Good afternoon, ladies and gentlemen, and welcome to Casella Waste Systems, Inc. Q3 2017 Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Joe Fusco. Please 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 will be discussing our 2017 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 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 our 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. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures to the extent they are available and without unreasonable effort are available in the appendix to our Investor slide presentation, which is available in the Investor 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.

Thanks, Joe. And good morning everyone. We're very happy with our third quarter results. As reported in our press release, our revenues for the quarter were up 10% from last year, adjusted EBITDA for the quarter was up $2.4 million from last year and our year-to-date normalized free cash flow was up $19.5 million from last year. In addition we accomplished two exciting financial milestones in our third-quarter. Adjusted EBITDA was one of the highest quarterly amounts in the company's history and we reduced our debt leverage down to 3.71 times which gets our leverage below the 3.75 times threshold that was our last main goal as part of our 2018 plan. And it is also the interest rate step down threshold for our term loan B reducing our interest rate by another 25 basis points which will save us almost $900,000 per year in interest costs We drove year-over-year improvement through our strong pricing execution, our operating and efficiency programs and continuing strong overall execution against our key strategic initiatives These things were partially offset by headwinds in recycling business due to China's National Sword program which has net negatively impacted paper and cardboard prices the increase sorting and quality control, labor to meet emerging lower contamination standards. We've done great job over the last several years closing a series of programs to help mitigate commodity risk in recycling business. These programs include a revenue share contracts that share commodity revenues about the threshold with our customers or below the threshold our customers pay dollar per dollar processing fee. Our net average commodity rate formula that allows us to tax back increase cost to sell commodities including higher labor or equipment cost to meet new quality standards and our floating sustainability recycling adjustment or SRA fee that works like…

Thanks John. Now on to the quarter. Revenue for the third quarter were $160.3 million up $9.1 million or 6% year-over-year. Solid waste revenues were up $6.1 million or 5.4% year-over-year with higher collection disposal pricing, higher solid waste volumes and the rollover impact from acquisitions of $1.3 million during the period. Revenues in the collection line of business were up $4.5 million year-over-year with price up 3.3% and volumes up 1.6%. Pricing was up 3.4% in our residential and commercial lines of business and roll-off pricing was up 3.3%. We experienced volume growth in the commercial, residential and roll-off collection lines of business with the residential line of business being positively impacted by the onboarding of four new municipal contracts in the last year. Roll-off was positively impacted as we saw some Q2 activity shift to Q3 after unusually rainy spring. Revenues were up $1.5 million in the disposal line of business year-over-year with both positive pricing and volumes. We increased our reported landfill pricing by 3% year-over-year and more importantly we increased average price per ton at the landfills by 5.3% and improved the mix of our customers and volumes. We increased our average price per ton by 8.6% in our Western region as we continue to inhibit strategy to focus on advancing pricing versus capacity utilization. Our total landfill volumes were 1.2 million tons up 1.2% year-over-year. We continue to ramp down tons at the Southbridge landfill in the quarter and we continue to trade higher pricing at our site for volumes. Recycling revenues were up $1.9 million year-over-year with higher commodity pricing and volumes partially offset by lower tipping or processing fees. Average commodity revenue per ton or ACR as we say was up 22% year-over-year and higher fiber PETE and metals pricing. However commodity prices…

Thanks Ned, good morning everyone. As Ned laid out we finished the quarter ahead of plan. As you can see in the numbers we are enjoying a strengthening economic environment with good pricing dynamics, good demand for roll-off and other another services, and a tightening disposal market that benefits our unique and irreplaceable asset base. Last quarter we were talking about the excessive rain which effects roll-off activity and our leachate cost and landfill construction schedules and we are also talking about an unusual uptick in our healthcare cost. I am happy to say that these things normalized, precipitation went back to normal and our healthcare cost returned to the actuarial trend lines and we had a very strong quarter. Cost of ops improved another 55 basis points as compared to the third quarter of last year, that's 340 basis points from the same quarter the year before last. Despite our recycling cost of ops jumping up over 5% to the extreme volatility and commodity prices. This improvement was led by a strong performance in our collection line of business which improved cost of ops by 158 basis points on strong price and our ability to hold the line on labor and maintenance costs. And from our disposal operations where we experienced a 152 basis points improvement, driven both by price and actual reductions in labor and maintenance costs. Collection price was up 3.3% with a 1.6% volume increase while disposal pricing was up 3.5% on the reported basis. The average price per ton received at the landfills was up 5.3% on flat volumes. There has been a lot of focus on the market disruption for recycling commodities caused by China’s attempts to improve the quality of material they are willing to accept. As a major market participant in the…

I think operator, we will open it up for questions.

[Operator Instructions] Your first question comes from the line of Corey Greendale with First Analysis. Your line is open.

So just you might have hit on a couple of these things, I just want to make sure I am understanding that. Ned I think you talked about the lower EBITDA year-over-year in the recycling business. Can you just dig in why was EBITDA down in -- I'd say it's going to be down in Q4, why was it down in Q3?

Yes so, two different things really happen in Q3, one we started to add a lot more labor to our processing facilities to ensure that we can meet emerging quality standards. So our labor costs were up $700,000 year-over-year in the third quarter. These new standards from China were really put out in the July timeframe and in order to continue to move materials domestically and internationally we want to clean up the quality further of our materials and start to move towards standard. The second is, year-over-year commodity prices are almost less rather than the sequential commodity prices, because as we described we are almost always paying our customers or charging our customers based on last month's rates. So as prices decline very, very rapidly we can get a dip behind. Now our programs work well over an average number of months but over a singular month or rapidly declining period we can get behind. So on those two factors that’s where we got hit year-over-year on EBITDA in the recycle business. We will see the same thing in Q4 as I said, we expect a $1 million to $2 million of negative variance in the recycling business in Q4. It kind of depends on what happens here over the next couple of weeks. In October, we know we have a negative variance year-over-year. As John mentioned, recycling prices are beginning to go up and stabilize and there is a lot unknowns still here.

I think the other thing with regard to the quality issues, our quality was pretty high quality materials that we were selling. And we’re bringing that quality down even more. So if we were at say 3% or 4% residue, we want to bring it down lower -- I’m sorry -- contamination lower. We’re trying to bring it down even lower. I think that the quality standards that have been set by China are not going to be met by anyone. So I think that there is potential that that’s going to have to change, but nonetheless, we are -- as Ned said additional labor to increase quality standards from a position of -- pretty strong position in terms of the quality that we’re selling into the marketplace currently.

I apologize, on the limit the number of questions here but the 700K from higher labor, was that a full quarter impact, and should we assume there is something like that every quarter, until that anniversaries?

Yes and no, I don’t us to be [flippant] here but John talked about our three risk mitigation programs. One is our revenue share, where we share revenues above our threshold. So we look at our fully loaded processing cost in that facility. Above that threshold, we share revenues with our customers, we also increase profitability. Below that we actually get paid dollar-for-dollar processing fees. We of course have that rate fee, that’s off-taking risk from our hauling customers. We also have one other risk mitigation program, and it’s what we call our net ACR. So we adjust our commodity revenue price that we sell, based upon any changes in the market to meet quality standards, and this can be higher labor, higher equipment cost. So as the market place is changed and standards are changing, we’re now adjusting our net ACR to reflect those changes. So while in the period, our labor cost were up and we under recovered on that higher labor cost. We expect our labor -- yeah, we still expect our labor cost to be up next year. But we actually will be pushing that back to all of our customers in higher shipping fees.

I think the real unknown at this point in time Corey is where that standard's going to settle out…

So, maybe the easiest way to kind of say this is, if everything stayed exactly the same as October for the next year, and we saw the 40% drop from September, October, we'd see about $3 million headwind year-over-year to operating income.

And your next question comes from the line of Tyler Brown of Raymond James. Your line is open.

Ned, quick question on incentive comp. So I think this is the second year in a row where we had the heightened incentive and equity comp, which is great. I mean, you guys have been beating budget. I’m sure it’s great for internal morale. But I’m just curious what’s the delta between the current incentive comp accrual and maybe what would be a normal 100% accrual?

So, we’re tracking to about 87%, 88% right now in calendar year ’17 on the cash incentive comp. We did about 90% last year. There’s a few things going on in the numbers. If you just checkout any changes in cash flow and this equity compensation year-over-year, our G&A cost were up $700,000 year-over-year, or down 10 basis points as a percentage of revenue. So you’re right, changes in the timing and the expected amounts of incentive comp are skewing overall G&A numbers a little bit. But overall, it is not a huge change in the quarter. One of the reasons that comp -- G&A was up a bit, really how to do with equity compensation expense. As you may know, our Board adopted a program two years ago, where more of our compensation was at risk, especially on long-term incentive comp. We moved away from just a time vested RSU program to a perform share program, where 75% of our stock is in performance share units. And we tried our long-term models in the third quarter to reflect our projected performance for 2018 and 2019 as such, and we had some true up to equity expense in the quarter, that caused our equity incentive comp expense to go up roughly $1.1 million year-over-year in the quarter. One other kind of small factor's happening here. We have some great initiatives in the back office right now in IT systems and the like and we’ve got a little double pounding that’s happening. We had to ramp up the resources, we’ve got double hanged for some software licensed and what not. But we’re on schedule, on budget with our next implementation in over the next couple of years there maybe investments that help us to reduce our cost.

So on that, I'm a little unclear on the G&A side. So when you talk about 75 to a 100 basis points what is the base that you’re comping that off of, is it 13% or is it 13.3% or what’s the number?

So we did 13.3% last year. We’ll probably come out around there 13.2% or so. So we want to reduce that by 75 to 100 basis points.

Okay, all right that’s helpful. And then I'm a little confused -- sorry go ahead.

Sorry, we’re not playing to make that based on incentive comp changes or what not. We’re playing to make that goal based upon fundamental changes in our back office.

Right okay and then I'm a little confused on the free cash flow. So I think year-to-date you’re at 34.5. You’re guidance is effectively at the mid-point for 35.5. What am I missing are you really guiding to $1 million of free cash in Q4 and if so is that just conservatism or is it a working capital or what’s the delta there?

So it’s two things. One, it’s CapEx this changes in timing year-over-year in CapEx. We’re looking at -- we have a really ramp for construction here this year. We’re building 8 out of 10 landfills. So we expect our CapEx to be $16 million or so in the fourth quarter. Such part of it and part of it is working capital. So this will be the last year that we’ll have this problem 2017. But if you think about it, when you used to have the subnotes we build accruals in two quarters and reduced accrual, cash interest accrual and this year we’re paying flat each quarter, cash interest. So our comparisons change, [indiscernible] changes of assets and liability is compared to previous year. So we have this yo-yoing effect. In our second quarter we had about negative $7 million working capital hit due to the interest accrual, in the third quarter we had a positive $7 million impact. In the fourth quarter we’ll have the headwind as well. So we normalized this out through year-over-year, okay. But this yo-yoing that's happening has been skewing the quarter slightly. It won’t happen next year though. So those are the big issues really.

And then maybe my last one here, John, thanks for the color on the M&A pipeline but I'm curious, has the cadence of the incoming calls or just the deals that you’re seeing come across your desk really pick up in the last maybe quarter or so since you made your announcements. And then how should we think about that M&A activity, do we expect it to pick up here in short order? Is it maybe too hard to tell, or is it more of an ’18 story just anything there would be helpful. Thank you.

I think it’s more of an ’18 story. We’re gearing up now. We obviously put the structure in place. And historically over the last four or five years there hasn’t been a real focus on it. So we kind of reorganized that whole process just to make sure that we have got the right kind of discipline in terms of our due diligence, everything that we need to do to be really proficient in terms of acquisitions. So it’s going to -- I think it's going to be more of an ’18 story but we’re beginning to see activity. I think it’s fair to say Tyler that we’re seeing there’s pressure from the disposal inflation standpoint to third party haulers, there’s also inflation from the recycling standpoint. So I think that we’re beginning to see activity. I think once we start being more active from a deal flow standpoint it’s going to bring momentum to that whole aspect of our strategy.

And your next question comes from the line of Brian Butler of Stifel. Your line is open.

I think Corey asked most of my recycling questions, but I just wanted to follow up on one or two. When you talk about price being down 40% kind of over the last month or so, where that translates on a average commodity dollar basis like on per ton, so I can kind of like trace it back to that sensitivity of $10 million move equal to 800,000?

Yes, so, we just saw our ACR down by about $40 a ton as well, for about September we’re little bit over a 100, and we’re little bit over 60 right now.

And then on the split, I guess the floors. Can you talk about just kind of on average, how much above the floors you are? I don’t know if that’s a number you have but -- and then think about, how do you share that going on the up and down. I mean, I guess the sensitivity is there. But, I just wonder if you just put little bit more color on that.

So we’re now below the floors, at all of our contracts, and we’re in a position, where charging customers. So it’s always a little bit hard for us to answer a question of what is a $10 move in commodity price mean to you, because it really depends on what the starting and ending prices are. So if you think about it, if we have threshold price say $80 a ton, for our threshold, when we’re above that, we typically are sharing say $0.50 on the $1 with the customer, and keeping $0.50 profitability. So if our prices our $100, and they dropped to $80, that first $20 is pretty painful. I mean, we’re losing $0.50 on the $1 to the bottom line. But when you fall below the $80, we then start charging a dollar-for-dollar tipping fee. So we almost flatten out and we eliminate much of our risk. Now this isn't a 100% across our portfolio. We have one larger customer, who does in sharing that downside, that contract rolls over in 2019, so that's hitting our downsize. And as we talked about our program’s lag, but they’re pretty well situated, and as we look out for next year with our current program we are estimating that will cover up 85% plus of the risk.

And last one on just the volume growth was strong this quarter. When you think about going to fourth quarter and ’18, can you just kind of update what the kind of headwinds from South Bridge is in the quarter? Because I mean, I think we’re looking for a little less volume, but on the expectation that South Bridge was a headwind, but maybe it’s just less going forward.

It’s interesting, if you look at our volumes in the quarter, there is one thing we’re guide to is we won a few new municipal contracts, and they rolled on. So our collection line of business, we had great growth there, 1.6%. You break it down, front load we’re slightly positive. At the rolled off we’re couple percent positive, partly this is probably some Q2 work showing up in Q3 with the rain, and then a real benefit is we are very positive. We had four new contracts, that comp year-over-year. Great contract win in July with York Main. So we had some good movement there. On the disposal side of the business, we’re just actually slightly positive overall. But we’re up about 11% in our West region and down about 11% on Eastern region, as South Bridge ramp downs. Things are getting tight in the Northeast. Waste is moving further distances, and as you know, we’ve got about 900,000 tons a year of excess capacity on our landfills, mainly out of Western New York, and Pennsylvania. It’s all about price over the last year. We’ve been slowly metering in some volumes, but as Massachusetts and the eastern part of our franchise gets tighter, we’ve opportunity to move more tons southwest at the price points we want. So you starting to see some of that into the numbers right now.

I think it’s also, important to recognize that price in the western regions still hasn't Gotten back to levels of where it was in ’09 and ’10, before the collapse of the financial markets and the economy. So we still have quite a bit of runway from a price standpoint over the next three or four years.

[Operator Instructions] Your next question comes from the line of Jordan Gregov with Federated Investors. Please go ahead your line is open.

Just one quick question, you guys have outlined the interest coverage ratio for 9/30 for your credit facility requirement?

Yes, give me one second. We’ll have this is in our Q that will be put out later today as well. interest coverage ratio at Q3 was 5.68 times. It is the minimum ratio of 2.50 times.

[Operator Instructions] I am showing no further questions at this time. I would like to turn the call back over for closing remarks to John Casella. Please go ahead.

Thanks for your attention this morning. We look forward to discuss our fourth quarter 2017 earnings and our 2018 guidance with you in early March 2018. Thanks everyone. Have a great day.

Ladies and gentlemen, this concludes today's conference. Thank you for participation and have a wonderful day. You may now all disconnect.