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Edited Transcript of CWST earnings conference call or presentation 1-May-19 3:00pm GMT

Q1 2019 Casella Waste Systems Inc Earnings Call

RUTLAND May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Casella Waste Systems Inc earnings conference call or presentation Wednesday, May 1, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edmond R. Coletta

Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer

* Edwin D. Johnson

Casella Waste Systems, Inc. - President & COO

* John W. Casella

Casella Waste Systems, Inc. - Chairman, CEO & Secretary

* Joseph S. Fusco

Casella Waste Systems, Inc. - VP of Communications

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Conference Call Participants

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* Michael Edward Hoffman

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research

* Patrick Tyler Brown

Raymond James & Associates, Inc., Research Division - MD

* Sean D. Eastman

KeyBanc Capital Markets Inc., Research Division - Associate

* Steven Schwartz

First Analysis Securities Corporation, Research Division - Analyst

* William Spencer Grippin

UBS Investment Bank, Research Division - Director & Equity Research Associate of Utilities

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Casella Waste Systems Inc. Q1 2019 Earnings Call. (Operator Instructions) As a reminder, today's conference will be recorded.

I would now like to turn the call over to Joe Fusco, Vice President of Communications. Sir, you may begin.

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Joseph S. Fusco, Casella Waste Systems, Inc. - VP of Communications [2]

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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 2019 first 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 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. And with that, I'll turn it over to John Casella, who'll begin today's discussion.

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [3]

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Thanks, Joe, and good morning, everyone. We are pleased with the strong start to the year and a most challenging seasonal quarter. We continue to execute well against our key strategies as part of our 2021 plan and remain focused on driving further normalized free cash flow growth. As reported yesterday's press release, our Q1 revenues and adjusted EBITDA were up 11% and 8.1%, respectively, from last year. We also reaffirmed our 2019 guidance for revenue, net income, adjusted EBITDA and normalized free cash flow. Notably in the quarter, we completed an equity offering with net proceeds of just over $100 million. We are well positioned to continue to grow the business in a disciplined manner. And yesterday, we announced our first acquisition in 2019 of MPC disposal located in Maine. This is a tuck-in, great addition to the 10 acquisitions we completed in 2018, and we continue to see a robust pipeline in the North East.

Overall, we remained focused on executing against our 2021 plan. The 5 key strategies are consistent with the plan as announced in August of 2017, which includes increasing landfill returns, improving collection profitability, creating incremental value through resource solutions and using technology to drive profitable growth and efficiencies along with efficiently allocating capital for our strategic growth. Our first strategy in our 2021 plan is increasing landfill returns. We continue to enhance returns through price execution, operational programs, the sourcing of new volumes at higher prices and our efforts to advance key permits.

Our average landfill price per ton was up 6.6% in the quarter, as we advanced a strong pricing program in the early 2019. The pricing landscape continues to be favorable, and we expect it to remain so into the foreseeable future due to the continued disposal capacity constraints across the Northeast.

We're not only increasing price on existing [abrupt] volumes, but also replacing lower price waste streams with higher priced volumes, which blends up our overall pricing and improves return. The first quarter was a tough quarter for our disposal line of business with adjusted EBITDA down due to the expected closure of the Southbridge Landfill in 2018 -- November 2018, a tough comparison given the large soil remediation job that we had in the first quarter of last year. And most notably operational challenges at our Ontario Landfill that caused us to cut hike, price sludges accepted at the site and to incur higher unbudgeted expenses to resolve several operational issues.

It's an all hands on deck, including myself to resolve the issues, and we are well on our way to getting back to our high operating standards and expected financial performance at the same. Our second strategy in our 2021 plan is driving further profitability within our hauling business. We continue to outperform and execute well against our pricing and operational strategies.

Our pricing discipline and agility once again apparent in the quarter as we advanced collection price by 6% year-over-year. We're continuously monitoring inflation across the business and adjusting our pricing programs accordingly as we aim to outpace heightened disposal recycling and labor cost.

As we continue to advance price, our risk-mitigation SRA and E&E fee programs are working well to offset recycling commodity pressures, fuel environment and regulatory costs. We improved collection margins in the quarter while at the same time experiencing slightly negative volumes as we deselected or shed less profitable customers. We launched a new program in 2019 called service excellence, focused on establishing clear and measurable service standards. We initially focused in the collection line of business where it is paramount to provide top-notch service to our customers each and every day. Third strategy in our 2021 plan is creating incremental value through resource solutions. Our recycling business performed well in the quarter with a year-over-year improvement in adjusted EBITDA as we continue to make progress restructuring third-party, recycling processing contracts, to pass commodity risk back to our customers, introducing contamination fees to help drive behavioral changes with recycling and starting 2 large recycling facility equipment upgrade projects. Our SRA fee continues to work well as it is fully offsetting the commodity risk on our intercompany volumes. Given our early success in 2019 and the strength of our risk-mitigation programs, we do not expect the year-to-date declines in the recycling commodity prices, including the recent declines in cardboard to significantly impact our forecast for remainder of the year.

We will maintain focus on producing high-quality and materials, reducing our exposure to commodity prices and improving our operational efficiency. The customer solutions team also performed exceptionally well in the quarter with adjusted EBITDA growth of approximately 33% and margin improvement of over 70 basis points, as they continue to capture share of wallet for major industrial customers across our franchise area.

The fourth strategy in our 2021 plan is using technology to drive profitable and efficient growth. We're happy with the progress we have made against this initiative over the last year. Our net suite implementation went very well. And we are now starting to drive meaningful change to our business processes, working to simplify, automate our purchasing processes to drive out cost, enable us to continue to scale our business without adding significant back office headcount. One of our main focus areas in 2019 is on better integrating our sales force and our customer care teams through a newly launched case management system, which is tied to our CRM, which is Microsoft CRM, with an aim on improving our ability to quickly and efficiently respond to customer needs. Moving on to our final strategy in -- on our 2021 plan, which is allocating capital to balance delevering with smart growth. We executed very well in 2018 against this strategy with the completion of 10 acquisitions during the year.

We exceeded our goal to acquire or develop $20 million to $40 million per year of annualized revenues, and we are well positioned to again outperform our goal in 2019.

Over the last 6 months, we have made great progress, integrating the acquisitions we completed in 2018. To date, we've completed all of the finance back-office systems integration work for all of the acquisitions completed in 2018.

And we are busy working on executing against our post-acquisition operating plans for each acquisition to drive synergies and internalization.

We're tracking generally well to the performance or above performance for almost every acquisition completed last year with a few areas that need to improve over the next several years. And as we said last year, when we talked about those acquisitions, the value will come out of those acquisitions over the next year or so as existing disposal contracts terminate, and we are able to internalize additional tons from those acquisitions that we did in 2018. Yesterday, we closed on the acquisition of MPC disposal in Maine. This is a great tuck-in acquisitions for us, roughly $7 million of annualized revenues that will integrate well with our existing operations in Maine.

This acquisition represents a nice start to our acquisition growth strategy in 2019. And as we look out over the next few months, we have approximately $40 million of annual revenues across several acquisition targets in the letter of intent stage. We expect to close these transactions by the end of the third quarter. We're well positioned to continue to opportunistically grow the business given the recent equity offering and our ability to continue to grow free cash flow organically. The overall strength of our balance sheet coupled with the robust pipeline of that overlay our existing operational footprint or that is in adjacent strategic markets.

One area that is not specifically outlined in our 2021 plan but is very important to our continued long-term success and underlies all of our initiative -- initiatives is the focus on further building our team. As we have highlighted in the past, in 2018, we introduced our career path program to our maintenance and landfill technicians, our recycling employees and our drivers. While the program is in our early innings, we are starting to see some early positive benefits. The goal of career path program is to provide a measurable and transparent path through advancement through carrier training programs, safety and productivity goals. Over time, we expect this program to improve employee satisfaction, strengthen our recruitment, reduce turnover and enhance productivity while lowering safety incidents.

In 2019, with the help of our human resource team, we are also in the process of creating a robust, on-premise onboarding and training platform. Our goal is to develop a training program to help us to train CDL drivers and apprentice level technicians that are highly committed to the company and dedicated to superior safety and service.

We have established several training hubs across our operations, and we are having great initial success in attracting trainees to the program. Wrapping up, as reflected in our guidance, 2019 is tracking well against our 2021 plan and displays continued execution of our key strategies with the goal of driving additional shareholder value. We expect continued strength in solid waste, a robust acquisition pipeline, recycling tailwinds to offset the 2018 (inaudible) of the Southbridge Landfill. And with that, I'll turn it over to Ned.

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [4]

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Thanks, John. Revenues in the first quarter were $163.7 million, up $16.2 million or 11% year-over-year with $11.9 million or 8.1% in net growth driven by acquisition activity, the rollover impact year-over-year. Solid waste revenues were up $11.2 million or 10.2% year-over-year as a percentage of solid waste revenues with price up 5% and then 10.8% from the rollover impact acquisitions and volumes down 4% year-over-year.

Revenues in the collection line of business were up $16.6 million with price up 6% across all lines of business, volumes down very slightly, our risk recovery fees up 2.4% and acquisitions up $11.3 million.

Our disciplined pricing strategy has been working very well, balancing customer retention and new business growth with appropriate pricing levels to offset the building inflation across our operations.

Revenues in the disposal line of business were down $4.2 million year-over-year with very strong pricing offset by volume declines and the closure of the Southbridge Landfill in November 2018. The closure of Southbridge resulted in a $2.2 million year-over-year decline in revenues. Disposal volumes had a tough year-over-year comparison, as we had a one-time $3.5 million soils remediation project in the first quarter last year that did not repeat this year. And volumes were also negatively impacted by a $600,000 business interruption at a transfer station we're rebuilding after a fire. This transfer station is now open. Excluding these 2 factors, disposal volumes were actually up slightly. Economic activity remained strong across the region and landfills and waste energy facilities were generally at capacity throughout 2018. The tightness to the market has given us a great pricing backdrop for 2019. And in the first quarter, we increased reported landfill pricing by 4.2% year-over-year. And as John mentioned, we drove average price per ton up 6.6%. Excluding the Southbridge Landfill closure, landfill tons were slightly down. They're down 1.5% year-over-year. However, we do expect to ramp tons up during the higher price summer months.

Recycling revenues were up $600,000 year-over-year, with $1.9 million lower commodity pricing, but this was offset by a $2 million of higher third-party tipping fees or processing fees and a $0.5 million of higher volumes. Average commodity revenue per ton was down 15% year-over-year in the quarter on lower fiber pricing and down 16% from December of '18 to April of 2019 and further declines in cardboard pricing with cardboard down 35% from December to April.

Organics were up $1.4 million year-over-year and higher volumes mainly associated with a new 2-year sludge T&D contract. And customer solutions revenues were up $3 million year-over-year due to several new multisite retail customers and continued growth in our industrial services business. Adjusted EBITDA was $26.6 million in the quarter, up $2 million or 8.1% year-over-year with margins down 44 basis points. Solid waste adjusted EBITDA was $24.8 million in the quarter. This is actually down $100,000 year-over-year with very strong pricing and acquisition activity offset by some inflation in our operating cost, and as I just mentioned, lower disposal volumes and $1.8 million of lower adjusted EBITDA for Southbridge Landfill. Solid waste adjusted EBITDA margins were 20.4% in the quarter. This is down 220 basis points year-over-year and one of the largest reasons we saw margin pressure overall to business. The Southbridge Landfill closure negatively impacted margins by 115 basis points while our heightened operating cost and reduced volumes at Ontario Landfill pressured margins by 80 basis points and fuel negatively pressured margins by roughly 40 basis points.

So excluding these 3 items, margins were actually slightly up year-over-year. Recycling adjusted EBITDA was up $2 million year-over-year with lower commodity prices and higher variable processing costs offset by $2.8 million of higher tipping fees and lower rebates and slightly higher volumes.

Adjusted EBITDA was $1.8 million in the other segment, which is up $100,000 year-over-year with a great quarter for customer solutions with adjusted EBITDA up $300,000 or up 33% year-over-year on strong execution of industrial strategy.

Cost of operations was up $12.1 million year-over-year with roughly $9 million of that increase driven by acquisition activity and most of the remainder driven by higher third-party transportation and disposal cost.

G&A costs were up $1.7 million year-over-year, but down 36 basis points as a percentage of revenues as we began to gain leverage from acquisition activities in the 5-year technology plan. Roughly $1 million of this year-over-year increase was driven by acquisition activity.

Depreciation and amortization costs were up $1.5 million year-over-year, mainly due to higher depreciation on trucks and equipment related to our 5-year fleet in Yellow Iron plant and heightened acquisition activity.

You will notice there are 2 unique items in the quarter. One, we incurred roughly $600,000 of legal and transaction cost related to our ongoing efforts to cap and close the Southbridge Landfill. This is moving along well as John mentioned, but we do continue to work with the state with a capping plan in place. And we incurred expense from acquisition activities in -- during the period as well.

Our normalized free cash flow was negative $6 million in the quarter as compared to positive $7.2 million for the same period in 2018. This reduction was mainly due to 2 items. The biggest is timing differences in cash outflows associated with accounts payable. We expect this to normalize through the remainder of the fiscal year, and we're on track to meet our guidance. And we also had higher capital expenditures year-over-year due to business growth and timing differences. This is actually a positive story line where we're able to take delivery of trucks and equipment earlier in the fiscal year as we placed orders in mid-2018.

As of March 31, 2019, our consolidated net leverage ratio as defined in our credit facility, was 3.10x, which is down 2.3x since December 31, 2014. Our total debt was $469.9 million with liquidity of approximately $197 million.

In addition, we have fixed our interest rates on roughly 67% of our debt. As John mentioned, we believe our capital structure is in a great position and will allow us to execute well against our strategy to grow through smart acquisitions in 2019.

We just refreshed our 2019 forecast, and we are confident that the 35% decline in cardboard prices year-to-date through April will not impact our guidance ranges for the year. We currently have over 90% of our recycling revenues covered by either our SRA fee or our revenue share risk contracts. This has allowed us to offtake commodity pricing risk to our customers.

As stated in the press release yesterday afternoon, we've reaffirmed our guidance for fiscal year 2019 by estimating results in the following ranges: revenues between $710 million and $725 million; adjusted EBITDA between $152 million and $156 million; and normalized free cash flow between $51 million and $55 million. We have updated our net cash provided in operating activities guidance range to between $111 million and $115 million from the previous range of $119 million to $123 million. This change was made because of our adoption on January 1, 2019 of ASC 842, not because we expect weaker cash flow generation during the year. As part of the adoption of ASC 842, we've changed the classification of payments on operating -- landfill operating leases from an investing activity on the statement of cash flows to an operating activity. To reinforce, this change in classification will not change cash flows or change our normalized free cash flow guidance for the year. And with that, I'll hand it over to Ed.

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Edwin D. Johnson, Casella Waste Systems, Inc. - President & COO [5]

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Thanks Ned, and good morning, everyone. Well, we had a very good start to the year. Our collection operations, which generated about 50% of our revenue continue to grow and expand margins. And our recycling operations have almost fully recovered from last year's commodity market disruption moving to a pay-for-service model that minimizes commodity exposure. Additionally, our landfills and related transfer assets are well prepared to take advantage of great market conditions as we enter the busy spring summer season. Let me go through some of our key operational numbers.

On a consolidated basis, our cost of ops as a percentage of revenue increased by 33 basis points in the quarter versus the prior year. This was driven by the landfills, as we ran lower tonnage to save permit capacity for later in the year and to get caught up on, what I will call, preconstruction work to allow for early spring sell construction.

As most of you know, landfills have high operating leverage with minimal variable cost and a loss of volume flows through the margin. So we expect this to reverse through the year as we crank volumes back up.

Landfill demand remained strong and price was up 4.2% in the quarter and the more important average price per ton was up 6.6% indicating that we're being very selective on the tons we take in.

Cost of ops as a percentage of revenue on our collection operations improved by a 108 basis points, and this was driven both by price and operational efficiency. We achieved 6% in price growth for the quarter and our key metrics in each line of business within collection improved.

We want to note here that this was not aided by acquisitions as the new operations had only a minor effect on the percentage, more on that in a minute. Cost of ops in our recycling operations improved by 1,600 basis points, as last year we had negative margins. But this is a relatively small part of our revenue, less than 7%.

A year ago on this call, I stated that the imbalance caused by the rapid change of commodity markets would right itself in 6 to 12 months as we rolled off long-term recycling contracts and implemented our new paper service language. That is exactly what has happened. We saw the term start to gain momentum in Q4, and now we're happy to see the strong Q1 results. Most states in the Northeast where we operate mandate recycling and even though with now cost more to recycle than to put it in the landfill, our customers want to do the right thing and are willing to pay for the service we provide. In the long run, markets will recover and the cost to our customers will go down.

While these are very busy times for us at Casella, we are seeing tremendous opportunities for growth in our market and have a considerable pipeline of acquisitions. As exciting as this is, I wanted to assure you that we remain disciplined in the acquisition process, and understand the importance of successfully integrating the acquired companies and more importantly, the management teams and other human resources that come with it.

We're very happy with all of the acquisitions we have completed to date and particularly our new Rochester operation, which is now our largest division. These acquisitions remain on track to their pro formas, and we are methodically integrating them into our systems and processes and look forward to attaining additional synergies over the rest of the year.

I want to thank all of our team members that have been doing the integration work. They're doing a great job, and we appreciate the extra effort that, that requires. With that, I'd like to turn it back to the operator and to start the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from Sean Eastman with Keybanc Capital Markets.

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Sean D. Eastman, KeyBanc Capital Markets Inc., Research Division - Associate [2]

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Ned, thanks for parsing out all the margin impacts in the quarter, that was helpful. I'd just like to start on the operational challenges at the Ontario landfill. If you guys wouldn't mind just providing a little more color on what those challenges are? And whether they're fully contained in the quarter? I'm just trying to get an idea of sort of margin progression here towards the 50 basis points of expansion that's embedded in the guide considering we, sort of, started the year at a kind of down year-over-year level?

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [3]

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Yes. I think that it's -- clearly we had some challenges at Ontario, and it really related to sludge going into the facility. I mean, there is very little tolerance from an odor standpoint. And quite frankly, some of the issues that are associated with that were gas getting out of the front. And from an operational standpoint, as I said, Sean, it was all hands on deck where we've put the additional wells in. We've experienced that cost in the first quarter of significant number of additional wells and we're well on our way to having, as I said, back to the standards that we need to be at. It happened. We're not pleased with it. I think we've made the changes necessary, make sure that it doesn't happen again. And we've spent the dollars obviously from an operating standpoint both in terms of putting additional wells and to make sure that we control the issue and as well as additional work too. We always have a lot of work in the spring time at sites as well from the winter in terms of erosion. That also contributes to those issues. And you just -- you have those issues to clean up when you come out of the winter. But we did have the additional issues related to the sludge, which we slowed down going into the facility as well. But the cost associated with that is in the first quarter.

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Sean D. Eastman, KeyBanc Capital Markets Inc., Research Division - Associate [4]

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Got it. All right. So I'm just wondering how the kind of margin trajectory should look from here. I assume it'll follow -- assuming the operational issues are contained. I assume that margins will ramp alongside the anticipated pickup in disposal volumes. So I'm just wondering should that be pretty sharp upward swing into the second quarter or maybe this will be a more back-end loaded year than usual?

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [5]

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Yes. When we look at the forecast for the year, we're still tracking to be up the 50 basis points as we refreshed our forecast for the year. And when you look at the progression throughout the year, we'll be kind of flattish in Q2 and then gaining on a year in Q3, Q4. And as John said last year, if you remember, we get out of the gates really fast with the landfills in Q1, probably took in too many tons. And then in November and December, we really struggled to find homes for those tons. So slowing tons earlier in a year and really pushing our pricing strategy is a good strategy for the year. Some of it was due to these operational challenges, but we expect to comp higher margins later in the year.

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [6]

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Well, and also -- I mean, I think, that we did have that really large project in the first quarter that didn't repeat. I mean, it's kind of serendipity. And that we'll able to realize higher pricing towards the end of the year as opposed to in the beginning of the year. We just had a very large project that, that didn't repeat.

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Sean D. Eastman, KeyBanc Capital Markets Inc., Research Division - Associate [7]

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Okay. That's helpful. And just last quick one for me. I believe there are 2 landfill expansion permits in the works that could be received within 2019. So I'm wondering if we can get a quick update on those. And I know those particular landfills still do have some runway of permitted capacity. But with those permits coming in this year, kind of, changed those disposal volume dynamics we're looking at this year?

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [8]

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I don't think that it's likely that those 2 permits -- I think you're talking about Hakes in WasteUSA are likely to change the total volume this year. I think it's more a function of long-term capacity. The WasteUSA facility, as you know, is a 20-year permit of a 50-acre expansion of that facility. So that's a very long-term expansion for the WasteUSA facility. I do think that we will see that. It's hard to say exactly when, but we've got 14 out of 15 permits there. We've got one permit left, which is our 250 permit. The hearings are over and closed. At this point in time, we're just waiting for the 250 commission to write that permit. And then same thing with Hakes. Hakes is not as much capacity there. Its capacity for a few years. But it's not going to change the dynamics in 2019.

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Operator [9]

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And our following question comes from Tyler Brown with Raymond James.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [10]

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All right Ned, so there might be a lot to unpack here, but I want to come back to the EBITDA bridge for this year. So I'm trying to parse out what's changed versus the bridge that you laid out last quarter. So it feels like there's 4 things here. So number one, recycling is maybe a smidge lower, if recycling prices hold maybe $1 million or so, something like that. But two, collection pricing was up 6%, which I believe was ahead of your guidance of 3.5% to 4%. So maybe some tailwind. Three, you closed on some M&A, which might give you a slight tailwind. And then four, Ontario is having some odor issues and added costs. With those be the things that changed? And can you give any color on those pieces?

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [11]

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Yes. I think you've really hit the nail on the head. Recycling is not going to be significantly off. It's really about $5 million. We had guided up $5 million to $6 million. We're probably tracking about $5 million. We were up $2 million in the quarter. Southbridge is tracking to about the same level negative $8 million. You look at our collection-wide business, we're up $6 million to $7 million, we're probably tracking up more like $7 million to $9 million right now, that range. And on the landfills, we're tracking more like $7-ish million maybe right now or slightly lower. And in acquisitions, we've guided $8 million to $10 million up. This first acquisition is a smaller one. And as you know, the first couple quarters, what we're doing a lot of work to integrate the acquisition and drive long-term value. So yes, it's not a big needle move [or it's] $0.5 million or something in the year or less. And -- but the big swing we're seeing right now is the reallocation between the other landfills and collection price. There was a good opportunity to recover on the other Landfill side because some of it's just volumes we intake in the first quarter, and we will take this summer or this fall, a little bit of it as well to its higher operating cost in the first quarter that we had to outperform and make up for.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [12]

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Okay. Very helpful. Now one clarification, so you noted 6% actual pricing into the landfill. But I think it's 4% on a same-store landfill pricing, which number should we use when we compare that to the 3.5% to 4.5% pricing expectation you laid out last quarter.

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [13]

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It's the $4.2 million. So the $6.6 million rolled through a couple of different areas: one, it's our intercompany price plays into today; and two, it's blending in with the new volumes if we kicked out our customer. But it -- I think it really helps to illustrate the type of discipline we have where we're charging ourselves very high price increases getting that back to The Street through the collection line of business. And as Ed said, still expanding margins in the collection line of business. So our transfer pricing is working very well in the business.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [14]

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Okay. And then clearly disposal prices are on the move given tightness, but it sounds like Chicopee has started its capping work, it's slated to close in June. [Indiscernible] by all indications, this could close maybe even as early as the end of this year. I mean, I think, you're talking another 0.5 million tons of disposal capacity in Massachusetts. But it's imminently slated to disappear. Do you think that North Eastern disposal pricing could actually accelerate into 2020?

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [15]

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I think there is a real possibility of that. I mean -- I think just look at what transpired in the Boston bids. I think that's clearly we could see it accelerated. I think that it's also -- we've received our additional permitted capacity at our transfer station in Holyoke. But with the activity of Chicopee, until that's closed, we're not seeing any additional tons there at all. We're successful in getting the permit. But we're thinking that we should -- once that closes, Tyler, we should see additional tons going through Holyoke as well.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [16]

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Okay. That's helpful. And then just real quickly back on recycling for a moment. So I think we can all appreciate the SRA fees and the repricing of that handful of contracts. Ned, I think you mentioned 90% of recycling is covered. But is those larger contracts are renegotiated? Will that number actually go up? Or when you renegotiate those contracts, are you simply recalibrating them so you don't lose money in them? But they don't have an SRA fee? Or how will that work?

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [17]

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No. We've established a pretty strict standard that -- we call the SRA fee what we put on our collection customers, that's floating like a fuel surcharge. But I think, as you know, about 1/3 of the tons that come into our processing facilities come from our own trucks, our own collection customers. And 2/3 of the tons comes from others, whether they be municipalities or private haulers. And in those instances we call our contract structure revenue share structure where if commodities fall below our fully-loaded processing cost as an appropriate return, our customers pay dollar-for-dollar of processing fee and the risk of commodities is transferred back to the customer. And we're using that structure with all new contracts. And as you know, last year, we didn't have a few contracts under that structure, it is painful for us. And it was a big headwind during the year. It actually laid out back when we gave guidance for the year, the step up year-over-year from 2018 to 2019 in recycling, a lot of it was driven by the reset of a couple legacy contracts that didn't have that risk being pushed back to our customers. So as we step through those resets, that's how we start to get up to about 90% or more of our customers where the commodity risk is passed back to them. So with this recent decline, it's going to hit us a little bit. I would say, like $0.5 million or so. But it's not a huge headwind to us because we've put in very effective risk programs.

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Patrick Tyler Brown, Raymond James & Associates, Inc., Research Division - MD [18]

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Right. Okay. Maybe my last one here. I want to come back to M&A. So John, you've been successful in New England market, but if assets both collection and disposal were to come up in markets say that were contiguous to your proverbial sandbox, would you entertain expanding the footprint geographically?

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [19]

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I think that we have said that we would look at contiguous. We have a presence in Pennsylvania as an example right now with McKean. And so I mean, we have facilities in Pennsylvania. So I think there are contiguous markets, Tyler, that we would look at and are looking at, quite frankly. The vast majority of what we're looking at is over the top of the existing investments that we've already made as we've said. But there are some things that are interesting from a Pennsylvania standpoint. We do have assets in McKean already in that market area. But certainly, we're not -- we wouldn't be interested in -- we have no desire to step out of the Northeast region. That's -- you won't find us in Texas or California or the Midwest. We're not looking to do anything like that.

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Operator [20]

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(Operator Instructions) Our next question is from William Grippin.

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William Spencer Grippin, UBS Investment Bank, Research Division - Director & Equity Research Associate of Utilities [21]

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Just one question. The $40 million of revenue for deals under letter of intent, just wondering if that is contemplated in the guidance reiteration? And if so, are there some offsets to that benefit that you're seeing over the rest of the year? Or should we think about these deals? Should they close as potential upside?

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [22]

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Yes. So well, we have not contemplated that in the guidance for the remainder of the year of the reaffirmation. Until we close the deal, we really don't have visibility. John and I and Ed had a few back-and-forth conversations about this because we don't typically talk a lot about acquisitions before they close. But we did raise equity, and we raised it for a reason to fund acquisitions. And we've been working hard on bringing in a few acquisitions that are little bit more complicated and will be great fits to our business. And we just want to make sure people are updated where we're headed and how we plan to use the equity proceeds. But it's not in the revenue or EBITDA or free cash flow guidance at this point.

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Operator [23]

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And our next question comes from Michael Hoffman with Stifel.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [24]

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So I know you don't put it in the guidance, but how should I think about what that $40 million could be on an annualized basis? And is -- think of it is 20%, 25% margin, so $8 million to $10 million is incremental contribution?

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [25]

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Yes. So last year, we acquired a few transfer stations and that kind of blended things down. This is more hauling than transfers. And the first year, we haven't closed these deals yet, we're close. But you probably want to be more like the 20% level and then drive up from there.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [26]

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All right. That helps. And then Boston's in the process of redoing all of their contracts on, you know, their 5-year rolling thing. If I am -- if I have my facts correct, there were 2 companies didn't bid at all. You all did a no bid. So what's the status of that process? I'm assuming Boston got caught off guard? And what do you mean nobody wants to recycle for us? Where are we in that process? And then I have a follow on about the Boston disposal contract.

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [27]

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Go ahead.

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [28]

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Yes. So there are 3 people who went to the pre-bid. And one of the most important bidders decided not to bid. And they made a few public comments about it. It really had to do to with contamination in the City of Boston in the recycling stream. And we might have been very fearful as well if we weren't currently handling the streams. We're auditing them weekly, daily in many cases, and we know where the issues are. When we put our proposal together for the City of Boston, we've set up a real incentive for them to educate their residents and get contamination out. But I could see why some of the smarter players in the marketplace decide maybe not to bid with the levels of contamination in the city today. They are not doing a great job.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [29]

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Okay. So will you expect to be awarded something? Are you planning on taking on all of it? Or -- because I would have thought this is going to be divided up by 2 or 3 players.

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [30]

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No. We were handling all of it. We've handled all of it historically over the last 5 years, Michael. And I think, it's likely that we'll handle all of it to the extent that we're successful in negotiating the bid, which we're in the process of doing that right now. We'll, in all likelihood, handle all of it as we have done historically. But I think that we've -- we're very comfortable with where we are. As Ned said, we did the bid. We also gave them significant incentive to clean up the stream. The way that we bid it, so there's obviously one cost, if it's not cleaned up, then there is another cost, if they clean it up. So there is real incentives for the city to do a better job from an education standpoint. And certainly we'll work with them to achieve a much higher level of quality coming to the facility so that we can continue to put real quality material into the markets. So -- but it's likely that we'll handle the entire stream.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [31]

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Okay. And then the Boston disposal bids look like it's coming out with a 9 handle on it. Can you talk about what that knock-on consequences to ongoing efforts to keep improving your disposal pricing?

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [32]

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I think it's very clear that, that's a positive in terms of disposal pricing. But it's also a double-edged sword in that our cost for disposal at the facilities that we go to in Massachusetts are obviously going up as well. So it's a positive, but it's a double-edged sword. As you know in the quarter, we had higher transportation cost, higher disposal cost internally as well.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [33]

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Okay. And then with regards to Ontario, so you've put in more landfill gas wells to be able to capture gas and odors and things of that nature. But you've reduced the sludge volume in the quarter. Will you be able to ramp back the sludge volume? Or you have committed to just a lower rate of sludge?

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [34]

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We're going to be utilizing a lower rate of sludge, but that lower rate of sludge, Michael, is going to be at a higher price. So we'll get back some of that, probably not all of it. But as you know, the pricing from a sludge standpoint is very significant. So high price -- some of it will get back in higher price. But we won't get back all of it. We're going to be running lower amount of sludge at our facilities.

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [35]

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But this isn't a trend that's unique to Casella. I think we've seen some of...

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [36]

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Across the board.

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [37]

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Across the board, some of our peers across the marketplace significantly reduced levels of sludge going into their sites. And it's an area that we have a lot of pricing power into that.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [38]

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Yes. I get that. I agree. But just to be clear, the 4.2% landfill price, so also had to absorb the fact that you reduced the sludge rate?

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [39]

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Yes. That's correct.

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Michael Edward Hoffman, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Group Head of Diversified Industrials Research [40]

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Right. So if I -- if you hadn't then the actual price you're going would assume greater...

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [41]

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(inaudible) than higher. It's exactly right.

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Operator [42]

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And our last question comes from Steve Schwartz with First Analysis.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [43]

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I'll tell you what, to ask the 10th question on M&A. The deals that are under LOI, well, what's the probability typically that a deal comes to close while it's in the LOI stage? I know it's not a 100% obviously but if you could flavor that for me?

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [44]

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I think, it's really difficult to flavor. I think they are all somewhat unique. I think that we get to that stage, obviously it's nonbinding letter of intent, so it's really hard to give a factor. I mean, obviously, we've had good success. We haven't gotten all of the deals done that we approached in 2018. But I think, we've had a fairly high rate of success. But certainly until we're closed, they are not closed.

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [45]

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In each of these transactions, we've been working through a diligence on in progressing. So it's -- they're not immediately going to close, but there are things we've been working on for a period of time, and we're in a constructive space and that's why we decide to give some additional commentary.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [46]

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Yes. And they are -- to be clear, they are company's you worked alongside with for a long time, right? Since they are in your geographic area.

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [47]

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Yes. That's correct.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [48]

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Yes, okay. And Ned I think when you answered William's question, you did through a win, a comment that these deals this year might be a bit more complicated than the deals we saw come through last year. Is -- did I hear that correctly?

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [49]

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Yes. They just -- there are a few transactions that have multiple sites, and we're just -- part of it is -- we've been working really, really hard on integration at every deal we completed in 2018. And we're not a huge company, we don't have a huge team. So many of the same people who are working on integration also work on diligence and integration planning for new deals. So maybe I wasn't embracing it...

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [50]

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Pacing -- I mean, (inaudible) appropriate pacing of those transactions as well to make sure that we get done what we need to get done from an integration standpoint as we continue to grow.

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Edmond R. Coletta, Casella Waste Systems, Inc. - Senior VP, CFO & Treasurer [51]

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Yes. My choice of words maybe wasn't perfect. It's more of a metered approach is probably better.

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Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [52]

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Okay. And then certainly back on Boston, is this a situation where they could handle it like many municipalities do with police and fire contracts? If July first comes can -- is there a possibility you continue working under your old contract and the negotiation continues? I think in that case that would obviously push out your SRA recovery element and maybe some other things would push it out to later in the year or even into 2020?

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [53]

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No. That's not possible at this point in time. We had a long-term contract with Boston. We honored that contract. We will continue to honor that contract through the end of the contract. But we're not going to carry that contract into the rest of the year. We would continue to work with the City of Boston if they weren't -- if we weren't able to get to an agreement. If they would be providing -- if they -- we're willing to meet the bid that we put in place. And we've continued to provide the service at the new price if they wanted us to do that while we continue to negotiate, that would be fine. But we're not going to extend the existing contract. We can't afford to do that. We've -- we had the contract. We honored the contract to the end of the contract. It was the right thing to do. And now the contract is over, if they want us to continue to provide service, they'll have to do it at the new price.

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Operator [54]

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

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John W. Casella, Casella Waste Systems, Inc. - Chairman, CEO & Secretary [55]

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Thank you very much. Thanks everybody for joining us this morning. We look forward to discussing our second quarter 2019 earnings with you in early August. Have a great day, everyone. Thank you.

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Operator [56]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.