Casella Waste Systems, Inc. (CWST) Q3 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Inc. Third Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Mr. Joe Fusco. You may begin.

Thank you for joining us this morning and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ed Johnson, our President and Chief Operating Officer; and Ned Coletta, our Senior Vice President and Chief Financial Officer. Today, we'll be discussing our fiscal year 2013 third 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'll 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 SEC's safe harbor provisions. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our prospectus and other SEC filings. 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 estimates change and therefore, you should not rely on those forward-looking statements 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. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in the financial table section of our earnings release which was distributed yesterday afternoon and is also available in the Investors Section of our website ir.casella.com. And now, I'll turn it over to John Casella who'll begin today's discussion.

Thanks, Joe. Good morning, and welcome to our fiscal year 2013 third quarter conference call. Our goal today is to discuss our third quarter results and to update you on the midterm strategy. I will start with a brief overview, Ned will take us through the numbers and then Ed will provide an overview of his game plan to improve operating performance in his new role. As we stated in our press release yesterday afternoon, our third quarter was disappointing with results coming in below our expectations. We continue to see the same recessionary trends in the business and the weak regional economy that have plagued us all fiscal year. Lower landfill tons, especially in Western New York, historically low landfill special waste tons, the jobs were just not out there to bid this year, lower collection volumes and recycling pricing at levels 20% below the 10-year average. Offsetting these challenges, we made progress in the quarter on several important fronts, including improved pricing in the collection line of business, successfully early integrating the BBI acquisition, permanent closure of Maine Energy and significant progress ramping the new annual permit limit at the Southbridge Landfill. What is particularly frustrating is the operating and economic environment remains unpredictable, difficult and stagnant, canceling out the impact of the hard work we have been aggressively doing to put the company in a position to succeed. I plan to run through my comments quickly to leave adequate time for Ed to share his thoughts on what he's learned during his first 90 days on the job. Ed has been quite busy as he's visited all of our operations to meet with the local teams to learn what's working and what's not at each division. Ed will get into the details but at a high level,…

Thanks, John. Moving on to the quarter. Revenues in the third quarter were $115 million, up $400,000 or 0.4% year-over-year. Solid waste revenues were up $2 million or 2.2% year-over-year with the increase mainly driven by higher pricing and acquisition activity. Revenues in the collection line of business were up $2.6 million year-over-year or 5.3% with price up 1.9% and volumes down 3.6%. Volume weakness was most pronounced in the Roll-off line of business. Roll-off pricing was up 0.5% and volumes were down 8.1% due to the challenging construction market, lower work associated with drilling sludges and the tough comparison to the third quarter last year when we saw increased demand for Roll-off services with Hurricane Irene and Tropical Storm Lee cleanup. Despite this weakness, our pricing programs in the commercial and residential lines of business remained on track with positive 2.3% pricing in the quarter. Excluding the divestiture of Maine Energy, the closure of the Worcester landfill and acquisition of BBI transfer stations, revenues in the disposal line of business declined $0.5 million year-over-year. Price was up 3.3% on higher special waste pricing in the disposal line of business, while MSW and C&D tipping fees were down roughly 1.7% year-over-year. Disposal tons declined 226,000 tons or roughly 20% year-over-year with MSW tons down 11,000 tons with the closure of Maine Energy and special waste tons down 214,000 tons year-over-year or 43%. The decline in special waste volumes was mainly driven by a regulatory delay in accessing additional interface at the Worcester landfill closure project and a decline in drill cuttings in Western New York. During the quarter, we acquired $4 million of revenues and divested $1.5 million of revenues. Recycling revenues declined $1 million or 8.9% year-over-year with the drop in recycling commodity pricing driving most of the decline.…

Thanks, Ned, and good morning, everyone. My discussion today is going to be a lot more detailed than normal for a call like this but the financial performance word is I think it's very important to explain the changes we've been making both at the tactical level and the strategic level. Since my appointment as Chief Operating Officer, I've spent most of the last 3 months on the road visiting each of our collection and landfill operations and spending quality time with our local management teams. As much as I thought I knew the operations from my CFO position, I learned a great deal and I feel I have a much better understanding what's working, what's not working and the changes we need to make. The exciting part for me is that I'm now a lot more confident that we have a bright future and that we are not years away, but months away from seeing a positive turn in our results. As John and Ned had discussed, we brought our guidance down this year. Obviously, my focus is next year and we wanted to bring the guidance down to a level where we can meet or exceed guidance on a go-forward basis. Having said that, we are doing the things now that will build momentum going into fiscal '14. Our goals are to reach profitability as quickly as possible and to build a company that can produce consistent improvement and financial results and generate significant free cash flow. Over the past 3 or 4 years we've made numerous changes in the way we run our business, including the centralization of various business processes, building a Customer Care Center, centralizing our marketing efforts and even centralizing some of our core activity such as routing. At the same time, we suffered…

[Operator Instructions] Our first question is from Michael Hoffman of Wunderlich Securities.

Ed, thank you for the detail and the sort of candor, all of you. In that, things aren't as good as they should be, you cut as low as you can and now, let's go from here. Can you set us some goals that we can target as we get through the fourth quarter and then into fiscal '14? Things that are -- that you're comfortable about that are very achievable. What should we see differently when we're doing this again in June, when we're doing the fourth quarter call?

So without getting into too much detailed goal, targets, I think when we have the next call, we're going to be focused on next year and that's the time to really get into more specifics. Our focus right now is to get more volumes into the landfill in the Western region. That's the #1 driver of our financial success. And so that's why we're restructuring around it, bringing in new resources and really changing our focus to build the relationships in the Eastern market where the handlers of waste and the producers of waste are. And that's the kind of volume -- that's the target for us to bring volume into the market. So that's our primary focus. Our focus, going forward, is we've got to get this company to profitability and get it to significant free cash flow. So we're going to make those moves necessary to get us there and the biggest driver, again, is volumes into the Western landfills and hopefully, we'll have things to talk about for the next quarter.

So will you be positive free cash flow in the fourth quarter? I mean, you may be negative for the year but will you be positive in the fourth quarter?

That's a tough question to answer. I don't know if I want to peg that target for me. I think if we have the normal seasonal turn up, we could get the free cash flow. But I don't want to throw it out there and then disappoint you...

I'm not holding you to a number but we all have to agree that time's of an essence here. We've been having the same conversations. It feels like Groundhog Day.

We certainly understand that and we share the frustration. We're...

So as we -- so the message and when you give guidance on '14, again, not looking for the numbers, you will be a positive free cash flow company in '14?

Yes.

And I mean, not -- something substantive. I mean, something that's more like 4%, 5% of revenues, not 1% or 2%? I mean, this is a real but the idea they're probably 10% is the right place to be over time, 10%.

I don't think I'm ready to set that target but yes, that's the goal.

Okay, which then corresponds if you're free cash flow positive in sort of middle single digits, that would correlate to profitable earnings?

Again, that's the goal.

So the intention is that's the message for your guidance in '14 is you will be profitable and you will generate free cash substantially?

Boy, you're really putting me in a box.

Well, I mean, to some level -- we put a lot of investors into this theme so I want...

No, I certainly understand and that is the goal. I mean, we're focused on building this going into next year and making the changes now that are going to get us there. And certainly, in the next call, I hope to be providing guidance that everybody's going to be happy with.

Okay, and so I'm going to keep on some of these for a second since there's not that many of us who cover this, anyway. You spend about $50 million in capital spending. Why shouldn't that number be less in '14? Not stupidly less but more like 40 to 45 instead of 50 to 55.

Well, I think it probably will be. We are looking at things -- we've made some strategic investments over the past year and the year before that haven't shown. They were kind of outside the core, trying to drive volume or feed catalyst into the core business. And now, I think we're at the point where we need to just focus our CapEx on the core business.

Okay. That's good news. At what point -- I don't think that the economy ever helps you out here. I think structurally, this economy in the world, and the geographies you live in isn't going to get good enough to be the driver of volumes. You have to find it which means that you're going to use creative marketing to get it, which is supposedly, I guess, the euphemism for price. And there's a lot of people who are going after that same thing. So at what point in your plan do you recognize that those 4 Western landfills don't cut it? What comfort are you giving the market that having said you have evaluated sales an option, when does that come back on the table? What do you have to see that tells you that okay, we got to sell?

First of all, all strategic options are on the table. I mean, I don't want people to think we don't look at that. It's just nothing that we've seen makes that work for us. And the real issue is are we running our business the best way we can and are we getting our share of volume from outside the market? And I can tell you, we're not. And the real great learning experience for us, I think, was Hurricane Sandy. Here, we had a large amount of volume show up on the East Coast. We tried to react to it as fast as we could and what we learned is we really didn't have the long-term relationships with the right players in those markets to really access a meaningful amount of that waste. So we're understanding now that we've got to put the resources towards building those relationships. And we've been doing that over the past few months and we're going to continue to do it and the restructuring is really designed to help us add resources to doing that.

Okay, last question and I'll let -- get off and let somebody else. When I hear about this plan if CapEx would come in to be focused on regular operations, so does then things like G&A probably tightens up more as a percentage of the business. And correspondingly, if your route rationalization really drives productivity that I'll see a COGS impact pretty quickly.

I believe so.

Our next question is from Corey Greendale of First Analysis.

This is David Warner for Corey. Can you talk a little bit about sort of the third quarter impact from BBI integration costs, whether you expect that to be accretive in Q4 and sort of your ramp to that $4.9 million goal that you cited for next year as a run rate?

David, so this is Ned. The BBI business is seasonal, much like a seller's business where their summer months and late spring and into the fall are their strongest periods of the year. And as we laid out in our initial guidance on the acquisition, it will take us until the second full year of operations to fully recognize the various internalization benefits and the operational and G&A synergies. We expect that to ultimately produce right around $5 million of a bid-up [ph] from the business. And after, in the first full year of operations, we expect the business to produce around $3.5 million of adjusted EBITDA. So coming into next quarter, we should expect that to pick up to a run rate of somewhere in the neighborhood of $600,000, $700,000 of benefit. And we're seeing the internalization to North Country today. We've seen very little operational or G&A synergies as Ed laid out because we had a 90-day truck [ph] period we needed to make it through which expires next week. And then we can begin to rationalize additional assets and routes together and that benefit will start to come in.

And just a follow-up to dovetail on the last questions. Can you talk about the progress of greener hue and just more generally, your ability to supplant some of the lost Sandy and drilling volumes with industrial customers or universities or any other alternative streams?

That's a good question and I don't want to get too lengthy on my answer but that is something else we've restructured a little bit internally to improve our success in areas like greener hue and the industrials line of business. We formed a group. The problem in the past is we've identified a bunch of things that greener hue and the industrials could go after. But we really were trying to run that on corporate. And so now we've kind of restructured things so corporate is more of a support group and we pushed it down into the local markets. We don't have a material contribution from those 2 initiatives yet but we certainly like the prospects of it and we think we're going to do well with it going forward, especially under the new structure.

And just one real quick follow-up. I'm sorry if you said it but did you receive any Sandy volumes in Q3 and does the guidance assume no Sandy volumes going forward? Is that correct?

We received some limited volume, very small and it came by truck that was really sourced from another company, and just coming into our landfill but no, there aren't any meaningful Sandy volumes in our numbers or forecast.

There's nothing in the forecast as well.

[Operator Instructions] Our next question is from John Zaro of BCM.

I'm still not -- having been a shareholder on and off through this whole process and I'm still not sure how you guys are ever going to get us back to where we were before when you all admit that the economy has changed and the world is different and it's going to be tougher. Like, I don't understand. I mean, why do think that the Northeast is actually going to ever get that profitable? All of those 4 sites are ever going to be profitable enough no matter what you do? You have this battle down there with the Seneca landfill and things like that. I just don't understand why, when you look at the return of dollars to shareholders, you've tried 4 different plans, we had this plan last year where you guys laid out all these things for increased EBITDA. That's almost now disappeared because of the economy and other factors out there. So we're back to where we were before and the stock price is down and you diluted us. So I guess the question is what's the endgame here if you guys keep doing this plan as opposed to there must be countless people who want to buy those 4 landfills. There must be countless people that want to buy you guys and make it more efficient. I mean, your whole eastern section, as you pointed out in the call, is incredibly attractive. It's incredibly well-run. It's incredibly profitable. The other part just can't be. You said it yourself on the call. It's too competitive.

The simple analysis of our Western landfill is first of all, there is overcapacity in the market. There's 4 landfills that we have in the West that work as one, basically and it's all about long haul volumes. So yes, there's overcapacity in the market. We looked at all the options. We've looked at shutting some down temporarily to take capacity out of the market, kind of like what we did with MERC in the East. It didn't make economic sense. It hurt us to do that. We looked at selling a landfill or 2 outside the market and we couldn't sell it in the market because it doesn't solve the problem for the rest of it. We looked at selling them outside the market and ...

Why not just sell them all?

Well, who's the buyer? I mean...

I don't know. But have you looked to see if there's a buyer? I mean, that's -- this is the issue, okay? We've been through all these restructurings and all these things and I realize that Ed, you have not been there. But these are endless programs that we've gone through and endless restructurings of looking to solve a problem that is sitting there and gets bigger and bigger since 2008. And I just don't understand...

They get bigger by comparison ...

But I don't understand what the issue is. What point is it for us to try and see if it's going to make it when at the end of the day we -- I mean, you thought that -- John thought the company was worth a ton of money last year but decided to dilute all of us at $4.25. So we're trying to get the stock price to go up, not to have an experiment to see if it's going to work. And if this experiment doesn't work again, we're going to be in worse shape than where we were before because then everyone is going to know it didn't work.

It's Ned. Can I intercede for a second? Everything is a relative basis. The Western landfills we're talking about are still some of the most profitable assets in the company. They ended this quarter with around 37% of better margins. It's a relatively issue where we lost about 350,000 tons to these sites and they're not running at full and their last ton through the gate comes in at very high-margin...

But they may not run. But we've already had this discussion for the last 2 years. They may not run back there.

I think we talked about some important structural changes we made today. We brought in a very seasoned leader who is with one of the more successful waste companies in the industry. We've restructured our landfill sales efforts and Ed and John are spending a lot of time over the last couple of weeks working with the landfill sales team, working with the local teams to source additional volumes and we've turned a corner. We're sourcing volumes. We went through a drought period. We were getting the least amount of special waste that we've gotten in the 8 years I've been with the company. And things were not as well structured as they should have been on the sales side. And it's an area that John and Ned are bringing leadership to. We expect Randy to bring additional leadership to this area. And it's not a massive number of tons we're talking about. It's just a lot of leverage at those sites we lost. So the problem while it's big in a financial sense, in a sense of attracting these volumes, we are talking about 354,000 tons we're running full and we can swing the pendulum the other direction. So ...

I'm not disagreeing with it but you guys are a public company and you're supposed to be returning money to shareholders and increasing shareholder value and you guys have been going the opposite way for 6 years on these various plans. That's my only point. So maybe what you ought to think about doing is how can I get the highest return to the shareholders going forward? And I don't think the highest return going forward is to try and fix, which even you admit is going to be difficult to fix. And the economy is not going to change that much. I mean, Michael is right. The economy's not going to change that much. It is what it is. And if we go into another recession, you guys will then say oh, well the economy slowed down again and it's going to be terrible. We already know that. That's a given.

Let me make a couple of comments here because first of all, no, the economy's not going to get better. We're not betting on that. But when I look back at what we've done as a company last year, year before to try to fix this issue out West, it was really more shooting for a strategic solution. We made a big bet on drill cuttings, for example, and the drill cuttings have now gone away. I think the changes we're making today and also on the collection side, we're making changes in the fundamental management. The blocking and tackling, I don't think we've done as well as we can do. And that's our best hope for bringing in new volumes.

But why isn't your best hope trying to get the most value out of the company? Because if you spend 3.5 years trying to turn the company around as opposed to people wanting the assets because they can use them and integrate them in a better manner because they're bigger and it's just the very nature -- what you experienced in Sandy is what the problem is for you guys. You're not big enough and you can't get big enough, fast enough because you don't have the money in order to move forward. And -- just, look at it. I don't understand why you can't see that.

Well, all strategic options are on the table, John. I mean, we're...

Well, if all strategic options are on the table, then I think that -- I mean, if we really all believe that all strategic options are on the table the stock wouldn't be $4.25. Right? Seriously. John think it's worth $12, maybe $15. If all strategic options were on the table, it would not be $4.25.

I don't think that -- John, I think we're all completely aligned in terms of trying to create as much shareholder value as we can and I think that all of the options are on the table but I don't think that anything's changed in terms of our belief as to whether or not we can access the 350,000 tons that gives us the leverage to those 4 facilities. I think that when you look back at what we've been able to do in terms of refinancing the balance sheet, taking out Maine Energy, getting the Southbridge facility, a number of years ago, we were struggling with the Eastern region. It's fixed now and we're moving on. We fixed the Maine Energy issue this past year. We've got that facility sold. We shut it down. We've built the Westbrook transfer station. We're moving tons to our facility. So I don't think that there is any disconnect in terms of our ability to create value and understanding the only way that we could for all of our stakeholders is to execute this plan and to do that [indiscernible] in short order.

Wait, John. The disconnect is you have -- I'm 100% in agreement with you. You have done all of that and your stock is $4.25. Look at the other waste companies. That's not what happened to them. So that's the point. You're taking this as if you're a bad guy or you're not doing the right thing. You're totally doing the right thing. It's just the world has changed and it's getting bigger. So all I care about is if you're telling me you're willing to sell the company and get the highest value for the company, that's great. But you got to be open to doing that as opposed to saying we're just going to work away at this. Because working away at it and all these various plans and bringing in different people, the stock has gone down every year since, okay? And that's the economy's problem, that's your problem, that's my problem, that's every shareholder's problem and that is not going to change.

I mean -- I don't think that -- I think that we're, there's alignment. Our effort is to create as much shareholder value as we can and our [indiscernible]

Then I think you ought to put something out there that says you're looking at strategic alternatives because if you think...

That's not where we are. We just laid out for you what we need to do and that's to generate the 350,000 tons of waste into those facilities so that they can create the kind of value that we think is inherent in this franchise. And at that point in time, then I think that's a bit longer-term. And I think we understand that have a very limited amount of time to get this done. We need to get this done as quickly as we can. I think we are completely aligned on that. It's not a [indiscernible].

Well, I think if we were completely aligned -- I think if everyone really thought that, that was true, it wouldn't be $4.23 down $0.50. I mean, it is what it is.

I mean, we're all shareholders, John. And we are aligned in terms of trying to create as much value for all of our shareholders.

Okay, as long as you're willing to sell the company if people come in with offers, great.

I'm not showing any further questions in the queue. I'd like to turn the call back over to management for any further remarks.

Thank you, folks. Appreciate everyone's participation today. Look forward to you all of being on our call in June of -- for the fourth quarter. Thanks.

Bye.

Ladies and gentlemen, thanks for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.