Page 1 ADVANCED DISPOSAL SERVICES, INC. Operator: Good morning, ladies and gentlemen, my name is (Ryan) and I will be your conference operator today. At this time, I would like to welcome everyone to the Advanced Disposal Q3 2014 Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speaker s remarks there will be a question-and-answer session. If you would like to ask a question at this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question from the queue press the pound key. I would now like to turn our call over to Jennifer Lada. Please go ahead. Jennifer Lada: Thank you. Good morning everyone. We would like to welcome you to the Advanced Disposal Q3 2014 Earnings Call. With me this morning is Richard Burke, our CEO; Steve Carn, our CFO and other members of the senior management. We issued our press release yesterday with our results and trust that you have had a chance to review it. If you need a copy of the release you may find it on our website or on EDGAR at sec.gov. In today s earnings release and during the conference call, we are providing adjusted financial information including adjusted pro forma and adjusted EBITDA and adjusted free cash flow. All of which are defined in our press release and exclude certain items that management believe do not reflect items that are indicative of our results of operations. This information is provided to enable you to make meaningful comparisons of the company s operating
Page 2 performance between years and to view the company s business from the same perspective as management. The earnings release contains exhibits that reconcile the differences between the non-gaap measure and the comparable financial measures calculated in accordance with U.S. GAAP. Now, before we begin I need to make certain cautionary remarks about forward-looking information. The matters discussed in the teleconference may contain certain forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995 including projections, estimates and description of certain future events. Any such statements are based upon current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in those forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our financial filings. This call is being recorded and will be available two hours after the conclusion of the call for 30 days. Time-sensitive information provided during today s call may no longer be accurate at the time of the replay. Any re-distribution, re-transmission or re-broadcast of this call in any form without the expressed written consent of Advanced Disposal is prohibited. I would now like to turn the call over to our CEO, Richard Burke. Thanks, Jennifer. Good morning. I want to thank everyone for joining us today. During the quarter, we continued to focus on growing the business by driving our service for safety-always culture and achieved our highest reported revenue and adjusted EBITDA for the quarter since creating the new Advanced Disposal. Revenue for the quarter was $368.1 million, an increase of $23.4 million or 6.8 percent driven through by volume and price. 4.3 percent of the revenue
Page 3 increase was driven by volume, 1.8 percent from acquisitions and new municipal contracts. 1.2 percent from average yield and negative 50 basis points from recycling. We continue to have a balanced view on price and volume and it standardized our marketplace pricing strategy whereby we implemented price increases for third party disposal on October 1st. We continue to see positive trends on both commercial and roll-off collection with positive net new business for the quarter and service increases slightly outpacing service decreases for the quarter. Residential collection increased over the prior quarter with 29 new municipal contract wins during the fiscal year of which the city of Detroit is the largest. MSW and C&D volumes continue to be positive and special wastes remain strong for the quarter. Additionally, we launched a program to consolidate our customer call centers into district centers of excellence which contributed to a decrease in our churn year-to-date. Adjusted EBITDA of $105.5 million for the quarter is the highest since the formation of the new Advanced Disposal. The increase in adjusted EBITDA was driven by a combination of revenue initiatives as previously discussed, our commitment to cost-management and our tuck in acquisition strategy. Our focus on managing cost contributed to a sequential improvement in both our operating in SG&A expenses as a percent of revenue from Q2. The reduction in force that we took in August allowed us to restructure the frontlines of our operations and ensure that strategy and vision of our company remains along with our core values. The elimination of a layer of management helps drive the entrepreneurial spirit which we strive to embody and maintain. We reduced other SG&A costs through implementation of T&E savings programs and decreased our DSO. We completed our fuel hedging strategy for 2015 and have seen decreases in our fuel cost as a percent of revenue with conversion to more CNG trucks and decreasing fuel prices.
Page 4 Currently, 10 percent of our routed trucks are operating on CNG and our automated residential fleet is at 49 percent with plans to increase to 55 percent by midyear 2015. Additionally, we ve launched the standardized program for repairs and maintenance for our truck fleet as of October 1st. Other highlights of the quarter include completing three acquisitions for a purchase multiple of 4.6 times and we are within our full year target of $30 million to $50 million spend between acquisitions and new municipal contracts. Additionally, we reported our highest adjusted free cash flow as a percent of revenue since our initial public filing and improved adjusted free cash flow year-to-date by $10.6 million or 11.6 percent. Steve will now provide more detail about our Third Quarter Results. Thanks, Richard, and good morning. Revenue for Q3 14 was $368.1 million, an increase of $23.4 million or 6.8 percent from revenue of $344.7 million from the prior quarter. The revenue increase over the prior year was attributable to increase of special wastes, collection volumes driven by roll-off activity, net new commercial business, new residential contracts and acquisitions. Average yield is defined as the year-over-year price change expressed as a percentage and includes all price adjustments, service changes and rollbacks. For Q3 14 revenue increased 6.8 percent broken down by price and volume as follows, average yield increased 1.2 percent including fuel fees and was tempered by tough comps from Q3 of the prior year as the fee harmonization, (fully) anniversaries in Q3. Collection pricing increased 40 basis points impacted negatively from residential price rollbacks, negative churn in the commercial business but offset by strong roll-off pricing.
Page 5 Price rollbacks on residential contracts accounted for 20 basis-point negative impact on pricing. And churn in the commercial business is 7.1 percent yearto-date improving 130 basis points sequentially from year-to-date Q2. Landfill pricing increased 40 basis points driven by MSW third party core pricing initiatives and improved special wastes pricing but was all set somewhat by lower C&D pricing. Recycling pricing was negative 50 basis points when an average OCC pricing of 98 per ton in Q3 14 compared to 118 in the prior year, a 17.1 percent decrease. Environmental and admin fees remain flat as the fees fully anniversary in Q3 and as a reference point, these fees represented 1.1 percent of price in Q3 13. Fuel fees increased 40 basis points. Net organic volume growth increased 4.3 percent and 1.8 percent volume growth due to acquisitions and new municipal contracts resulting in total volume growth of 6.1 percent. Collection volumes increased 3.6 percent with 1.7 percent of the increase in residential system due to several new residential contracts. 90 basis-point increased in roll-off volume benefitting from strong seasonal uptick in activity and 50 basis-point increased in the commercial business benefitting from net new sales. We ve seen a slight net positive in service increases exceeding service decreases in the commercial system in the quarter. Landfill volumes increased 1.5 percent benefitting from special waste projects, which account for 60-basis points primarily in the Midwest region. MSW volumes increased 40 basis points and C&D volumes increased 50 basis points. Moving to cost of operations, excluding accretion expense, increased $17 million or 8 percent to $228.4 million for Q3 14 from $211.4 million in the prior year. Cost of operations as a percentage of revenue increased 70 basis points to 62 percent for Q3 14 compared to 61.3 percent for the prior year.
Page 6 Excluding some one-time events, our cost of operations as a percentage of revenue, would have been 61.2 percent and with the Third Quarter benefitting from the seasonal uptick in volumes. Labor and benefits as a percentage of revenue remain flat, benefitting from the seasonal uptick in volumes. Lower claim reserves for health insurance but offset by driver shortages resulting in increased overtime in temp labor. Transfer disposal sub-contract cost increased 1 percent with 30 basis points due to one-time true-up of auto-period subcontract cost related to our national accounts program and 120 basis-point impact from volume that was internalized in 13 that was lost as part of the DOJ divestures and the balance of the increase was due to higher transportation cost impacted by increased waste volumes flowing through our transfer stations. In compressed margin on pass through subcontract revenue, related to the transportation of special wastes and shale lines, maintenance and repairs increased 30 basis points impacted negatively by (tech) shortages resulting in increased overtime. Repairs and maintenance was also impacted, increased container repairs. Fuel decreased 40 basis points as a percentage of revenue and we paid an average of $3.64 per gallon Q3 14 compared to $3.80 in the prior year. Franchise fees and taxes increased 20 basis points due to increased special waste volumes and risk management remain flat. Other expenses decreased 30 basis points benefitting from decreased equipment, rental and landfill site costs. SG&A expenses decreased, by $8.9 million to $35.6 million for Q3 14 from $44.5 million from the prior year. Excluding the impact of rebranding and integration cost which were higher in the prior year, SG&A as a percentage of revenue decreased 80 basis points to 9.5 percent for Q3 14 compared to 10.3 percent for the prior year.
Page 7 Salaries expense decreased 20 basis points benefitting from corporate headcount reductions, lower health insurance costs, structural changes made to the 2014 health insurance plans, positively impacted accrual rates in 10 basis-point pick up from lower stock comp and expense. Rebranding and integration costs decreased $8.5 million as most of the integration has been completed. Other SG&A costs decreased 50 basis points with 15 basis points due to recovery of bad debt previously written off and 35 basis points due to lower costs as the cost reduction initiatives start to take hold. Depreciation, depletion and amortization increased by $0.8 million to $73.8 million for Q3 14 from $73 million from the prior year. As a percentage of revenue DD&A was 20 percent in Q3 14 versus 21.2 percent in the prior year. Please note, our DD&A is higher that our peers due to the write-up of assets and purchase accounting on the Veolia Acquisition. Overall, adjusted operating income increased $8.2 million for Q3 14 over the prior year. We continue to focus on cost control programs and as the initiatives take hold for improved margins on a year-over-year basis. We provided the schedule in Q3 Press Release, the details of reconciliation of pro forma adjusted EBITDA on a continuing ops basis for Q3 14 and 13. Strong price volume growth and cost reductions contributed to the year-overyear increase in EBITDA and margin but were offset somewhat by lower commodity pricing and resi price rollbacks. Pro forma adjusted EBITDA Q3 14 increased $3.6 million or 3.5 percent to $105.6 million compared to $102 million Q3 13 and sequentially increased $8.5 million or 8.8 percent from Q2 14. Adjusted EBITDA margin from continued operations for Q3 14 was 28.7 percent compared to 28.8 percent in the prior year, a decrease of 10 basis points, but increase of 200 basis points sequentially from Q2 14 as Q3 is our strongest quarter due to seasonality of the business.
Page 8 Adjusting for the impact of lower recycling pricing and the out of period subcontract cost, EBITDA margin would have been 29.3 percent for the quarter or 60 basis-point improvement over the prior year quarter. Adjusted pro forma EBITDA TTM September 14 was greater than $71 million compared to $367 million TTM June 14, an increase of $4 million. Net cash provided by operating activities year-to-date was $194.8 million. The company expended $113.6 million on CapEx or 10.8 percent of total revenue year-to-date compared to $112.2 million in the prior year. CapEx was adjusted to exclude capital, but is more like acquisition capital than maintenance CapEx in which we spent $21.6 million on the city of Detroit residential contract and $8.8 million related to expansion property in one of our landfills that will provide 15 years of additional capacity. Replacement maintenance CapEx was $87.9 million or 8.4 percent of revenue year-to-date and the company spent $4.3 million on infrastructure-related CapEx. Growth CapEx including Detroit in the expansion property was $23.7 million or 2.3 percent of revenue. Adjusting for certain costs not expected to occur, adjusted free cash flow was $101.8 million year-to-date 14 or 9.7 percent as a percentage of revenue. Interest expense for Q3 14 was $35.4 million, a decrease of $3 million benefitting from the refinance of the term B loans. Cash paid interest was $18.4 million in Q3 14. As of September 30, 14, we had total funded debt of $2.35 billion with zero drawn on the revolver with approximately $233 million of revolver availability. The leverage ratio of total funded debt to pro forma adjusted EBITDA as defined under our credit agreement decreased to 6.3 times as of September 30 14 compared to 6.4 times at June 30 14. We will now open the lines for questions.
Page 9 Operator: At this time, ladies and gentlemen, if you would like to ask a question please press star one on your telephone keypad. We ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of (Phillip Bocelli) from Deutsche Bank. Your line is open. (Phillip Bocelli): Good morning. Good morning. Good morning. (Phillip Bocelli): So my first question s regarding selling general administrative expenses. Clearly a very nice performance year-over-year and some continued improvements to be expected. Should we run the fourth quarter in 2015 at a 9.5 percent of revenue or what s the best guidance you can give us as to what the SG&A level should be going forward? I think you re going to be in that range in around 1.5 in Q3, you have the benefit of increased volumes on your revenue and you got some relative fixed cost related to some of those volumes and then there were some other unique events in Q3 that were kind of one-time, a bad debt recovery as I ve disclosed and some stock comp expense year-over-year that didn t happen. (Phillip Bocelli): OK, great. Those are the those were the changes but we would expect to kind of be in that band. (Phillip Bocelli): OK. And then with regard to fuel obviously, you know, oil prices have come down, I know some of your contracts you give back some of that, so can you give us some metric as fuel drops by x dollars, you know, what that would mean for EBITDA or anything you can help us with there?
Page 10 Let s talk about what we did with regard to the 2015. We were kind of opportunistic on our hedging strategy but for 15 we had at a fixed price of $3.40, 23.8 million gallons, and so if you look at the comparison at where we re kind of year-to-date, fuel of around $3.67 and we use about 25 million gallons and we fixed for 15 about 23.8 million of that at $3.40. (Phillip Bocelli): Great. That s very helpful, thank you. And then, the next one for me would be on the CapEx outlook, clearly you ve brought that down a little bit but it sounds like there s a couple, you know, expansionary opportunities out there. What would you guide us for CapEx for 2015? You know, I think we re going to be consistent where we re going to be in the, you know, 10 to 12 percent, kind of band probably, kind of in the middle, depending on cell construction that can be lumpy from year-to-year. We still have some CapEx that will come in Q4 of 14 because our cell construction really doesn t start in the Midwest because of weather until the latter part of Q2 and finishes up Q3 and into Q4. (Phillip Bocelli): OK, great. I ll get back in queue, thank you. Operator: Again, if you d like to ask a question please press star one on your telephone keypad. Your next question comes from the line of Michael Hoffman from Stifel. Your line is open. Michael Hoffman: Thank you very much. Nice job on the quarter. Steve, I misheard you I think, did you say 10.5 percent for SG&A or I just or didn t hear it at all? What is the percentage you re suggesting? I think that s a good target. I mean we ve run higher than that if you look historically in some of our quarters now. Now, Q3 of 14 is lower, you know, again because of the revenue and then some of the one-time events. But our goal would be to be in that band.
Page 11 Michael Hoffman: OK. And then in theory if the volumes are holding 10 to 10.5 is probably the band because of the operating leverage. Correct. Yes. Michael Hoffman: OK, all right. I just wanted to make sure I understood that correctly. And then, I m assuming the Qs out here tonight or tomorrow and it will have all the segment data is there so without getting in all the gory details of the numbers is there a particular trend that you would emphasize, things that are improving like the east region has been a challenge, what are we looking at some of that trend data? You know, I think in the East it s really the benefit of the Detroit contract. And we have seen a significant increase and some volumes both special wastes and MSW. That certainly has helped the East. In the South in Q3 14, it s impacted somewhat by the national accounts out-of-period subcontract costs and a little bit heavier on the resi pricing rollbacks, a little bit weighted to the South. Michael Hoffman: OK. And the Midwest has benefitted a little bit in the quarter from very strong special wastes. And the Midwest had a bit of a drag that the other ones have more of our recycling is weighted more to the Midwest than it is the other two regions just because of the nature of where we work there, so they have a bit of a drag on recycling. They feel it more than the other two regions. Michael Hoffman: OK so on that vein, if you thought took where you are today in October, November on paper prices, how do I think about that drag in the quarter? Is it about the same basis points wise than it was in 3Q?
Page 12 Yes, that drag on the paper pricing is about 30 basis points. Michael Hoffman: OK. And then, you did mention that you know, net new business plus positive service intervals, can you talk a little bit about the trends on weight per yard as well as dollars per yard in front end loader and then as far as similarly on roll-off, where are you on your dollars per (pool)? Yes, Michael on the let me break that one down a little bit. On the commercial and weight per yard, the weight per yard is heavy but it s static, it s holding pretty still on that high 60s, low 70s pounds per yard, so we re seeing some uptick in service levels but it is pretty nominal at this point, so I won t say we ve hit that level through where the restaurant in the corner needs to get from three times a week to five times. We haven t seen that yet, but the weights would indicate that it has to come it s just a question of when. Your other question on pricing, we re seeing pricing up slightly in some markets and none in others but your price per yard is holding pretty through on the commercial side. On the roll-off side, we ve seen better pricing as we ve seen more demand for the service, you know, we are still getting rental, we re still getting in minimarkets rental, we re still getting mini-markets delivery fees. And those are the kinds of fees that all the way back to 2007, we ve lost for three or four years, so we re seeing that come back as demand rise for roll-off. Now there won t be seasonality to that as you know, you know, I think it s snowing in Wausau Wisconsin today so. But you know, as old man winter comes in, we ll see a fall-off in certain parts of our market on that. But the roll-off have stayed strong through the quarter and even in the October and early November, roll-off has remained strong. Michael Hoffman: So you had a by the way, we re supposed to snow in Maryland today, too. So you ve had pretty good roll-off activity and the C&D and the special wastes they re kind of interlinked because, you know, the dirt s excavating the sites in the road building. When you think about 2015 you start to comp those
Page 13 good numbers and the important statement is, is you re not growing slower, it s just comping a good number. What do you think that settles in to? Is that a 3 percent or 4 percent versus the 6 to 8 it s been? Is that the kind of way to think about it? That s a way we were thinking about it. That it s a 3 percent to 4 percent growth there. You know, again that doesn t include new municipal contracts, that doesn t include tuck-in acquisitions that we do. But I think a 3 percent to 4 percent is a good model number. Michael Hoffman: And then you have trended on the reported price you know, sort of under 1 percent but based on what you re talking about in, you know, your price per yard or even that you know, you re at that 60, 70 pounds per yard, you got to hit that service interval upgrade. Is it reasonable to assume you could breakthrough a reported price at 1 percent? Yes, Michael, I think you ll see because of the comps, I think you ll see a flip next year when we re comping 15 to 14. I think you ll see, you know, a tougher on the volume side and a little bit easier on the pricing side. Yes, I think we ll be sitting here defending we will be sitting here defending volume. Volume. Not price next year because of the anniversary of the fees. Michael Hoffman: OK. All right, that s terrific. Thank you very much. Operator: Your next question comes from the line of Bob Franklin from Prudential Financial. Your line is open. Robert Franklin: Hi. Is there a cost of oil where maybe the conversion to CNG is less economic or will you start thinking twice about it?
Page 14 I mean certainly there would be. I don t think it s $80 a barrel, that s the number and our CNG plays a little bit longer play than just the, you know, the recent downturn in the oil markets. If it s sustained at below 70, I think you d have to think about whether you continue, we would think about whether we continue to build out sites or whether we hold with what we have but the delta is still pretty compelling. I mean, we re still buying CNG at about $1.60 diesel gallon equivalent versus 3.40, 3.50, 3.60 for diesel. So it would really have to come down before CNG becomes a drag as supposed to an upside. The upside just may not be as great and the return of capital and new investments instead of the four years we look at, may drag out a bit longer. But we re still bullish on CNG, but of course we re watching the other metrics, too. Robert Franklin: OK. And then my next question I think you ve already answered but I ll ask it a different way. In the second quarter you were talking about volumes picking up commercial volumes picking up but you know, not to the point where there was the inflection point of larger containers or more frequent pick-ups and it sounds like you said the same thing this time. Did you get the sense in the third quarter that things were accelerating more in the third quarter than the second quarter or I think you used the word static, but I m just trying to get a handle on that? I think, you know, we ve seen service increases outpace decreases and that started Q2 and we ve seen that into Q3. But it is not a large enough margin where you start to think, OK, we re really we re starting to really see the impact of those service upgrades and service increases. Robert Franklin: OK. And can you tell us from your perspective how the construction industry is doing in your areas? It s been strong. Overall, it s been strong, I mean, our roll-off is up year-overyear our special waste was up nicely year-over-year which is a leading indicator, to me of construction, and people normally clean these lots, a lot of our special waste is some sort of contaminated soil.
Page 15 Robert Franklin: Right. And they re prepping those sites for something if we re removing solid wastes so then what we see behind these special waste is roll-off opportunity and then many times you see multi-family dwellings or houses or business that are built on the lot. So we ve continued to see that trend, it hasn t slowed, so we re seeing construction strong. Just to give you a stat, I mean, we re up 90 basis-point on roll-off and we really saw it in the south particularly in Florida and Georgia and then a little bit in the East where we re internalizing some of the work that we didn t internalize before on some national accounts. Robert Franklin: OK, terrific. Thank you. Operator: We have no further questions on the line. OK. Thank you, thank you, folks. I d like to reiterate that we re strongly committed to growing the business and improving our margins. We believe that the actions that we re taking both from the revenue and the call side will achieve these goals. Our teams dedicated to providing a service-first, safetyalways experience for our customers while growing this business to maximize value. Enjoy your upcoming holiday season and thank you all for your time today. Thank you. Operator: This concludes today s conference call. You may now disconnect. END