Casella Waste Systems Inc Q4 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Casella Waste Systems, Inc. Q4 2021 Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised, this call is being recorded. I would now like to hand the conference over to your host today, Joe Fusco. Sir, please begin.

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 Vice President of Finance. Today, we will be discussing our 2021 fourth quarter and year-end results. These results were released yesterday afternoon. Along with a brief review of those results and an update on the company’s activities and business environment, we will be answering your questions as well. But first, as you know, I 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 the 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. With that, I'll turn it over to John Casella who will begin today’s discussion.

Thanks, Joe, and good morning, everyone. Welcome to our fourth quarter 2021 conference call. We are very pleased with our results in the quarter as we finish the year strong and continue to execute well against our key strategies. Ed and Ned will provide color on the quarter, but I would like to focus my comments on performance for 2021, our forward outlook and our strategy. In August of 2017, we laid out our multi-year 2021 strategic plan. The plan included key strategies most relevant to driving shareholder value, along with a financial framework that provided measurable targets to track performance. As we exit 2021, I truly could not be prouder of what we have achieved. As a result of the hard work, focus and discipline across the organization, we exceeded all key metrics of the 2021 plan. As an outcome, we grew the business meaningfully in 2021 through our pricing programs, operating initiatives and growth strategy. For the year, revenues were up nearly 15%, adjusted EBITDA improved over 18% and adjusted free cash flow increased roughly 38%. Our performance reflects continued strong operational execution within our base business, combined with growth through acquisitions. During 2021, we closed on 10 acquisitions with $88 million of annualized revenues. In the first 45 days of '22, we've closed on five additional tuck-in acquisitions with approximately $4 million of annualized revenues that have a great strategic fit. As our momentum carries into 2022, we have a plan that aligns with our recently created 2024 strategic plan. The key strategies of the 2024 plan are very much consistent with those of the 2021 plan, which are as follows: one, increasing landfill returns; number two, driving additional profitability in the collection and operations; third, creating incremental value through resource solutions; and the fourth, allocating capital to return-driven growth. To bolster our ability to execute against these core strategies, we're introducing the fifth, which is strengthening the key foundational pillars. The four foundational pillars are as follows: number one, our people; number two, our technology; three, sustainable growth strategy; and four, our facilities. And quickly touching on the foundational pillars from a people perspective, we understand the importance of reinforcing our core values, while investing in our culture and team with technical training programs for key frontline roles, leadership development, and incentive compensation programs aligned with long-term goals. Great examples of our recent success here are our CDL school and career path initiatives, which have helped to stabilize our workforce during a challenging labor market. As it relates to technology, we're making select investments that drive and support profitable growth. This is evident within our collection operations as we are making continued investments in route optimization, onboard computers, and automation programs that are driving margins. Execution against our key strategies is also supported by our sustainable growth initiative. We have further integrated our sales, marketing, engagement, and customer care teams to drive better alignment across our sustainable service offerings, as we seek to enhance profitability, retain key customers, and grow the business further in a manner that also enables our customers and society to meet the sustainability goals and needs. Finally, from a facilities perspective, we're prioritizing and allocating capital spend in a manner that meets our long-term safety, operational, and strategic needs while creating a more welcoming and accommodating experience for all of our people. I'll provide an update on the core strategy supported by the foundational pillars. Our landfill assets are positioned well to continue to help meet the disposal needs of a capacity constraint in the Northeast. Our pricing programs are working well to offset cost inflation and our operating programs coupled with investment in innovative technology are focused on further driving margin expansion. As we look out over the next few years, we believe there to be a positive backdrop to drive further value. We continue to focus on improving the blend of our customers to increase the quality of revenue at our sites. In fact, we are experiencing some nice sequential trends here through January of 2022, as it relates to continued improvement of our average price per ton. Landfill volumes remain lower than pre-pandemic levels by over 300,000 tons. This is primarily isolated to volumes in our New York facilities and in around New York City. Our expectation in '22 is that we will only experience a modest recovery of these tonnages. We also continue to advance key permitting and expansion efforts, including focusing on developing future disposal capacity, such as our McKean landfill rail project, which we are targeting to bring online in late 2023 or early 2024. We're also continuing to invest in sustainable infrastructure at our site. As an example, in 2022, we have budgeted to spend over $8 million in aggregate projects related to further reductions in greenhouse gas emissions, water management, and other environmental upgrades. Further from an RNG perspective, we have projects in development at two of our landfills where a third party is making the capital investment. As these projects come online over the next year, we will benefit from gas royalties.

Thanks, John. Revenues in the fourth quarter were $241.8 million, up $41.6 million or up 20.8% year-over-year, with 11.7% of the year-over-year change driven by acquisition activity and the remainder from organic growth. Solid waste revenues were up 18.9% year-over-year with price up 4.3%, volumes up 2%, and acquisition growth of 12%. As expected, our price growth improved again sequentially from the third to the fourth quarter. Revenues in the collection line of business were up 18.3% year-over-year with price up 4.8% and volumes slightly up. Revenues in the disposal line of business were up 19.3% year-over-year with price up 3.3%, volumes up 5.9%, and the remainder acquisitions. Landfill pricing was up 4% year-over-year with landfill tons up 4.2%. We still have a negative basis to pre-COVID tonnage levels of roughly 300,000 tons. Resource solutions revenues were up 26.4% year-over-year with 8.3% from higher recycling commodity prices, 10.7% from growth from acquisitions, and the remainder from higher processing and non-processing volume growth. Commodity prices were up year-over-year and our higher cardboard, mixed paper pricing, higher metals pricing, and higher plastics pricing. However, from September 2021 through January 2022, commodity prices have dropped by roughly 30% with the declines driven by plastics and fiber pricing. Adjusted EBITDA was $51.4 million in the quarter, up $8.8 million year-over-year, and adjusted EBITDA margins were 21.3% for the quarter, flat year-over-year as acquisitions negatively impacted margins by 35 basis points, and fuel costs, net of our muni fee negatively impacted margins by 11 basis points. So excluding our acquisition impacts, adjusted EBITDA margins were up roughly 35 basis points year-over-year with our pricing programs and cost efficiency efforts offsetting the rising inflationary pressures. Solid waste adjusted EBITDA was $43.7 million in the quarter, up $5 million year-over-year with collection and disposal adjusted EBITDA both up year-over-year. Resource solutions adjusted EBITDA was $7.6 million in the quarter, up $3.7 million year-over-year with improvements from recycling, organics processing, and non-processing operations. Cost of operations in the quarter was up $29.6 million year-over-year and up 80 basis points as a percentage of revenue with most of the increase driven by acquisitions. Ed will get into some additional details. General and administrative costs in the quarter were $3.3 million year-over-year, or down 104 basis points as a percentage of revenues, with the majority of that coming from changes in the timing of incentive compensation. Depreciation and amortization costs were $5.6 million year-over-year, mainly due to higher depreciation on trucks related to our fleet plan, higher amortization on higher landfill volumes, and higher amortization of intangibles associated with acquisition activity. Our income tax provision was $2.5 million in the quarter. This was actually up $56 million from the same period in 2020. As you may remember, we had a $55 million non-recurring benefit to income taxes last year due to the reversal of a valuation allowance. On December 22, we completed an amendment and restatement of our senior secured credit facility. With this refinancing, we added five years of tenor to our credit facility, reduced the pricing by 12.5 basis points, added $100 million of capacity to our resolver and created a LIBOR transition pathway. As of December 31, we had $562.6 million of debt, $33.8 million of cash, and liquidity of $305.8 million. Our consolidated net leverage ratio was 2.35x. Our balance sheet is in great shape and positions us very well to continue to grow into the future while also providing stability in this rising interest rate environment, with our fixed interest rate on approximately 72.5% of our debt today. Net cash provided by operating activities was $182.7 million for the fiscal year, up $42.8 million year-over-year, mainly driven by higher operating results and positive changes in our assets and liabilities year-over-year. Adjusted free cash flow was $95.3 million for fiscal year 2021, up $26.2 million or up 38% year-over-year. As stated in our press release yesterday afternoon, we announced guidance for fiscal year 2022 by estimating results in the following ranges; revenues $980 million to $995 million, adjusted EBITDA of $228 million to $232 million, and adjusted free cash flow of $104 million to $108 million. As we stated yesterday, our 2022 guidance ranges assume a stable economic environment continuing from the fourth quarter of 2021 through the remainder of 2022. In addition, our 2022 guidance includes $55 million of revenue growth from the rollover impact of acquisitions completed in 2021 and those already completed in early 2022. However, our guidance does not include the impact of any acquisitions that have yet to be completed. Our pricing programs continue to increase sequentially from late 2021 into early 2022, and we expect solid waste pricing of 4.5% to 5% in fiscal year 2022. We have already rolled out the vast majority of our plan pricing for 2022, and we have not experienced any meaningful pricing rollbacks. We believe that we have established an appropriate pricing plan for 2022 that positions us well to offset inflationary headwinds while still improving margins through our investments in technology and core operating programs. Our internal rate of inflation is currently running at roughly 4.1%. However, if our cost inflation increases further, we have great flexibility to advance additional price increases on roughly 70% of our collection book of business. In addition, our floating energy and environmental fee effectively offsets most of our fuel exposure. Overall, we expect adjusted EBITDA to be up 12% to 14% year-over-year with roughly 40 basis points of margin expansion. Given the timing of acquisition activity in 2021 and the expected year one margin headwinds from these acquisitions as we complete the integration and drive synergies, we expect margins to be flat in Q1 and build throughout the rest of the year. As John stated, we have several exciting resource solutions projects planned for 2022, including the full equipment upgrade to our Boston, Mass recycling facility and two renewable gas projects at our landfill where a third party is making the capital investment and we will receive the gas royalties. In addition, we expect an income statement tax provision of roughly 27% in 2022. However, our cash taxes are expected to remain at roughly $4 million in 2022. In addition, we have roughly $99 million of net operating losses remaining as of December 31. With that, I'll hand it over to Ed. Thank you.

Thanks, Ned, and good morning, everyone. So we finished the year strong. We're excited about our growth and our positioning going into 2022. All our operational improvement programs are building momentum. And with 20% more revenue now than Q4 a year ago, there was more opportunity to apply these proven programs to new divisions. Having said that, I know everyone is focused on inflation, pricing, and our ability to maintain margins. So I'm going to concentrate my comments accordingly. For the quarter, on a consolidated basis, cost of ops as a percentage of revenue increased 78 basis points and adjusted EBITDA margins were roughly flat. Acquisitions accounted for an 80 basis point increase in cost of ops as a percentage of revenue and negative 35 basis points in EBITDA margins. The margin dilution on the pass-through of higher fuel costs accounted for another 11 basis points headwind, so cost of ops and EBITDA margins, net of these items improved by about 13 and 46 basis points, respectively. As I've discussed on prior calls, acquisitions will generally hurt our margins for the first couple of years until we put in our operating programs, introduce technology, improve equipment solutions for the services provided, and execute on synergies. The best example of this is our Rochester operation. I looked at the financials for 2021, and margins for Rochester are now almost exactly the company average. We accomplished this by implementing our best practices, converting to the most efficient equipment to service that market, and using our technology to streamline routes. So I'm very confident in our ability to execute, but it takes a little time. About half of our revenue comes from our collection operations, and we had a great quarter from a bottom line perspective. Cost of ops in this line of business increased 130 basis points as a percentage of revenue compared to Q4 last year, but acquisitions gave us a 146 basis point headwind. So the 4.8% in price that we achieved in the quarter was enough to keep cost of ops on the same-store basis on a positive trajectory. Costs continue to rise, and it is very important that we keep up with these increases with our pricing programs. We've done some work to identify inflation factors specific to Casella. Keep in mind that things like fuel and environmental cost inflation are passed to the customer in fees that do not factor into our price data. So looking at CPI isn't really the best indicator. By tracking our internal Casella cost index, we can react quickly to protect our margin, and as Ned has mentioned, a substantial portion of our collection pricing is open to further price adjustments should our costs continue to decline. And as John said, we have just completed our January APIs; customer pushback has been relatively muted and we remain confident in our ability to maintain core margins. We expect our various operating initiatives, which include increased automation, expansion of our use of onboard computers, and ongoing computer-aided routing improvement projects will allow us to continue our margin improvement trends that we have attained over the past few years. The disposal line of business, which includes our landfills and transfer station network, saw cost of ops increase by 300 basis points this Q4 versus the same period a year ago. Acquisitions accounted for about 182 basis points of this increase. So on a same-store basis, we did see some margin compression on rising costs and a pass-through price increases to recover margin at the start of 2020. The higher effect of acquisitions on our disposal margins relates to an intentional mix change I'd like to talk about. We have strategically acquired transfer stations in new markets that will eventually allow internalization into our existing landfills, benefiting economies of scale and making the landfills more efficient. Our resource solutions is a totally different story as cost of ops improved by over 300 basis points on strong commodity prices and great execution of the business plan. In our business model, we share revenue with our customers on the upside over certain thresholds; so higher commodities give us more revenue to spread over our operating costs. Commodity prices fluctuate over time, and our fee structure has protected downside swings. But our real success in this line of business comes from efficiency improvements in the processing of material, whether it be recyclables or biosolids. Every year, the solutions team recommends various improvements in processing technology to improve our efficiency. And this year, we are very excited about the coming upgrade in our flagship Charlestown facility that John mentioned. The team has done a great job helping to design the new layout in a tight footprint to take advantage of the latest technology to improve throughput and increase the level of automation, reducing costs while increasing much-needed capacity. So I'm happy with the finish to a great year and look forward to continued progress in 2022. I want to take this opportunity to thank and congratulate all of the Casella team on a job well done. With that, I'd like to turn it back to the operator to start the Q&A.

Thank you. Our first question comes from Sean Eastman from KeyBanc Capital Markets. Your line is now open.

Hi, gentlemen. Just wanted to start on the 2024 plan. Just at a high level, it kind of sounds to me like you’re conveying the message of 'don’t fix what ain’t broke' around the 2024 strategy. It sounds like maybe human capital is a bigger focus. You adjusted the M&A target a little bit. But is that kind of a fair characterization here?

I think there's a very clear perspective, Sean. Over the last few years, everyone has focused on people and HR. It's a much higher priority and certainly attracting drivers and mechanics retention. We've got to do everything we can as an industry to attract as many people coming out of high school as we can that are not going on to college. So the people, the technology, facilities, those pillars really help us drive the overall performance of the business.

And when we sat down to look at the strategic plan, the core strategies are working amazingly well. But underneath those are sub-strategies that we're focusing capital resources on people resources. We also took a good hard look at our growth over the last few years. We've grown from 1,600 people to 3,000 people in less than three years. As we look around to be successful for the next three years and the next 10 years, we really do believe we need some additional investment in key foundational elements, and that's where that part of the plan has emerged. And there's not like some radical shift there or huge dollars. It's just kind of taking what we're doing, codifying it, improving it, and making sure everyone is rowing in the same direction.

Okay, understood. That’s very helpful. Can you clarify the intentional mix shift related to the transfer stations and the upcoming disposal capacity? Specifically, how this change will impact our margins in the coming years? I want to ensure I fully grasp what you mean.

Certainly. The disposal capacity in our market is quite limited and is changing. For instance, Massachusetts is considering exporting all its waste, and Connecticut is facing challenges with its disposal plans. Over the coming years, we are already witnessing a trend toward using transfer stations, including rail transfer stations, to transport waste to existing landfill sites since no new sites are being permitted. Our strategy is to expand these existing sites, and we have significant permitted capacity at McKean that we should utilize. To effectively manage this, we need to position ourselves strategically in areas experiencing disposal crises, ensuring we have transfer stations to facilitate the movement of waste to landfills.

And another example of this is our investment in Buffalo, New York. We've purchased two transfer stations there that are about 40 to 50 miles away from our Hyland landfill. There's a landfill in the Buffalo market closing in the next several years that takes 400,000 to 500,000 tons a year. At the same time, we're working on expansion at our Hyland landfill to take it from 400,000 tons a year to 1 million tons a year. So intentional moves like this of looking at markets that will be capacity constrained, adding assets like transfer stations that can allow us to vertically integrate and build our business. The McKean rail strategy are parts of what we're looking at intentionally over the next couple of years to drive great organic growth.

And then the idea there that you can drive a lot of that growth from disposal, which is higher margin.

Exactly. It gives us a platform for growth and integrated growth from recycling resource management to collecting waste to disposing of it. If you don't have a full set of solutions, it's hard to gain new customers; it's hard to grow that base. So finding ways to make sure we are secure in our ability to handle waste and recyclables over the long term is important to us.

Your question about the margin effect relates to a timing issue. We have expanded in the transfer stations, which, as everyone knows, does not contribute significantly to the margin. The margin is generated at the landfills. Once we begin to internalize the volume from these transfer stations into our landfills, you will notice the margin effect for the company.

Got you. Okay, great. Super helpful, guys. I'll turn it over there.

Thanks, Sean.

Thanks.

Thank you. Our next question comes from Tyler Brown from Raymond James. Your line is now open.

Hi. Good morning, guys.

Good morning.

Good morning, Tyler.

Hi. Thanks for some of the color in the prepared remarks about pricing broadly. But can you just talk a little bit more about landfill pricing outlook in '22 and even beyond that? I know things have slowed a bit in '21 on the New York City dynamics. It doesn't really sound like those volumes are tightening up that quick. So can you just talk a little bit more specifically about the outlook longer term there?

Yes, it's interesting. We've talked about this for a few quarters where sometimes statistics tell the story perfectly; sometimes, they don't. In our reported landfill pricing stat has maybe not fully told the story. It was 4% in Q4, which is up from 3.5% in Q1 '21. So it has been increasing. It's over 4% into January. But probably more importantly, our average pricing stat was over 6% in Q4 and increased into January. The way we calculate stats, we talked about this last quarter, is same customer, same site, same type of waste, how much we have changed it year-over-year. But we're changing customers, changing mixes, blending up our book of business, which is creating more profitability. That doesn't really show up in the price. The way we have it calculated, the average stat shows it better. So we're excited about the pricing plan for the year. We've gone out to the street with most of it in collection and at landfills, and it's sticking. If we see additional opportunities to push price either to cover more inflation or just advance pricing in the market, we'll look to do that again in 2022.

Okay, that's extremely helpful. So I do want to come back to the margins and the outlook. I think you're looking, and correct me if I'm wrong, but maybe 40 basis points of improvement next year. But that is despite some dilution from layering in that M&A. So you talked about price exceeding inflation. But can you just talk about some of the broader puts and takes to margins? Is there anything that's kind of one-time that we should think about?

Yes. So if we look at 2021, just as a starting point, our margins were up 75 basis points year-over-year, up strong in the first half of the year. The second half of the year was a little more muted with more of the acquisition overhang. For the full year, we had an acquisition overhang of about 30 basis points. If we net those two together, our margins were up over 100 basis points for the full year. You start to get under the hood of what drove that in big pieces. As Ed said, our core investments in technology offering programs drove about 30 plus basis points; recycling, our SRA fees, those programs drove about 35 basis points. Then, pricing drove 50 to 60 basis points. There are a couple of one-time things and other moving pieces, but those are the big buckets. As we enter this next year, Jason, how much acquisitions headwind into 2022?

Yes, thanks, Ned. So in 2022, there's on a full year about a 25 basis point headwind as it relates to acquisitions. In the first half of the year, it will be more dramatic at about 35 basis points in the first half of '22 and about 15 basis points in the second half of the year, and it will roll over.

And as we look to the year, we expect recycling to slow from September through today to actually be positive year-over-year in the first half of the year, but then negative in the second half of the year, unless something really changes. No other really big moving pieces. We expect that same kind of 30-plus basis points from the core operating programs and we expect pricing to do the same thing, 40 to 50 basis points of improvement.

Could I ask one last question quickly? You mentioned the Boston MRF upgrade. Will that $15 million in capital spending be added back to free cash flow or not? Also, I missed the other point you made.

It's not.

Okay, it is not. Okay, that's helpful. So can you talk about what the $15 million is on the add back, which I think is Waste USA, but I'm not sure? And then secondly, and I may have missed it, but when does the Boston MRF come online, or when the retrofit is done? And then how much of an EBITDA contribution is that once it's done?

The first Boston MRF investment of $18 million spans the years 2021 and 2020, with approximately $6 million to $7 million occurring last year. We have not included it again; it falls under maintenance capital or recurring capital expenditures. The additional investment next year will be about $11 million to $12 million and is also classified as maintenance recurring capital; it is not something we are adding back. This year, the only category of capital we are adding back relates to the integration of acquisitions. As previously mentioned, when we evaluate a pro forma for an acquisition and acquire a business in the initial 18 months, we tend to invest more in that business to achieve synergies, integrate our systems, and consolidate facilities. The $15 million mentioned is linked to that process. In Waste USA, that project is complete. It has been a very successful undertaking over three years, the cell is operational, waste is being processed, and this will not be added back in the future.

Okay. And then EBITDA contribution?

I’m sorry. Yes, it's several million dollars once it's all done, but we have to ramp additional customer facility. So we're adding about 35% new capacity to the facility by increasing throughput and being more efficient with less people. We're not just going to snap our fingers in 2022 and have more tons, but it will allow us to grow into that over a couple of years. So you'll see less downtime, less maintenance, and there's $1 million of benefits there. But in the year, us being shut down for six to eight weeks and having to move recyclables all over the Northeast, it's going to consume all those savings. Looking out over the next couple of years, we've got some really nice built-in organic growth there to build that business and meet needs.

Okay, great. I'll hop back in the queue. Thanks.

Thank you. And our next question comes from Michael Hoffman from Stifel. Your line is now open.

Thank you very much. Following back on the landfill side, I'd like to understand the juxtaposition between scarcity value of the space, so you brought that Ed, versus there probably is some ceiling that gets triggered by more competitive transfer stations add rail, so that optionality in the rail, but why can't you get more price in the landfill now given the scarcity value?

Well, I think we are getting quite a bit of price. As we said earlier, Michael, we ended Q4 with over 6% average price. If you look back over the last couple of years too, you'll see from a reported pricing standpoint, we had periods of 6% to 7%. Those were related to some rollovers of long-term contracts. About one-third of the tons going into our landfills come from our trucks, one-third from long-term municipal contracts, and one-third from commercial contracts. Those municipal contracts are typically longer in nature, three to five years. What we've seen is when we roll over those contracts, we can get larger increases. Within the term of the contracts, they're a little lower; they increase sometimes at CPI indexes and sometimes their set indexes. You might see some periods of higher pricing and some periods of pricing more at that 5% level as we look out over the next couple of years in that mix of our book of business.

That's particularly true when you have a really large contract. We have a couple of contracts, Michael, that are in that vein with 300,000 tons a year. There's a really nice increase to the price when that contract is renewed, but then it's somewhat tied to inflation for the period of the time of the contract until the renewal. Then it would be appropriately adjusted.

Right. Okay. I have a second question, but I'd like to follow up. Boston renewed like $94 for the burners, but the spot market is at $120 right now, and that rate of change there seems greater than when I figure out how much cost to drive each of your facilities, the rate of change you've been taking advantage of. It's just a wonder if you couldn't do more, given the scarcity value. That's where that sort of is coming from.

I think it's a good question, and it's something we're continually looking at and addressing where we can address additional pricing. As you know, transport is very complex right now. There are multiple shifts of where waste is going across the Northeast as additional rail opens up and people struggle to move waste out in markets where you have closing facilities. From our vantage point, we just understand this as a long-term opportunity. It's not just a one-year opportunity. So this pricing is going to come for years into the future. From our vantage point, we're adding value, we're adding margin each year, we're adding returns at the sites. If we can course-correct a little higher, we'll do so.

The second question is regarding the long-term opportunities we see related to waste movement in the Northeast as new rail options emerge and companies face challenges in transporting waste due to facility closures. We perceive this situation as a multi-year opportunity rather than a short-term one. As a result, we expect pricing benefits to extend well into the future. We believe we are consistently increasing value, margins, and returns at our locations, and if we can make adjustments to improve, we will take action to do so.

I was just going to say, Mike, we're also offsetting substantial inflation at this point in time as well.

I appreciate that, and it's important to acknowledge that the industry has validated this. You can respond to this just as you have with other matters while maintaining the quality of cash conversion. Regarding cash conversion, you have benefited from a net operating loss for a long time, which we are starting to reduce, reflecting our significant success. You are likely to exhaust this net operating loss in about three years. How should we approach modeling a free cash flow analysis in light of this?

We are currently taking less bonus depreciation with the intention of maintaining more tax depreciation as our net operating losses roll off. As you know, bonus depreciation will no longer be available after 2026. We are intentionally taking less advantage of it now to preserve our tax assets. Most of our acquisitions are structured as asset deals, allowing us to step up the valuation and depreciate assets from a tax perspective. The Willimantic acquisition was a stock deal treated as an asset deal for accounting purposes, which is beneficial for our tax position. It's likely that by 2020, our net operating losses will be primarily utilized, and we will transition to a more regular cash tax payment structure. Next year, we expect to see an increase in cash taxes, starting from about $1.5 million in 2021 up to $4 million in 2022, with increases of a few million dollars each subsequent year. We will be implementing additional strategies to manage this over time.

But what I'm hearing is talk about that this is $5 million to $10 million, not a $20 million or $30 million thing?

Yes. It really depends on the year. By 2024, we’re looking at like $10 million in cash taxes. That's generally what's in our models today, but not 20 or 30.

Okay, that's very helpful. Thank you very much.

Thank you, Michael.

Thank you, Michael.

Thank you. And our next question comes from Hamzah Mazari from Jefferies. Your line is now open.

Good morning. Thank you. I may have missed this, but could you just remind us how much of the business is inflation indexed? And how the resets work? And then I think you had mentioned a specific Casella inflation index, and maybe talk about how that plays into it and if that's already in the contracts?

Yes, a good question, Hamzah. On our book of business on the collection side, it’s pretty unique, as you know, where only about 10% of our collection book of business are municipal contracts. About 25% are subscription residential agreements where we have pricing flexibility; about 35% is small commercial customers where we have pricing flexibility; about 15% is temporary construction roll-off, and the remainder are long-term industrial roll-off contracts that typically have set escalators. A large degree of our book of business over 70% has a lot of pricing flexibility. Where we do have linked contracts, about half of them are CPI linked and about half of them have set escalators. Those CPI linked contracts vary from CPI used to regional CPI to somewhere on the trash and garbage index. Given where CPI is, those should be nice tailwinds this year. As far as the cost index that we talked about earlier, it’s interesting, because you see the headline CPI huge numbers of 7.5%, and then you dig into our business or anyone in the trash business, and it's not perfectly reflective of what we do. You start to look at the components of that 7.5%, and there are things like cars and other kind of categories that aren't exactly related to our business. We created our own internal CPI index looking at key categories to make sure we take out any sort of price volume indicators, and our aggregate basket is sitting at 4.1% today, which is interesting because the Bureau of Labor Statistics trash and garbage index is right at 4% in January. Our internal index is sitting right on top of what the BLS is predicting for the industry as well.

Right, very helpful. My last question is about the free cash flow growth of 10% to 15%. If I’m correct, it seems like you have been experiencing over 10% free cash flow growth recently. Is that a cautious estimate, or is there something else we might be overlooking?

Yes, good point. We have been growing higher than 10% to 15%. We've been growing closer to 20% for several years now. If you look at just core organic growth, we're growing more like 10% to 12%-ish. Then you add in acquisitions that accelerate us greater than the 15%. As we guide that 10% to 15%, we're not really including acquisitions. As Michael mentioned a few minutes ago, we're going to have a little headwind from cash taxes over the next number of years. That will not significantly moderate our growth rate, but will moderate a little bit. We're really comfortable with that 10% to 15%. We'll look to hopefully beat it with some acquisitions as well.

Got it. Thank you.

Thank you, Hamzah.

Thank you. And our next question comes from Michael Feniger from Bank of America. Your line is now open.

Hi, everyone. Thanks for taking my questions. You may have covered this Ned. Your CapEx guide for 2022, I think, is around $120 million. It's actually down from 2021. With all the investments and growth opportunity, any reason why we're not seeing that capital spend and the level of investment higher with where you guys are in the cycle?

Yes, we have pretty unique investments happening in 2021, the largest of which was getting open this 25-year sale at Waste USA, which is a really unique one-time investment for us. We don't usually open up an entire 25-year period like that. So that was a bit of the reason. I don't know, Jason, is there anything else we're seeing there? There's no kind of like major decline in any category.

It’s primarily Waste USA year-over-year. If you look purely at our absolute capital less the CapEx that we add back related to acquisitions and Waste USA, last year in 2021, you'll actually see what we call our maintenance capital step up slightly year-over-year from about 9.5% to 10.5%. So we are maintaining a consistent level of spend year-over-year, if not slightly increasing.

Yes, I think one other kind of comment there, and it goes to something we’re really passionate about and put a lot of work into our fleet plan, our yellow iron plan, and now our facilities plan. You got that planned out years into the future, Ed.

Yes. We have a lot of automation opportunities still in the company. So look forward to the efficiencies we gained through that fleet plan in the next few years.

Great. I apologize if you guys touched on this earlier. You talked about with Hamzah that 4% of what you’re seeing within your internal costs. Is that, Ned, what you're embedding for your guidance for cost inflation in 2022? And do you have that easing at all in the second half because based on the margins, you're obviously likely to see more operating leverage in the back half of the year? Just curious how those dynamics play out?

Yes, you're right. We are. That is in our model right now, 4% cost inflation for 2022. We don't have it easing in the back half of the year. However, the negative overhang from acquisitions moderates through the year, allowing our pricing programs and our cost efficiency programs to add more margin through the last half of the year.

Makes sense. Just to squeeze one last thing, I know you guys were very early in restructuring the whole recycling model. So forgive me for asking this. How do we think about the sensitivity to commodity price? I believe you said earlier, Ned, that the fees were a 35 basis point tailwind to margin in 2021. So I'm just trying to get a sense of what we're thinking about for 2022? How does that relate to movements we see with fiber prices, for example? Thanks, everyone.

I'm going to give you like the two-minute answer on this, and if you want, give me a call and I'll explain even further. At our recycling processing facilities, we put thresholds in place. They're equal to our fully loaded processing fees plus a margin. Those thresholds are around, let's say, $100 a ton or maybe a little bit higher, a little bit less. If commodity prices click over those thresholds, we start to share some of that additional commodities with our customers, maybe 50-50 or a different formula. If they click below that and we can sell say the average basket of commodities for $70 a ton, a customer would pay us a processing fee of 30. What happened in 2021 is we clicked through those thresholds for the first time in four years. We started to create more money to our bottom line and we gave more back to our customers. But that 90% risk off take we have when we're below the threshold shifted, where we actually added more value from recycling, but we also took on a little bit more risk. If you saw recycling commodity prices drop through the floor, we would have some downside until we hit those thresholds. Once we get below the thresholds, our customers then start taking on the risk dollar-for-dollar. Above those, we accreted some additional value in 2021.

Okay. I appreciate it, guys. Thanks for running through that with me. Thanks, Ned.

Thank you.

Thank you. And we have a follow up from Alexander Leach from Berenberg Capital Markets. Your line is now open.

Hi, guys. Thanks for taking my question. Just a quick one for me. You mentioned wanting to improve customer mix to improve the quality of revenue. Could you dive into that a little bit more, what sort of end markets or customers does that include and what characteristics make revenue from them high quality?

So I think that there's a real opportunity from a resource solution standpoint in terms of meeting the needs of our customers, particularly as it relates to colleges and universities, industrial customers, and municipal customers for that matter in terms of helping them meet their sustainability goals. That's somewhat down the middle of the fairway in terms of improving. We know where people are really trying to move the needle from a sustainability standpoint, and they understand that there's cost associated with that, and it gives us an opportunity to help solve that problem and improve our book of business as well. I don't know if you have anything to add, Ed.

Yes, just going to mention that there's an interesting trend over the past few years where we used to propose to colleges and universities a sustainable solution. A few years ago, they'd react just based on the cost at the end of the day and not accept our proposal. In the past year or so, we're starting to see quite a bit of success because the attitudes have changed, and the colleges and universities are much more focused on the overall intrinsic value of being sustainable. We've started having a lot of success.

It's the same thing from the manufacturing standpoint; major manufacturers, major industrial customers, we're seeing the same thing. They're all trying to rethink their processes, rethink their packaging if they're packaging a product, etc. There’s just an awful lot of activity that is lending itself to higher-margin customers and people that are obviously willing to pay for those types of services.

Okay, great. Thanks, guys.

You're welcome.

Thank you. And our next question comes from Tyler Brown from Raymond James. Your line is now open.

Hi. Thank you for the follow-up.

Hi, Tyler.

Good morning.

Thank you. This may be a hard question, but I'm going to ask it anyway.

You’re not supposed to ask hard questions.

Yes. Well, given that the Northeastern market is and it's going to continue to be a long-haul waste market. It sounds like it's probably going to become even more transfer-centric with the build-out of rail. How should we think about the long-term solid waste margin profile versus your peers? If there are say, let's just call it low 30% margins, are you structurally a couple hundred basis points behind that, or just any help on handicapping that?

Yes, but I don't have exact details on the mix of our peers and their margins. However, we are currently experiencing a negative impact on our margins since almost every ton we handle is routed through a transfer station before being sent long distances to landfills or disposal sites. We operate very few direct routes. Unlike us, many garbage trucks across the country pick up waste from businesses or homes and go straight to disposal sites in the Northeast. Most of the waste there goes through transfer stations, which does not negatively affect cash flow but does hurt margins. As Ed mentioned, we noticed this in our numbers this year as we slightly increased our transportation efforts for our long-term strategy. While this approach is beneficial for the future, it does contribute to margin pressure.

Yes. Okay, all right. That's helpful. Then my last one, it sounds like you finished up Waste USA. Will we see that in your airspace table in the 10-K?

Yes, it's in there already.

Okay.

We have permitted and permutable. That's the permitted airspace for the last couple of years. It just wasn't built. Now it's built. Waste is being placed. This is a really big deal for us because that was complex and tough permitting and complex and tough construction cycles. So we're excited to have that done.

Okay, all right. I'll leave it at that. Thanks, guys.

Thank you.

Thanks, Tyler.

Thank you. And I'm showing no further questions. I would now like to turn the call back over to Mr. John Casella for closing remarks.

Thank you. Thanks everybody for joining us today. We look forward to discussing our first quarter 2022 earnings with you in April. Thanks, everybody. Have a great day.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.