,000 year-over-year with $1.3 million lower commodity pricing, fully offset by $1.6 million higher third-party tipping fees and $600,000 of higher volumes. Commodity prices were down 13.3% year-over-year in the quarter, mainly on lower plastics pricing and down 23.2% sequentially from Q1 to Q2 and this is driven mainly on further declines in OCC pricing with cardboard pricing down 44% from December to July or down roughly $50 a ton. We have effectively pushed over 90% of commodity risk…

Thanks, Ned, and good morning, everyone. Well, things remain good in the waste business. We’ve completed another strong quarter, remain on track to hit our goals for the year. Operationally, we’ve been very busy and have made great progress with the integration of our acquisitions, towards conquering the challenge of a changing labor market and capitalizing on our unique landfill assets, all while continuing to execute on pricing. Cost of ops as a percentage of revenue increased in Q2 versus the prior year by 115 basis points. As expected, this is driven by the initial lower margin contribution of the acquisitions and the margin compression of passing through significant disposal and labor cost increases in the collection line of business. Collection operations generated about 49% of our revenue and grew almost 24% primarily through acquisitions. We obtained 5.5% of price growth in our legacy operations and as we install our processes and price discipline in the new operations, we will recover the margins. Additional price is now being pushed through on our eastern markets where disposal costs have escalated the most. More importantly, our key metrics continue to improve. On a same-store basis, excluding the acquisitions, we have improved our variable margin contribution per driver hour for each of the past five years and that trend continued through Q2. Despite additional cost incurred to finish cleaning up some operational issues that the Ontario County Landfill that we mentioned on the last call, the landfill line of business performed well in the quarter. Volume was up 8%, price was up 6% and the cost of ops as a percentage of revenue improved 53 basis points. We continue to be a price leader in this ever tightening disposal market in the northeast and look forward to Q3 as we finish up cell construction projects and add back capacity. Recycling processing is only about 6% of our overall revenue, but cost of ops improved substantially in that line of business as we continue to roll off older municipal contracts, where we bore the commodity price risk. The big news here is the Boston contract. This contract has been a drag on profit over the past few years and finally expired at the end of June. We did win the bid for a new contract under more reasonable terms and we'll be earning a normal return of that on assets going forward. Acquisition integrations are going well. We couldn't be happier with the opportunities in the new markets we have entered and the tuck-ins are always a plus. We closed on an additional four acquisitions in Q2. I want to extend a warm welcome to our new team members that have joined us and hope that each of you find long and rewarding careers with what we think is a great company. Keeping it short, I'd like to now turn it back to the operator to start the question-and-answer session.

Thank you. [Operator Instructions] And our first question comes from Tyler Brown from Raymond James. Your line is now open.

Hey, good morning guys.

Good morning.

Good morning Tyler.

Hey, so solid quarter. But Ned you mentioned EBITDA margins were down around 85 basis points year-over-year. I thought last quarter you talked about them being more flattish here in Q2 if my notes are right. So I get to Southbridge in Ontario, were drags, but were those worse than expected or can you help us just maybe understand that down 85 versus flat?

lead shade, some pond work:

Okay. Now this may be kind of goes to my second question. So year-to-date, margins are actually down a bit, but your guidance is implying up margins for the full year. So can you kind of take us on a walk between the first half and second half? I assume maybe some of the Ontario costs peeling off maybe the new Boston contracts, some other things benefit you in the back half versus the first half.

Yes, so our forecast in Q3 has margins up flat to slightly down. We're anticipating a resolution of, as I said, Ontario issues and starting to ramp tons more significantly at the landfills. But our issues – and then into Q4, we see margins up significantly year-over-year and a lot of it really has to do with: one, the cost profile that we bore at Ontario in the first half year; and two, our plan to ramp landfill tons more in the second half of the year. And if you look back to last year in the fourth quarter, we have ramped down landfill tons pretty significantly because we are up against annual permits on a number of our sites. This year we've managed our flow much more effectively and we plan to run it in normal pacing Q4, which will give us a big bump to EBITDA in margins year-over-year. In addition, you pointed out the Boston contract, this will have a positive impact of roughly $3 million. We'll have a half year impact this year, $3 million to EBITDA over the current contract. So that'll be a nice benefit to the last half of the year. And I think as John and Ed both said in their comments, we've made a couple of course corrections as well on pricing and cost of ops in the collection line-of-business inflation was a little higher than we expected and we're trying to be nimble.

Okay. Now that's very helpful. And then it does sound like the SRA fees are working really well. They're off taking the commodity risk. But when I think about my bridge for 2019 so this year is recycling still around $5 million good guy, despite the commodity moves.

Yes.

Okay. Okay that's helpful. And then I know you guys have a number of landfill gas and energy projects. So one of your – excuse me, one of your competitors noted that the collapse in the RIN markets is posing a headwind. I'm just curious if you could talk about that. Is that a headwind for you or your contracts may be structured differently there?

Yes, so our landfill gas-to-energy portfolio today is only producing electricity. And the electricity market, either you're generating revenues through the sale of power, or through renewable energy credits, or through capacity payments. Well the energy markets and they're renewable credit markets have collapsed over the last like five years. And this used to be a business for us that produced over $5 million a year of EBITDA, today it produces about $1.5 million a year of EBITDA. We have not invested in any high BTU projects or pipeline gas quality projects and that's where you would generate the RIN. So while RINs are down over 30% year-over-year, we don't have any of that exposure in our portfolio. And furthermore we're really already taken the pain over the last few years on the landfill gas-to-energy business and it's been pretty much steady as she goes over the last 18 months to 24 months.

Okay. Yes, that's very helpful. Maybe one for Ed. So Edward we’re maybe a year and a half into this big M&A push, but I'm just curious how you view the integration, how that's gone across the book? Do you feel the team is stretched? Do you feel like you have capacity either from a human resource perspective, or from an IT perspective? Just any color there would be great.

Yes. So not all acquisitions are the same. I mean some are very easy and some we know going in, we've got to make some changes. Just to give you an idea, we track – safety is a very big focus here and it certainly affects operations. And we track– like all the companies, we track certain metrics, the metrics in acquired companies tends to be almost twice what the metrics are in our company. So that's the initial push going in. But to really answer your question, we have the teams in place to handle the acquisitions especially the ones coming up should go very smoothly. So we're pretty confident we can keep the momentum going on the growth side, the acquisition side.

Okay, good. And then maybe my last – yes, sorry John.

I was just going to say Tyler that when you look at what we've done in Rochester as an example, we have four companies coming together. That's a very different acquisition than tuck-ins obviously. And it's also a very different acquisition when you're dealing with another very professionally run company in terms of some of the other acquisitions that we're looking at. So there's a pretty broad array of skill sets. But to your question, we've also added some resources obviously having brought back the acquisition program as part of a key strategy. There are resources that we put in place to support being able to continue to integrate at a level that we need to. So, it's a good story. But the acquisitions themselves are different, but we are adding a few resources to make sure that we can integrate properly.

Okay. That's very helpful. And then maybe my last one, so Ned, I know it's a little early to be thinking about 2020, but I just want to think about some of the buckets of movement based on what we know today. So what are some of the more unusual pieces that we should be thinking about? I mean, should recycling still be a good guy on the contract rollovers? Would the Ontario potentially be a positive variance in 2020? It seems like Southbridge should be fully closed, so that's going to not be there. Then we have kind of the rollover of the presumable close of the RSG assets, but anything else that we should be thinking about just bucket wise, not necessarily numbers, but just buckets into 2020.

Yes, good question. And it is a little early, we haven't completed our budgeting, but there are some big buckets as you pointed out, recycling should be at least 1.5 million positive impact next year as we get the full year benefit of the Boston contract. There are a few smaller contracts we're working on and we're making some additional investments in that business to drive higher productivity. So that will be positive as well. Ontario, is as much as a $3 million $4 million headwind this year, so there is some potential resolve some of those issues coming into next year. We've completed a number of acquisitions year-to-date and the rollover impacted those will be about $2 million of EBITDA next year. And as you pointed out, the Republic acquisition is set to close in Q3. So will get us small benefit this year and have a positive comp next year. Southbridge will be done. We closed the site in November of 2018 so we'll comp that this year. And our big focus in budgeting and through the remainder of the year, is just really understanding exactly where cost inflation is in the business and where we need to be more nimble on price. Some of it will really start to anniversary. We've been running at wage inflation closer 4.5% to 5% as we're looking to ensure we have drivers in the seats and mechanics. And we'll really anniversary this big hump here at some point in late 2019, so we expect it to be a little less the headwind decks here as Kelly Robinson has worked to really get us to marketing and get new career paths and wage programs in place. So I think that's going to be a big focus in budgeting. Just understanding where the pricing programs work perfectly in 2019 and where we need to advance them a little bit more next year because our expectation is we should be pushing through margin expansion with pricing programs like this.

Okay, great. I will turn it over. Thank you very much.

Thank you.

Thanks.

Thank you. [Operator Instructions] And our next question is from Michael Hoffman from Stifel. Your line is now open.

Thank all of you for taking the questions. If I could…

Good morning Mike.

Good morning. If I could follow-up on a deal rollover, the number you gave is just as $18 million year-to-date and rolls over to, are you including the $30 million closing in that when you gave that number?

Yes, good clarification Michael. So we've completed about $18 million a year-to-date. About $10 million of that revenue will show up in 2019. About $8 million of that revenue shows up in 2020. And with that $8 million of revenue rolling into 2020, we expect about $2 million of EBITDA associated with that. And then acquisition of assets from Republic that we expect to close in the third quarter, I have not included that in the $2 million from next – including next year. So was a little bit of impact late this year in the fourth quarter. And now will be a nice benefit coming into next year from a rollover standpoint.

And just to tease that out, does the adjusted guidance include that little bit of benefit in the fourth quarter?

No.

Okay.

So we've made it a habit over time of never including acquisitions that have not closed in our guidance numbers.

Right, okay. And just wanted to make sure that was clear to everybody that that's a little bit of a potential upside. Following your comments earlier about cadence, is the free cash flow going to follow the profit cadence or are there some oddities about timing of interest payments, or taxes or things like that? How do I think about the free cash flow trend?

Yes, so free cash flow is back loaded this year as we talked about last quarter a little bit earlier in the call. Our working capital is more negative in Q1 than we typically had. And it was funny how this happened. A bit of it was really due to net suite last year where we launched a new software in February and we had a couple bumps in the road on our payables probably in the first quarter and our DPO was a little bit longer than it typically would be Q1. So we had a strange shift in year-over-year working capital, we didn't expect. Plus we have some changes associated with the remediation project at some of that have been in closing. It's really started to resolve itself in Q2, and it will be fully resolved by the end of the year. So that will shift working capital another $10 million from June 30 through December 31. And then we expect CapEx trends were a little bit more front-end load this year than last year. And then, as you pointed out, our earnings drive up further through your last half of the year. So we remain confident with the free cash flow guide for the year and it will be back-half loaded.

And then one more teaser on that, you had a pretty big adjustment line on a relative basis in 2Q. Does that trend down a bit? Because I'm assuming like the $3 million of future development capital spending isn’t – there's not necessarily a repeat if something like that. So help us with the adjustment not in line, they take us from traditional cash flow from ops plus all capital spending to your adjusted free cash on the trend of the adjustment.

Yes. What's happening there is when we put together a pro forma for an acquisition, there's a amount of CapEx we plan to spend in the first year to get the fleet onto our standard, or consolidate facilities, or you name to get new equipment into transfer stations. And we've been line writing them net out as you've pointed out. And we are calling it non-recurring CapEx. And we're about $6.3 million year-to-date. Right now we have the expectation spending maybe another $5 million on capital through the rest of the year associated with pro formas of businesses we bought in the last year. And we're working a lot on fleet conversions, and automation and getting into kind of the way we do business in the new markets.

Okay. So it still suggests that the trend of $15 million, $16 million first half pace is less in the second half as far as how I think of that. So I'm going to have absolute more cash and I'm going to have less overall adjustments.

Yes. So we are going to generate absolute more cash and there are going to be less adjustments in the last half.

Okay. All right, good. And then can I ask – this is a read through question of Boston, I'm not asking about the details of the Boston contract, but the disposal contract itself in Boston, which was with somebody else was a really meaningful increase in disposal prices from 2014 to today. I got to believe that if I put a stake in the ground in Boston and then just start doing the loaded tons per mile driven is you get to each of your facilities, you just take the Boston contract less the cost to drive, you get a number and you go if that number is greater than what we're charging, we ought to be able to raise price. One, is that the right way to think about it? And two, what's the opportunity?

I think that absolutely is the right way to think about it, Michael. I think that there is no question that we're seeing huge inflation in that market. And some of it is driven by the activity from a bidding perspective on some of the larger contracts. So I think all of the transfer stations have moved up dramatically, both ours, as well as a third party sites have all moved up. And I think one of the areas where I don't think that enough inflation been – all of the inflation has been covered off, I think, is in the Massachusetts market. We've got more work to do there. We've got great price, but we've got substantial inflation in that market that still, in our view, we've asked our team to go back and really take a hard look because we've got a couple of areas that we're not feeling like we're picking up all of the inflation. So I think you're absolutely right. I think that there's more pricing that we're going to continue to see in that market because, I think, that that's exactly what's happening. Those bids are setting the tone for the market for sure.

So closing the loop on that for both John and Ed, then I would suggest you could sustain these trends that we saw in 2Q for awhile on price.

I think that's a fair perspective, yes. I mean, as I said, we've asked the team to go back and take a really hard look at it because we're certainly aware that we came up short – in a few sites in terms of covering all of the inflation that we're experiencing.

Okay. And then lastly…

But the other thing is – the other piece, that you're also – where the entire market is experiencing Michael, there's inflation from a transportation standpoint as well, can't get trucks. So the market not only is impacted by disposal pricing, but it's impacted by transportation pricing as well.

Okay. All right. That's good to know too. And then lastly, when we were together in June, John, you talked about your deal pipeline being about 400, and you profiled a lot of these transactions that we're talking about today. How do you feel about what that pipeline looks like at this point? Are you seeing opportunities to replace and keep the number at around 400 or are we sort of whittling down and I just started wanting to understand sort of what that trend look like?

I think our entire team can't be any more happy about how robust the pipeline is. It's even more robust than what we had thought, Michael. As we got back into acquisitions and started to really get into the marketplace, what we're finding is that there is even more opportunities. So I think that the pipeline continues to be robust. Our phone is ringing at this point in time because of the activity that we've had in the marketplace. So I think we’re really pleased with the opportunities on a go forward basis and see the ability to continue to execute in the manner that we have. And as I said before, one other things that we have to do is make sure that we've got the right integration teams in place and the right resources, from a overall HR standpoint to make sure that we execute the integration very well.

Okay, great. Thank you very much.

Thank you, Michael.

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

Thank you. Thanks everybody for joining us this morning. We look forward to discussing our third quarter 2019 earnings with all of you in early November. Thanks everybody. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.