Good day, and thank you for standing by. Welcome to the Casella Waste Management, Inc. Second Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Charlie Wohlhuter, Director of Investor Relations. Please go ahead.

All right. Thank you, Michelle. Good morning and thank you, everyone, for joining. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ned Coletta, our President and Chief Financial Officer; Jason Mead, our Senior Vice President of Finance and Treasurer; and Sean Steves, our Senior Vice President and Chief Operating Officer of Solid Waste operations. Today, we will be discussing our second quarter 2023 results, which were released yesterday afternoon. After a brief review of those results and an update on the company's activities and business environment, we will be answering your questions. Please note that various remarks we may make about the company's future expectations, plans and prospects constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K, which is on file with the SEC. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as 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, July 28, 2023. 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 under the heading Events and Presentations. And with that, I will now turn it over to John Casella, who will begin our discussion.

Thanks Charlie. Good morning everyone and thank you for joining us. Welcome to our second quarter 2023 conference call. Before I comment on the quarter, I'd like to take a moment and talk about the communities that were impacted by the severe flooding across our footprint earlier this month. I'd also like to recognize our team. Many of our people have been on the front lines, helping our communities recover. Some of that damage absolutely catastrophic in some areas in Vermont, Waterbury, Weston, Montpelier. Our Montpelier operation itself was under five feet of water and hats off to the entire team there, Billy Aaron, Pat, Mike, all -- the entire team did a hell of a job. They were up and operating within two days of being under five feet of water, one of the first businesses in Montpelier to get back up and operational. Also in Vermont, significant different damage in Berlin, London Berry and significant amount of damage in Ludlow as well. In New York, Clinton, Essex, and Franklin Counties, along with other areas in upstate New York; communities in Western Massachusetts, such as North Adams and neighborhoods across our new markets in Pennsylvania were all impacted significantly by the weather. Hats off to the priority response teams, the team that's put together by Sean Steves that takes assets, people, trucks, containers, from different areas of our footprint where they weren't impacted and brings those resources to the affected areas. And again, many of our people have worked tirelessly and selfishly to help the affected areas across our markets to restore conditions, remove debris, and get things back to normal. We've also done some fundraising as well, fundraising effort to help support affected during a very difficult time. So far, our relief fund has raised just under $100,000,…

Thanks John and good morning, everyone. Revenues in the second quarter was $289.6 million, up $6 million or up 2.1% year-over-year with 1.8% of the year-over-year change driven by acquisition activity. Solid waste revenues were up 7.6% year-over-year with price up 7.7% acquisition growth of 2.5%, with volumes down 2.6%. Revenues in the collection line of business were up 9.2% year-over-year with price up 8.2% and volumes down 2.3%. Volume declines were primarily driven by higher churn in the residential line of business associated with pricing programs, and we experienced lower roll-off activity split between industrial customers and temporary construction jobs. However, with these declines, we improved the quality of revenue, grew our adjusted EBITDA and expanded margins in both of these lines of business. Revenues in the disposal line of business were up 5.7% year-over-year with landfill pricing up 7.7%, while landfill tons were down 6.1%. The landfill volume declines were entirely driven by lower priced special waste volumes that were down year-over-year. As expected, Resource Solutions revenues were down 11.6% year-over-year with our average commodity revenue per ton down roughly 53% on lower cardboard and mixed paper pricing, lower metals pricing and lower plastics pricing. This decline in commodity prices was partially offset by 7.6% growth in processing fees at the MERC. Commodity prices hit a high point in April 2022 and then declined 67% through the remainder of 2022, hitting a multiyear low last December. Combined prices have rebounded from this low level, up roughly 30% sequentially from December through June. Adjusted EBITDA was $72.2 million in the quarter, up $3.7 million or 5.5% year-over-year with $2.8 million of the growth, driven by improvements in our base business and $900,000 derived from acquisitions. Solid waste adjusted EBITDA was $68.4 million in the quarter, up $9.5 million year-over-year…

Thank you. [Operator Instructions] And our first question is going to come from the line of Tyler Brown with Raymond James. Your line is open, please go ahead.

Hey good morning guys.

Good morning.

Hey. Lots of detail as usual. But Ned, can we kind of go back over some of the margin pieces. I think you said fuel was 35 basis points. And then I couldn't tell was it commodities in Boston was 105? Or can you just walk through that a little bit more?

Yes, sorry. Yes, there's a few numbers there. So, we had solid waste price as a percentage of total revenues was up 6.4%, with inflation dropping at by 490 basis points. And then we had positive good guys of a 45 basis point improvement with -- in the solid waste business and a 35 basis point tailwind from fuel net of -- so lower fuel prices, but we also had lower surcharges. And then we had a 105 basis point headwind, and that was Boston and recycling commodity prices, a 35 basis point headwind from landfill gas to energy and 10 basis point headwind and from acquisitions.

Okay. Okay. And then as Boston kind of turns back on, does that become a margin good guy in the back half? Is that the right way to think about it?

It does. We're expecting about $1.5 million to $2 million of positive impact in the second half of the year from Boston. We're still in that 90-day shape down phase. It started off the second to third week of June. And this is one of the more technologically advanced processing facilities in the country. Machinex is doing a great job, but there's a lot of work to get all of those opticals and debts completely in sync. So, that will continue to happen, but we're really positive about where we sit. And the next year, if you think of how you get the positive from the benefit of the investment, but you also get rid of that negative comp in the year. So, this is going to be like a $6-plus million tailwind coming into next year, which will be really positive for the resource business.

So, I would assume you readdress contracts without SRA fees?

Yes. So, we talked about this last quarter. There's a handful of them out there. And there's a couple of notable ones in Connecticut. There's a few notable ones around our Western Mass recycling facility as well. And there are a couple of million dollars a year of negative headwind. And we very successfully over the last decade, have worked with communities and different businesses to share that risk more effectively. And we don't have an expectation that we can't do the same thing here over time.

Yes. And those are really related. As you know, I think, Tyler to acquisitions those contracts all came with acquisitions and we'll renegotiate them at the end of the contract, obviously.

Okay. And then -- so I wanted to kind of hit on volume. It came in a bit weak. You gave some color, but it's interesting because this is actually something we've seen with a couple of the other guys that have reported. Maybe it's idiosyncratic, maybe not. But can you kind of help bridge that down to $6 million? Was it just broad weakness? Or was there something idiosyncratic that felt like in your franchise?

Yes. So, I listen to waste management earnings, and I'm not sure much of what we saw is not all that dissimilar. So at the landfill, we saw MSW volumes basically flat. And we saw C&D up a little bit, which is interesting. But we saw almost every single special waste category down we saw sludges down, which is a little bit of our own doing because we're trying to have less of those materials in the landfill. But then we saw all other special waste categories down; contaminated soils buds, ashes, you name it, asbestos and other categories were down in the year. We also saw industrial roll-off activity down, and we've seen our pipeline stretch out a little bit there. And I think what it really is, as everyone knows, industrial companies, large businesses are looking around themselves and slowing their capital cycle a bit just given the banking crisis and some of the stress in the economy, while the consumer remains strong still. So, some of these projects that might be a bit discretionary in nature investments are getting pushed off a bit, and we're seeing that flow through both on the roll-off side of the business and into the special waste categories at the landfill. On the residential side of the business, Sean and his team and the temporary roll-off side, they're just trading price for quality of revenue and making sure we have the right mix in our business. As you know, like every other trucking business, we struggled to always fill the seats and have high-quality drivers and mechanics. So, we've been in a mode of making we really want to do business, and we're doing it for the right return level, and it's a big focus of the team. So, you see a little bit of that churn there. Not a lot of its stuff we're disappointed about. We're improving margins and quality of revenue.

Okay. And then is it in the guide kind of flattish volume in the back half? Is that what I heard?

Yes, that's where we are right now, a little more visibility on some special waste projects, plus the comps are a bit easier. Last year started off a bit hotter on volumes and tail off through the second half of the year.

Okay. And then, Jason, just a couple of modeling questions, but what is the M&A contribution for this year in the guide today, which excludes in bridges, but roughly what is that in solid waste? And then what should we expect kind of the run rate on interest expense to be?

Yes. Just one clarifying point, and Jason can hop in. The guide does not include Twin Bridges. It just includes the GFL operations, yes.

Yes. So hey Tyler, so GFL in the back half of the year in terms of revenues for Q3 and Q4, roughly $91 million in revenues in the second half of the year. Then we have in terms of rollover from acquisitions completed in 2022, we've got roughly another $3 million of revenues that will be in the back half of 2023. We had about $12 million in the first half of the year. And then we completed a tuck-in acquisition in April of this year, Triple T trucking that we announced with our Q1 earnings. And that was roughly $9 million in annualized revenues. So, we'll get the pro rata portion of that in the second half of 2023.

Okay. Okay, that's helpful. And then, John, I got maybe my last one here. I read an article a couple of weeks ago, I think it was about an intent to reopen Hardwick. I know it sounds like it's kind of far away and there's a lot to do to get there. But I'm just curious if those reports were correct and what was the driving factor in looking into that?

Yes. Actually, as a development team associated with the community that came to us and asked us if we would be interested in working with them to potentially reopen it. And so it's true. We made a presentation to the Board. Brian and Oliver made that presentation about three weeks ago to the Board. It is very early in the process. There's a lot of heavy lifting to be done, but there is capacity there for 20 years. And we're happy to push forward to the extent that we continue to enjoy a favorable response from the community. It's it certainly is a possibility for additional capacity in the future.

And to flash back in time, this was a site that did not run out of capacity, but needed some selling changes. And so it really hinges on great support for us to invest here.

Okay. So, it's something to stay tuned. That seems like it's kind of a ways away, but we'll get--

Indeed.

Okay. All right. Listen, I'll turn it over. I appreciate the questions.

Thanks Tyler.

Thanks Tyler.

Thank you. And our next question is going to come from the line of Michael Hoffman with Stifel. Your line is open, please go ahead.

Good morning. Hoping it's sunny in Vermont today, not rainy.

It is Michael. It's hard to believe, but the sun is out.

Every other day.

We had three inches of rain yesterday afternoon. So, it may be coming towards you, unfortunately. On recurring revenue volume, can we talk about underlying characteristics of the recurring revenue volumes. So, I think of small container service interval changes, new business formation large container permanent inside office building schools, things like that, what are those trends like?

Jason, do you want to hop in on that?

Yes. I'll start, Michael. So, in the second quarter, just focusing on our commercial line of business, where many of those attributes would be, Michael. Our volume in the commercial collection line of business was flat year-over-year in the quarter. We did experience net new business activity in the quarter in terms of net new revenue from a sales perspective, i.e., we gained more new accounts than we lost. Yards per lift were flat from an operational metric perspective. And price was quite positive in the quarter in our commercial line of business, up about 9%, and we expanded adjusted EBITDA margins by about 100 basis points.

Okay, that's terrific. And then just to touch on your renewable energy, can you tell us what your current amount of MMBtu were playing with? And then what the development with Waga would add?

Yes. So, we've got two projects under development, one at our North Country Landfill in New Hampshire and one at our [indiscernible]. Charlie, is that one--

Those two projects combined about $1.3 million.

$1.3 million Yes, MMBtus. And then we just announced this partnership or commercial agreement with Waga whereas they will develop the infrastructure at 3 of our sites and they'll own that infrastructure, invest in development -- develop and operate it and we'll receive revenue shares from the gas sales and RINs. And that will initially be about $1.3 million MMBtus as well, $1.2 million, $1.3 million. That contract we think it's very favorable and can create quite a bit of value for shareholders over time. It will take about two-plus years to sites permitted, built and online, but some real benefits after that point.

So, the when you refer to margin headwind from landfill gas, is that electricity based in the quarter?

Yes. So, we still have a number of facilities that are producing electricity. And we definitely saw a decent size headwind year-over-year in those facilities as RECs and power sales were down.

Okay. And then back to Boston for a second. We've been hearing through various sources that the Boston three-year or five-year contract renewal cycle starting for 2024, that they may actually extend you and not go through a contracting process and focus on just collection and disposal since the disposal side may be up so much. Do you have any color on that? Because that would be good. You put $20 million in there and you've got a shared rollover into the next sort of three to four years.

Yes, I don't think that we have any comment on it at this point in time, Michael. I think that the ordinary course of business, they would go out to bid. It's certainly a possibility, but it's nothing that we would comment on at this point.

Okay. And then fleet replacement, how do you stand there? And what's the sort of positive impact to repair and maintenance cost, if that's improving?

Yes, it's -- we've had a little bit of uptick. Michael, this is Sean. Truck delays, but nothing out of the ordinary. The fleet is in the best shape it's been in the history of the company, actually. And we went thoroughly through the GFL trucks, and we're pleased with what we have down there. We have some automation opportunities. And all in all, it's looking good.

Yes. Sean, probably our highest inflationary categories are still parts, tires, maintenance outside repairs or some of our highest inflationary categories. And then on the capital side, trucks and landfill construction still pretty heightened as well. We see those as outliers that aren't dropping as fast as other categories.

Okay. And then can we get an update on two sort of landfill scenarios, the sort of New Hampshire, Boston -- Dalton status and then McKean timeline?

Sure. McKean is under construction now. I think we had talked about we received all of our permits last quarter under construction anticipate early in 2024 with McKean beginning to ramp. So, it will take a year or two to ramp. We don't expect to see significant tonnages on the start. It will ramp over a period of time. The Dalton facility, just moving forward with permits, nothing really to report there just continue to move forward from a permitting perspective. Same thing with regard to Highland. We're doubling the permit at Highland, post community agreement in place in Sam and the engineering team are working with DEC to expand that permit as well, and we expect to have that. Probably, I would say towards the end of the year.

Okay. And then I have to ask it because you bought GFL. So, when do we hear about your first M&A deal in the PA, Maryland, Delaware market?

Well, we might want to do a little more integration, Michael. Maybe another week or two of only --, only kidding. I mean, I think that clearly, Kyle, the real benefit of having Kyle who manage those assets and then having him work for us from a business development standpoint, we do have a great a great portfolio of opportunity there. So, it wouldn't be surprising to see something happen. But we're really focused on the integration at this point in time. And want to get that done very well, which the team is in the midst of at this point. So, I wouldn't anticipate something on an immediate basis, but the portfolio is just terrific opportunity there. So, it will begin to happen quick enough.

Okay. Thank you very much.

Thank you, Mike.

Thank you. Our next question is going to come from the line of Sean Eastman with KeyBanc Capital Markets. Your line is open, please go ahead.

Hi team. Thanks for taking my questions. I just wanted to come back to the 2023 guidance update, specifically the organic update. I mean I think the M&A part of it is straightforward. But I just wanted to understand that, I think it was $3 million kind of underlying EBITDA raise? I wondered if maybe that underlying raise is a little juicier than it might seem if you're overcoming some of these volume headwinds that weren't anticipated? Obviously, the weather has been challenging. Any color on that would be helpful.

Yes, I mean it's a good point because we are a little bit lower on the recycling side than we had expected. We had a bit more headwind there, and we've seen a little bit weaker special waste volume. So this is really a raise on the strength of great investments and great execution on the hauling side of the business and other areas where we've been able to flex costs and drive efficiencies and execute our plan. So, it's a good point. It is really important to note that even with a little bit of weakness in volumes, you see what we're doing on the margin side of the business, and it's pretty incredible. I mean we increased margins 230 basis points while shedding some volumes, and that really shows the ability for us to be nimble. The investments we've had in systems like Power BI that give us good real-time tracking and our onboard computing and automation, ability to reroute trucks is allowing us to take cost out of the system rapidly.

That's helpful. And then I'm trying to think through the margin bridge for next year with all the moving parts in the model. Usually, we're starting at that 50 basis points kind of baseline entering the year. We know recycling is going to be a tailwind. We've got some M&A dynamics going on. Maybe that price cost spread visibility is looking pretty good into next year with inflation coming down. Just curious where your head is going as we think through that assumption.

Yes. We've had a lot of moving pieces recently as you correctly reflected. We really haven't done a lot of updating to our models. We're just stepping into budgeting right now. But all of the points you made are valid that recycling becomes a good guy into next year given the Boston shutdown even if commodities were a little weak, we still would have some tell in there and are outpacing of inflation that will continue with our pricing programs. We're very confident there. Operating programs, we still have multiple investments we're making this year into next year to drive more returns in that space. So -- and then you look at the acquisitions, I mean, they're coming in at good margin points and that they're not dilutive day one. So, we could be setting up to a year that could be better than 50 basis points. I think we've got more work to do before we start to guide next year, but your perspective is fair.

Okay, got it. And then last quick one for me. Just looking at the bridge from kind of vanilla free cash flow to adjusted free cash flow, those to acquisition-related items that step up kind of unsurprisingly around a large deal being folded in. But I just wanted to make sure I understand what's going in there on this post acquisition and development CapEx line and the cash outlays from acquisition activities line, just understanding what those adjustments are?

Yes, the cash outlays from acquisition activities is lawyers and consultants and work and stuff like engineering were. And then the post-acquisition and development capital expenditures, some of the initial dollars we put to work, right, we get on the ground to drive synergies or to fix facilities or safety issues. It's always contemplated in our pro formas, but we carve that out separately just as a line item to give clarity of that additional investment we're making in those businesses in the first 18 months.

Okay. Thanks. Thanks for all the perspective.

Thank you, Sean.

Thank you. And our next question is going to come from the line of Stephanie Moore with Jefferies. Your line is open, please go ahead.

Hi, good morning.

Good morning.

Maybe touching on what you're seeing and with maybe some of your competitors on the private side. So, both -- I guess, two-part question. First, what are you seeing maybe from an appetite from an M&A standpoint in that portion of the industry? And then secondly, are you continuing to see, I think, maybe the same level of rational activity around pricing with those competitors that we've seen over the last year? Or maybe any change on that front would be helpful. Thanks.

I think that there's significant activity. And I think when you look at inflation, the challenges, recycling commodity prices. The atmosphere from an M&A standpoint is very strong. Businesses that historically we really didn't think would be for sale or for sale. And so activity there is really strong.

But we're not seeing the private as active buying things because their access to capital is maybe dried up a bit.

Yes. Yes, I mean I think that there's not a great deal of activity. Certainly, on larger transaction, you'll see activity and higher pricing. But on the smaller transactions, not a lot of activity from a competitive perspective.

And then on pricing, John kind of answered that in the first part of this question where there's a lot of inflation out there and recycling has been a really big headwind, I think, for companies across the Northeast in the last year. And then that cost of capital is a big deal, I think, for smaller companies. So, they're all looking at the same things we're looking at and that they're making sure they can cover their costs and cover the cost of capital and creating prices.

Yes. And in addition to the disposal increases, labor difficulty. I mean there's just a significant amount of activity that is driving M&A. And as Ned said, there's not a lot of activity from a competitive standpoint on smaller deals.

No, that's really helpful. And then maybe just a follow-up to that point, and you probably kind of already answered part of it. In terms of you thinking the go-forward opportunity to price, so even as inflation continues to come down, how do you view just the overarching pricing opportunity in your markets?

Yes, it's interesting, like, we see the headline stack coming down, but I mentioned a minute ago that some costs that hit our specific industry are still pretty high. I mean we see it across parts maintenance outside repairs, tires, but then you move over to some of the construction elements, and we haven't seen inflation peak yet. It's still quite high into this construction season at land sales and some of the equipment side is still very far out to get the equipment and demand is high there. So, we haven't seen prices start to come in on that side. So, from our vantage point, in our pricing programs, it's business as usual. We're going to be out there trying to recover and recover slightly in excess of inflation and be nimble with what we're doing on the street, and that's our intention through the rest of the year and into next year. And our goal always is 50 basis points ahead of inflation is our goal when we're looking at pricing programs.

Absolutely. All right. Thank you so much.

Thank you.

You're welcome.

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to John Casella for any further or closing remarks.

Operator, I think we do have one follow-up.

I do. I see Mr. Hoffman. So, just one moment.

Go ahead, Michael.

And Michael Hoffman, your line is open, sir.

I just wanted to follow-up on the dialogue on the last question because I think it's important for everybody to understand that as inflation comes down, the rate of change in price is going to narrow. But what's really important -- so there's a statement inferred in a question here. Can you talk about the discipline around managing the spread even as the rate of change narrows? I think it's important for the market to understand that industry is really good at that, you're good at it. And therefore, even if the price is 100 basis points lower next year, you'll still have the spread.

Yes, I should have been clear too, Michael. You're aware of this, but maybe not everyone is on the call. Over 70% of our collection book of business is not tied to CPI. There are contracts where we have the ability to price as necessary in whatever inflationary environment. That's how we structured many of our agreements and contracts. We do have some CPI linked or set prices and contracts. So our book of business may be a little different than our peers, and we can be very nimble and make sure that we're maintaining that spread. So, if inflation does start to come down, we make course correct our pricing to a lower level, as you said, but we're still working always to outpace inflation by 50-plus basis points. And with our book of business and not being so CPI-linked, we can be a little more nimble with that and make sure we get to that right price point. And we've done great at this over the last five, six years and have done a very nice job.

Okay. I just wanted to make sure we had that clarity.

Yes, thank you.

Thank you. And I do see another follow-up question, just one moment. And we have a follow-up question from the line of Tyler Brown with Raymond James.

Hey. Real quick follow-up. Jason, did you -- you never answered my question, Jason, on the interest expense run rate.

Yes. Sorry about that, Tyler. Yes. As you came back into the queue, I realized what you're going to ask. So, no problem there. So, in our original guidance, our interest expense net that we guided to back at the beginning of the year was $26 million. And in our updated guidance, we're at $35 million, which is reflective of the new Term Loan A, which is $430 million and funded on June 30th. And that's -- that will run at about $26 million of annualized interest related to that. So, we'll get half a year on that. Although we are experiencing higher levels of interest income as we have more cash on the balance sheet, we're putting some of that to work in conservative overnight investments with modest yields associated with them. So, that's a partial offset of about $5 million.

Yes, I would say maybe more than modest yields. So, we're getting like close to 5%. It's covering most of that interest cost.

Yes, it's a good offset. So, $35 million is our new guide on the interest expense line. Cash interest should come in at around $33 million for the year.

And how much should we gain cash from income?

About $5 million, yes. That's within the 33%, yes.

That's a net number.

Correct. $33 million is a net, inclusive of the interest income.

Okay. I think I got it. appreciate that.

Thank you. And now I'm showing no further questions, and I'd like to hand it back over to John Casella for any further remarks.

Thanks everyone for joining us this morning. I look forward to discussing our third quarter 2023 earnings with you later on this year. Have a great afternoon. Thank you.

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