Ladies and gentlemen, thank you for standing by, and welcome to the Casella Waste Systems, Inc. Q4 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Joe Fusco, Vice President, Communications. 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 fourth quarter and year-end 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 am deeply compelled to 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 investor slide presentation, which is available in the Investors section of our website at ir.casella.com. The older I get the harder is to breathe through that statement. But with that, I will turn it over to John Casella, who is a little older than me, who'll begin today's discussion.

Thanks, Joe. Good morning, everyone. Welcome to our fourth quarter 2020 conference call. We are obviously very pleased with our fourth quarter and 2020 results. This year was unprecedented, and our strong performance and execution highlights the resiliency of our business, along with a courage, dedication and tenacity of our 2,500 employees. Many thanks, again, to the men and women on our frontlines who performed at an exceptionally high level in providing safe and reliable service to our customers. Our success in 2020 is also credited to other teams across the company, including, but certainly not limited to, our safety, operating, maintenance, sales, customer care and back office personnel. As a company, we are organized and proactive from the onset of the pandemic. We ensured the continued safety of our workforce by adhering to CDC guidelines and state orders. At the same time, we worked with our customers to understand their changing service needs so that we could rightsize our service levels and flex variable operating costs. These actions not only helped drive strong results for the year, but also safeguarded our ability to deliver our central environmental services to our customers. Lower economic activity levels during the year resulted in a decline of solid waste volumes of $40.6 million as compared to 2019. This was primarily driven by lower disposal tonnages, lower volumes in the commercial and industrial collection lines of business. Despite this volume headwind and other COVID-related expenses in 2020, on a year-over-year basis, we grew consolidated revenues by 4.2%, improved adjusted EBITDA by 9.5%, while expanding margins by over 100 basis points, increased adjusted free cash flow by 24.7% and further drove down our consolidated net leverage ratio. Notably, our 2020 adjusted EBITDA and adjusted free cash flow respectfully met and exceeded our initial 2020 guidance…

Thanks, John. Revenues in the fourth quarter were $200.2 million, up $6.6 million or up 3.4% year-over-year, with 2.2% of the year-over-year change driven by acquisition activity. Solid waste revenues were up 1% year-over-year, with price up 3.9%, 2.7% growth from acquisitions and volumes down 4.6%. This is a sequential improvement from the third quarter when solid waste volumes were down 8.4% year-over-year. Revenues in the collection line of business were up 2.7% year-over-year with price up 3.8% and volumes down 3%. With roughly 70% of our business in secondary and rural markets across the Northeast, we have experienced a stable to improving economy since the low point of COVID in late April through mid-October. However, with the ramp-up of COVID cases in November and December, we had select commercial customers reduce their service levels. However, this impact was limited, it was short-lived and it was further offset by winter seasonal businesses coming back online. By early February, we're back to roughly the same levels at a run rate basis as we were in October. Or said another way, we've recovered roughly 70% of the commercial and industrial collection services on a revenue basis that were reduced or suspended due to COVID. Revenues in the disposal line of business were down 3.3% year-over-year in the quarter with landfill pricing up 5.6%. Landfill tons were down 10.5% year-over-year as economic activity in construction projects were both negatively impacted by COVID-19. And we also had some timing differences year-over-year at the end of the permit year. Resource solutions revenues were up 11.1% year-over-year, with organics up 6.2% on new contracted volumes and additional processing. Customer solutions up 5%, mainly driven by growth of our services, our existing customers and some new industrial customers as well. And recycling revenues were up 29.7%, mainly…

Thanks, Ned, and good morning, everyone. Operationally, we had a strong finish to the year, and I continue to be impressed by the focus and discipline of our frontline workers and management. Our ability to flex cost on lower revenue during the continuing pandemic while protecting our workforce and customers is testament to our culture and the quality of our people, and I'm extremely grateful to the team for their hard work. Consolidated cost of ops as a percentage of revenue improved by about 110 basis points over Q4 last year, which in turn was 206 basis points better than Q4 of the year before driven by price and improved operating costs for the collection business at the landfills and at our resource solutions businesses. For the full year, despite the early extra cost and reduced revenue from COVID, consolidated cost of ops improved 186 basis points. Our collection operations, which generate over 50% of our revenue improved cost of ops by 166 basis points in the quarter and 163 basis points for the full year. We improved our overall variable margin contribution per driver hour, which is our key productivity metric by 4.4% for the year. Though all divisions performed well, I'm particularly pleased with the maturation of our 2018 acquisitions, where we have succeeded in moving margins up to company averages and are ahead of our original pro forma expectations. I have mentioned in the past that acquisitions tend to dilute our margins for a couple of years as it takes time to get pricing where it should be and to increase the level of automation appropriate to the operation. The current results prove out our ability to transition the acquired companies to our culture and our operating standards. As we continue with our growth strategy, it is…

[Operator Instructions] Our first question comes from Sean Eastman with KeyBanc Capital Markets.

I just wanted to start it on the guidance. So you guys made it clear that you're kind of assuming status quo sort of macro backdrop. But just given the volume range is fairly wide 1% to 2.5%, is there some reopening sort of reflected at the high end? How should we be thinking about it within the range in terms of how you're building in the sort of reopening or lack thereof?

Yes. It's -- I think as everyone would say in this environment, it's a bit of an unknown, right? So we -- as I said a while ago, we saw this really nice trend, right, from early May through late October, and then we actually saw things go into other direction where we saw business owners and industrial customers reduce services a bit in late November into December. And now into February, we're right back to where we were in October. So that is a positive. But I think we're making a little bit of a wider range than we typically do because we just don't know. We're all very excited about the vaccine news, but the rollout appears to be slow across many of our market areas. And something we pointed out last fiscal year is our secondary, the more rural markets have really weathered the storm quite well. And yes, we do have declines in volumes and some economic impacts. But probably some of the larger impacts we have, have been in a major metropolitan areas. We don't haul waste in New York City, but we have customers who bring us waste to our landfills from the city, and that's been probably the slowest to recover to-date.

Okay. Got you. All right. That's helpful. And the dollar EBITDA bridge is always helpful, Ned. So I appreciate that. But as we look at it from a margin perspective, the guidance implies 50 basis points of expansion. I think that's consistent with sort of the preliminary expectations, you messaged last quarter. But is there any other interesting element to parse out there from a margin expansion perspective in terms of the moving pieces?

There's really not a lot more to it. I think as we look at it, we expect our core pricing programs and our core operating programs to advance in 2021. And as you look back to 2020, something we get asked quite often, are there margin improvements from COVID that you expect to roll into 2021? Or are you going to lose some of them? And there's a lot of moving pieces here, and we've sliced this in a bunch of different ways. And the best we can tell is in the year, we had about 100 basis points of headwinds from COVID on margins, and we had about 100 basis points of help on margins from COVID-specific issues of things like T&E, overtime, healthcare, things like that, that help. And we feel like the patterns we had coming into COVID when we were expanding margins, and we were outpacing inflation with things like dynamic route optimization, automation of trucks and some of our other key initiatives are what will carry margins into next year.

Got it. So maybe just drilling in on those sort of systems enhancements. How much of the 110 basis points of expansion in 2020? Do you think those drove? And maybe more importantly, how much sort of juice is left in the tank on those programs as we think about the go-forward?

So we did quite a bit of automation during the second half of 2020. And we have more automation taking place in the first quarter of ‘21. So it's a guess as to how much of that margin improvement was from that. But a good chunk of that, at least 1/3 of the margin improvement was related to that.

And about 40% of our residential fleet, 40%, 45% is automated today. So it's a long way to go. We have a lot of opportunity.

Our next question comes from Michael Hoffman with Stifel.

The MIRA closing and New Haven. How do you -- how would you prognosticate, if you would the impact of 700,000 tons coming out on your assets to be the disposal assets, sort of transfer stations or landfill, would be able to drive another layer of pricing?

I think that the indications are that, that's going to happen in 2022. I think that it's really -- could really be another issue in terms of the supply and demand imbalance, as you know, Michael. And I think obviously, we're really well positioned. We're doing more work with McKean. We believe that we need to bring McKean on. It will be a couple of year process to go through the process in terms of permitting -- additional permitting that we need to do in construction. But it's our view that it's -- that capacity instead of being an option is probably going to be necessary in the future. And I think there's other activity from a permitting standpoint that is questionable at this point in time in addition to the 700,000 tons at MIRA. There are other facilities that are questionable in terms of whether they're going to operate into the future in the Northeast. So I think that we're going to see we said this before, we're going to see the same kind of dynamics for the next 3 to 5 years in the Northeast in terms of the imbalance, which should bode well for our assets.

So is it reasonable to try and model a 5% to 6% price increase on disposal for a while?

We don't see anything that disrupts that pattern. But we're still in the place where these assets, as you know, are extremely capital intensive, the regulatory and environmental compliance issues are getting greater, and we need to drive higher returns on invested capital at each of these sites. So that's our game plan, and we don't see anything that disrupts it.

Okay. And then I'm going to interchange these 2 names, I can't remember that it's Hyland or Hakes. You've got the community vote came through on a pretty meaningful increase.

It was Hyland.

Hyland.

Yes.

Well, how is the progress of the [DEP] on that part?

I think that, that progress is going well, Michael. I think the biggest hurdle, in our view, was getting through the community, and we had a unanimous vote in the community to move forward with the project from the select board. And then obviously, we won the referendum in a very positive basis as well. So that facility will have the capability to go from 470,000 tons to 1 million tons a year, and we have a very significant additional development in terms of acreage. So we'll have another -- I think it’s just -- what it is 100 acres, another?

107 acres.

Yes, 107 acres of potentially approvable capacity. So we're going to be there for a lot of years. And that facility will be performing at a much higher level than it is today.

Okay. You mentioned that service intervals were positive sequentially. In your guidance, Ned, what's your assumption about the underlying service interval pattern?

Yes. So say, so we do expect volumes to be down a bit in Q1 overall as a company because we didn't have a meaningful COVID impacts in '20 -- Q1 of 2020. However, we expect a moderate to slightly positive recovery from COVID through the first quarter and into the second quarter. And then we've modeled kind of getting to 70% getting recovery. So the 30% that we lost early in COVID, we just don't see a pathway to that coming back on the collection side. And that's roughly like $8 million to $9 million of revenues. The remainder of the $40 million that John spoke to is in landfill volumes and some in the roll-off collection business as well. And once again, we've put a little bit of a wide range on that because I think your guess is as good as ours of when that will come back or how long it will take.

Okay. So that's -- it's upside to the opportunity depending on -- like if New York finally wakes up and realize they probably ought to restart their economy, all that volume at third-party base that goes to disposal coming out of the lower New York starts showing up. That's all upside to the guidance.

It's -- a part of this upside. So we do have a range there up Jason, what's our ranging?

The midpoint of our solid waste volume guidance year-over-year is 1.75%.

1.75%. Our range was 1% to 2.5%. So some of that's towards the upper end, Michael, and then some of it's additional upside.

Okay. All right. That helps. And then capital spending, when -- what's the line of sight where you no longer have conversations about having to talk about big chunky adjustments like Waste USA., for instance, the $13 million, and then I want to just make sure the $10 million for Southbridge to finalize that closing remediation, is that in the $113 million, is that going through the cash flow statement somewhere else?

So Southbridge is going through the statement of cash flows. It will be a reduction of short-term liabilities. So it will be a negative hit to working capital as we work down the closure liability. And we expect to substantially complete Southbridge this year. It's been a tough road with the regulators. Right now, our plan is to have about 80% to 90% of that done in 2021, but there are some things outside of our control. Way to say, we will complete that site in the development this year, and it's about $13 million of capital to complete that 25-year development project, and we won't call that out going forward.

So thinking about modeling long-term modeling, I can take $113 million and pull $13 million out of it, all things being equal into next year, just as a starting place?

Yes.

And then the cash flow from ops is $10 million better as a starting place, all else being equal?

Yes. We don't see any major capping or closure activities. I mean there's always some that's routine, but nothing like the Southbridge project.

Okay. And then you spent about $33 million on deals per the cash flow statement. What's the basis of the $15 million that's in CapEx for related to M&A? I mean, were the trucks that old, the container is that old that you're basically having to recapitalize the whole fleet. And so the real purchase price here was $47 million for the revenue spot?

Quite a bit of that was related to acquisitions we completed in late 2019. And so we look for about a year to 18 months after we completed the acquisition of all of our enhancements to the fleet, integration, those matters, we're putting them into that basket. So it wasn't really all related to assets in 2020. And furthermore, as you know, Michael, it takes 12 to 15 months to get it dropped right now if you place an order. So some of those plans were put into motion upwards of a year earlier and the assets arrived in 2020.

Okay. And then lastly, you had recently talked about there's about $100 million of active dialogue out of the $400 million sort of pipeline M&A standpoint, you've four of that. So I got $96 million less of the active pipeline. What's your sense of probability of close and timings? And I get it's not in guidance, but just so we have a feel for what we're looking at.

I think a good portion of that, Michael, obviously, still in the works. And I think a good portion of that will be in the second half of the year.

Our next question comes from Tyler Brown with Raymond James.

I got to be honest, a lot of my questions have been answered. You guys have talked about quite a bit of stuff here. But I do have a conceptual question. And it may be a tough one to answer at this point. But Ned, I thought you said that maybe 70% of your revenue is in rural or secondary markets. Do you guys believe that there is a real deurbanization trend in the Northeast are you seeing that maybe in your resi subscription market pickup in those rural markets? Or is that just transitory? Or do you think there's something bigger afoot?

It's really hard to say at this point in time, Tyler, but there's no question that there is something afoot. To be able to characterize that correctly, I think it's a little bit early. But what we can characterize is the movement of real estate in the entire Northeast, particularly around the ski areas, around the vacation areas, property that hasn't moved in over a decade is all sold at this point in time. So there is a lot of movement that we can see and feel from a real estate standpoint, which is impacting positively volumes. But to be able to characterize it, I think it's still little -- it's a little early. But certainly, there's significant activity from a real estate standpoint that, that supports the perspective that there is a movement.

Yes. No, definitely seems quite interesting. And then this might be a bit of a silly question as well or maybe bigger picture, I guess. But if I recall, back in the day, you were doing some E&P disposal activities in the Marcellus. Was that right?

That's correct, yes.

So gas prices have been on the move. I think they're peaking over $3 now. I don't know if you've seen any activity. I don't know if rigs are repositioning there. But I'm just curious, have you seen anything happen there? Do you think that's an opportunity, just any broad thoughts there?

Yes. It's definitely been a headwind to us for the last year, and activity is dramatically lower than it was in 2011, 2012, and we have not budgeted or forecasted any of that to come back in, in 2021. So to your point, if there is some additional activity there, it could be a positive. But we're talking like millions of dollars, not like tens of millions of dollars of positive revenues. It has it's never been a huge part of our business and it's primarily McKean.

[Operator Instructions]. Our next question comes from Hamzah Mazari with Jefferies.

I guess, just a question on pricing. Is the difference between the low end and the high end of pricing just price relief for commercial customers or anything going on, on the disposal side that sort of equates to that range?

Yes. It's always -- we get a lot of our pricing rolling this time of the year. In December, January, February, and you just don't know. I think we have a lot of certainty in our pricing programs, a lot of certainty in our market analysis and how we run our pricing. But you could see some rollback. So that's why we create ranges just to make sure we encompass that. The activity we've seen year-to-date has been positive. We've seen good stability in the marketplace. And as you know, I mean, there's a lot of disruption to every waste collar. There’s incremental cost, with lower volumes with COVID and then just the inflationary elements in the Northeastern market and the labor market. Our pricing programs are where they need to be to overcome those changes in the environment. So we feel pretty confident, but that's why we do have the ranges for the year.

Got you. And then just you talked about flexing variable costs down and margin expansion, 100 bps, plus, I guess, you saw in 2020. Just any thoughts on incremental margins, how to think about that for the business today?

Do you want to hop in on that Ed?

Yes. So as we're looking ahead for this year and the years after, we've been trying to evaluate how much of a COVID effect, either positive or negative was last year, even though we had a significant margin improvement. And I think Ned pointed out pretty well as we dig into that, we see it as almost a wash. I mean there's a little higher disposal cost per pickup on the resi side, but it's offset by lower tons or pounds per yard on the commercial side. So a lot of what the margin improvement has been, has been our operational initiatives, and we continue with those initiatives. So we're pretty confident that we can continue to improve the margin. I think we have -- I think we said we had 50 basis points in.

Yes. And tacking on to that, it's an interesting strategic point, but you did notice that our G&A as a percentage of revenue was up year-over-year. And when COVID hit, we sat down and thought this through very clearly, we're investing in some very important mid-term areas in the business, whether it be on the HR side or on the technology side, that we believe position us and our shareholders very well over the next several years, and we did not cut those programs. We continue to invest, in some areas we invested a little bit more to accelerate and we see some of those investments actually translating to improvements on the operating side, like our new dynamic route optimization software is having a real impact on the ground, taking out operating hours. But as we roll back in some of those revenues we lost from COVID as we grow other areas, we're getting some scale back on G&A, and it's definitely another area, Hamzah, so that we're going to gain margin.

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

Thanks, everyone, for your attention this morning. As reflected in our 2020 results and 2021 guidance, we're executing really well against our key strategies. In August 2017, we announced our 2021 plan. I'm proud to say we've achieved this plan 1 year early. As such, we're in the process of developing our 2024 plan, and we look forward to provide an update later in the year. Thanks, everybody, for joining us this morning. We look forward to discussing our first quarter 2021 earnings with you in late April. Thanks, everybody. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.