Earnings Call Transcript - CWST Q3 2022

Operator, Operator

Good day. Thank you for standing by. Welcome to Casella Waste Systems, Inc.'s Third Quarter 2022 Conference Call. 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, sir.

Charlie Wohlhuter, Director of Investor Relations

Thank you, everyone, for joining us this morning. 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 2022 third quarter results. These results were released yesterday afternoon. Along with a brief review of those results and an update on the company's activities and business environment, we will be answering your questions as well. But first, I must remind everyone 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. 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. Reconciliation 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. And with that, I will now turn it over to John Casella, who will begin today's discussion.

John Casella, Chairman and CEO

Thanks, Charlie. Good morning, everyone, and welcome to our third quarter 2022 conference call. This was another great quarter, and of course, I'm really proud of our overall performance. Strong operational execution and robust pricing programs allowed us to outpace inflation as well as the recent sharp decline in recycling commodity values. We have good momentum carrying into the balance of '22 and looking ahead to 2023. We grew revenues by 22% year-over-year in the third quarter, while adjusted EBITDA grew by about 23% in the same period. Thus, we expanded margins, which is a notable accomplishment given the environment. We expect year-over-year margin growth in the fourth quarter and for the full year. At the same time, we continue to drive adjusted free cash flow growth. We are on track to achieve our multiyear goal of 10% to 15% adjusted free cash flow growth per year, highlighting not only our solid operating performance but also our capital discipline and continued execution against our growth strategy. We have great balance between organic growth within our core business and inorganic growth through acquisitions. Roughly 50% of our revenue growth year-to-date has been driven by growth within the core business, through new customer growth, coupled with higher pricing and fuel recovery fees. The remaining 50% of revenue growth has been driven by acquisitions. To date this year, we have closed on 13 acquisitions with approximately $48 million of annualized revenue, outpacing our target of $30 million. Our business model remains resilient and we are performing well. From a risk mitigation perspective, we ended the quarter at our lowest leverage ever. Further, we fully offset the higher impact of fuel prices through our fuel cost recovery program and expect to do so for the full year. We also have innovative recycling risk mitigation programs that will help offset most of the headwinds we will see from the global recycling markets. Ned and I will cover more on this topic, but all in all, we are well positioned. I'd like to provide a brief review of the execution against a few of our key strategies. We remain focused on improving returns at our landfill, and the positive volume and pricing growth we posted in the quarter reflects our performance. Landfill tonnages were up 6% year-over-year in the quarter due to our strategically placed in-market position of our disposal assets combined with great sales execution. It is our expectation volumes will remain positive as we close out the year. From a pricing perspective, improving the quality of revenue in our inbound streams is a major focal point. We measure this through our average landfill price per ton, which was up 8% in the quarter, helping us offset inflationary cost pressures and manage through heightened regulatory costs. Aside from the operational and pricing programs we have in place, our first renewable gas project, which is expected to come online in the first quarter of 2023, provides a sustainable solution with a strong return profile. Moving to the collection business, we posted another strong quarter of year-over-year adjusted EBITDA growth and margin expansion above budgeted levels. Our investment in return-driven technology solutions, along with our business process, enables us to be nimble and drive additional productivity and improve performance. We took fast action early this year to address the inflationary environment by resetting our budgeted pricing programs. In the quarter, collection price was up over 7%. In addition to positive pricing combating inflation, our fuel recovery fee program fully recovered higher fuel costs in the quarter. From an operational perspective, Sean's work in further deploying automated trucks and onboard computers across our fleet mitigates higher costs while driving improved margins. We are making return-driven investments across our collections fleet, and we see a runway of opportunity into the future. We believe these enhancements will continue to improve our safety profile, service, employee attraction and retention, sales growth, and operating efficiency. Next on Resource Solutions, on Tuesday, we published our 2022 sustainability report, highlighting our vision and the progress we are making to achieve our sustainability goals. This is a collaborative effort by many and demonstrates how sustainability is intertwined within all aspects of our business and strategy. Our Resource Solutions segment is not only a key part of that focus but a business segment that we continue to invest in as we aim to drive economical and environmentally balanced solutions for our customers. We're making technological upgrades at several of our recycling facilities. The early results are quite positive with increased safety, throughput, and operating efficiencies. But the focus doesn't stop there. Customers continue to ask for ways to reduce their environmental footprint. In fact, I recently visited a large customer who is looking for solutions to reduce their Scope 3 emissions by driving higher recycling and materials management. This is just one example of a growing opportunity, and I believe we are very well positioned to support this trend going forward while generating solid financial returns. With regards to the recent performance of the recycling commodity prices, as you know, the team has done a fantastic job creating risk mitigation programs with the sustainability recycling adjustment fee. We implemented our SRA fee several years ago, and it shifts the vast majority of the recycling commodity price exposure to our customers. Finally, I'd like to highlight our capital allocation and growth strategy. We continue to have success executing against our growth strategy through our disciplined approach, targeting strategic fit and follow-through on integration to achieve expected returns. Our pipeline remains robust, over $500 million in revenues of identified opportunities of our existing operating footprint we're currently working on. Several acquisitions currently have approximately $30 million of annualized revenues under LOI. Clearly, we have a great opportunity to continue to drive value by way of growing the business through acquisitions. Wrap it up, I'm obviously very proud of the performance thus far in 2022 from our team's execution against our key strategies. But before I turn it over to Ned for more details on the financials, I'd like to take a moment to recognize our team's tireless dedication and commitment to our core values, which is apparent day in and day out. They've weathered the worst of the pandemic and are working together to ensure exceptional service to our customers and the communities that we serve. In recognition of this, in early December, we're paying out a special bonus to our hourly employees as a thank you for contributing to the company's success. I'm exceptionally proud of the hard work and service of our entire team. And with that, Ned, the floor is yours.

Ned Coletta, President and CFO

Thanks, John, and good morning, everyone. I'd like to start also by thanking our team for another great quarter. We beat our plan during the quarter and year-to-date despite the challenging backdrop of historically high inflation, rapidly rising fuel costs, and a significant drop in commodity prices. Our team once again did an amazing job accelerating cost efficiency programs to help moderate inflation, realigning our pricing plans to offset the heightened costs, and ensuring the eligible customers were on our fuel cost recovery program. Further, as John mentioned, our recycling risk management programs worked as intended and have done a great job offsetting the significant decline in recycling commodity prices. This is a great testament to our ability to remain nimble in a dynamic economic environment. I believe that we are well positioned to course correct and execute in any environment at this point in time. Moving on to the quarter. Revenues in the third quarter were $295.3 million, up $53.3 million or 22% year-over-year, with 8.5% of the year-over-year change driven by acquisition activity and 13.5% of the year-over-year change from organic growth. Solid waste revenues were up 20.4% year-over-year, with price up 6.6%, volumes up 2%, acquisition growth of 5%, and our fuel cost recovery fees up 6.4%. Revenues in the collection line of business were up 21.2% year-over-year, with price up 7.2% and volumes slightly up. Revenues in the disposal line of business were up 19% year-over-year, with price up 6% and volumes up 6.4%. Landfill pricing was up 5% year-over-year. However, this doesn't tell the full story. Our average price per ton was up 8% as we continued to improve the mix at our sites. Landfill tons were up over 6% in the third quarter and after a slow start to the year, are now up close to 3% year-to-date. Resource Solutions revenues were up 7% year-over-year with 18.2% growth from acquisitions, 7.7% volume growth, and our processing fees and other price up 12%, with all of this offsetting the lower commodity prices in the quarter. Our commodity prices were down roughly 37% year-over-year on lower cardboard and mixed paper pricing, lower metals pricing, and lower plastics pricing. In fact, commodity prices hit a high point back in April and have declined roughly 55% a ton from April through September with weakness across all classes. Adjusted EBITDA was $70 million in the quarter, up $13.8 million or 22.5% year-over-year, with $10.7 million of the growth driven by improvements in our base business and a little over $3 million derived from the rollover impact of acquisitions. Given our strong performance in 2022, as John said earlier, we accrued $1.2 million in the third quarter and plan to accrue another $1.2 million in the fourth quarter for a special onetime bonus for all of our hourly frontline and back office employees that have worked so hard to help us excel in this environment. We plan to pay this bonus out in early December. Adjusted EBITDA margins were 25.4% in the quarter, up 10 basis points year-over-year, a strong sequential improvement and exactly on plan for the quarter. Once again, our pricing programs covered cost inflation in the quarter, with solid waste price up 6.6%, offset by a 5.9% headwind from inflation, excluding fuel. Further margin bridging items include: an 80 basis point improvement from general operational improvements and volume gains; a 50 basis point improvement from our fuel recovery program, net of higher fuel costs; a 75 basis headwind from acquisitions; a 75 basis point headwind from recycling commodity prices; and roughly a 40 basis point headwind from the special bonus accrual. As fuel prices peaked and began to decline during the third quarter, our fuel cost recovery fees began to catch up both with the cost and margin under recovery experienced during the first six months of the year. Solid waste adjusted EBITDA was $67.1 million in the quarter, up $14.8 million year-over-year, with strength in both collection and disposal. Resource Solutions adjusted EBITDA was $7.8 million in the quarter, down $1.2 million year-over-year, with improvements in the industrial and organic operations, offset by lower performance in recycling MRFs. Cost of operations in the quarter was up $36.4 million year-over-year or up 84 basis points as a percentage of revenue, with most of the increase due to higher fuel costs and mix changes driven by acquisition activity. General and administrative costs in the quarter were up $3.4 million year-over-year but down 120 basis points as a percentage of revenues as we continue to gain cost leverage on higher revenues, our efficiency programs and technology investments have also made a positive difference. As of September 30, we had $596.8 million of debt, $47.9 million of cash, and liquidity of $319.7 million. Our consolidated net leverage ratio was 2.16x. As John mentioned, that's a historically low level, and our average cash interest rate was approximately 3.3%. Our balance sheet is in great shape and positions us well to continue to grow while also providing stability in this rising interest rate environment, with fixed interest rates on approximately 73% of our debt. Our next major debt maturity is in January of 2025. And with our leverage now at 2.16x, we've reached the lowest pricing point on the grid for a senior secured credit facility, and our spread will drop to LIBOR plus 1.125%. Adjusted free cash flow was $81.7 million year-to-date, up $3.4 million year-over-year, with higher capital expenditures more than offset by higher net cash provided by operating activities, mainly driven by improved operating performance, partially offset by negative changes in our assets and liabilities. As stated in our press release yesterday afternoon, we have increased our fiscal year 2022 revenue, net income, adjusted EBITDA, and net cash provided by operating activities guidance ranges and reaffirmed our adjusted free cash flow guidance range. We increased our guidance ranges for the third time this year, mainly due to our stronger-than-planned pricing programs, continued execution against our operating efficiency initiatives, excellent cost offset from the matured fuel cost recovery fees, and the positive contribution from recent acquisitions. As part of our updated guidance ranges, we have contemplated that recycling commodity prices will decline another 20% from September through December, resulting in about a $2 million headwind in the fourth quarter. We expect higher net cash provided by operating activities to be partially offset by higher capital expenditures for the year, including our continued investments in newly acquired operations, growth capital investments for new contracts and customers, additional investments to accelerate operating efficiencies, and just higher inflation on things we're buying. Our internal rate of inflation is currently running at roughly 5.8% to 5.9%. We expect to outpace this inflation, increase adjusted EBITDA margins by roughly 10 basis points for fiscal year 2022 with more significant year-over-year margin improvements in the fourth quarter. As we discussed last quarter, if our cost inflation increases further, we have great flexibility to advance additional price increases on roughly 70% of our collection book of business, and our floating fees are doing a great job mitigating risk. And with that, I'll turn it back to the operator for questions. Thank you.

Operator, Operator

Our first question comes from Sean Eastman with KeyBanc.

Sean Eastman, Analyst

And compliments to the team on the quarter. Since I got in before Tyler here, I'll ask for the early look on the bridge to 2023 EBITDA. Maybe just a preliminary thought on some of those key puts and takes, just between recycling, operating leverage, that would be great.

Ned Coletta, President and CFO

Great. Yes. We haven't finished our budgeting for 2023 nor have we guided the year. But I think a lot of the building blocks that we expect to be in place for the fourth quarter really will roll into next year unless there's something unexpected. Right now, if you roll forward where recycling commodity prices are into next year, we'll be looking at, for the full year, a $60 or $70 a ton decrease, which would result in about a $4 million headwind to EBITDA next year from recycling. Our programs are working great and doing a really nice job offsetting the headwinds. Some of our newly acquired customers and operations will have our risk management programs in place and something we'll look to advance. On the pricing side, things are looking good there. We're putting together our pricing strategy for 2023, and we'll look to outpace inflation again next year and more than likely look for pricing programs in excess of 6%, 6.5% for the year, depending on where inflation is. And on the volume side, we don't see anything tailing off right now in our greater environment, both on the commercial side, the residential, the construction side. We just haven't seen a volume decline. So we're looking into early next year to see a stable environment there unless something changes. And we'll have more information on bridging items and guidance coming into next quarter.

Jason Mead, Senior Vice President of Finance and Treasurer

And Ned, maybe just to add one element there just on the M&A rollover here on the bridge. So Sean, as you know, we've completed 13 acquisitions this year with about $48 million in annualized revenues. We'll see about $12.5 million of revenue rollover next year related to those acquisitions and a couple of million dollars of EBITDA, which is typical. So 15% to 20% EBITDA margins on those acquisitions. So typically, we see lower margins first year post-acquisition as we get those acquisitions up to our consolidated margin levels as well.

Ned Coletta, President and CFO

Another data point, Jason, one more thing there is we'll end this year with about EBITDA margins up about 10 basis points, and I went through some bridging items earlier. But we'll be exiting the year in Q4 with a little bit stronger margin enhancement. We're up about 50, 60 basis points in Q4. We'll look next year to get back on to a normal cadence of advancing margin gains year-over-year, a little higher than 10 basis points back to that 40 to 50 basis points.

Sean Eastman, Analyst

Okay. A lot of helpful color in there. I'm just curious, within that 40 to 50, how much of that is sort of operating leverage on price-led growth versus the operating efficiency gains, which seem to be gathering momentum, if anything?

Ned Coletta, President and CFO

Yes. I mean, if you look at our quarter, there's always some onetime stop in the numbers. So it's hard to separate both, but we had great advancement of our core price ahead of our core inflation, and we had probably one of our best quarters from an operating efficiency standpoint. We beat on core price against inflation, almost 70 basis points, and our operating programs delivered close to 80 basis points to the bottom line. Now there are bridging items that worked against that, that help to mute some of those gains. But what we're seeing on the street and what we're seeing with our programs is really positive.

Sean Eastman, Analyst

Okay, excellent. And one last question. We've outlined many aspects related to the EBITDA lock, but could you expand on that with regards to free cash flow? It appears that capital expenditures are a bit higher. Other companies are discussing interest and tax factors. Is there anything you can highlight about that?

Ned Coletta, President and CFO

Yes. So I mentioned in my script that we've done a really nice job on the balance sheet, and we have our lowest leverage rate ever as a company. And right now, we've got 73% of our debt fixed, both through fixed positions and through interest rate swaps. So for a 100 basis point move in LIBOR or another rate with similar like SOFR, we'd expect roughly $1.6 million of higher interest costs. So we are going to see a little bit of a headwind there next year. On the tax side, our NOL position continues to serve us well and serve shareholders well, where we'll continue to offset the vast majority of federal taxes. And we'll see more and more state taxes coming into 2023. You're right. On the CapEx side, we are a bit elevated. And I would say we're running about 5% to 6% inflation on CapEx. And then the rest of the higher spend is really on good things. There are contracts we've won. They're on great investments to accelerate operating efficiencies and continuing to invest in acquisitions we've completed. So we'll give more color on that coming into next year and in specific investments.

John Casella, Chairman and CEO

Also the work that Sean's doing from an automation standpoint, just taking opportunity to move that more aggressively.

Operator, Operator

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

Patrick Brown, Analyst

Jason, real quick on the M&A rollover. So I think you said $12.5 million. So how does that split between solid waste and Resource Solutions?

Jason Mead, Senior Vice President of Finance and Treasurer

Yes. Good question. Thanks, Tyler. So of the $12.5 million, the split is roughly $5 million in Resource Solutions next year and $7.5 million in solid waste.

Patrick Brown, Analyst

Okay. Thanks for the modeling help there. But I do want to kind of go back to price a little bit. I noticed that if you look at your total solid waste pricing in the quarter, I think it was up 6.6%, but that was actually a slight deceleration from 6.9% last quarter. And frankly, it's a little bit different than what we saw at waste and republic, where Q3 actually accelerated. So I'm just curious, there could be some mix in there, I'm not sure. But can you talk about any puts and takes there?

Ned Coletta, President and CFO

Yes, you're correct. We experienced a slight deceleration. As a company, we typically do not have many contracts linked to CPI. Perhaps Waste or Republic, if they had resets on June 30, may have seen some acceleration into Q3, while we have very few significant municipal contracts tied to CPI. We started the year strong in January and February with robust pricing programs and made some adjustments in the spring. Things stabilized over the summer. As we approach the budgeting process in the coming weeks, we will begin to formulate our strategy for next year. It's not unusual for us to have higher pricing earlier in the year that gradually decreases throughout the year. This year, we observed that prices increased until June and then slightly declined in Q3. We are not losing pricing or experiencing substantial rollbacks; it's simply the natural rhythm of our activities in the marketplace.

Patrick Brown, Analyst

I believe the larger picture here is that you anticipate growth of around 6% to 6.5% next year. It seems like things will remain relatively stable, at least based on our current perspective.

Ned Coletta, President and CFO

Yes. I think we need to really get a good read on inflation. Our core internal inflation is running around 5.8%, 5.9% right now, which is the highest read we've had on that. But we might need to step that pricing setup even a little bit more, and we're working on that right now. And we'll have a better strategy in the next four to six weeks coming into next year. But as you know, we have a great amount of flexibility through both our collection and our disposal book of businesses where we can course correct through our contracts. We don't have a lot of things that are just linked to fixed price increases.

John Casella, Chairman and CEO

Yes, Tyler, there was nothing that was significant that was a one-timer in the quarter from a volume perspective. It was really just, I think overall, we saw positive trends across the Northeast at many of our disposal sites. And year-over-year, frankly, that's what drove our solid waste volume up 2% in the quarter year-over-year was through disposal. Collection was a little bit flatter in the quarter from a volume perspective, which is okay and fine. We've advanced a lot of price and fees in this environment as appropriate with inflation. So it was primarily landfills, Tyler, and we expect to kind of see that trend continue through the fourth quarter, barring any unforeseen weather in December, which is always a little bit TBD, right?

Patrick Brown, Analyst

Right, okay. No, that's helpful. Yes, go ahead, Ned.

Ned Coletta, President and CFO

And the commercial line of business had a lot of strength through the summer as well. It really was a bright spot in the collection line of business, which makes you feel good about the overall economic environment as well, Tyler.

Patrick Brown, Analyst

Congratulations on the balance sheet. I know that's a significant point of pride for John and the team. However, I'm a bit uncertain. Do you anticipate interest rates will rise next year? Or will the changes in the grid and the facility counterbalance that? It seems like it could still be a challenge next year, but I would like to hear your general thoughts on it.

Ned Coletta, President and CFO

Yes, it will. So I haven't done the calculation, but if we assume across the full year that LIBOR is up, say, 300 basis points or so, maybe that's not enough, but let's just assume 300 for the full average year, that would put us up $4.8 million of interest expense. And then moving against that our reduction in the grid, which would take off really less than $1 million off that. So we could see some headwind next year. We're doing a lot to keep leverage low in the business and make smart decisions on where we invest money.

John Casella, Chairman and CEO

There is no doubt that opportunities are continuing to grow. Depending on the outcome of the recession, multiples might contract slightly from a competitive perspective, which could actually be a positive for us given our capabilities and strong balance sheet. Therefore, it's important to view the situation optimistically, as the opportunities are quite substantial.

Patrick Brown, Analyst

Excellent. 53 deals. You guys have been busy. Appreciate the comments.

Operator, Operator

Our next question comes from Stephanie Moore with Jefferies.

Stephanie Moore, Analyst

I would like an update on the general capacity trends in the Northeast. It seems to be consistently declining, so any insights on that would be helpful. Additionally, could you share your thoughts on McKean and when you anticipate it will come online?

John Casella, Chairman and CEO

I don't think there’s any doubt that the supply and demand imbalance in the Northeast remains evident and is trending in that direction. Capacity continues to exit the market, with minimal new capacity being introduced. Currently, we are likely adding more capacity than anyone else in the market. The McKean project is progressing well, and we are in the permitting stage for some modifications to the rail infrastructure. This is advancing smoothly with strong support all around. We are on track to begin construction in 2023, likely in early 2024, and we expect it to be operational by early to mid-2024. As we ramp up, we don't anticipate reaching full capacity immediately, but we will start to increase output in 2024.

Ned Coletta, President and CFO

Yes. And a few of our other key initiatives continue to advance really well. Our permitting at Hakes is going well, permitting at Hyland landfill is going very, very well. Hyland is extremely well placed in western New York, about 50 miles away from a landfill that's scheduled to close in 2025, 2026. That landfill takes about 0.5 million tons a year. We're looking to increase Hyland from 460,000 tons a year to 1 million tons a year. So there's some other initiatives out there we're working on that will have a really nice impact over the next couple of years as we complete permitting and sites come offline.

Stephanie Moore, Analyst

Great. And then just as a follow-up to your margin performance. I know that you have several tech and digital initiatives underway here. Are you starting to see kind of any meaningful benefits from whether it's your fleet planning or automation or even some of your back-office ERP implementations? Or should we expect the lion's share of those gains to be more apparent kind of in 2023, 2024? Any color there would be helpful.

Ned Coletta, President and CFO

Yes, I can start and then Sean can provide more details about our automation and onboard computing efforts. We are making significant progress, which takes time. Investing in technology often involves an initial period of increased spending before we start seeing substantial benefits. Our major advantages this year, from 2022 into 2023, are primarily derived from our procurement initiatives, such as our use of NetSuite and Coupa, which have helped us standardize procurement processes. We are seeing improvements through increased digitization, digital payments, and utilizing our single-use cards to generate rebates. Additionally, we are enhancing our purchasing power with catalog-based procurement linked to Coupa, allowing us to buy items like containers and parts more efficiently. This work is streamlining our back office operations and reducing costs, ultimately benefiting our field personnel. We're also launching an exciting pilot for our service management process, covering our order to cash cycle. John points out that we've used the same system for 35 years, which has been highly effective, but modern demands from our staff and customers require more digital tools. We are enthusiastic about the developments in our pilot launch. On the fleet side, Sean has some excellent initiatives that are already producing significant cost savings.

Sean Steves, Senior Vice President and COO of Solid Waste

Yes. From an automation and conversion standpoint, we are booked through the end of next year, so we will do at least as many of those projects next year as we did this year. And from a technology perspective, we plan to escalate that a little bit next year and do more units for onboard computing on the trucks.

Ned Coletta, President and CFO

Yes, we're through about 45% of our fleet today on onboard computing. And will be through about 60-plus percent by the end of next year. And maybe you could just make a couple of comments about what that does for us, having computers in the trucks?

Sean Steves, Senior Vice President and COO of Solid Waste

The return on our onboard computers is very favorable. It impacts various aspects of our business. Our customer service representatives can verify service, whether it's a photo of a blocked dumpster or a residential home that forgot to put their bin out. We also see revenue opportunities with overloaded containers, which supports an incentive program for our drivers. Early indicators have shown that in markets where we have these driver incentives, turnover has significantly decreased. Staffing in the solid waste industry has been a major concern, and this technology helps drivers earn a little extra money. Simply put, the drivers appreciate the system; they enjoy not having to deal with paper anymore and are pleased with the tablets.

Ned Coletta, President and CFO

And we've had some great safety incidents too, where we're able to prove we weren't the cause of incidents and really push that liability to others, which is great.

John Casella, Chairman and CEO

And right now, we still have a fairly significant opportunity in terms of the work that we're doing for the future with regard to further automating the fleet, particularly on the residential side, getting to fully automated. So we still have some opportunity left there, right?

Ned Coletta, President and CFO

Yes. Like I said, we're planned out through the end of next year, and then it's a competitive process for capital with all the divisions. And then we pick the highest return for each one. But I feel, John, I can plot it out. In a couple of years, we'll get to our goal of automation, but as you guys know, for sure on the phone, we're probably not going to stop buying companies anytime soon. So that gives me plenty of work in the future. Usually when we buy...

John Casella, Chairman and CEO

Job security.

Operator, Operator

Our next question comes from Michael Hoffman with Stifel.

Michael Hoffman, Analyst

So very quick detailed question on 4Q. What's your interest rate for 4Q? What's the interest rate for 2023 based on where we are right now?

Ned Coletta, President and CFO

Yes. So for 4Q, do you have it, Jason? Or I can pull it.

Jason Mead, Senior Vice President of Finance and Treasurer

Yes. Our effective cash interest rate over the last five quarters has averaged around 3.4%. For the fourth quarter, it's up slightly from that but generally stays in that range. As mentioned earlier, we moved down to the lowest pricing levels in our credit facility due to our leverage at September 30 of 2.16x, which is also providing some benefit. I think Ned has the specific statistic here.

Ned Coletta, President and CFO

Yes, I think it's around 4.1%, income statement, effective interest rate.

Michael Hoffman, Analyst

Okay, that helps. And then with regards to fuel, when you share with us headwinds, tailwinds, are you accounting for that on a constant engine hour or miles-driven basis? Because you're doing a lot of M&A. There's been good volume growth. So there's more fuel consumed, period, that drove the cost out plus the price of the fuel went up. So how, in fact, you think about that?

Ned Coletta, President and CFO

Yes. Really good question. We should probably be more specific. So when I gave the good guide of about 50 basis points for fuel during that period. So during the quarter, our fuel cost recovery fees offset our cost of fuel, and we had some margin enhancement of 50 basis points. That was in just our core businesses, not any newly acquired businesses. So in that bridging, I said that we had a bad guide of about 75 basis points from acquisitions. I kept the fuel in with those acquisitions. In almost all cases, acquired companies don't have fuel cost recovery programs and that they're seeing some levels of inflation, it takes us months, if not a year, to get our fee programs into those companies.

Jason Mead, Senior Vice President of Finance and Treasurer

And if you don't bifurcate the M&A from the base business, year-to-date, it's been about a 40 basis point margin headwind, which is also what we expect in the fourth quarter and then the full year as it relates to fuel being offset by our energy and environmental fee.

Michael Hoffman, Analyst

You experienced higher volume in the core business, leading to an increase in total spending on fuel. This rise is not solely due to price increases; you would have incurred higher fuel costs regardless because of the greater volume.

Ned Coletta, President and CFO

Yes, it's a good point. I mean because the program's meant to generally offset the increases in price of fuel. And to your point, we're at the point right now where we're offsetting any price increases in fuel with our core program. If there's some volume increases, that could be another component. That hasn't been materially large this year. Most of the acquired customers were already into the program by earlier in the year and hasn't driven a big variance.

Michael Hoffman, Analyst

Okay, just to clarify for everyone listening, you will experience a margin headwind in the fourth quarter for fuel based on current trends?

Ned Coletta, President and CFO

That's our expectation. So these are trailing fees, right? So we saw fuel drop like a rock from July through September after it rose like a rocket ship in the first part of the year. We were behind all in Q1 and Q2, we're behind from a margin standpoint. We got a little bit ahead in Q3. We're estimating to be slightly behind in Q4, about 40 basis points. Margins for the full year, we're estimating to be about 40 basis points behind on fuel. This fee, as you're well aware, we're just trying to recover costs and it can have margin headwinds, Q3 is a little bit of an anomaly with that pickup.

Michael Hoffman, Analyst

I want to clarify that while we have great news regarding the volume, we need to recognize that in the third quarter of 2021, the tourism season was quite mediocre, and this quarter represents your best volume. Based on hotel occupancy and tourism data from the states, there was a significant tourism season in your regions during this quarter, which contributes to the increase. It's important to keep this in perspective.

John Casella, Chairman and CEO

That's very fair, Michael.

Michael Hoffman, Analyst

And you're well positioned. You have a great position to take advantage of it, but we want to make sure that we don't get over our skis on volumes running away.

John Casella, Chairman and CEO

Exactly.

Michael Hoffman, Analyst

I recently moderated a panel at a conference with participants from the Northeast, including a major burner operator. I asked whether they believe Boston's pricing will reset in 2024, and they indicated it would be above $180 a ton. What is the current spot market at the transfer station? Are you fully accounting for that potential upside, or is there still significant room for improvement? Could landfill pricing be even better?

John Casella, Chairman and CEO

I would say that the transfer station pricing is likely what they were referring to instead of disposal pricing. I believe there's more opportunity there because we're not currently seeing $180 a ton. However, it is over $100 a ton at transfer stations. This suggests there will be an opportunity moving forward.

Ned Coletta, President and CFO

Yes. This year, we need to improve our pricing strategy for transfer stations. We have experienced significant inflation on the third-party transporter side. Jason introduced a new transfer station energy and environmental fee, which we launched late in the second quarter, and it became effective in the third quarter, helping to address some issues. However, there are many factors at play, including shifts in waste flow, increased disposal prices, and rising transporter costs. This is a major focus for us, and the market needs to increase transfer pricing as we move into 2023.

Michael Hoffman, Analyst

Which adds momentum to why you have a 6 handle or better on price in '23?

Ned Coletta, President and CFO

Yes, absolutely. I mean pricing stats sometimes don't tell the full story. And we often will talk about the difference between just our disposal price, which is third-party customers, same customer going to the same landfill, same type of waste, has seemed a little bit muted the last few years at 5%. But that's because we're constantly looking to reblend our book of business and we're looking to vertically integrate more. If you look at the average price of what a ton is making into our site of total revenues divided by total tons, that's gone up 8% and that's a real good indicator to us that we are making good decisions in the marketplace to attract new customers. We are blending our own internal prices up at the landfills at the appropriate rate, and things are working well.

Michael Hoffman, Analyst

Okay. Regarding 2023, can you provide more clarity on the expectations for growth? Specifically, should we anticipate double-digit revenue growth, low double-digit profit, and improved free cash flow, or are there challenges that might limit us to high single-digit growth? I just want to understand the direction we are heading in.

Ned Coletta, President and CFO

I believe we are currently experiencing high single-digit revenue growth, double-digit growth in EBITDA, low double-digit EBITDA growth, and mid-range free cash flow growth of about 10% to 15%. We have not finalized our budget yet, but these are our foundational estimates. We expect some challenges due to recycling headwinds. Additionally, fluctuations in fuel fees could slightly impact our revenues, as they do not contribute to our profits. However, we are aiming for double-digit growth in terms of EBITDA.

Michael Hoffman, Analyst

Okay, that helps. And then lastly on the self-help question that was asked earlier. Had if you put dollars around what you thought the scope of what self-help would do over time and then what you've captured so far?

Ned Coletta, President and CFO

So there's a lot of opportunity there, and we were talking about earlier that if we can pick up 20 to 30 basis points of margin enhancement each year through Sean's automation efforts, onboard computing, back-office technology initiatives like that, that's a great cadence for us. And we don't see an end in sight in the next 3-plus years. There's a lot of opportunities we have across the franchise.

Michael Hoffman, Analyst

And is that incremental to you talking about being up 30 to 50 or is that part...

Ned Coletta, President and CFO

No, that's part of that. I mean hopefully, we can exceed those numbers. But if we say we're up 50 basis points on margins, it's a combination of price, self-improvement, and offsetting challenges that will always be a factor against us.

Michael Hoffman, Analyst

Okay. I just want to make a comment. If you look at your pricing history, you've typically performed better in the first half of the year, and then it tends to narrow in the second half. This is the first time we've experienced hyperinflation in 40 years, but before this, that was your usual pattern due to your pricing strategy. There's no need for anyone to panic about it.

Ned Coletta, President and CFO

No. And we're not either, but we're definitely conscious of what's going on in the external environment and really looking at whether we need to advance some more price.

Operator, Operator

And our next question comes from Michael Feniger of Bank of America.

Michael Feniger, Analyst

You highlighted the internal cost inflation in the quarter, 5.8%, 5.9%. Just what are the moving pieces there that's kind of driving that? And how do we kind of think about some of those moving pieces into 2023?

Ned Coletta, President and CFO

Yes. That's a great question. Jack Vande Water from our team developed our own inflation index because it's challenging to distinguish the price volume component of inflation, and we aimed for a consistent method to measure the elements of our inflation on the expense side. We assess capital separately. Our overall basket includes various costs such as labor, tires, facilities, and maintenance, but it excludes fuel, outside repairs, parts, and operational support, covering every aspect of our business. Currently, costs are trending higher than that 5.9%. Maintenance, parts, outside repairs, and labor are actually tracking below that figure. Labor has stabilized and even begun to decrease slightly from an inflationary perspective this spring into early summer, which is a positive sign. Facility costs are also showing more stability, and we've experienced less inflation in that area.

Michael Feniger, Analyst

Fair enough. I understand you mentioned it earlier. When considering capital expenditures in 2023, inflation is contributing to some increased costs, but many expenses are also related to your upcoming growth projects. Is the intensity of capital expenditures expected to be somewhat higher in 2023 and 2024 as you tackle these projects? How should we approach this?

Ned Coletta, President and CFO

Yes. So we've been running for a number of years now. If you look at pure running our business and keeping the lights on, 10.5% of revenues from a CapEx perspective. And then we've been doing more than that because we've been growing and we've had a lot of great opportunities to put money to work. And we see that coming into 2023 as well. We've got some new contracts we've won that we'll be putting capital to work on. We've got acquisitions where we're investing to drive synergies and integration. And then McKean, we'll be looking to invest about $20 million into bringing McKean online in 2023 into 2024. I don't have an exact split yet, but that will be some really good money put to work for shareholders for long-term value.

Michael Feniger, Analyst

Great. Just lastly, like I know this got asked earlier, but the pricing like on the collection or maybe even disposal, there's always a ceiling at some point. Do you feel like we're approaching that? Or is it just the cost inflation, it's understandable with what everyone's dealing with in their own business? How do you guys kind of think about that? And is there any type of undercutting or ceiling there that you guys are starting to bump up against?

Ned Coletta, President and CFO

Yes. So if you look at the Fed's data and you look at waste services as a percentage of a consumer's wallet or a business's wallet, it's less than 0.4% of that wallet. And frankly, we're just doing what we need to, to get the high cost of our business back to our customers, whether it be on the labor side, the truck side, environmental side. And I think our people are doing a really good job of assessing what we need to do and how to get that price back to the Street. And we don't look at it as whether there's a ceiling or not a ceiling. We're just trying to establish fair programs that get that inflation back to the market.

Operator, Operator

And I have a follow-up with Tyler Brown with Raymond James.

Patrick Brown, Analyst

Super quickly. Is RNG a material benefit next year? Is it maybe $1 million or $2 million?

John Casella, Chairman and CEO

It's not really. I wouldn't characterize it as material, right? I mean...

Ned Coletta, President and CFO

No, we'll need to provide you with the exact number, but we have two RNG facilities set to begin operations, one in the first quarter and the other likely in the third or fourth quarter. Overall, we'll have 1.3 million MMBtus available. It's important to note that we did not invest the capital in these facilities; our partners handled the investment, and we receive royalties from our gas sales and for RINs. Charlie, do you know how much that is across those two projects?

Charlie Wohlhuter, Director of Investor Relations

Yes. So just kind of assuming the first one will come online in the first quarter, and then the second one is going to be towards the end of the year, Tyler, assuming pretty conservative $2 D3 RIN price, we're probably looking at revenue contribution of about $2.5 million or so next year.

Patrick Brown, Analyst

Okay, okay. That's helpful. I think I can work with that.

Operator, Operator

I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Casella for closing remarks.

John Casella, Chairman and CEO

Thanks, everyone, for joining us this morning. We look forward to discussing our fourth quarter 2022 earnings and our 2023 guidance with everyone in February. Thanks, everybody, and have a great weekend.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.