Casella Waste Systems Inc Q2 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Casella Waste Management, Inc. Second Quarter 2023 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 that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Charlie Wohlhuter, Director of Investor Relations. Please go ahead.

All right. Thank you, Michelle. Good morning and thank you, everyone, for joining. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ned Coletta, our President and Chief Financial Officer; Jason Mead, our Senior Vice President of Finance and Treasurer; and Sean Steves, our Senior Vice President and Chief Operating Officer of Solid Waste operations. Today, we will be discussing our second quarter 2023 results, which were released yesterday afternoon. After a brief review of those results and an update on the company's activities and business environment, we will be answering your questions. Please note that various remarks 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 these 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, July 28, 2023. Also during this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures, to the extent they are available without unreasonable effort are available in the appendix to our investor slide presentation, which is available in the Investors section of our website at ir.casella.com under the heading Events and Presentations. And with that, I will now turn it over to John Casella, who will begin our discussion.

Thanks Charlie. Good morning everyone and thank you for joining us. Welcome to our second quarter 2023 conference call. Before I comment on the quarter, I'd like to take a moment and talk about the communities that were impacted by the severe flooding across our footprint earlier this month. I'd also like to recognize our team. Many of our people have been on the front lines, helping our communities recover. Some of that damage was absolutely catastrophic in some areas in Vermont, such as Waterbury, Weston, and Montpelier. Our Montpelier operation itself was under five feet of water, and hats off to the entire team there, Billy, Aaron, Pat, Mike, and the entire team did a remarkable job. They were up and operating within two days of being under five feet of water, being one of the first businesses in Montpelier to get back up and operational. Also in Vermont, significant damage occurred in Berlin, Londonderry, and a significant amount of damage occurred in Ludlow as well. In New York, Clinton, Essex, and Franklin Counties along with other areas in upstate New York; communities in Western Massachusetts, such as North Adams, and neighborhoods across our new markets in Pennsylvania were all impacted significantly by the weather. Hats off to the priority response teams, which is a team put together by Sean Steves that takes assets, people, trucks, and containers from different areas of our footprint where they weren't impacted and brings those resources to the affected areas. And again, many of our people have worked tirelessly and selflessly to help the affected areas across our markets to restore conditions, remove debris, and get things back to normal. We've also done some fundraising efforts to support those affected during this very difficult time. So far, our relief fund has raised just under $100,000, about $86,000, to help people who have experienced loss and hardship. Also, there's a spot on our home page if anybody would like to donate to the relief fund. Again, I'm incredibly proud of the efforts of all of our people and the work that they've done to help people recover from what in many cases was catastrophic damage, every bit as much damage as we experienced in many situations, similar to what we saw during Hurricane Irene. Now, moving on to the performance for the quarter. We're pleased to share with you our continued strong results and updated outlook, which demonstrate our focus on operating performance, disciplined growth, and driving shareholder value. We are executing well against our key strategies as reflected in the results. We also had several key announcements recently culminating with the acquisition of GFL's Mid-Atlantic operations on June 30th. Our entry into the Mid-Atlantic presents a great long-term opportunity to grow the business and expand our platform into adjacent markets. Over time, we look forward to the potential to continue to grow both organically and through acquisitions. Less than one month into the GFL-related acquisition, operations and services are running smoothly, and we're highly focused on establishing Casella's culture and core values. Once again, we welcome all of our new team members. As reported in yesterday's press release, we grew adjusted EBITDA by 5.5% year-over-year in the second quarter, expanded our margins by 80 basis points, and grew adjusted free cash flow. Results from our solid waste operations once again shone this quarter, showcasing the hard work of our team. After a strong start to the year in the first quarter, solid waste adjusted EBITDA margins expanded over 220 basis points year-over-year for the second consecutive quarter this year, and we achieved over 31% EBITDA margins in the second quarter. These results demonstrate the strong operating plan we have in place to drive productivity and higher returns while keeping safety front and center. Our ongoing investments in automated trucks, route optimization, and onboard computers are adding value across many areas from safety to efficiencies. Our pricing programs complement these efforts with a 7.7% price increase in solid waste in the quarter, helping to offset inflation. Recycling commodity prices remained well below last year's levels as we expected. While recycling prices were down 53% year-over-year in the second quarter, our risk mitigation programs are working well to limit the impact and we expect the headwind to ease moving through the rest of this year. At the onset of the year, we took a conservative outlook on recycling commodity prices, and that remains intact. All said, the business is performing well as reflected in our updated guidance, and we look forward to carrying this strong momentum into the remainder of 2023. A brief review on related key strategies: We continue to focus on increasing returns across our disposal assets. Improving revenue quality of our inbound streams is a major focus for us. We measure this through our average landfill price per ton, which was up nearly 10% in the quarter to help us stay ahead of inflation across many categories, from daily operations to our capital spending on cell construction and machinery, and heightened regulatory costs. Notably, we are also capping several sites this year which reflects our commitment to further lower emissions and improve gas capture for renewable energy. On this topic, in mid-July, we announced the signing of an agreement with Waga Energy to build and operate RNG facilities at three of our landfills. Waga's proven track record and expertise in this field confirms that they are a strong partner to lead the next stage of our RNG development projects. We expect RNG to be another opportunity for driving higher returns and sustainability across our landfills. On the collection line of business in terms of the second quarter, we achieved great execution once again through the leadership of Sean Steves and his team. We posted another strong quarter with both adjusted EBITDA growth and margin expansion in collection operations exceeding our budget in the quarter. As I highlighted, our cost reduction investments and operational initiatives improved several of our key operating metrics, both sequentially and year-over-year. We accomplished this while maintaining a high level of service excellence. Looking ahead, our focus remains the same. As of the second quarter, 60% of our routed fleet has onboard computers and over 50% of our addressable residential collection fleet is automated. This strategy is paying off, but we still have room for further operational enhancements and investments to drive higher returns. Resource Solutions. Notably, as of mid-June, our fully upgraded Boston recycling facility is up and running. Recycling is at the core of this company, and this approximately $20 million investment represents a meaningful component of sustainability to many customers in the greater Boston area. The upgrades are expected to drive higher material throughput, enhance end product quality, and improve operating efficiency, while advancing the safety profile of the facility. Like any investment we make, we balance environmental stewardship with economic returns to support the longevity of our programs and services. Our SRA and other risk-mitigating features in our contracts are examples which have greatly limited the financial impact of current recycling prices. Including the Boston MERC, we expect positive contributions to our results from our recycling operations over the remainder of the year. Finally, I'd like to highlight our capital allocation and growth strategy. Following our recent debt and equity raises, the strength of our balance sheet positions us well to continue growing the business and driving further free cash flow growth. Our acquisition pipeline of about $500 million in annualized revenues over the top of the Northeast footprint combined with approximately $400 million around our Mid-Atlantic operations provides a great opportunity for us, and we will remain opportunistic in our approach. Aside from the GFL operations we acquired in June, we announced the pending acquisition of Twin Bridges in New York with approximately $70 million of annual revenues. The acquisition cleared HSR review on July 14, and is currently being reviewed by the New York Attorney General's office, targeting a close by the fourth quarter. Overall, we have a strong runway that positions us for continued growth and driving long-term shareholder value. We look forward to our continued ability to grow in a disciplined fashion. And with that, I'll turn it over to Ned for some more detail on the financials.

Thanks John and good morning, everyone. Revenues in the second quarter were $289.6 million, up $6 million or up 2.1% year-over-year, with 1.8% of the year-over-year change driven by acquisition activity. Solid waste revenues were up 7.6% year-over-year with prices up 7.7% and acquisition growth of 2.5%, while volumes were down 2.6%. Revenues in the collection line of business were up 9.2% year-over-year with prices up 8.2% and volumes down 2.3%. Volume declines were primarily driven by higher churn in the residential line of business associated with pricing programs, and we experienced lower roll-off activity split between industrial customers and temporary construction jobs. However, despite these declines, we improved the quality of revenue, grew our adjusted EBITDA, and expanded margins in both of these lines of business. Revenues in the disposal line of business were up 5.7% year-over-year with landfill pricing up 7.7%, while landfill tons were down 6.1%. The landfill volume declines were entirely driven by lower priced special waste volumes that were down year-over-year. As expected, Resource Solutions revenues were down 11.6% year-over-year due to our average commodity revenue per ton declining roughly 53% on lower cardboard and mixed paper pricing, lower metals pricing, and lower plastics pricing. This decline in commodity prices was partially offset by a 7.6% growth in processing fees at the MERC. Commodity prices hit a high point in April 2022 and then declined 67% through the remainder of 2022, hitting a multi-year low last December. Combined prices have rebounded from this low level, up roughly 30% sequentially from December through June. Adjusted EBITDA was $72.2 million in the quarter, up $3.7 million or 5.5% year-over-year, with $2.8 million of the growth driven by improvements in our base business and $900,000 derived from acquisitions. Solid waste adjusted EBITDA was $68.4 million in the quarter, up $9.5 million year-over-year, with collection and disposal both up year-over-year. Resource Solutions adjusted EBITDA was $3.8 million in the quarter, down $5.6 million year-over-year, with negative performance mainly driven by two factors. Adjusted EBITDA was down roughly $3 million due to lower commodity prices. Our risk mitigation commodity programs helped to offset most of the significant drop in commodity prices. Unfortunately, these programs are not fully implemented in several newly acquired markets that had legacy contracts that do not allow us to pass recycling risk back to the customers. These markets accounted for roughly 60% of the year-over-year decline from commodity prices. In addition, adjusted EBITDA was down $2.5 million at our Boston recycling facility, as the facility was shut down for most of the quarter while we completed a full technology upgrade. Revenues were lower as we displaced volumes and costs were higher as we had to transload volumes to other facilities. Adjusted EBITDA margins were 24.9% for the quarter, up 80 basis points year-over-year. Solid waste margins were 31.4% in the quarter, up 230 basis points year-over-year, partially offset by the weakness in Resource Solutions. Our pricing programs once again covered cost inflation in the quarter, with solid waste price as a percentage of total revenues up 6.4%, partially offset by 490 basis points from inflation. Further margin bridging items include a 45 basis point improvement driven by solid waste operating efficiencies, partially offset by lower volumes, a 35 basis point tailwind from lower fuel costs and lower recovery fees, which were partially offset by a 105 basis point headwind from the shutdown of the Boston MERC and lower recycling commodity prices, a 35 basis point headwind from lower landfill gas to energy performance, and a 10 basis point headwind from acquisitions. Moving on, the second quarter includes several unique items in the income statement that we highlighted in our press release and have additional disclosure in our 10-Q. These included a $6.2 million legal settlement charge in connection with the settlement of a class action litigation matter relating to Fair Labor Standards Act and state wage and hours loss, and an $8.2 million loss from the termination of bridge financing for the secured and unsecured bridge loan associated with the acquisition of the GFL operations and the pending Twin Bridge's acquisition. Excluding these non-recurring items and several other one-time costs, adjusted net income was $18.8 million in the quarter, flat year-over-year. It was a busy quarter for our team from an M&A and financing perspective. On April 3rd, we acquired a hauling and transfer company with approximately $10 million of annual revenues. On June 30th, we acquired GFL solid waste operations in Pennsylvania, Maryland, and Delaware, with approximately $185 million of annualized revenues. On June 9th, we entered into the asset purchase agreement to acquire Twin Bridge's assets with approximately $70 million of annual revenues. To support these acquisitions, we completed several financing events. We entered into a $375 million secured bridge financing to provide committed capital for the GFL transaction. This bridge was never drawn, and on May 25th, it was terminated when we entered into the $430 million delayed draw Term Loan A. The Term Loan A is priced on a grid with an initial pricing at SOFR plus 2 and 3/8. This pricing will drop to SOFR plus 1 and 7/8 next quarter. In addition, we entered into a $200 million unsecured bridge financing to provide committed capital for the planned Twin Bridges transaction. This bridge again was not drawn and on June 16th, it was terminated when we closed on the $517.5 million common stock offering. As of June 30th, post the GFL acquisition, we had $1 billion of debt, $466 million of cash, and liquidity of $738 million including the availability on our revolver. Our consolidated net leverage ratio was 2.35 times, our average cash interest rate was approximately 3.74 times, and we had fixed interest rates on 64% of our debt. We have earmarked approximately $219 million of cash on hand to complete the Twin Bridges acquisition. Post the Twin Bridges acquisition, we will still have significant liquidity to support our M&A pipeline with a focus on building additional density in the Mid-Atlantic and across select Northeastern markets. While adjusted free cash flow started the year a bit light due to working capital and capital expenditure timing differences, these headwinds were mainly resolved in the second quarter. Adjusted free cash flow was $49 million year-to-date through June, up roughly $2.8 million year-over-year and on track to hit our fiscal year guidance range of $123 million to $129 million. Given the expected contributions from acquisitions closed through the first half of this year and the expectation that our solid waste operations will continue to perform well against budget, we increased our revenue, adjusted EBITDA, and adjusted free cash flow guidance ranges for the year. However, given the negative impact of several non-recurring items I focused on earlier and the higher interest expense associated with the financings, we have lowered our net income guidance for the year. The updated guidance ranges include the contribution from the acquisition of the GFL assets but do not include the pending acquisition of Twin Bridges. As always, we'll update our guidance after completing the acquisition. As part of the updated guidance ranges, we increased our adjusted EBITDA guidance range by $23 million, with roughly $20 million of this increase associated with the newly acquired GFL operations and $3 million from the base business. As I mentioned earlier, our internal rate of inflation is running at about 4.9%. That's down over 100 basis points from last summer, and we have definitely seen inflation cool off a bit in the business. We do expect to outpace this inflation increase with adjusted EBITDA margins by 70 basis points for fiscal 2023, which is an improvement from our prior guidance range. We are forecasting solid waste prices to be up 6.5% to 7.5% and volumes to be flat through the second half of the year. Additionally, we forecast recycling commodity prices to remain flat at current levels through the remainder of the year. We have conservatively increased our fiscal 2023 adjusted free cash flow guidance range by $4 million, with all of this increase associated with the newly acquired GFL operations. While we expect continued operating cash flow growth and the working capital timing differences to resolve further through the remainder of the year, higher capital expenditure costs due to inflation and higher interest costs offset this growth in the existing base business. And with that, I'll turn it back to the operator for questions.

Thank you. And our first question is going to come from the line of Tyler Brown with Raymond James. Your line is open, please go ahead.

Hey good morning guys.

Good morning.

Hey. Lots of detail as usual. But Ned, can we kind of go back over some of the margin pieces? I think you said fuel was 35 basis points. And then I couldn't tell was it commodities in Boston was 105? Or can you just walk through that a little bit more?

Yes, sorry. Yes, there are a few numbers there. So, we had solid waste price as a percentage of total revenues was up 6.4%, with inflation dropping by 490 basis points. And then we had positive contributions of a 45 basis point improvement within the solid waste business and a 35 basis point tailwind from fuel net of lower fuel prices, but we also had lower surcharges. And then we had a 105 basis point headwind, and that was from Boston and recycling commodity prices, a 35 basis point headwind from landfill gas to energy, and a 10 basis point headwind from acquisitions.

Okay. And then as Boston kind of turns back on, does that become a margin boost in the back half? Is that the right way to think about it?

It does. We're expecting about $1.5 million to $2 million of positive impact in the second half of the year from Boston. We're still in that 90-day ramp-up phase. It started off the second to third week of June. This is one of the more technologically advanced processing facilities in the country. Machinex is doing a great job, but there's a lot of work to get all of those systems completely in sync. So, that will continue to happen, but we're really positive about where we sit. And next year, if you think of how you get the benefit of the investment, you'll also see the removal of that negative comp in the year. So, this could be a $6-plus million tailwind coming into next year, which will be really positive for the resource business.

So, I would assume you readdress contracts without SRA fees?

Yes. So, we talked about this last quarter. There's a handful of contracts out there that don't have the SRA fees. There are a couple of notable ones in Connecticut and a few notable ones around our Western Massachusetts recycling facility as well. These accounts involve a couple of million dollars a year of negative headwind. We have worked with communities and different businesses over the last decade to share that risk more effectively. We don't have an expectation that we can't do the same thing here over time.

Yes. And those contracts are really related to acquisitions, and we'll renegotiate them at the end of their contract terms.

Okay. And then I wanted to hit on volume. It came in a bit weak. You gave some color, but it's interesting because this is actually something we've seen with a couple of the other companies that have reported. Maybe it's idiosyncratic, maybe not. But can you bridge that down to $6 million? Was it just broad weakness? Or was there something idiosyncratic that affected your franchise?

Yes. So, I listened to waste management earnings, and I'm not sure much of what we saw is not all that dissimilar. So, at the landfill, we saw MSW volumes basically flat. And we saw C&D up a little bit, which is interesting. But we saw almost every single special waste category down. We saw sludges down, which is a little bit of our own doing because we're trying to have less of those materials in the landfill. But then we saw all other special waste categories down; contaminated soils, buds, ashes, you name it, asbestos and other categories were down year-over-year. We also saw industrial roll-off activity down, and we've seen our pipeline stretch out a little bit there. I think what it really is, as everyone knows, industrial companies and large businesses are looking around themselves and slowing their capital cycles a bit due to the banking crisis and some of the stress in the economy, while the consumer remains strong. Some of these projects that might be a bit discretionary in nature are getting pushed off a bit, and we’re seeing that flow through both on the roll-off side of the business and into the special waste categories at the landfill. On the residential side, Sean and his team are trading price for quality of revenue and making sure we have the right mix in our business. As you know, like every other trucking business, we have struggled to always fill seats and have high-quality drivers and mechanics. So, we've been in a mode of making sure we're really doing business for the right return level, and that's a significant focus for the team. So, you see a little bit of that churn there. Not a lot of things to be disappointed about, as we are improving margins and quality of revenue.

Okay. And then is it in the guidance kind of flat volume in the back half? Is that what I heard?

Yes, that's where we are right now. We have a little more visibility on some special waste projects, and the comps are a bit easier. Last year started off a bit hotter on volumes and tapered off through the second half of the year.

Okay. And then, Jason, just a couple of modeling questions, what is the M&A contribution for this year in the guidance today, which excludes Twin Bridges, but roughly what is that in solid waste? And what should we expect kind of the run rate on interest expense to be?

Yes. Just one clarifying point, and Jason can hop in. The guidance does not include Twin Bridges. It just includes the GFL operations.

Yes. So hey Tyler, in terms of GFL, in the back half of the year, roughly $91 million in revenues in the second half of the year. Then we also have revenue rollover from acquisitions completed in 2022, which will be about another $3 million added to the back half of 2023. We got about $12 million in revenue in the first half of the year. Additionally, we completed a tuck-in acquisition in April of this year, Triple T trucking, that we announced with Q1 earnings, and that was roughly $9 million in annualized revenues. So, we'll get the pro-rata portion of that in the second half of 2023.

Okay. That's helpful. And then, John, I got maybe my last one here. I read an article a couple of weeks ago about an intention to reopen Hardwick. I know it sounds like it's kind of far away and there's a lot to do to get there. But I'm just curious if those reports were correct and what was the driving factor in looking into that?

Yes. Actually, there’s a development team associated with the community that came to us and asked us if we would be interested in working with them to potentially reopen it. So it's true. We made a presentation to the Board. Brian and Oliver made that presentation about three weeks ago to the Board. It is still very early in the process. There's a lot of heavy lifting to be done, but there is capacity there for 20 years. We're happy to push forward to the extent that we continue to enjoy a favorable response from the community. It certainly is a possibility for additional capacity in the future.

And to flash back in time, this was a site that did not run out of capacity but needed some selling changes. It hinges on great support for us to invest here.

Okay, so it's something to stay tuned for. It seems like it's a bit far off, but we'll get there.

Indeed.

All right. Listen, I'll turn it over. I appreciate the questions.

Thanks Tyler.

Thanks Tyler.

Thank you. And our next question is going to come from the line of Michael Hoffman with Stifel. Your line is open, please go ahead.

Good morning. Hoping it's sunny in Vermont today, not rainy.

It is, Michael. It's hard to believe, but the sun is out.

Every other day.

We had three inches of rain yesterday afternoon. So, it may be coming towards you, unfortunately. On recurring revenue volume, can we talk about underlying characteristics of the recurring revenue volumes? So, I think of small container service interval changes, new business formation, large container permanent inside office building schools, things like that. What are those trends like?

Jason, do you want to hop in on that?

Yes. I'll start, Michael. So, in the second quarter, just focusing on our commercial line of business, where many of those attributes would be. Our volume in the commercial collection line of business was flat year-over-year in the quarter. We did experience net new business activity in the quarter in terms of net new revenue from a sales perspective; i.e., we gained more new accounts than we lost. Yards per lift were flat from an operational metric perspective. Price was quite positive in the quarter in our commercial line of business, up about 9%, and we expanded adjusted EBITDA margins by about 100 basis points.

Okay, that's terrific. And then just to touch on your renewable energy, can you tell us what your current amount of MMBtu you're playing with? And then what the development with Waga would add?

Yes. We have two projects currently in development, one located at our North Country Landfill in New Hampshire and another at a different site. Together, these projects represent approximately $1.3 million of MMBtus. Additionally, we recently announced a partnership with Waga, in which they will develop and own the infrastructure at three of our sites. They will also invest in its development and operation, while we will benefit from revenue shares generated from gas sales and RINs. We believe this agreement is very beneficial and has the potential to create significant value for our shareholders over time. The process for permitting, building, and bringing these projects online will take about two years, but there will be tangible benefits following that period.

So, when you refer to margin headwind from landfill gas, is that electricity based in the quarter?

Yes. So, we still have a number of facilities producing electricity. We definitely saw a sizable headwind year-over-year in those facilities as RECs and power sales were down.

Okay. And then back to Boston for a second. We've been hearing through various sources that the Boston three-year or five-year contract renewal cycle starting for 2024 may actually extend you and not go through a contracting process and focus on just collection and disposal since the disposal side may be up so much. Do you have any color on that? Because that would be good. You put $20 million in there, and you've got a shared rollover into the next sort of three to four years.

Yes, I don't think that we have any comment on it at this point in time, Michael. I think in the ordinary course of business, they would go out to bid. It's certainly a possibility, but it's nothing that we would comment on at this point.

Okay. And then fleet replacement, how do you stand there? And what's the sort of positive impact to repair and maintenance cost, if that's improving?

Yes, we've had a little bit of an uptick. Michael, this is Sean. Truck delays are nothing out of the ordinary. The fleet is in the best shape it's been in the history of the company, actually. We went thoroughly through the GFL trucks, and we're pleased with what we have down there. We have some automation opportunities, and overall, it's looking good.

Yes. Sean, probably our highest inflationary categories are still parts, tires, and maintenance outside repairs, also some of our highest inflationary categories. On the capital side, trucks and landfill construction are also still at a heightened level too. We see those as outliers that aren't dropping as fast as other categories.

Could we please get an update on the landfill situations in New Hampshire and Boston, as well as the timeline for McKean?

Sure. McKean is under construction now. I think we had talked about we received all of our permits last quarter and now under construction. We anticipate early in 2024 with McKean beginning to ramp up. It will take one or two years to ramp. We don't expect to see significant tonnages at the start. It will ramp over a period of time. The Dalton facility is just moving forward with permits, nothing really to report there, just continue to move forward from a permitting perspective. Same thing with regard to Highland. We're doubling the permit at Highland, post-community agreement in place. Sam and the engineering team are working with the DEC to expand that permit as well, and we expect to have that likely towards the end of the year.

Okay. And then I have to ask it because you bought GFL. So, when do we hear about your first M&A deal in the PA, Maryland, Delaware market?

Well, we might want to do a little more integration, Michael. Maybe another week or two of integration before we do that. Only kidding. I mean, I think that clearly, Kyle, the real benefit of having Kyle manage those assets and then having him work for us from a business development standpoint is that we do have a great portfolio of opportunity there. It wouldn't be surprising to see something happen. But we are really focused on the integration at this point in time. We want to get that done very well, which the team is in the midst of at this point. So, I wouldn't anticipate something on an immediate basis, but the portfolio is just a terrific opportunity there. So, it will begin to happen soon enough.

Okay. Thank you very much.

Thank you, Mike.

Thank you. Our next question is from the line of Sean Eastman with KeyBanc Capital Markets. Your line is open, please go ahead.

Hi team. Thanks for taking my questions. I just wanted to come back to the 2023 guidance update, specifically the organic update. I think the M&A part of it is straightforward. But I just wanted to understand that, I think it was a $3 million kind of underlying EBITDA raise. I wondered if maybe that underlying raise is a little juicier than it might seem if you're overcoming some of these volume headwinds that weren't anticipated? Obviously, the weather has been challenging. Any color on that would be helpful.

Yes. I mean it's a good point because we are a little bit lower on the recycling side than we had expected. We had a bit more headwind there, and we've seen a little bit weaker special waste volume. So this is really a raise on the strength of great investments and great execution on the hauling side of the business and other areas where we've been able to flex costs and drive efficiencies and execute our plan. So, it's a good point. It is really important to note that even with a little bit of weakness in volumes, you see what we're doing on the margin side of the business, and it's pretty incredible. I mean we increased margins by 230 basis points while shedding some volumes, and that really shows our ability to be nimble. The investments we've had in systems like Power BI that give us good real-time tracking, and our onboard computing, along with automation, allows us to reroute trucks rapidly, taking costs out of the system.

That's helpful. And then I'm trying to think through the margin bridge for next year with all the moving parts in the model. Usually, we're starting at that 50 basis points kind of baseline entering the year. We know recycling is going to be a tailwind. We've got some M&A dynamics going on. Maybe that price cost spread visibility is looking pretty good into next year with inflation coming down. Just curious where your head is going as we think through that assumption.

Yes. We've had a lot of moving pieces recently as you correctly identified. We haven't updated our models a lot. We're just stepping into budgeting right now. But all of the points you made are valid; recycling will become a positive driver into next year given the Boston shutdown, even if commodities are a little weak, we still have some tailwinds there, and we are outpacing inflation with our pricing programs. We are very confident there. Operating programs, we still have multiple investments we’re making this year into next year to drive more returns in that space. And then, you look at the acquisitions; they are coming in at good margin points and not dilutive day one. So, we could be setting up for a year better than 50 basis points. I think we've got more work to do before we start to guide next year, but your perspective is fair.

Okay, got it. And then last quick one for me. Just looking at the bridge from vanilla free cash flow to adjusted free cash flow, those two acquisition-related items that step up are unsurprisingly around a large deal being folded in. But I just wanted to make sure I understand what's going in there on this post-acquisition and development CapEx line and the cash outlays from acquisition activities line, just understanding what those adjustments are?

Yes, the cash outlays from acquisition activities include lawyers, consultants, and work on engineering. The post-acquisition and development capital expenditures reflect initial dollars we put to work to drive synergies or to address facilities or safety issues. It's always contemplated in our pro formas, but we carve that out separately as a line item to give clarity on that additional investment we’re making in the businesses in the first 18 months.

Okay. Thanks. Thanks for all the perspective.

Thank you, Sean.

Thank you. And our next question is going to come from the line of Stephanie Moore with Jefferies. Your line is open, please go ahead.

Hi, good morning.

Good morning.

Could you share your insights on what you're observing in the private sector, particularly regarding your competitors? I have a two-part question. First, what is the current appetite for mergers and acquisitions in that segment of the industry? Secondly, are you still witnessing the same level of rational behavior in pricing among those competitors as we have seen over the past year, or has there been any change in that respect? Thank you.

I think that there's significant activity, and I think when you look at inflation, the challenges, and recycling commodity prices. The atmosphere from an M&A standpoint is very strong. Businesses that historically we really didn't think would be for sale are now for sale. So activity is robust.

But we're not seeing the private market being very active in buying things because their access to capital is maybe dried up a bit.

Yes. Yes, I think that there's not a great deal of activity. Certainly, on larger transactions, you'll see activity and higher pricing. But on the smaller transactions, there's not a lot of activity from a competitive standpoint.

And then on pricing, John kind of answered that in the first part of this question where there's anxiety around inflation and recycling has been a really significant headwind, I think for companies across the Northeast in the last year. The cost of capital is also a big deal for smaller companies. They're all looking at the same things we’re looking at ensuring they can cover their costs and the cost of capital, which is resulting in changes in pricing.

Yes. And in addition to the disposal increases, labor difficulties prevail. I mean there's a significant amount of activity that is driving M&A. As Ned said, there's not a lot of activity from a competitive standpoint on smaller deals.

No, that's really helpful. And then maybe just a follow-up to that point. In terms of the go-forward opportunity to price, even as inflation continues to come down, how do you view just the overarching pricing opportunity in your markets?

Yes, it's interesting. We see the headline stack coming down, but I mentioned a minute ago that some costs that impact our specific industry are still pretty high. We notice it across parts, maintenance, outside repairs, tires, but then you move over to construction elements, and we haven't seen inflation peak yet. Equipment demand remains high. From our vantage point, in our pricing programs, it's business as usual. We're going to be out there trying to recover and recover slightly in excess of inflation, being nimble with what we're doing on the street. That's our intention through the rest of the year and into next year. Our goal is always to be 50 basis points ahead of inflation when looking at pricing programs.

Absolutely. All right. Thank you so much.

Thank you.

You're welcome.

Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to John Casella for any further or closing remarks.

Operator, I think we do have one follow-up.

I do. I see Mr. Hoffman. So, just one moment.

Go ahead, Michael.

I wanted to revisit the discussion from the last question because it's crucial for everyone to recognize that as inflation decreases, the pace of price changes will slow. What's key is the implied question about maintaining the spread even as that rate of change diminishes. It's vital for the market to realize that the industry is quite skilled at this, and you are as well. Thus, even if prices are 100 basis points lower next year, you'll still maintain the spread.

Yes, I should have been clear too, Michael. You're aware of this, but maybe not everyone is on the call. Over 70% of our collection book of business is not tied to CPI. There are contracts where we have the ability to price as necessary in whatever inflationary environment. That’s how we structured many of our agreements and contracts. We do have some CPI linked or set pricing contracts, so our book of business may be a little different from our peers, and we can be very nimble to ensure maintaining that spread. So, if inflation begins to decline, we can adapt our pricing to a lower level, as you said, but we're still working to outpace inflation by 50-plus basis points. With our book of business not being so CPI-linked, we remain nimble with that and ensure we achieve the right price points. We've done a great job over the last five, six years.

Okay. I just wanted to make sure we had that clarity.

Yes, thank you.

Thank you. And I do see another follow-up question, just one moment. We have a follow-up question from the line of Tyler Brown with Raymond James.

Hey, just a quick follow-up. Jason, you didn't answer my question about the interest expense run rate.

Yes. Sorry about that, Tyler. Yes. As you came back into the queue, I realized what you're going to ask. So, no problem there. So, in our original guidance, our interest expense net that we guided to back at the beginning of the year was $26 million. In our updated guidance, we're at $35 million, which is reflective of the new Term Loan A, which is $430 million and funded on June 30th. That will run at about $26 million of annualized interest related to that, so we'll see half a year on that. Although we are experiencing higher levels of interest income as we have more cash on the balance sheet, we're putting some of that to work in conservative overnight investments with modest yields. So that's a partial offset of about $5 million.

Yes, I would say maybe more than modest yields. We're getting close to 5%. It covers most of that interest cost.

Yes, it's a good offset. So, $35 million is our new guide on the interest expense line. Cash interest should come in at around $33 million for the year.

And how much should we gain cash from income?

About $5 million. Yes, that's included in the 33%.

That's a net number.

Okay. I think I got it. Appreciate that.

Thank you. And now I'm showing no further questions, and I'd like to hand it back over to John Casella for any further remarks.

Thanks everyone for joining us this morning. I look forward to discussing our third quarter 2023 earnings with you later on this year. Have a great afternoon. Thank you.

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