Welcome to the Casella Waste Systems, Inc. Q1 2020 Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, May 8, 2020. I would now like to hand the conference over to your speaker today, Joe Fusco, VP of Investor Relations. Please go ahead, sir.

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 2020 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 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 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 investors 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 will begin today's discussion.

Thank you, Mr. Fusco. Actually, Mr. Fusco. Thanks, Joe. Good morning, everyone, and welcome to our first quarter 2020 call. I hope all of you and your families are doing well in this unprecedented time. I want to start off today by first thanking our 2,500 dedicated employees, particularly those on the front lines, who have displayed their commitment and courage in providing our essential service to our customers and communities. Your hard work and family support at home during these unprecedented times is recognized and truly appreciated. As a company, we've been diligent. Our experienced team has done a tremendous job ensuring the well-being of our employees while maintaining efforts in effectively servicing our customers. Since the onset of the pandemic in early March, we have taken the following 5 steps to ensure business continuity: number one, keeping our people safe and healthy; establishing plans to provide continuity of operations; number three, effectively transitioning back-office functions to work at home; open communications in creating flexibility for our customers; and flexing variable costs and freezing discretionary capital. And touching on some of the key elements of these 5 steps, we have been highly focused on mitigation measures, such as distributing PPE, increasing social distancing within our field operations to limit exposure, establishing contact tracing, operational continuity and disinfecting procedures. During this period, we have also eliminated nonessential travel and very much limited in-person meetings by leveraging virtual formats. In addition, I'd like to have a shout out to Mike Hughes and our safety team for the outstanding job that they have done in support of our frontline operations. The team also did a great job transitioning office personnel into a work-from-home environment, creating a safer, more flexible workspace while maintaining redundancy of key processes and systems security. Our investments in…

Thanks, John. Revenues in the first quarter were $182.9 million, up 11.8% year-over-year with 6.4% of the increase driven by acquisition activity. Solid waste revenues were up $15 million or 12.4% year-over-year as a percentage of solid waste revenues with price up 5.8%, volumes down 2.7% and 8.5% growth from acquisitions. Revenues in the collection line of business were up $11.5 million year-over-year with price up 5.2% across all lines of business, volumes down 3.2%. Our negative collection volumes in the quarter were mainly driven by our efforts to shed unprofitable work, advance pricing, and we began to experience some early negative impacts from COVID-19. Revenues in the disposal line of business were up $2.6 million year-over-year with reported landfill pricing up 10.1% year-over-year and transfer and transportation pricing up 4.8%. Landfill tons were down 5.1% year-over-year as we reduced tons going into the North Country Landfill. We also were conserving airspace in New York State in Q1 to ensure we are able to execute in Q4, and we also experienced some early impacts from COVID-19. As John just mentioned, we changed our segment reporting for 2020 with recycling, organics and customer solutions now rolling up into the Resource Solutions segment. Resource Solutions revenues were up $4.3 million or 10% year-over-year with the organics group driving 9.8% growth year-over-year on new contracted volumes. Customer solutions revenues were up 15% year-over-year due to several new multisite contracts and a higher industrial service work. Recycling revenues were up 1.9% year-over-year. This is a great story. Once again, we had significantly lower commodity pricing with commodities down 33% year-over-year, but our higher third-party tipping fees and also a little bit of acquisition activity offset that during the period. Adjusted EBITDA was $33.5 million in the quarter, up $6.9 million or 25.9% year-over-year. Adjusted…

Yes. Thanks, Ned. Good morning, everyone. Well, great first quarter. Certainly, one of the best Q1s operationally since I've been with the company. The landfills performed very well with strong pricing. Our overall average price per ton is up 12.5%. Improved operating cost and improved EBITDA contribution and margin. The collection line of business also performed well. We enjoyed strong pricing, up 5.2%, and continued to improve our key operating metric, which is variable margin contribution per driver hour. And our Resource Solutions group where we've now combined recycling, organics, our national brokerage business and our industrial in-plant services business turned in strong numbers as well. All combined, we saw an improvement of cost of operations as a percentage of revenue of around 170 basis points and achieved profitability in our seasonally lowest quarter. So on track, great quarter. Now I'd like to spend the rest of my time providing some details about our management through the challenges of the pandemic and how we are preparing ourselves for the resurgence of the economy as and when that comes. When it became clear in early March that everyone was going to be impacted by the virus, we established a task force meeting daily to manage through the rapidly evolving situation. And managing any crisis, communication and leadership is imperative. And through this task force, we established direct lines of communication for each of our frontline managers. Our primary focus has been to protect our employees, comply with changing rules and guidance within each of the states that we operate, accommodate our customers for their changing needs and to protect the long-term health of the business. As it relates to protecting our workforce, there have been some pretty significant changes to the way we operate, and I'm sure most of the waste…

[Operator Instructions] Your first question comes from Tyler Brown with Raymond James.

Nice quarter. Ned, so to be clear, you bought a couple of businesses, I think, that will add $13 million in revenue. Is that right? And then, as you see it right now, basically, what's the rollover benefit in the model to revenue from M&A, roughly?

Yes. So for the year, we've got about 7% or so, Jason.

Right...

We had about 7% in April. For the full year, it reduces a little. Do you have that number for the year?

We had about $35 million to start the year, and we did a couple of -- 2 most recent subsequent acquisitions. So a little north of $35 million.

And then, in the year, these new ones give us about $8 million, so that's $43 million, roughly.

Okay. That's helpful. That's a good placemarker. Okay. So I am curious about how you think about the New York City dynamics really playing out, particularly from a disposal perspective. So I know a lot of tons come out of New York City. It fills a lot of mouths in the region. So I'm curious what the competitive response has been given that those tons have maybe gone away. And do you think that this changes the dynamic in the region in any way? I mean I know the landfill price increase was very strong this quarter. But is it having any impact today?

I don't think so. I think that, if any, it's modest. We haven't really felt anything at this point as evidenced by what we were able to do in the first quarter, Tyler. Doesn't mean that it won't in the future, but we haven't seen any indications that that's problematic. I think that the supply and demand equation speaks for itself.

Yes. And if you look at across our different states, New York State is one of the areas where we had the highest volume declines at our landfills, and it is most directly related to New York City. But as everyone on the phone knows, the cost and the complexity of permitting and building and maintaining the landfills doesn't go down in other disposal sites. So we still have the perspective that these are invaluable assets that need to be managed for long-term returns, and that doesn't change at all.

Okay. That's great to hear. So John, you mentioned that 75% of your resi business is subscription, which is a very unique aspect for you guys. So are you guys able to implement any real-time, like, I don't know, call it, a surge fee to basically help offset the can weight increases?

I think that -- it's a great question. I think we contemplated it internally. We did not execute it because we didn't feel we needed to, but it's certainly something that we looked at and contemplated. And Ned and Jason, Tyler, started to look at the algorithms and how we would approach that, but it wasn't necessary. In our view, it wasn't necessary to execute.

Yes. And this is a weird thing. So everyone has been talking about how increased tons have gone up year-over-year and whatnot. And we spent a ton of time studying this because every year, from February to March to April, our weights go up in our resi containers. But they went up generally the same way this year. They go up every year. And Ed was just telling me a stat a minute ago...

So I went through -- you know how we have A- and B-week services. So you got to have 2 weeks when you're comparing things. But I went back to the last 2 weeks of last April, compared to the first 2 -- last 2 weeks of this April and computed the pounds per stop, and it was very consistent. It actually went down slightly year-over-year. So the only thing we've seen is a seasonal -- a normal seasonal uptick in those pounds.

Okay. That's interesting. Real quickly, John, what is...

I think one of the reasons for that, Tyler, is that we see a seasonal uptick because we go through the winters up here. Nobody sees any sunshine. And all of a sudden comes the end of March, April, and all of a sudden, the sun comes out. At least 1, 2 days, people are like, wow, we have to get all excited, start spending money, start going to the gardeners, and it's like everything starts to kind of bloom. And actually, people start to smile.

That's interesting. So John, I am curious about the status of the markets that you're in. So particularly in roll-off, I think you're about 50-50, temp versus perm, if I'm not mistaken. I think you said...

Yes, that's correct.

Yes. Okay. So you said April was down 26%. I'm just curious, how is temporary versus perm? And what about those big markets, say, like Boston? Just what's kind of going on in your general regions?

Jason, you got the -- do you have the split? Or do you have it, Ned?

Yes. The temporary is down a little bit more than permanent, a couple of hundred basis points more. On the permanent side, with some factories and colleges and universities and other businesses that have temporarily shut down, we have seen declines. And then urban is down more in our secondary markets. We see the urban -- we haven't netted acquisitions out of this, but urban is down about 14%; secondary markets, down about 11%.

And that would be consistent, Tyler, because when you think about it, as you look at Massachusetts, Massachusetts is going through a peak at this point in time in the last few weeks. So they were late to the -- late to peak. And so that's kind of consistent, and we're going to see more from an urban standpoint than from a rural perspective.

Okay. Makes sense. I'm going to give it one shot here, Ned. So I know it's early. It sounds like you're going to give more color on Q2, hopefully, but we all have to calibrate our models. So I mean, if we just walked at a very high level, very high level from 157 last year. I mean it feels like you still have quite a bit of contribution from incremental M&A. Let's call it Ontario is a couple of million positive. And then if we just assume that collection's a negative and disposal's a fairly high negative, I mean, could you walk into the low- to mid-150s of EBITDA? Is that crazy based on what we know today?

Yes. So we didn't feel comfortable providing guidance for the year, as you know, because there's just -- there's so many exogenous factors here that we can't control. But if you look at our month of April, revenues were down roughly 1% year-over-year. And as I said, it doesn't really -- you can't really use this normal decremental concept because we have some remixing of our revenues, where we're growing with some of the acquisitions and we see some higher-margin landfill work down significantly. So if you just start to roll out in a model that EBITDA margins are down 150 basis points year-over-year and you look at -- you can make your own assumptions what future months look like. I think you can start to get a sense of if April rolls forward, what that would do to Q2 or Q3. But we just can't do that at this point in time.

Your next question comes from Michael Hoffman with Stifel. We have no response from Michael's line. We'll move....

Sorry, sorry, I had it on mute. So I think you clarified one of my questions in the last one, Ned, because you made a comment of decremental of 150, 200. But what -- I think what you meant is, what you just said, it would be down 150 to 200. It's not a decremental. It's the absolute margin will be down year-over-year.

Yes. Yes, I'm sorry. Yes, these concepts get a little confusing. I -- this concept of for each dollar revenue loss, how many cents of EBITDA you'll lose gets a little confusing because of the remixing of our business. I think the easiest way to model this is just take our Q2 EBITDA margins from last year, hit them by 150 basis points to 200. You know how much our revenues are tracking down in April, and I think you start to get a sense of what a quarter could look like.

Got it. That makes that clear. And then, what was the percent of your direct labor cost in 2019 that was overtime?

Oh, I'm not sure I know that.

$19 million.

So we're about $19 million for the year. And we've flexed out right now close to 40% on a run rate basis out of the business. But I don't know the percentage, Ed, do you?

No, I don't. It's probably higher than most of your national companies, Michael. It's just the way we run things...

I suspect you guys have a lot of windshield time because of the site -- the nature of your markets.

Well, yes, and we also to maximize the return on our equipment, our trucks and equipment while still staying safe. So our routes are designed to run 10 hours a day. And so we have a pretty high overtime percentage in our collection operations.

Okay. But what you're saying is $19 million was direct cost -- is that $19 million for the -- I think that seems to be...

For the entire year last year spent on overtime.

Oh, it was overtime last year. Okay. Got it. And you've reduced that number by 40%.

By about 40% in the month of April.

In April. And at this point, that's done, right? Wherever those cost things were behind you because if the trend is improving, you might hold the cost, but -- right?

That's done. That's right. It's done.

Yes. Okay. And then, Ed, what do think that -- how do I think about landfill pricing having successfully gone in and said, all right, the world's changed pre COVID. Lots of capacity out. I don't know how to be able to price this better. We do. Then what -- how do I anniversary that and get to how to think about modeling on a recurring basis? Because I can't imagine you keep coming back double digits. So what's the sustained rate?

Yes. So what makes up the 10% landfill price are a lot of different factors. And a few of the things that led to that 10%, we had several longer-term contracts that rolled over in the last 6 months that we've rightsized to current market rates. So the underlying rate of landfill pricing is more like the 6-ish percent that we've been at. And then a few of those longer-term resets really showed themselves in this period, getting things to the right levels across a few of our markets.

Yes. And a couple of those contracts, Michael, were really large contracts with over 100,000 tons to almost over 200,000 tons, so that's why the big impact.

Got it. And that anniversaries when?

Some of that really anniversaries in the fall, and some of it goes all the way to next January.

Okay. So we'll see this good trend all the way through the rest of this year, and then it's pretty much, for intents and purposes, done going into '21...

Yes. And one of the exciting things is we got out with a lot of our pricing plan early in Q1. So I think it's 70ish...

70%. 70% of our price for the year went out in January, which makes sense because everyone obviously wants to front load in the year. Those price increases get the benefit through the course of the year.

Yes, yes. And I realize predicting this is just difficult, just trying to predict the model. But what do you need to see to restart M&A? Because I get, though, everything between the logistics and doing due diligence...

I don't think that we -- we really haven't -- it's not a matter of shutting down M&A. It's really more a matter of being somewhat impacted by stay at home, those issues from a state standpoint. So I mean we've continued on the phones. We've continued to reach out to potential targets. We've actually added some resources there as well from an acquisition standpoint, recognizing some of the things that we had shortcomings on over the last couple of years. We've added some resources at the beginning of the year. So I think it's a matter of when things open up, Michael, more than -- because that will give us more flexibility to be face-to-face. And as you know, a lot of that really has to take place face-to-face.

And we closed one deal on April 1 and closed another in the second week of April. But they had been in the pipeline until was completed. But you probably will see a little blank spot for a bit here because all of the early work and diligence has been pushed off with it.

Okay. And then last one for me. I get why we talk about normalized free cash flow. Where are we on the gap between that and the classic definition of cash flow from ops less all capital spending, those 2 merging together? How far away are we from that happening?

Well, if you look at every business, you're trying to get information out there about what cash flow you're producing from your business to invest back into different opportunities. And we adopted this normalized free cash flow concept to try to give a sense of that, where you start to see our net cash provided by operating activities less capital expenditures-less win. And then we start to add back a few items. And one of the items we've been adding back is the cash we're spending to get Southbridge permanently closed, which, as everyone knows, is a pretty unique event, and it was the right decision for shareholders. We've also been investing heavily into several of these acquisitions after they're completed in the fleet to get operating synergies, other benefits. And you see that in this quarter, we put -- $5.9 million of our CapEx went into newly acquired businesses to get them into our system. And then we also -- as we've laid out, we're making a very long-term investment to Waste USA Landfill to get the new cell open, which is 25 years of capacity. So we have felt it's really important for shareholders and for everyone to understand that part of our CapEx, part of this is something that's unique. You do need to understand. We could be choosing not to do it, but these dollars are being put to work in areas that have great returns, great growth profile.

Right. So like, Southbridge comes to an end -- when is that...

Southbridge, we're going to be substantially done this year. Maybe there's a little bit that carries into next year. I think there's some unknowns, the COVID, in the construction cycle right now. But we're substantially done with cash out the door there this year.

And the Waste USA.

Waste USA will be done substantially next year. We'll be done with that investment next year. The acquisitions, it was all part of the pro forma to begin with, and it just doesn't roll into acquisition accounting, and we feel like it's a great thing to call that out and let people know what that investment is.

Yes. And actually, interesting enough, I mean, at the end of the day, you either bought a really good fleet and paid for it in the purchase price or you upgrade the fleet and it comes in capital spending. And it's the difference in the purchase price.

That's right. Yes.

Exactly.

Your next question comes from Hamzah Mazari with Jefferies.

My first question, and you may have touched on this a little bit, but -- I know it's early. But in early May, I think you referenced sequential volume improvement. Is that across all lines of business? And so maybe if you could just give some color as to where you're seeing that improvement and whether it's broad-based

Yes. So we definitely don't want to call a bottom because we don't know where the virus is going and how this will -- but we are tracking a lot of key stats every single day. And on the commercial and industrial side of our business, we track service level changes in our billing system with a COVID code. So every day, we get a flash to look at if services have been suspended or reduced or increased. And over the last 2 weeks, we've seen some days with customers bringing services back online. We've definitely stabilized, and we see some bright spots there. On the roll-off side of the business, this is typically the time of the year where you see pulls ramping. And throughout the month of April, we were declining week on week on week until the last week of April and the first week of May, and we started to increase the number of pulls, both on the temporary basis and the permanent basis. So some positive movement there. And then on the landfill side, we were reducing week on week until the -- I think it's the last week of April. And then the last 2 weeks, we've been in a positive trend at the landfills. So once again, a little bit of brightness but a little early to fully understand what that means.

That's very helpful. And then we talked about the landfill pricing dynamic, and you touched on the new contracts, et cetera. But could you maybe talk about at what point does -- do people start thinking about waste to rail? Does that show up when you're bidding on these contracts? Just give us a sense as to how that dynamic sort of plays out.

Yes. The waste to rail dynamic, you don't have a transfer station that 1 day goes by truck and 1 day goes by rail. There's a lot of infrastructure involved. And furthermore, we've really seen that infrastructure get built in more urban areas where there are constraints or truck constraints or even in states where you don't get overweight permits for trucks on the highways, so you can't carry as much in a trailer. And the sources we get waste from in the markets are generally stable, and we're not seeing big changes there, Hamzah. And as you know, it's very capital-intensive and very hard to handle moving municipal solid waste via rail, and you've seen mainly just construction and demo of contaminated soils being moved via rail over the last several years in the Northeast.

And fundamentally, Hamzah, because of the capital intensity of MSW, you've got to containerize it where, in the case of C&D, you can use gondolas to move it, effectively, from a rail standpoint. And the capital intensity to containerize MSW is just huge.

Got you. That's very helpful. And my last question, I'll turn it over, is I know you're the largest sort of market share in your area where you're operating, largely. At what point do you think you get scale benefits in terms of just being a bigger revenue base? So what I mean by that is, even companies like ADSW that were $1.4 billion of revenue talked about that, that revenue base just didn't have enough scale benefits to extract. And I'm not trying to compare you to the larger public companies. But just curious as to -- do you think you have enough scale today where you're getting some of these benefits? Or at what revenue base do you start to see incremental scale benefits in the waste space?

Well, I think if you look at our performance over the last few years as we've begun to grow again, I think we're beginning to see the benefit of a small amount of scale. I think, certainly, as we go out into the future, we're going to have to continue to move on that path. We're approaching $1 billion in revenues today, and we have still significant opportunity from a growth perspective. So at some point in time, that may very well be an issue for us in terms of whether or not we can get enough scale, Hamzah, but we've got a great runway in front of us to create a lot more value over the next few years as we continue to grow. I don't know, Ned, do you have something to say?

I mean, just one quick thing, and I know we have one more caller. Waste business is very much a local market business, and we focus on route density and building scale within markets to drive operating efficiencies. The larger scale for G&A, I mean, that's a whole different question. But on the local level, we're doing everything we can with acquisitions, smart marketing and the work we do to get that scale.

Your next question comes from Sean Eastman with KeyBanc.

I'm just curious relative to that April 1 kind of update you guys put out how these April volume trends ended up versus expectations at that point. And then I'm also wondering just about the burn plant dynamic in the Northeast. What are you seeing from those guys in this kind of lighter volume environment? And does that -- is that a concern going forward?

I think that it's a concern, Sean, but I think we have not seen a lot of activity from them yet in terms of the marketplace. I think some of that really depends on how quickly things begin to ramp up and how quickly the economy begins to open back up again that may or may not have an impact on that. But to date, we have not seen a lot of activity from a pricing standpoint with regard to the incinerators. That doesn't mean that we won't, but I think that's really driven by how quickly the economy comes back.

And we -- that was a moment in time on -- I think it was maybe March 30 or March 31, what we saw for changes in our business. And the first 2 weeks of April, we shed a lot of volume in the commercial line of business, the industrial, the landfills, roll-off. And then as I said, the last week or so of April, we started to improve slightly. And it's definitely on the commercial segment, we were down at that point in time, I think, Jason, about 6% or 7%, and then we ended up being down about 17% on a run rate basis. So we saw that roll-off maybe down to about 22%, 23%, and we were down maybe 6% or 7% at -- right at the beginning of April. So things really did -- you almost got the stay-at-home orders in mid-March. We felt some impact. And I think when customers got bills and we started to engage with them, you saw a big slowdown in the first 2 weeks of April and then a stabilization and a little improvement.

I think that the biggest thing that we're really excited about, Sean, is the reaction of our team and the levers that they pulled to get overtime out. The work that Ed and Sean did to work with our team to make sure we're doing everything that we can to get the variable costs down. And I think that they did an absolutely terrific job during that period of time. I mean Ned has really laid out for you what the volume impacts were for April. But one of the offsetting factors, clearly, is the response of our team and the work they've done to minimize everything that we can from a variable standpoint.

Yes, that was the other question I had. You clearly have a lot of moving parts around the decremental margin impact in April, but I'm just curious around the 150 to 200, maybe what that would have been, if not for the aggressive cost action, just how much you were able to protect margins. Any way to parse that element out for us?

Yes. I'm not sure if we've done that math. But our margin decline is a little better than the negative 150 in April. But as we look at the next few months, there's just a lot of unknowns. So I don't think we've sat down with a piece of paper and said, if we didn't change these things, how bad would have been. But as you know, in the collection line of business, you can flex 60% of your costs, and we flexed most of that. In the landfill line of business, you can only flex 25% or 30% of your costs, and we do have some larger revenue declines there. So we've done what we can, and we've done it pretty rapidly. I guess that's one interesting thing about this crisis or this recession. It didn't come on over 6 months or a year where you're getting hit with a lot of different cuts over time. You could create a plan and move quickly and make changes almost immediately.

Yes. Got it. That's helpful. And last one for me. You guys highlighted $10 million of CapEx being frozen here. I'm just wondering, should we just -- is that what we should kind of lob off our estimate for CapEx for the year? Or is there potentially more...

Yes. Right now, yes. I mean we may have different perspective after the second quarter. But for right now, yes, right? I would think it makes sense. But we've put it on hold. It's out of the equation at this point in time, but who knows what will happen as things begin to open up, et cetera, et cetera. So it's hard to say. But you can take it out now.

Yes. It has to come to me for approval. So it's frozen. But as John said, we don't know what the next 6 months brings. And if we can put some of that money to work and things are opening up quickly and we need certain assets, maybe we unfreeze it. And that's unknown.

And that concludes the Q&A session for today. I'll turn it back over to the presenters for any closing remarks.

Thanks, everybody. Look forward to seeing you on our next conference call, which will be...

It's either -- it's going to be late July or early August.

Yes, late July, early August. So thanks, everyone. Stay safe, and enjoy the weekend.

Thank you for participating in today's conference call. You may now disconnect.