moderator: matthew nelson confirmation #...

Advanced Disposal Services, Inc. Moderator: Matthew Nelson

02-23-18/ 10:00 a.m. ET Confirmation # 3099638

Advanced Disposal Services, Inc.

Moderator: Matthew Nelson

February 23, 2018

10:00 a.m. ET

Operator: This is Conference # 3099638.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the

Advanced Disposal Q4 2017 Earnings Conference Call.

All lines have been placed on mute to prevent any background noise and after

the speakers remarks there will be a question-and-answer session. To ask a

question during this time simply press star then the number one on your

telephone keypad. Thank you.

I will now turn the conference over to Mr. Matthew Nelson, VP of Finance

and IR. Please go ahead, sir.

Matthew Nelson: Good morning, everyone. We would like to welcome you to the Advanced

Disposal Q4 2017 earnings call. With me today is Richard Burke, our CEO;

Steve Carn, our CFO; and other members of senior management.

We issued our press release yesterday with our results and trust that you've

had the chance to review it. If you need a copy of the release, you may find it

on our website or at sec.gov.

In today's earnings release and during the conference call, we are providing

adjusted financial information including adjusted EBITDA, adjusted free cash

flow and adjusted net income, all of which are defined in our press release and

exclude certain items that management believes are not indicative of our

results of operations.



This information is provided to enable you to make meaningful comparisons

of the company's operating 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 measures and the comparable financial measures calculated in

accordance with U.S. GAAP.

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 intended to qualify for the safe harbor's

reliability established within the Private Securities Litigation Reform Act of

1995 including projections, estimates and descriptions 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 with the Securities and Exchange Commission.

This call is being recorded and will be available 2 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 redistribution,

retransmission or rebroadcast of this call in any form without the express

written consent of Advanced Disposal is prohibited.

I would now like to turn the call over to our CEO, Richard Burke.

Richard Burke: Thanks, Matt. Good morning, and I want to thank everyone for joining us

today. Fourth quarter capped off our first full year as a public company where

we executed on a number of key initiatives.

These include growing the business by over $100 million through a

combination of organic growth and completing 14 acquisitions that

strengthened our market position, significantly increasing the cash generated



from our shareholders with cash from operations, up $71.8 million or 30

percent to $308.8 million; and adjusted free cash flow, up $37.8 million or 40

percent to $131.8 million; improving our customer experience by achieving

our goal of 75 percent of our customers by the end of '17 being served by one

of our regional customer care centers.

We were able to also reduce both injury and accident frequency. We

enhanced our company's financial position as evidenced by our rating upgrade

by Standard & Poor's, and reducing the interest rate on our $1.46 billion of

term loan B debt by 50 basis points to LIBOR plus 225 basis points. And we

were able to transform our Board of Directors, which is now comprised of a

majority of independent board members with all committees now made up of

fully independent members.

Looking at the fourth quarter, results either met or slightly exceeded the

guidance we outlined in Q3. Starting with top line, revenue grew 9.2 percent

led by growth from acquisitions, net of divestitures of 4.9 percent. While we

didn't purchase any new businesses in Q4, we did complete 14 acquisitions

during the year that either extended our market reach or strengthened our

position in existing markets.

Our acquisition pipeline remains healthy and is heavily weighted towards

tuck-in opportunities in existing markets that improve route density and drive

new lines to our disposal facility. That being said, we would expect the

amount of free cash flow spend on acquisitions in 2018 to revert back to our

historical norm of $30 million to $50 million.

Turning to organic growth. As we discussed on our last earnings call, we

expected the favorable volume growth trends from Q3 to continue into Q4,

and that is exactly what we saw with volumes up nearly 3 percent. This was

led by a combination of strong disposal volume with tons up 9 percent, along

with growth in our commercial and roll-off business.

Additionally, residential volume grew for the first time in 2 years as we began

a new municipal contract in Polk County, Florida and have now completed the



bulk of our efforts to rationalize municipal contracts that didn't generate the

proper long-term free cash flow returns for us.

Average yield contributed 110 basis points to revenue growth despite tough

year-over-year comps, which represented a 90 basis point increase from Q3

2017. The sequential gain was driven by more moderated negative mix

impact from special waste volume and the execution of previously planned

price increases.

We remain committed to disciplined pricing over the long term, and we

expect to see continued sequential pricing gains as we move into 2018. It's

part of our DNA and an important piece of our strategy for offsetting

inflationary pressures that we see in our business, while at the same time

generating value for our shareholders.

Finally, fuel fee revenue added 50 basis points to top line growth and

commodity sales revenue declined 20 basis points as anticipated as the sharp

decline in commodity prices in late Q3 related to regulatory changes in China

continue.

While most of our collected recyclables are processed domestically, the ripple

effect of Chinese regulatory changes has impacted the global supply and

demand picture and put significant pressure on U.S. market. Based on what

we see in our markets, we believe the commodity price headwind will

accelerate throughout 2018 due to increasingly difficult year-over-year comps.

Turning to bottom line results. Adjusted EBITDA improved $1.1 million to

$108.8 million, consistent with the guidance we provided in Q3 despite a $2

million headwind from health care costs, as we noted last quarter, and a $1.4

million increase in net fuel cost led by nearly $0.40 increase in our average

diesel cost per gallon. Without these cost pressures, adjusted EBITDA would

have been even stronger $112.2 million.

Gains and profitable organic growth and strategic tuck-in acquisitions that

strengthen our footprint in our existing markets help drive EBITDA

improvement during the quarter. Additionally, we were able to moderate



some of the pressures related to third-party disposal and disposal facility cost

that we saw earlier in the year.

Overall, as we look back at 2017, it was an important year for our company

where we executed on some key new opportunities, matured as a public

company with important enhancements toward independence and improved

our long-term cash flow generation potential. That being said, we're less

concerned about the past.

Instead, we're excited about what the future holds in an environment where

market conditions are favorable for the waste industry. And we're focused on

what we're doing -- going to do in 2018 and beyond to generate additional

value for our shareholders.

For us, that starts with living our mission and vision, with a relentless focus

around safety, service and employee engagement. These are fundamental to

our long-term success. It then leads to market selection.

We have a well-positioned portfolio of assets and we will continue to invest in

vertically integrated operations in secondary markets, primary markets where

we have a strong asset base and disposal neutral markets. In this business,

being in the right markets is a critical component towards free cash flow

generation.

As we look at 2018, we're also focused on pricing our services appropriately

for the value that we provide our customers and ensuring that the pricing we

achieve over the longer terms meets or exceeds the inflationary pressures we

experience in our business.

While we are committed to organic volume growth and believe industry

conditions remain favorable, we will not sacrifice price over the long term to

achieve volume gains. And we remain focused on what we call managing in

the middle, where we will deliver all additional productivity gains, improve

safety and, ultimately, reduce cost.

This also incorporates strategic changes at times to address broader

challenges, which for 2018 includes adding plan options to our health



insurance programs that incentivize team members to be better consumers of

health care.

For 2018, we expect revenue of $1.45 billion to $1.565 billion, including

strong pricing of 2.1 percent to 2.8 percent, which should benefit from higher

CPI and favorable macroeconomic conditions, volume of 40 basis points to

100 basis points and adjusted EBITDA between $426 million and $436

million. These gains were expected to yield between $134 million and $144

million of adjusted free cash flow that will be used to close accretive

acquisitions or repay debt.

I would note that while we're not giving specific quarterly guidance, we do

expect to see normalized seasonality with Q1 2018 as our lowest margin

quarter of the year. This is driven by weather and seasonal volume trends that

impact both productivity and disposal volumes.

Less than 1/3 of our disposal tons are from our southern region. And disposal

tons in January 2018 were impacted by snow and ice in southern markets that

do not normally experience this weather.

We also expect pricing to build as the year progresses, driven by internal

pricing actions and the benefits of a rising CPI environment that helps with

both over market pricing and CPI resets while volumes should moderate as we

get into the back half of 2018, as we cycle some event-driven 2017 volume.

Overall, waste fundamentals were strong, and we are excited with what the

future holds for Advanced Disposal.

With that, I'll now turn the call over to Steve.

Steven R. Carn: Thanks, Richard, and good morning. Revenue for the fourth quarter of 2017

increased $32.4 million or 9.2 percent to $384.4 million from $352 million for

the fourth quarter of 2016. Adjusted EBITDA for the fourth quarter increased

$1.1 million to $108.8 million, achieving margins of 28.3 percent.

A reconciliation of a non-GAAP measures to the non-comparable GAAP

measures can be found in our earnings release. We achieved revenue growth

for the quarter of 9.2 percent with 5.5 percent coming from acquisitions and



2.9 percent organic volume growth driven by the Polk County residential

contract along with strong collection in disposal volumes.

Average yield for the quarter was 1.1 percent, up 90 basis points sequentially

from Q3. Average price yield of 1.1 percent for the quarter was driven by

residential price yield of 2.2 percent, which is up 80 basis points sequentially

from Q3, benefiting from the annual resets, which are weighted to the back

half of the year for us.

Roll-off price yield was 2.5 percent, benefiting from high roll-off demand

which provided leverage to market pricing. Commercial price yield remained

relatively flat for the quarter as we defended profitable business and customer

density in certain markets.

Post-collection disposal price yield was relatively flat for the quarter,

somewhat impacted by mix of business, with lower rate C&D tons up 21

percent and special waste tons up 6 percent for the quarter. However, the

price yield improved 250 basis points from Q3 as special waste volumes

normalized.

The decrease in OCC commodity prices resulted in negative 20 basis point

yield for the quarter. What was offset by 50 basis point increase in fuel

searches revenue is diesel fuel increased $0.39 per gallon or 18 percent over

the prior year quarter.

Solid waste fundamentals remained strong with overall organic volume

growth of 2.9 percent for the quarter. Disposal volume drove 1.6 percent of

the total revenue growth for the quarter led by a 9 percent increase in landfill

tons year-over-year broken down by 6 percent increase in MSW tons, 21

percent increase in C&D tons and 6 percent increase in special waste tons.

Commercial and roll-off revenue increased 1 percent for the quarter, driven by

2 percent increase in commercial cubic yards and 4 percent increase in roll-off

cost as service level increases continued to outpace decreases in our

commercial business.



The company's residential revenue turned positive 30 basis points as the

company starts to fully cycle the non-regrettable losses and benefiting from

several new residential contracts awarded during the year.

Revenue for fiscal year 2017 increased $103 million or 7.3 percent to $1.508

billion from $1.405 billion in 2016, with 3.5 percent growth from 14

acquisitions and 3.8 percent from organic growth.

Adjusted EBITDA for the year was $418.1 million, an increase of $7 million

or 1.7 percent from the prior year, with adjusted EBITDA margin of 27.7

percent, which decreased 160 basis points year-over-year, negatively impacted

by fuel cost of 40 basis points, 50 basis points related to public company, legal

and severance cost, increased health insurance cost of 30 basis points and 30

basis points from leachate and gas cost and 10 basis points due to acquisition

and contract startup cost.

We have taken several actions that will help moderate these cost headwinds in

2018 as we have added more cost-effective medical plans as part of our health

benefits package, and we accelerated landfill infrastructure CapEx to reduce

leachate and sulfate treatment cost.

In addition, as we cycle the new residential start-up cost and acquisition

integration cost, we expect to start to materialize a higher EBITDA

contribution from the acquired 2017 revenue.

Turning to our bottom line results for the quarter. Adjusted EBITDA

increased $1.1 million to $108.8 million from $107.7 million in the prior year.

Adjusted EBITDA margin for the quarter was 28.3 percent compared to 30.6

percent in the prior year, reflecting a 230 basis point decrease in the margin

year-over-year, negatively impacted by 70 basis points from audit, legal and

public company cost, 50 basis points from fuel cost, 50 basis points from

health insurance cost and 40 basis points of favorable legacy insurance of full

reversals in the prior year and 20 basis points impact from lower commodity

pricing.



Looking at our expenses in more detail, our cost of operations excluding

accretion in Greentree expenses as a percentage of revenue was 61.8 percent

compared to 59.6 percent in the prior year quarter.

The 220 basis point increase in operating expenses as a percentage of revenue

is primarily due to health insurance, acquisition deferred maintenance, new

resi contract start-up cost, property insurance premiums and cycling prior year

favorable insurance accrual adjustments and leachate and gas control cost.

SG&A expenses as a percentage of revenue was 11 percent compared to 10.6

percent in the prior year quarter. Salary expense decreased 50 basis points as

a percentage of revenue due to stock compensation and bonus expense accrual

timing compared to the prior year, offset by 90 basis point increase in legal

and professional fees, primarily related to ZOCs implementation and testing.

We have provided detailed schedules of our cost of operations and SG&A

expenses in our 8-K filing.

Depreciation, depletion and amortization for the quarter was 18.7 percent of

revenue compared to 16.3 percent in the prior year, an increase of 240 basis

points over the prior year, impacted by acquisitions in unfavorable landfill

depletion adjustments as a result of our annual life of site analysis compared

to favorable adjustments recorded in the prior year.

As a reminder, our D&A is approximately 6 percent higher due to the impact

of GAAP purchase accounting on the legacy business. However, it has no

impact on free cash flow generation.

We generated full year cash flows from operations of $308.8 million or 20.5

percent of revenue compared to the prior year quarter of $237 million or 16.9

percent of revenue. Adjusted free cash flow for the year increased $37.8

million or 40 percent to $131.8 million compared to the prior year of $94

million, with the increase driven by lower interest cost and increased

EBITDA.

We continued to deliver strong free cash flow improvement with year-to-date

adjusted free cash flow as a percentage of revenue of 8.7 percent compared to



6.7 percent in the prior year. The company had adjusted CapEx spend of

$174.8 million for the year or 11.6 percent as a percentage of revenue.

For the full year, replacement maintenance CapEx was $122.1 million or 8.1

percent of revenue, growth in acquisition CapEx spend of $25.4 million or 1.7

percent of revenue and infrastructure CapEx of $27.4 million or 1.8 percent of

revenue primarily related to landfill gas and leachate treatment infrastructure.

Total funded debt net of cash at December 31, 2017 was $1.98 billion, with

approximately $232 million of revolver availability. For the year, interest

expense was $93 million compared to $130.2 million in the prior year. Cash

paid interest for the year was $86.2 million.

During the fourth quarter, we purchased $600 million of interest rate caps to

reduce our exposure against rising interest rates from October 2019 through

September 2021. These caps are in addition to the $800 million of interest

rate caps that we have currently in place and expire in September 2019.

Covenant leverage, defined as total funded debt net of cash to pro forma

adjusted EBITDA at December 31, 2017 was 4.7x, with adjusted pro forma

EBITDA of $424.1 million that includes $6 million of pro forma credit full

year impact of acquisitions, net of divestitures and new municipal contracts.

I will now review our outlook for the full year of 2018. Before I do, I would

like to remind everyone once again that actual results may vary significantly

based on risks and uncertainties, outlined in our safe harbor statement and our

various SEC filings. We encourage investors to review these factors

carefully.

Our outlook assumes no change in the current economic and operating

environment. The outlook for 2018 includes the rollover impact from the

recent acquisitions and new municipal residential contracts but excludes any

additional acquisitions or significant municipal contract awards that may

occur during the year, along with acquisition-related integration and contract

start-up cost.



Looking first at full year 2018. Revenue is estimated to be between $1.545

billion and $1.565 billion with average yield estimated at 2.1 percent to 2.8

percent, volume of 40 to 100 basis points, and acquisition rollover of

approximately 1.3 percent.

This is offset by negative estimated 80 basis points on the sale of recyclables

and negative estimated 60 basis points related to the adoption of the new

revenue recognition standard.

Adjusted EBITDA in 2018 is estimated between $426 million and $436

million, with EBITDA margin of 27.7 percent at the midpoint of the range.

Lower commodity pricing is estimated to have 40 basis points negative impact

to 2018 EBITDA margin.

But this headwind will be partially offset by 20 basis point positive impact to

margin due to netting of customer recycling rebates against the sale of

recyclable revenue resulting from the adoption of the new revenue recognition

standard in 2018.

Excluding the impact from both commodity pricing and the revenue

recognition standard in 2018, adjusted EBITDA margins are estimated to

expand 10 to 40 basis points over the prior year.

Cash flow from operations estimated to be between $318 million and $338

million, with adjusted free cash flow estimated to be between $134 million

and $144 million. These expected 2018 results position us well to further

reduce our leverage in 2018 as we work towards our target leverage of 3.25 to

4.25x.

The specific amount of deleveraging will be somewhat dependent on the

amount of acquisition spend and EBITDA multiples paid for those

acquisitions. But we want to emphasize that we remain committed to

reducing leverage over time.

We are providing additional components that have impact on cash flow from

operations and adjusted free cash flow. Capital expenditures are estimated to



be between $184 million to $194 million and expenditures for closure and

post-closure between $17 million and $23 million.

Net interest expense in 2018 is estimated between $89 million and $94 million

with cash paid interest in the range of $83 million and $88 million.

Our effective tax rate for the year is estimated to be about 27 percent with

cash taxes between $2 million and $4 million as the company continues to

utilize gross net operating loss carryforwards to offset taxable income.

As of year-end, we have $344 million of available gross net operating loss

carryforwards, which we anticipate will shield us from federal taxes through

the end of 2021. Total shares outstanding are estimated to be between $89

million to $90 million.

We will now open the lines for questions.

Operator: At this time I would like to remind everyone if you would like to ask a

question please press star one on your telephone keypad. Again, if you have a

question please press star one.

And our first question comes from the line of Corey Greendale with First

Analysis.

Corey Adam Greendale: Congratulations on the quarter. A couple of questions. The

quarter guide, just on the guidance. So first of all, strong price guidance in

2018.

Can you just give us a sense what churn looked like kind of the trend as you

went through 2017? And then, as you look at the volume versus price

guidance for 2018, are you assuming a pickup in churn as you increase prices?

Steven R. Carn: No. Corey, I think we've attacked churn pretty well. In a growing economy,

it really helps with that number, so we've actually saw in some of our

marketplaces, some positive churn, which we'd expect in a growing economy.

And we've been able to head off some churn in some other marketplaces by

defending some business. So we feel pretty good about the price range that



we gave in that 2.1 percent to 2.8 percent. And we continue with the --

economy continues to perform similar to '17 that we could continue to

moderate that churn into '18.

Corey Adam Greendale: Got it. So the fact that the volume guidance is -- maybe below

economic growth, that's more because of tough comps with special event-

driven work in 2017 versus churn?

Steven R. Carn: Yes, that's absolutely correct. So we gave a range of 40 to 100 basis points.

And you'll see that volume stronger in the front half of the year, Q1, Q2. And

as we start to get in Q3, and we had a very tough comp around special waste,

as you recall, we were up 29 percent on a tons basis in Q3 '17.

So it puts a little pressure on that volume piece. But we do see in Q4 of '17,

really strong solid waste fundamentals around increasing in cubic yards roll-

offs, C&D volume and MSW volume.

Corey Adam Greendale: Got it. And Steve, on the margin or the implied margin guidance

for 2018, the 10 to 40 bps netting out of the impact of recycled commodities

and the rev rec change, I might have thought it would have been certainly

versus the low end of that range higher given the strong yield.

But can you talk to other things that may be hitting that? Is it like a higher

fuel and you're not recovering all that? And what are you assuming on health

care cost inflation or anything else?

Steven R. Carn: Yes. There's a little bit on (assumed) health care cost, we think a little bit of

moderation. But let's just talk a little bit about the impact around recycling

and the change in the rev rec. So recycling has about a 40 basis point

headwind to margin, just as we think about commodity pricing we saw in Q4

'17 really being the trend for '18.

But that's offset by about 20 basis point positive impact on adoption of the

revenue rec. So we're having -- it's waited for us where we have the net the

recycling rebates against the recycling income. So the net of those 2 lower

commodity pricing and the benefit of the rev rec is a headwind of about 20

basis points to our margin.



And then in that, we have some things flipping as we were just talking about

kind of the midpoint of the range, there are some puts and takes that are

coming through. So we're gaining about 20 basis points on some cost that we

called out in '17, that will flip. We have some volume that won't repeat.

That's about 10 basis points negative headwind and we're thinking about 20

basis points on pricing in productivity. So that's kind of how it nets to that 10

to 40 basis points in the range of the guidance that we provided.

Corey Adam Greendale: OK. Maybe just one last quick one. On the CapEx, it looks like

you're guiding to a similar percentage of revenue for CapEx as you did in

2017. And I think there was some cost certainly with new contracts '17.

So I might have expected '18 to be a little lower, but can you just talk about

why that's as high as a percent of revenue as it was in '17?

Steven R. Carn: Yes. So what we're seeing in '18 is that in '17, we had about 11 of our

landfills under construction. In '18, we anticipate to have about 19 under

construction, so an increase of 8.

So most of the increase that you see from where we landed in '17 around

CapEx to where we're kind of guiding to in that midpoint, most of that is

about incremental CapEx for those 8 additional landfills that will be under

construction. And it's just the timing of when we have to bill those sales

relative to the increase in volumes that we've seen.

Operator: Again, if you have a question please press star one.

And our next question comes from the line of Hamzah Mazari with

Macquarie.

Hamzah Mazari: The first question is just on the commercial business. You guys had flagged

some increased competitive dynamics last quarter. Maybe just update us on

that. It seems like pricing guidance is pretty strong for '18. Is that behind

you? Any color there?



Richard Burke: Yes. Good morning, Hamza. So when we think about this, we don't think

globally of that. We think more specific to the market. So you're well versed

in the way we were laid out.

Secondary market, about 65 percent of our revenue, 20 percent of our revenue

is in what I'd call primary market, and then the balance is in disposal neutral.

So most of the pressure around commercial has been in the primary market,

not so much in the secondary market, just increased competition, everybody in

there.

So no 2 markets are the same. So we look at it more from a strategic

standpoint based on the market. If we're the 1 or 2 player, then the pressure is

not so great on the commercial side. If we're the third, fourth, fifth, sixth

player in a big primary market, that's where the pressure is.

So we'll adjust our focus to heavy weight towards price, heavy weight towards

volume really based on the position we are in that particular market instead of

a one-size-fits-all proposition. So we still see pressure in -- on the commercial

line in some of the big primary markets, but that's really nothing new.

So you defend by being more efficient. You defend by differentiating your

service delivery from everybody else by making it easier for customers to do

business with us, and you fight a bit harder in some of those primary markets.

But in secondary markets where we're 1 or 2, it's more about consistent

service delivery and getting prices above CPI.

Hamzah Mazari: Great. And then second question, you talked about 2018 getting back to

historical norms around acquisition spend. And at the same time, you

mentioned sort of leverage target is in the low 3x. How should we think about

-- when is ADSW in a position to do larger chunkier deals?

I realize it's a timing issue. Some of that is not under your control. But how

do we think about sort of -- are you comfortable taking the leverage up if the

right deals come to the table? Just any color around some of those issues.



Richard Burke: Yes. Sure. Good question. So Hamza, on the M&A side, pipeline looks

great. It's heavily weighted, as I said in my remarks, towards tuck-in

acquisitions.

So I think the smaller, I think the $1 million, $5 million, $6 million deals,

which we like, we integrate them. We get the route density. We roll them up

fast. We get the increased volume. Start-up costs are less, risk costs are less.

Sometimes, we have to throw some additional capital with those.

They may not be as capitalized as well, but we can buy those at a good

valuation, tuck them in quick and get great shareholder value fairly quickly

out of those deals. So the majority of our pipeline for '18, it just happens to be

weighted there. But I don't want you to get the impression that if a chunkier

deal comes down the path, that we'd like to do that we would shy away from,

look, I think we'd be real creative about the way we finance it.

I mean it's one of the reasons you're a publicly-traded company is access to

the market, so that's the best venue to do it. From a leverage standpoint, we're

committed to taking leverage down. I mean, we've guided everyone that our

goal is 3.25 to 4.25 to achieve that over time, so that goal doesn't change.

I don't ever see taking leverage back above 5 in this company. While I think

the industry or our company with our cash flows could certainly support that,

the markets may clearly don't like that, so we won't do that. But we won't shy

away from a chunkier, larger deal based on our balance sheet. We'll just get

creative about the way we finance.

Steven R. Carn: Hamza, I think on a normal year of acquisitions, I think, you can move

naturally in that 0.3 to 0.4 reduction in leverage.

Hamzah Mazari: Got you. Last question, I'll turn it over. Maybe if you could just help us

understand, inflation is a good thing for waste but you guys have had higher

health care costs, et cetera.

And you levered higher interest rates maybe have an impact. Just walk us

through higher interest rates, higher inflation on a net basis, big picture, is that

neutral for you, positive or negative?



Steven R. Carn: So a couple of things around the interest rate is that we pointed out in the

prepared remarks that we've added some additional caps to kind of help us

manage that interest rate risk rise, and we'll continue to look at opportunities

to make sure that we continue to delever the company and take advantage of

any of the credit markets, particularly the pricing on the debt that we have in

place.

So part of that strategy is that risk management around the caps we have in

place on interest rates and the others deleveraging the company. Around CPI,

it is helpful.

We've been in the range of 2.1 to 2.8. So if CPI continues to rise in '18,

remember that 62 percent of our contracts -- that 24 percent, 25 percent of our

revenue 800-plus contracts, 62 percent of those reset annually in the back half

of the year, with 24 percent of those in Q3 and 38 percent of those in Q4, and

that's really where you saw that increase sequentially for us from Q3 to Q4 in

that municipal residential pricing.

And so if inflation continues to increase, we would expect to get that tailwind

in the back half of '18 and then into '19, and then also higher inflation also

helps us push additional pricing to the open market customers.

Richard Burke: And Hamza, let me tag on to that. If you back up and look at the macro, a lot

of our managing -- and then a lot of our cost lines for years have been

outpacing inflation. I mean labor. 4 percent unemployment, you're paying

more for labor than the inflationary number of CPI.

And same thing on health care. So now that on the service side, rising CPI is

catching up with some of those costs, it gives us great cover to be able to push

price in these open markets above CPI.

So not only do we get it on our 24 percent, 25 percent of our revenue on the

resets on municipal contracts, but we think this gives us cover in the open

markets to price even higher to help offset costs that have already for the last

few years exceeded CPI.



Operator: Our next question comes from the line of Noah Kaye with Oppenheimer.

Noah Duke Kaye: Can I just follow up on Hamza's last question and maybe if we can ring fence

the interest expense. You mentioned adding additional caps. So now if we

get a 25 bps hike, how do we think about the increase in annual interest

expense?

Steven R. Carn: Yes. So I think we have a little bit of that increase and factored it in '18 from

'17. As you know, at the end of '17 in November, we reduced our margin on

our Term B 50 basis points, which is about $7 million of interest cost savings.

Some of that is moderated as we go into '18 because in the guidance we

provided, we did increase what we thought the interest rate environment

would look like.

Noah Duke Kaye: OK. But in terms of actually kind of pulling out the sensitivity here, do you

have that number available?

Steven R. Carn: I didn't calculate that number, but we have 25 basis point hike, is about $2

million of interest expense and we have about $800 million of caps that are

added -- caps at the rate of 150 basis points. We're about 62 percent -- we're

about 64 percent fixed versus float with this cash. So we try to manage our

fixed to float in that 60 percent to 70 percent range.

Noah Duke Kaye: OK. That's very helpful. And then Richard, I go back to your comments last

quarter and kind of consistent with this quarter. You commented to the M&A

pipeline being weighted more towards the tuck-in. And I think you mentioned

that some of the deals that you're seeing out there, the larger deals, may just

not hit your return hurdles because of valuation.

And we've now heard some of the peers this quarter commenting to kind of

the expansion in valuation in multiples. So I'm wondering if you're kind of

continuing to see that because in theory here, with interest rates going up,

lower taxes, we should be entering kind of a golden period for M&A?

So if you could just kind of give us a bit of additional color on how you're

seeing larger deals potentially come to market, and how you're seeing multiple

start?



Richard Burke: Yes. So good morning, Noah. Sure. I'm happy to do that. I don't think much

has changed since third quarter. I agree that M&A is very strong, and that

pipelines are good.

A lot of the larger deals seem to be coming out in the form of an auction and

seems to be a lot of players in the auction showing up for those deals. A lot of

them are not strategic or financial buyers, and that seems to be driving the

price up for the auction.

So while we participate, we're not going to overpay for assets. But I mean,

we're in the game, right? I mean Caldwell last year was somewhat of an

auction, and we were able to do that last February. But really, our focus is

more on the tuck-ins that we could do at existing market to build route

density, increase volume and tuck them in quick.

And we've probably seen a 0.5 turn to 0.75 turn increase in the price of those

2. I mean at this time, last year, 1.5 years ago, we were probably buying those

for 5, 5.5x. Now we're seeing that creep to 6, 6.25. As the sector has traded

up, we're seeing some pressure at the local level as well.

Noah Duke Kaye: Yes. I mean, part of what we've heard is that just with conditions being better,

some of those businesses that might have been underinvested before actually

have put a decent amount of capital into the business, so they're in better

shape. Are you seeing that as well?

Richard Burke: We are. I mean anecdotally, I can certainly find 1 or 2 of those. There's

probably just as many that aren't. But yes, I think in general, you can -- that's

a decent thesis.

Operator: Our next question comes from the line of Michael Hoffman with Stifel.

Michael Edward Hoffman: Just to get this number out there. What was your year-end

leverage ratio based on how the debt market calculates that?

Steven R. Carn: 4.7x.



Michael Edward Hoffman: OK. And so your expectation is that would be at 4 3 to 4 4 by the

end of this year based on the plan as we sit here today?

Steven R. Carn: Yes.

Michael Edward Hoffman: OK. And when I think about the -- how I get there the

combination of growing the EBITDA, but I'm assuming if you're going to

spend midpoint of $40 million, that leaves you about $100 million of cash, so

you'll pay down debt outright?

Richard Burke: Yes, sir. I mean, when we look at capital allocation at this point in the

company's position, it's really only 2 uses of cash. We either do accretive

deals or we pay down Term B. It's not real a complicated cash allocation

strategy.

Michael Edward Hoffman: And part of that sort of thinking about the business model, what's

your lenders saying to you, if you said, hey, I think I want to fix some of this

debt given that we are likely in a rising rate environment with the intention of

still delevering. Is that part of the strategy too, is maybe you can go back in

and get some more permanent fixed-rate debt?

Steven R. Carn: Yes. I mean, I think initially, we looked at it by doing some derivatives very

efficient, cost-effective way of managing some of that interest rate risk. And

then we always look at the debt capital markets and we'll be opportunistic

where we can be. And so we'll always look at that, Michael.

Michael Edward Hoffman: OK. And then within the context of the price progression how we

should think about it, my sense is that we're something at a one number in 1 2,

and then we pop into the 2 kind of range in the second half. Is that the right

way to think about it to get to 2 something for the year?

Steven R. Carn: Yes. So I mean if you're thinking kind of the midpoint at that 2 4, you're

going to get into the 1s and close to 2s in that front half of the year, and then

it's going to expand in the back half of the year and then moderate a little bit

Q4 of '18 because remember, we putted some additional environmental fee in

place late August, which really start to hit Q4 '17.



Michael Edward Hoffman: OK. And then on volume, is it likely that the way we play out just

because it's such a big number in 3Q that you could actually report a negative

volume in 3Q?

Steven R. Carn: There potentially could be some negative volume in the back half of the year,

particularly in Q3 because of the 29 percent increase in special waste. So it

really all depends on the timing and the flow of that. But we feel good about

the underlying solid waste fundamentals for the year around MSW, C&D,

cubic yards roll-off (balls). Really the wild card in this -- in the tough comp is

really around special waste.

Richard Burke: Yes, special waste, I mean, 29 percent up in Q3, a lot of the up was driven by

one large project in Chicago, about 700,000 tons. So while the pipeline for

special waste for '18 looks good. We don't have that elephant in there right

now.

Michael Edward Hoffman: Yes, and everybody should get that. I mean, I think, the bigger

message here is MSW trends remain very favorable. You have C&D tied to

the construction cycle. I would suspect that both your pull's up as well as

your rev for pull are up?

Richard Burke: Yes.

Steven R. Carn: Yes. Most definitely, our -- actually tons per haul were up, year-to-date '17

about 3.6 percent. So.

Richard Burke: Look, with housing starts 1 2 trending to 1 3, C&D volumes should continue

to be strong really across all of our -- really across all of our businesses.

Probably the strongest in our southern region for sure.

Michael Edward Hoffman: OK. And then anniversary-ing of defending the Midwest

commercial collection activity, when do we anniversary that?

Richard Burke: Michael, I'm not sure that ever stops in these primary markets. I think we are

always defending one market or another. I think it's just the nature of the

beast.



So I think it shows up for us a little bit just because there are a lot of small

numbers, right? I never thought $1.5 billion is small, but compared to our

comps, it is. So I think it's just more obvious. But to say our or others don't

defend certain markets wouldn't be true, it's just more obvious when we do it.

Michael Edward Hoffman: OK. All right. Lastly, on the deals you're doing, just to be clear, I

mean, sellers are selling because there's usually a succession issue, maybe

accelerated by death, divorce, disability or disease, that's the principal reason

they're still selling.

I mean, so when somebody's going 10-year CAGR participate, you got them

to be coming to the table, OK, I'm ready to do this, and it's not because of tax

reform or anything else.

Richard Burke: I mean, I think, we've been around the sector for a long time, so that is correct

what you just said. And that would be the majority of the tuck-ins. They

come for that. Or they come -- the rising interest rates have an impact on the

small guys, right? I mean, a lot of them have variable loans, so they're feeling

it.

So if they're taking on some debt, that can also make them rethink, well,

whether they want to take sweat equity off the table at this time or do they

want to keep pushing it. So rising CPI wallet is beneficial for us.

For the small guy, it may not be as beneficial. So I think some of that swings

are favorable, and I think that's part of the reason on top of what you just laid

out, that's the reason we're seeing our M&A pipeline so robust.

Operator: Our next question comes from the line of Kyle White with Deutsche Bank.

Kyle White: Just going to ask about recycling, I understand it's a lower exposure for you

guys relative to some of your peers. So just wanted to kind of get your

thoughts on sort of the long-term implications of trying those policies on

imports? And what do you think you guys in the industry can do to kind of

resolve this and kind of get the appropriate return from recycling?



Richard Burke: So I think the jury's still out on what the long-term effect is on the Chinese

policy around permits issued and contamination levels. I mean, right now it's

having an effect, how long do they adhere to the policy as a positive change.

On that, I don't think anybody has an idea. But I mean just to give you a data

point, right now, as I sit here today, I'm selling recycled material $65 a ton

cheaper than I was July of 2017. So it's having an impact.

I mean, there's a supply demand issue. U.S. domestic mills are being smart

and they realize export's down, so they can control the price better and they're

driving the price down. So that's where we are. We don't expect -- well,

there's no indicator right now to expect that recycling prices get better in '18.

I'm not sure where the bottom is, but I don't -- we don't think we're there yet.

We think it'll keep pushing down as it goes. I mean -- and the other part of

your question, how do we mitigate some of that? I mean, how you mitigate as

much of that as you can is to push back on the service side, right? So we're

going back to customers trying to do more of a share.

We've been doing this for years so this isn't a new strategy just reacting to a

down price but we're ramping it up now that it's more about service fees. I'm

going to run a truck on and pickup your recyclables. I need to cover my

return on investment on that service and then the commodity value needs to be

a shared risk, right?

So right now, when Steve and I talk about commodity value, we get about 70

percent of the revenue from the sale of a ton of whatever cardboard and the

customer gets back 30 percent. I think what we'd like to see over time is drive

that more down to a 50-50 split with more of the money push towards service

that's at less of a risk for commodity.

I don't think that's unique to Advance. I think the sector, in general, is moving

to more of get a return on investment off our service and share the commodity

risk with the client.



Kyle White: OK. That's very helpful. And then, if we could just move to the tax. We

talked about this a little bit in terms of its impact on M&A. But I was curious,

I may have missed this. Are you guys providing a book tax rate?

And just any other kind of broader implications that you think the reform

might have on you and the industry, maybe you're expecting the labor

inflation or just any other thoughts there could be helpful.

Steven R. Carn: For us, particularly with pro forma, it really doesn't change our current cash

pay taxes because of the utilization of the NOLs we've had over the last 2

years, and those NOLs going -- shielding tax really to the end of 2021. The

real benefit for us in this tax reform is that we would have gone into -- at a 39

percent rate in 2022 is now going to be 27 percent.

So there's less of a kind of a cliff in that period around the tax reform. You'll

see us more likely probably manage a little bit of the bonus depreciation.

There isn't any use of taking it in the current year because we have the NOLs

to shield the tax.

So we'll push that out into the future on that depreciation. So we'll continue to

be opportunistic around areas where we can become more tax efficient.

Richard Burke: Yes. I think on the macro side too, Kyle, I mean, when you think about it,

look if consumers have more money to spend, they buy more things, so they

generate more waste, right? Same thing for business.

If they have more money and they're investing in capital projects and they

grow their plant, they hire more people, generates more waste. So when we

think about the waste cycle, you would think that the tax reform lengthens the

waste cycle of a good macro economy and continues to drive a strong sector.

Operator: Our next question comes from the line of Andrew Buscaglia with Credit

Suisse.

Andrew Edward Buscaglia: I kind of look at your free cash flow and kind of understand

relative to some of your peers a lot of them are doing closer to a 40 percent to

50 percent conversion from their EBITDA. And you guys are going to --



you'll do about 30 percent -- or you did about 30 percent this year, and it's

going to be roughly about the same in '18.

So I was thinking a better pricing environment you're able to convert a little

bit better than that. But what are you looking at? Or have you taken a look at

that? And why is that conversion out a little bit higher just given inflation

here?

Steven R. Carn: Yes. I think just kind of looking at the midpoint, part of it is our increase in

our CapEx spend from '17 to '18 around the 8 additional landfills that will be

under or start construction in. But we were -- ended the year at $132 million

adjusted free cash flow and the midpoint will be $139 million, roughly 32

percent conversion, 8.9 percent margin.

But if we get a little more price as we gave in our band, if you look at the high

end of the range, that adjusted free cash flow is $144 million or 33 percent

conversion and we're at 9.2 percent. So we'll continue to try to increase

EBITDA, manage the middle, make sure we're spending the appropriate

amount of CapEx.

And also we're trying to drive some additional networking capital on the

balance sheet side by continuing to reduce DSO, leveraging the collection, the

centralized collection operations that we have, the customer care centers that

we have and then also increasing DPO to drive some additional efficiencies

around networking capital, which will continue to drive that adjusted free cash

flow.

Richard Burke: Andrew, I don't think this is an operating issue, it's more of a balance sheet

issue. The difference between our peers, I think, this is probably the most

obvious place that leverage shows up, and it's part of our overall goal to drive

down leverage using our free cash flow. As we drive down leverage, we'll get

a lift on this conversion.

Andrew Edward Buscaglia: Right. OK. Yes. And then, on your cost side too, I mean, we

talked about health care that nipped you guys this year. And -- but I mean,

your other 2 biggest cost items, transfer, disposal and those maintenance and

repairs costs still are growing high-single digits.



And like from an operating perspective, is there anything you guys can

implement there to curb those costs from growing still 5 percent to 10

percent? Or is that just kind of the new norm that we're going to have to deal

with?

Richard Burke: No, it's not a new norm. So on the health care side this year, we reengineered

our health care plan. So we put in another option like an HRA, a health

reimbursement account and we were able to market that within the company.

So 40 percent of our people moved over to an HRA from a traditional PPO.

So while we don't think we go back to 2016 cost of health care, we think -- we

believe based on actuarial science that we'll moderate somewhat that increase

from '17 into '18. And if you look at maintenance and R&M, it's actually flat

year-over-year as a percentage of our revenue.

So we've made great strides in our R&M side of the house in order to do that,

that's part of our capital plan as we're placing trucks over here and trying to

keep everything on a 7-year cycle. Probably one of the biggest challenges we

have on the R&M side is qualified technicians, not just retaining them but in a

4 percent unemployment market, I would dare say mechanic, qualified

mechanics have got to be 2 percent.

So we're putting programs in place to incentivize people to get certifications.

We're using trade schools to recruit to make sure we're fully staffed within our

operating locations.

Operator: We have a follow-up question from the line of Michael Hoffman with Stifel.

Michael Edward Hoffman: Further emphasis on the balance sheet, your peers were cash

interest as a percentage of revenues were around 3 percent. Your cash interest

as a percentage of revenue is 6 percent.

So the trick here is, if you cut that in half, that $40 million to your current free

cash flow, that puts you at 41 percent conversion rate. So talk to us about how

you take $40 million of cash interest out.



Steven R. Carn: Again, it's the task of deleveraging. So it's that 0.3 to 0.4 driving that leverage

down on an annual basis.

Michael Edward Hoffman: So when we think of it in $100 million increments, what's the

interest -- cash interest savings on a $100 million? I know I can go and find

this. I'm just asking it out loud.

Steven R. Carn: That's priced. The Term B is what we would pay down and that's at LIBOR+

2 25. So and it's somewhere between 1 month and 3-month LIBOR, there are

some different tranches that we have within that Term B loan.

Michael Edward Hoffman: OK. Which is like -- puts you like roughly 4 percent, so it's $4

million for every $100 million?

Steven R. Carn: Absolute, yes. (Matt) shaken his head, yes. He's my treasury guy. So he's

given me the ...

Michael Edward Hoffman: Right. OK. So I mean, the simple math here is to take $40 million

out, I got -- I can pay $1 billion of debt down?

Richard Burke: Yes, sir.

Steven R. Carn: That's math.

Operator: At this time, there are no further questions. I will now turn the conference

back to Mr. Richard Burke for any closing comments or additional remarks.

Richard Burke: All right. Thank you, folks. We're making great progress as an organization

and we're optimistic about what the future holds as we work to deliver on the

promises that we've made to our shareholders.

By focusing on market selection, profitable organic growth, accretive

acquisitions, pricing discipline, managing controllable cost and being

disciplined with our capital investments, we expect to continue to drive ever

improving free cash flow.



I'd like to thank the Advanced Disposal team for their hard work and their

dedication as we all strive to live out our mission of every day driven to

deliver, service first, safety always. Thank you, folks. Have a good weekend.

Operator: This concludes today's conference call. You may now disconnect.

END

moderator: matthew nelson confirmation #...

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