Casella Waste Systems Inc (CWST) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems, Incorporated Q2 2012 conference. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the call over to your host today, Joe Fusco. Please begin.

Thank you for joining us this morning, and welcome. Our group for today's discussion includes John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ed Johnson, our Senior Vice President and Chief Financial Officer; and Ned Coletta, our Vice President of Finance and Investor Relations. Paul Larkin, our President and Chief Operating Officer, is traveling today and will be joining us by phone during the question-and-answer period.

Today we'll be discussing our second-quarter fiscal year 2012 results. These results were released yesterday afternoon. Along with a brief review of these results, and an update on the Company's activities and business environment, as I said earlier, 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 available in the Investors section of our website, IR.Casella.com. And now, I'll turn it over to John Casella, who will begin today's discussion. John?

Thanks, Joe. Good morning, everyone, and welcome to our fiscal year 2012 second-quarter conference call. Our goal today is to discuss the second-quarter results and update you on our mid-term strategy. I'll start with a brief strategic summary and Ed Johnson will take us through the numbers. We've received many investor and analyst questions over the past several months about the impact of Hurricane Irene and Tropical Storm Lee on our business during the quarter. The flooding from the storms in Central Southern Vermont and Western New York was the worst experience in over 80 years and devastated many local roads and bridges. For several weeks after the storm, many key roads were impassable and certain roads are still closed today.

The flooding also destroyed a number of houses and businesses located near streams and rivers. These owners have begun the long rebuilding process that we expect will continue for the next several quarters. With the storm cleanup, we estimated that we had roughly 40,000 tons of additional waste placed at three of our landfills, or an additional 3% of our total tonnage. We had roughly 700 additional roll-off pulls, or an additional 2% of our total pulls, equating to about $3 million of additional storm-related revenue. However, much, if not all, of this benefit was offset by higher operating costs after the storm. The damage to roads and bridges impacted our ability to efficiently service customers and transport waste to landfills increasing certain costs in the quarter.

Overall, I'm pleased with the performance in the quarter. In particular, our division management teams did a great job on the pricing front, as we made additional progress in achieving our pricing targets in the collection line of business. After wading through the noise in the quarter from the storms, the overall picture is quite similar to the first quarter -- the collection business is doing very well, with strong pricing and stable volumes; the recycling business continues to benefit from robust commodity pricing, but, more importantly, continue to experience volume increases from our investment in Zero-Sort Recycling infrastructure; and the landfills remain challenged by lower special waste volumes across the Northeast. While MSW and C&D volumes were both up year over year and landfill pricing has been improving, the loss of historically lumpy special waste volumes was hard to overcome because of these incremental tons had such high marginal contribution.

As we have discussed over the past several quarters, our multi-year strategy remains consistent and is focused on executing in the following areas -- improve pricing and profitability of our customer relationships; improve our cost structure and service performance; harvest value from our landfills; reduce our cost of capital by refinancing the expect -- expensive second lien notes -- so expensive I cannot even say it -- and expanding our service offerings to provide economic and environmental solutions to our customers. Our team remains focused on accomplishing these goals will help us to increase free cash flow to above $20 million in fiscal year 2013, bring us to profitability, and decrease our leverage to below 3.5 times.

While we have talked about our collection pricing programs and our efforts to improve service performance over the past several quarters, this is the first quarter when I can truly say that we are achieving our objectives. Last quarter, we finally began to drive pricing to our expected level from these programs. This quarter, we exceeded our collection pricing goals. I will let Ed get into the details, but I want to reiterate that our effort to improve our collection profitability is focused in several areas, including but not limited to improved pricing.

To improve the profitability of the organization, we believe that it is critical to get our local managers focused on just a few important things -- managing pricing yield in their market; servicing our customers at the highest level; and developing their people. We have succeeded in shifting focus by centralizing back-office functions from the local divisions to our shared service center here in Rutland. This has helped free up managers' time to improve the profitability of their book of business and better align our service offerings with customer needs. As a result, we have improved our sales performance, reduced back-office functions at our divisions, and, equally importantly, we have reduced costs.

On the landfill development front, we made good progress this quarter. In early November the New York DEC issued a permit modification to increase annual tonnage limit at the Chemung County landfill from 140,000 to 200,000 tons a year. We were able to immediately take advantage of the new capacity to accept flood debris from local communities. We will continue ramping tons through the remainder of our fiscal year. The Chemung landfill is a well-positioned site, with a transportation cost advantage to many upstate landfills for MSW from New York City and its proximity to the Marcellus Shale drilling activity in Northern Pennsylvania.

The effort to expand the Southbridge annual permit from 180,000 to 300,000 tons per year is slightly behind schedule. We have completed the construction of the landfill gas-to-energy facility at the landfill, and we are producing power at the site. However, the electrical interconnect to the grid is still not complete -- with all of the damage to electrical lines in the Northeast, the power utility is running 60 to 90 days behind work on their schedule. We now expect the interconnect to be completed in early January and the permit to be increased by our fourth quarter.

Last year, as we looked to ramp up landfill tonnages in the face of this stagnant economy and lackluster C&D environment, we formulated a multi-year strategy to attract new streams of materials to our sites. One of the major drivers of this strategy was centered on growing our service offerings to the oil and gas industry. As a first leg of this strategy, we worked with drillers to provide environmentally responsible disposal for cuttings generated while drilling for natural gas. We are now working to deepen our relationships within this expanding market segment through water storage, recycling solutions, rail transport, and general logistics.

During the last quarter, we formed a new venture with an innovative small company called Altela to build and operate a water treatment facility to clean brackish water produced from the Marcellus shale drilling. The new facility will be sited at our McKean County landfill and will be powered by landfill gas. Treating brackish water that flows back after hydrofracking gas wells has become a major problem for drilling customers, and this new facility will clean the water, return recycled distilled water to the drillers for their next job. We believe that expanding our resource solutions to this important customer segment helps differentiate Casella and position us well to expand our business in this emerging market.

And with that, I will turn it over to Ed to take you through the numbers.

Thank you, John. Good morning, everyone. We've had a pretty interesting quarter. I'm pleased to say we are on track with everything we are trying to do, but I will need to give quite a bit more breakdown than usual for you to see it in the numbers.

Let me start with a brief overview of the consolidated results. Revenue for the quarter was up 5.7%, coming in at $129.9 million as compared to $122.9 million last year. Cost of ops for the quarter was $86.6 million, which is 67% of revenue, as compared to $79.3 million, or 65% of revenue last year. General and administrative expenses were $16.1 million, 12.4% of revenue, as compared to $15.7 million last year, which was 12.7% of revenue.

Depreciation and amortization was $15.1 million, down about $500,000 from last year. Excluding some minor one-time charges, which are segregated in the P&L, our normalized operating income was $12.1 million, slightly less than last year. Those are the consolidated numbers, but a lot happened during the quarter. And, when you break the business down, we are comfortable that a lot of progress was made, and we're still on track to hit our guidance and, more importantly, to continue improving the core business going into next year.

John mentioned the two storms that came through and devastated much of our operating footprint during the quarter, and I know you are all looking for some quantification of the effects. We initially were not sure whether this was going to have a net positive or net negative financial impact on our business and, honestly, it has been very hard to track, as it affected our day-to-day operations in many ways. The best way for us to do this is to compare results on a detailed basis with the first quarter, as before the storm there was no fundamental reason to see big changes between the two quarters. So, on the upside, as you can imagine, our roll-off boxes were in big demand after the storm and we imported boxes and trucks from unaffected regions to the affected areas as best we could. We got a revenue boost from that, as roll-off pulls were up 700 from the first quarter to the second, and related revenue was up about $1 million.

On the landfill side, we were up about 100,000 tons in the second quarter over the first. MSW volumes were about the same, quarter to quarter. 15,000 tons of the increase is attributable to an increase in drill cuttings, another 45,000 tons came in from various other special waste jobs. If we look at the two landfills that are closest to the damaged areas, we estimate that about 40,000 tons related to the storm and that amounted to about $2 million in extra revenue.

Sticking to the revenue side, we need to consider a few other effects and what the storms might mean for us going forward. In Vermont, 17 major roadways were closed by washout damage and many customers were stranded from basic services. Casella took a leadership position as a problem solver for our customers and the community. In cases where service could not be provided, credits were issued. And in cases where homes or businesses were destroyed, service and billing were put on indefinite hold. Where customers were accessible by driving long distances around damaged roadways, we did so without extra charges and even used our vehicles to deliver emergency supplies to areas cut off from normal distribution. It is hard to quantify the revenue costs, but we do not believe it was material, and solidification of the Casella brand was well worth it.

In addition, a great deal of the waste generated by the storm actually went to the only competitive landfill to ours in the state, which is located closer to the damaged areas and had more open road access. That landfill was denied its final expansion last July. That means that, even though we did not benefit directly from more of the storm disposal volumes, their site will close faster. So, our volumes will benefit in the long run.

The cost side is much more difficult to get a handle on. Sequentially our adjusted EBITDA was up about $1.9 million from the first quarter, and EBIT was up about $1.4 million. We know that we benefited from some volume improvement in the landfills and from our strong pricing in the collection line of business, and those two items alone account for that sequential improvement. So, although we have not been able to accurately quantify the extra costs, we believe it was in line with the extra revenue.

I'd like to address some of the concerns -- I'd like to now address some of the concerns we've been hearing around commodity prices. Casella has historically been one of the leaders in recycling. We have a lot of experience. We've been through volatile markets in the past and because of that experience we do things a little different than others in the industry. Recycling commodity prices were higher, year over year, in the quarter, with net commodity price per ton up 30.6%, with strength across all classes of commodities. Robust commodity prices began to decline in October into November, with OCT prices down roughly 20% sequentially, while plastics and metal prices were off roughly 5% to 10%. We had anticipated this decline in our guidance numbers, and our recycling business continues to track well against our fiscal year budget, with volumes higher than expected and commodity prices tracking towards our budgeted levels.

Furthermore, our risk mitigation strategies in the recycling line of business are offsetting much of the declines in commodity prices. We seek to manage risk through a number of strategies, including use of variable revenue shares with municipal or commercial customers, where we share revenues above certain commodity prices, and below certain commodity prices we get paid a tipping fee. We also buy and sell certain commodities off index rates and make a fixed spread without taking risks for the commodity pricing. In certain cases, we were also able to use financial hedges, forward sales contracts, and floor price contracts to further manage risk. Our recycling operations remain very healthy and growing; excluding some temporary tonnages that we took in last year for a competitor that was building their own MRF, volumes were up year over year about 14%.

Looking at the balance sheet, our financial position is pretty much unchanged over the past two quarters. I do have one comment on the debt side. We have been actively positioning ourselves to take out the expensive second lien notes with cheaper first lien debt when it becomes callable in July of next year. We've talked about our anticipation of a $10 million annual cash interest savings once that is completed, as computed on today's floating rates. Well, with what is going on in the world markets, no one can be sure what the floating rate will be a year from now. So, we took advantage of a flat yield curve in the quarter and entered into forward-starting interest rate swaps that start in January of 2013 that locks in our $10 million savings.

One quick comment on the cash flow statement, our free cash flow from operations is up about $8 million as compared to last year at this time, and our free cash flow year-to-date is already in the middle of the range of our full-year guidance. Free cash flow is generally negative in the second quarter; but, this result is directly related to our management of the timing of cash flows and we still forecast full-year cash flows to be within our guidance. We also remain on target for $20 million in free cash flow next fiscal year.

You've heard me talk before about our efforts to make yield management a core process in the Company, which basically means that our division management teams manage pricing on a continual day-to-day basis and that we put in the systems in accountability that make this happen. I believe this is a key to our long-term financial success, and I'm very happy with our progress. We've reported price growth in the collection line of business at 3.4% in the quarter. I talked quite a bit last quarter about our long-term landfill strategies and the respective distinct market areas and our overall collection and disposal strategy. All I want to say here is, we remain on track and we continue to see our landfills as strong strategic assets, and the markets in which they operate continue to develop in our favor.

Looking forward from this quarter, I see the key drivers for the remainder of the year and going into next year to be -- we will continue to benefit from our pricing management on the collection side of the business, and we expect to have residual revenue from remaining storm rebuilding activities through the remainder of the year, but do not expect to see any more of the extra costs we incurred. We are starting to pick up some special ways to replace the lost contaminated soil volume that we talked about last quarter. One of our long-term strategies is to replace these volumes with waste products from the Marcellus and Utica shale drilling operations in Pennsylvania and New York. We believe our disposal volumes will increase in our Chemung landfill, which just received a 60,000 ton per annum permit increase, and in Southbridge, where we expect 119,000 ton per annum increase to be finalized in the next few weeks. Both of these landfills are ideally situated in high disposal demand locations.

That concludes our formal comments. I would like to turn it back over to the operator to open the lines for any questions you might have on the quarter or our strategy going forward. Shawn?

(Operator Instructions). Scott Levine with JPMorgan.

Firstly on the pricing initiative. It really sounds like things are tracking in accordance with your internal objectives. If you could comment with regard to whether the pricing environment is evolving in line with your expectations or whether you see anything out there in terms of the competitive landscape or otherwise that might cause things to trend for the balance of the year and beyond differently than you expected. And maybe if you can elaborate on field receptivity in the way they are behaving and anything else that might be noteworthy.

Great. What I've said before is that this is a local market business. So, you have to really look at the specific markets we are in. The markets that we are in, I think, have been receptive to this change and in some cases we were price followers in the past. I think we've clearly established ourselves as a price leader.

We have seen the competition react accordingly. With the tools that we have put in place, it is not just ad hoc price increases. We are managing this very well and that we know our profitability by customer. We know when it changes. This is a dynamic report that we work off of.

So, we target underperforming customer relationships to work them into a decent margin. And we try to manage our higher-margin customers accordingly. So, we are doing the pricing in a smart way. And it has taken a while to get the culture change and to get the dynamics of the tool working and to really create this as a core ongoing process, but we really think we are there now.

Got it. Turning to guidance. We have seen -- looks like commodities dip here, obviously, in November December, but you're affirming guidance here. Is this a situation where storm profits help compensate for some of that shortfall or do you bake in more conservative assumptions for recycling into your initial guidance? Help us understand what is behind the affirmation of guidance given what is going on there and what we should think about going forward.

Part of it is clearly that we have budgeted recycling commodities to come off through the course of the year and that's obviously exactly what has happened. So one dimension is clearly that we've budgeted correctly, that commodity markets would come down in the second half of the year. I think that is part of it. I think that what we are seeing right now, there's a bit of pressure on some of the fiber, obviously, from the last couple of months, but generally speaking, in line with our forecast and budget for the balance of the year.

I know it is tough -- (multiple speakers).

And one other thing that is worth pointing out too and it kind of goes to your pricing question too, before, Scott, and that is that volumes are up about 14% on the year over year basis at the recycling facilities. That is another indication of differentiation in the marketplace. Some of the other things that we are doing now in terms of being a solutions provider to our customers is really helping us, whether our Zero-Sort programs, some of the other programs that we are putting in place for our segments of customers, whether it's the oil and gas industry or colleges and universities, municipalities. Those solutions are allowing us to increase volumes going into our facilities.

You said up 14% year on year in the quarter?

That is correct.

That is an adjusted number excluding the one-time benefit that we had a year ago from a competitor that was building a MRF and we were taking their volume temporarily. So that is the core level.

Core level, 14%. Got it. One last question, if I heard you correctly, Ed, I think you mentioned on the cash flow that you are usually negative in the second quarter. Is it right to think of this as a borrow from subsequent quarters given your affirmation of guidance? Maybe a little bit more color on the driver upside there.

Yes, to some extent. Also, we were -- our CapEx is actually a little higher than last year on a year-to-date basis, even though the full year budget is about the same. But our management of working capital has improved. And so we were able to cover that extra CapEx and -- but when you look at the details of the working capital, we do think that that is a timing situation.

Got it. Great. Thanks guys.

Thank you.

Al Kaschalk with Wedbush Securities.

Just a quick follow-up on the recycling. Are you able to share with us what you believe or estimate your revenue exposure is to a drop in commodity prices versus -- obviously we have a couple things compensating here, right. We are at improved operations and also very strong volumes off of arguably low basis. So, to me, relative to others in the industry you appear to have the lowest exposure given some of the things you have in place. And I am wondering if you could somehow help us understand a little bit better where your risk is or what the risk would be to the guidance given the current environment.

Yes, Al, it's Ned. As we talked about earlier, to within the guidance we had forecasted recycling commodity prices to drop throughout the remainder of the year. So within that context we remain confident with the update, December numbers are published in the yellow book yesterday, that we'll meet our numbers.

But to your point, for every dollar increase or dollar decline in recycling prices, we don't take all that to the bottom line because of our risk mitigation strategy. And it is very banded because there are differential breakpoints in how we share revenues with customers or how we don't share revenues with customers.

Where we sit today is somewhere between -- for every dollar decrease about $0.25 to $0.35 and that range drops to the bottom line. [That] becomes lesser and lesser as prices drop more because we stop sharing revenues. It's not a linear relationship. We are kind of starting to get to a point where we share less revenues with customers and keep more of it for ourselves to cover our costs and to cover our cost of capital in those businesses.

Then the second thing is, obviously, with what was going on in the core business, you may -- is it fair to say that special waste was not something you where overly focused on in the traditional context and that there is not a structural change in your markets for special waste going forward?

I don't think that there was anything particular that is a structural change or anything like that. I think some of it may very well be just the overall economic activity. People doing the special waste jobs are clean outs are lagoons and things of that nature. And it could be petroleum cleanup, those kinds of jobs.

With the economy where it is and also municipal, state and municipal government budget issues, I think it's probably more driven by some of those issues and the general economy as opposed to structurally missing it or having it go somewhere else. I think across the Northeast, I think there is a general realization that the special waste volumes are really down over the last quarter or two.

And finally if I may. It looks like a good win here on the water treatment side as it relates to brackish water. Should we expect more of that from the Company and how are you assessing the competitive landscape there?

Well, we have got a team on the ground there led by Paul and clearly it is our belief that we have the right technology that we are putting in. And we have built relationships with the oil and gas industry over the last two years, Al, and we are taking the time to get in front of them and build those relationships.

I think with the rail siding access that we have there, we have other services and solutions that we can provide for the industry in terms of bringing in sand so that you can round-trip drill cuttings in sand and then also obviously processing the water. So we've got a team on the ground. We have been working with the industry for two years now. We've got an individual dedicated to that line of business that we have just put in place.

So, we are pretty confident that on a go forward basis, because we've got a number of different places where we can provide solutions for the industry, it is an exciting opportunity for us on a go forward basis, which is really what we had kind of laid out two years ago when we put the strategy together.

I'll hop back in queue. Thank you and good quarter.

Thanks, Al.

Corey Greendale with First Analysis.

Just a couple of questions. First of all, on -- also on the pricing question. I realize there's a lot of moving pieces with the volume in the quarter, but can you give us some sense of whether there has been any customer pushback on the price increases and if there is any way you can quantify that in terms of a defection number or anything like that that would be helpful.

Yes, I think the preliminary information that we have is consistent with what Ed had laid out, that we have done a thoughtful job of really segmenting our customer base, understanding those customers by profitability.

And so the vast majority of the customers that we have lost through the pricing activity, it is our belief that the vast majority is a positive impact to the Company. Through the course of that, though, Corey, we also -- there is a small portion of customers that we lost. So we are re-looking at the reasons for that. Looking at whether or not we got all of our solutions to those customers. And I think there were some things that we have learned that we could do a little bit better, but on a 30,000 foot level, the vast majority of the customers that we lost from a pricing perspective is a positive.

Second unrelated question. Can you just speak to CapEx? The CapEx in Q2 was a little higher seasonally then you usually -- you just -- what I am looking for is basically do you still think the original guidance range in CapEx is valid and is there anything unusual that we should expect there?

The CapEx for, I think it is for the six months, is about $5 million higher than last year, but it really all relates to a couple of things. It relates to the landfill construction timing, because landfill cells have to be built over the summer before the snow flies. But also, some of our investment in Altela and we were -- we did win a couple municipal contracts, which when you win a municipal contract you have got to put the money into services.

But other than those minor items, I think we are on track for the CapEx guidance for the year. And we had -- our cash flow's a little bit stronger than we anticipated. So it offset any increase in the CapEx. So that is why we stuck with the cash flow guidance.

And in terms of the EBITDA guidance, special waste was weaker, the Southbridge extension is a little delayed. What is -- I just want to get a sense of what's offsetting those items to allow you to maintain the guidance. Did you say collection pricing is coming in better than you expected?

Certainly pricing is better than expected. I think that volumes are up from a recycling perspective. And I think it is our sense that through the end of the year we should benefit, as Ed said previously, Corey, that it is very likely that we are going to benefit from the storm related activity because we'll have that revenue stream, but we are not going to have the costs that were associated because the roads are back together at this point in time. And those additional costs, whether it be -- I think our [Lee J] costs alone were up $1 million in the quarter from the storm. Those costs are not going to repeat themselves in the third and fourth quarter.

Also the two landfills where we are getting permit increases, those two landfills are located in high demand markets. So, they just happen to be in places where we have no trouble filling them. And so we are going to get additional benefit out of those. One of them starting in November, the other one sometime in December.

And then just one last one for me. On the fiscal 2013 free cash flow, the way -- I think the way you're talking about that exchange just a little bit, I think a couple quarters ago you were saying $20 million to $30 million. Now it sounds like you're wanting people to -- maybe it is just conservatism to [focus] on the lower end of that. Is that just because -- because it sounds like you locked in the $10 million in cash interest savings, and [since consult] is on track, some of it just -- there's no point in being ridiculously aggressive at this point or has anything else changed there?

Our view hasn't changed at all. So we're just throwing out $20 million and that is the bottom of the range.

Okay. Thanks very much.

[Joe Kale with Cristo].

Just one question. You mentioned earlier that you expect to save around $10 million by calling the expense debt. And that you secured debt savings with future interest rates up, right?

Yes.

Can we give obvious (inaudible) amount of the subcontracts maturity and the rate of it?

Maturity would be tied to our credit facility.

Yes, there will be some additional disclosure in the 10-Q that will be filed later today, but we entered into two interest rate swaps that average at 1.4% interest rate through 2016. That would be a swap rate where we expect to use senior secured floating rate debt to refinance the second lien notes.

Okay, I get it. Thank you very much.

I'm not showing any other questions in the queue at this time.

Very good. Look forward to all of you being on our third quarter call in early March. Have a great day, everyone, and thanks for taking the time today to be on the call.

Thank you. Ladies and gentlemen thanks for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.