Earnings Call Transcript - CWST Q3 2021

Operator, Operator

Good day and thank you for standing by and welcome to the Casella Waste Systems Q3 2021 Conference Call. At this time, all participants are in a listen-only mode. Please be advised that this call is being recorded. Please follow the operator's instructions.

Joseph Fusco, VP of Communications

Thank you everyone for joining us this morning, and welcome. This is our 97th earnings call or if you have been binge-watching us this is Season 24 Episode 3. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ed Johnson, our President and Chief Operating Officer; Ned Coletta, our Senior Vice President and Chief Financial Officer; and Jason Mead, our Vice President of Finance. Our recurring characters will join us as well today. Today we will be discussing our 2021 third quarter results that were released yesterday afternoon, along with a brief review of those results and an update on the Company’s activities and business environment. We will be answering your questions as well. But first, as you know, I must remind everyone that various remarks that we may make about the Company’s future expectations, plans, and prospects constitute Forward-Looking Statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-K, which is on file with the SEC. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.

John Casella, CEO

Thanks, Joe. Good morning everyone and welcome to our third quarter, 2021 conference call. We are very pleased with our performance and continue to execute against our core strategies. In the third quarter revenues and adjusted EBITDA were both up over 19% year-over-year. We also continue to drive free cash flow growth and through the third quarter, adjusted free cash flow is increased over 37% compared to the same period in 2020. Our core solid waste and resource solutions businesses are performing at high levels, as we continue to advance key pricing and operational strategies, which help ensure we stay ahead of inflationary costs related to labor, disposal, containers, and equipment. At the same time, we are growing our business meaningfully in a disciplined manner through strategic acquisitions and select development projects. So far this year, we have closed nine acquisitions with $86 million of annualized revenue. Most notably, this includes the Willimantic acquisition in Connecticut, which we announced in July. Since then, we have acquired four additional businesses within our operating footprint, including two transfer stations in the Buffalo market. Overall, the acquisition pipeline is robust, and we are actively working on several deals in various phases. Now a brief update on the recent highlights and performance against our key strategies. Starting with disposal, we continue to see modest volume recovery; landfill tons were up slightly in the third quarter compared to the same period last year. The volumes have not returned to pre-pandemic levels, this is almost entirely related to New York City and the surrounding area, with lower economic activity levels paired with labor stresses on third-party truckers that move the volume to our sites. That said, third-party volumes were generally in line with our expectations. Year-to-date, we have advanced 3.8% landfill price as volumes come back into the system, and the Northeast disposal capacity continues to tighten. We will have further opportunity to advance our pricing programs. Our operating programs at our disposal sites also continued to drive value. Ed and his team have done a nice job here, improving key operating metrics and performance. From an R&D perspective, we have two projects in development that are slated to come online over the next year. In both cases, third parties are deploying the capital and we will benefit from the sale of landfill gas to those third parties. Moving to the collection business, operations continue to perform very well. Ed and Ned will delve into some of the pricing inflation and volume trends. I wanted to discuss my commentary on labor, our workforce given the unique environment that we are in. From a labor perspective, our continued investment into our human resources and technology programs has helped to mitigate some of the challenges. Over the past several years, we have reset our labor rates in many markets, provided improved transparency through our career paths initiatives, and significantly invested in training, including our new CDL school. The outcome of these initiatives has greatly benefited us through the past several months from a labor perspective. Ultimately, we have been able to maintain high levels of service excellence and accuracy during a challenging labor environment. I also should mention that we are focused heavily on keeping our people safe through the pandemic and rewarding them for their continued dedication to our customers and the company, which has undoubtedly enhanced our culture. Our continued investment in route optimization and automation has really helped us through this period. The work that Sean, Steve, and his team are doing is outstanding in terms of our ability to optimize our routes and fully automate and bring automation to those areas, particularly from an acquisition standpoint, where we have opportunities to gain efficiencies. We have gained labor efficiencies while widening our labor pool due to the increase in automation across the business. Simultaneously, we have improved the quality of our fleet, resulting in lower maintenance costs while improving the sentiment of our drivers and mechanics. Next, the resource solutions business, both our recycling processing operations and our non-core business units are performing very well. We continue to make return-driven investments into our recycling processing facilities as we aim to gain further operational efficiencies while improving the quality of our end product. We have created a balanced business model that is economically and environmentally sustainable. As recycling commodity prices have increased, we have been able to share in the upside with our customers through lower tipping fees, or in some materials a higher rebate. While we also benefited from higher recycling and commodity values, the flexibility and sophistication of our risk mitigation fee programs and contract structures protect us well on the downside should the market moderate in the future. In furthering highlight our capital allocation and growth strategy, acquisition activity continues to be strong. Our pipeline is very robust given the backdrop of labor challenges, heightened inflation, and tax reform. We are actively working on several opportunities that are expected to close late in 2021 or into next year. Our balance sheet and the strength of our team position us well to execute against our growth strategy. Since August, we have completed four acquisitions. We look forward to fully integrating these businesses into our operations and continuing to provide a high level of service to our new customers. We also welcome our new hardworking team members, who are already making meaningful contributions to the company. Two of the four recent acquisitions helped strengthen our position in the Buffalo market, with additional hauling routes and related transfer stations providing an opportunity to vertically integrate volumes into our sites over time. Touching on Willimantic, through the first three months post-acquisition, our team has displayed a high level of organization and collaboration as we work through the integration phase. The performance to date has been sound and we look forward to driving further value from our new platform in Connecticut. Wrapping up, given our continued execution against key strategies and our outlook on the remainder of the year, we have again raised our 2021 guidance. This is our third raise of the year, which reflects the consistent solid performance of our team. We are excited about the opportunity to continue to grow the business and grow adjusted free cash flow. Importantly, as we grow, we are selectively adding the necessary resources and focusing on succession planning throughout the company. This serves us better to position the organization for seamless execution into 2022 and into the future. With that, I will turn it over to Ned to walk through some of the financials.

Ned Coletta, CFO

Thanks, John. Good morning, everyone. Revenues in the third quarter were $242 million, up $39.3 million or 19.4% year-over-year with 9.3% of the year-over-year change driven by acquisition activity. Solid waste revenues were up 16.7% year-over-year with price up 4.1%, volumes up 2.8%, and acquisition growth of 9.7%. Revenues in the collection line of business were up 16.2% year-over-year with price up 4.6% and volumes up 40 basis points. Year-over-year volume gains moderated as the economy rebounded sharply last year in our markets after COVID, which created a tough year-over-year comparison. Further labor constraints this year limited our ability to capture all available growth in the market. Revenues in the disposal line of business were up 16.8% year-over-year with landfill pricing up 3.7%. Landfill tons were up 70 basis points to roughly 7,000 tons year-over-year. However, on a trailing 12-month basis, we are still down roughly 350,000 tons or about 8% versus pre-COVID levels. As John just mentioned, almost all of this negative impact is in New York State and we believe it is mainly the result of lower commercial activity in the greater New York City area, coupled with driver shortages, as third-party trucking companies that typically move this waste to our landfills still have major driver shortages. Resource solutions revenues were up 27.6% year-over-year with 12.3% driven by higher recycling commodity prices, 8.4% of the growth from acquisitions, and the remainder from higher processing and non-processing volumes. The average combined revenue per ton was up $113 per ton year-over-year in the quarter, driven by higher cardboard, mixed paper, metals pricing, and plastics pricing. Adjusted EBITDA was $61.2 million in the quarter, up $10 million or 19.4% year-over-year and EBITDA margins were 25.3% for the quarter, flat year-over-year. Acquisitions negatively impacted margins by 45 basis points and one-time operating costs hit margins by roughly 32 basis points. So excluding the negative impacts from acquisitions and the one-time operating costs, our adjusted EBITDA margins were up 77 basis points year-over-year, with our pricing programs and cost efficiency efforts offsetting much of the rising inflationary pressures. Given the challenges to retain and attract frontline workers, we have increased hourly wage rates by roughly 300 basis points over budgeted rates, which resulted in an additional $700,000 in costs in the third quarter, or about 27 basis points of margin headwinds. Solid waste adjusted EBITDA was $52.2 million in the quarter, up $4.8 million year-over-year, with both collection and disposal adjusted EBITDA up year-over-year. Resource solutions adjusted EBITDA was $9 million in the quarter, up $5.2 million year-over-year, with improvements from recycling, organics processing, and non-processing operations. With our floating SRA fee for customers in a floating processing fee or rebate structure at our recycling processing facility, much of the increase in recycling commodity prices was passed back to our customers in lower fees or higher rebates during the quarter. The cost of operations in the quarter was up $23.5 million year-over-year, but still down 75 basis points as a percentage of revenues. Many cost categories improved as a percentage of revenue, as our team worked hard to control costs amid rising inflation. General and administrative costs in the quarter were up $6 million year-over-year, with acquisitions adding roughly $2.3 million of costs. Our consulting costs were also up year-over-year due to the successful launch of the Cooper Procurement program. Given the reversal of a tax valuation allowance in fiscal year 2020, we expect an income statement tax provision of approximately 31% for fiscal year 2021. However, our cash taxes will remain low at approximately $1.3 million for the year due to our net operating loss position and use of accelerated depreciation. Our income tax provision was $6.6 million in the quarter, up $6.2 million compared to the same period in 2020. This resulted in about a $0.12 per share year-over-year headwind to our earnings. As of September 30th, we had $558.6 million of debt and $46.5 million of cash. Overall, we had liquidity of $218.5 million, including the availability of revolving credit in our cash position. Our consolidated net leverage ratio, as defined by our credit facility, is at 2.34 times. Given these metrics, we believe our capital structure is well-positioned and gives us a lot of flexibility to continue to execute our strategy of growth through smart investments and acquisitions. Net cash provided by operating activities was $134.1 million year-to-date, up $22.2 million year-over-year, driven mainly by higher operating results. Adjusted free cash flow was $82.3 million year-to-date, up $22.3 million or 37.2% year-over-year. Year-to-date, capital expenditures were up $4.3 million compared to the previous year, as we continue to invest in capital expenditures at the newly acquired operations to drive operating synergies and integration efforts. Given our solid year-to-date performance and increased visibility of economic trends, combined with the expected contribution from acquisitions completed this year, we raised our fiscal year 2021 guidance ranges for the third time this year. As we announced yesterday, these ranges are revenues between $870 and $880 million, adjusted EBITDA between $200 and $204 million, and adjusted free cash flow between $85 and $89 million. The updated 2021 guidance ranges assume a stable economic environment continuing through the remainder of the year with a modest rebound and solid waste volumes. We expect solid waste volumes to be up roughly 1.5% year-over-year in the fourth quarter and solid waste pricing to increase by about 4% or slightly more in the fourth quarter. Our 2021 guidance includes roughly 5.7% revenue growth from acquisitions already completed in 2021 or late 2020. However, as always, our guidance does not include the impact from any acquisitions that have yet to be completed. Additionally, as stated in our press release yesterday, we expect a rollover impact from acquisitions completed in 2021 to add roughly $50 million in revenues or 5% year-over-year growth into 2022.

Edwin Johnson, COO

Thanks, Ned, and good morning, everyone. As everyone can see, we had a really great quarter. The cost of operations as a percentage of revenue improved by 75 basis points, and we are hitting or exceeding targets on all our key operating metrics. As with most companies today, we do have some inflationary cost pressures, particularly with our labor force, but in the current environment, we are finding that our customers are receptive to price increases, and we continue to maintain our margins. As I mentioned in the past, acquisitions typically dilute our margins. As Ned said, this quarter we had a 45 basis point headwind on margins from acquisitions, but our operating efficiency initiatives and pricing programs have been able to make up the difference. With another strong quarter behind us, our focus as a management team is to assure that we are both strategically and structurally positioned to continue to improve. We talked quite a bit about our team strategy, so I thought I would provide some insight into our company’s structure and the advancements we have made over the past few years to position ourselves for growth. Casella enjoys a great reputation in the industry as having a very positive culture and working environment. This has become one of our greatest assets and comes directly from our shared core values. I know a lot of companies talk about core values, but at Casella, we really live them. Our culture has allowed us to meet tough challenges, and our reputation has enabled us to attract significant high levels of talent into the company to build needed bench strength as we have transitioned into a growth company. On operations, we have three strong regional teams led by seasoned RVPs, supported by equally seasoned regional controllers, and more recently, we have added regional marketing and operations positions. Supporting from the home office, we added Sean Steves, a Senior VP of Operations, and he and his team have been spearheading numerous operational initiatives, many of which can be directly credited for some of our collection margin improvements. We also added Mark Johnson as VP of Post Collection, and he has taken leadership over our landfill operations, as well as our transfer stations and heavy equipment planning. Neither of these positions existed five years ago, and they provide the operational experience and leadership talent to pursue our core value of continuous improvement. Rounding out the team, Sam Nicolai, our VP of Engineering and Compliance, has played a key role in our permitting process while overseeing landfill construction and regulatory compliance at all of our facilities. Mike Wilson, our VP of Fleet, and his team oversee our fleet maintenance and procurement. Mike Hughes, our VP of Safety, oversees our safety and DOT compliance. I’m really proud of this team and what they have accomplished. I am very confident that we are well-positioned for ongoing operational improvement in our legacy operations and to successfully integrate recent and future acquisitions. But operations are not the end of the story. Paul Legion, our SVP of Sustainable Growth functions as our Chief Revenue Officer and has built a strong team that handles marketing, community engagement, our sustainability initiatives, customer care, and our municipal and college bidding, and is now leading an effort to improve the efficiency and effectiveness of our salesforce. Kelly Robinson, our Senior VP of Human Resources, has played a key role in advancing our recruiting. He implemented career paths for our critical labor positions to boost our retention, refined our succession planning and leadership development programs, and built our CDL driver program. He is in the process of building our tech training program. More recently, Mark Fitzsimmons has joined us in a newly created position as VP of Business Development to oversee our rail development initiatives and acquisition efforts, both outside the footprint and inside the footprint in support of the regional teams. We believe we have built a very strong team to support our growth and our pursuit of operational excellence. In addition, we have also invested in technology providing tools to support management and to make us more efficient. I will stay in my lane here and mention the operational technologies. This past year, we successfully completed a pilot program for a new onboard computing solution, demonstrating a strong IRR, and have begun rolling it out to other divisions with currently 182 units deployed. We also developed and implemented various management operating reports using the Microsoft Power BI platform by aggregating data from numerous disparate systems into a centralized database. These reports provide predictive insight into key areas of our collection operations down to the division level, with drill-down capability to the core data, helping us react more quickly to any deteriorating conditions. These two technologies alone will drive margin improvements. So I’m not just happy with the quarter, I’m also very happy about where we are as a company. With that, I would like to turn it back to the operator to start the Q&A.

Operator, Operator

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

Tyler Brown, Analyst

Hey, good morning guys. Hey, Ned just first off, what was the one-time operating costs that accounted for the 32 basis points?

Ned Coletta, CFO

Yes, so we took an accrual in the quarter for the potential to relocate some waste at a landfill. It was a proactive move and it was booked during the quarter, about $750,000. So, it does affect the cost of operations, but it is not something you would ever see in a recurring period.

Tyler Brown, Analyst

Okay. And so can we just unpack the margins a bit more? You called out 45 basis points to the negative on M&A. You noted the 32 basis points, but how much of a pinch was fuel and was recycling a help even modestly?

Ned Coletta, CFO

Yes, fuel in the period moved against margins by about 26 basis points, while recycling was a help and had a positive impact across the board. If you look at it, we basically were even in solid waste on margins after backing out that acquisition. Pricing is covering inflation, but not advancing ahead of it. Recycling improved margins by about 50 basis points, and then the rest of our resource solutions groups contributed to the remainder of that margin.

Tyler Brown, Analyst

Okay. So I don’t want to dive too deep into recycling, but is there any way you can help us with sensitivity on that? I know it is difficult with the SRA fee, but it seems like we are looking at an EBITDA dollar contribution here, any help would be great.

John Casella, CEO

Yes, I think we can pick this up a bit offline. I will try to stay super high-level, but if you look at our processing centers in general, we have thresholds established with our contracts where - if the average revenue per ton is below that threshold, they are paying us a tipping fee or processing fee. When that threshold is surpassed, we begin to share revenues with those customers. We clicked through those thresholds in the third quarter, which we haven’t done in many years. We did drive some additional EBITDA from commodities, and it's a bit complicated because we have a lot of upside and downside risk mitigation in place.

Tyler Brown, Analyst

Okay. You mentioned on the landfill tons earlier that you are off 350,000 annualized from the pre-pandemic levels. Last quarter, I thought you had said it was closer to 250,000 tons. Was there a step down?

Ned Coletta, CFO

Jason and I looked at this yesterday, we ran the math comparing March 31st, 2020, to the last 12 months ending September 30th, and we are off 350,000 during that period, with almost all of this decline happening in New York State.

Tyler Brown, Analyst

Got it. Any thoughts on when that might get back to pre-pandemic levels? Maybe by the end of this year or early next year?

John Casella, CEO

I think it really depends on how quickly things return in the city. There are still a lot of people who are out of the offices, and the activity isn’t what it was pre-pandemic. So it depends on how fast those activities return.

Tyler Brown, Analyst

My last one, there’s a lot of talk among the larger players about 2022 pricing and CPI rollovers. How much of your book has an escalator tied to it? Can we discuss pricing as we head into 2022? I assume it will be strong given the disposal pricing.

John Casella, CEO

We are fortunate in that we are not tied to a large amount of municipal activity in terms of CPI rollover. The team has done a great job covering inflation during the year. While we addressed it adequately, we need to be more aggressive from a price standpoint to ensure we are covering all of the inflation as we head into next year.

Edwin Johnson, COO

As we look at pure labor statistics, the trash and garbage index was up 5.6% annualized in September. Currently, we are running close to a 4% inflation rate for our business. Our operating programs have made a significant difference in keeping our costs down as we have made smart investments. Our book of business, as you said, is different than our peers. Only about 10% of our collection revenues are from municipal contracts, 25% are from subscription residential, and about 40% from commercial subscribers. For both subscription and commercial, we can price within our contracts to cover inflation. Then we have temporary roll-off customers where we can set prices daily. Additionally, about 12% of our long-term permanent industrial work has set pricing tied to either the trash and garbage index or CPI. Hence, we do have a lot of flexibility in our contract structure and have moved many of our customers to the trash and garbage index over time, which we believe better reflects true inflation in this industry.

Tyler Brown, Analyst

Okay, great. I appreciate the time.

Operator, Operator

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

Hamzah Mazari, Analyst

Hey, good morning. My first question is just on landfill pricing. I think you referenced 3.7%. Can you talk about the deceleration in landfill pricing? Is that just from prior year comparisons? What are you seeing in the marketplace?

John Casella, CEO

Yes, it involves a few factors. Pricing statistics can sometimes be misleading, and we are seeing one flaw in our calculations. Over the past year, we shifted many customers and adjusted the locations due to COVID closures, which affected our year-over-year pricing metrics. The other noteworthy point is that pricing in New York State has not advanced as we had planned, mainly due to lighter volumes in the state. Although we have not reduced prices, we simply haven’t pushed as hard on pricing as we had anticipated. We are budgeting strongly for the coming year to ensure we cover higher costs associated with labor, steel, and consumables across the business.

Hamzah Mazari, Analyst

Got it. Very helpful. My follow-up question is on the M&A pipeline. One of your larger competitors recently acquired a major independent in Massachusetts. Can you comment on the capital you raised earlier in the year, how much is deployed, and the overall state of the pipeline?

John Casella, CEO

We are comfortable with our pipeline. The activity has been stronger than expected, and while we will not execute on every deal, we will stay disciplined. The pipeline is stronger than we envisioned at the beginning of this year, exceeding expectations from last year.

Edwin Johnson, COO

In October 2020, we raised $150 million in a common stock offering. In 2021, we have put close to $160 million to work buying nine companies during the year, and we have driven synergy values from these businesses. Acquisitions have picked up quite nicely, and we have a few more in the queue that will close either by year-end or into Q1 next year.

Hamzah Mazari, Analyst

Okay, great. Thank you.

Operator, Operator

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

Michael Hoffman, Analyst

So Joe Fusco, I understand Saturday Night Live needs some writing help.

Joseph Fusco, VP of Communications

And leave this amazing gift, no.

Michael Hoffman, Analyst

And Johnson, you celebrated a milestone birthday, so happy birthday, pal.

John Casella, CEO

Thank you, Michael.

Michael Hoffman, Analyst

I want to come back to M&A. I want to compliment you for your work in Connecticut and Massachusetts. How did that happen? It’s impressive wins.

John Casella, CEO

I couldn’t agree more, Michael. We are really excited about the substantial revenue growth and integration progress we made. We believe we will create more value from those revenues over the next few years. We have also been building the right team, presenting us with great opportunities ahead.

Michael Hoffman, Analyst

A couple of years ago, when you restarted your M&A program, the expectations were around $20 to $30 million a year. How do we model a baseline for deals? I understand you are cautious about future projections.

John Casella, CEO

It’s a great question and we acknowledge it. Our view is some years will be stronger than others. We intend to exercise discipline in executing transactions that create significant shareholder value. Thus far, we have found ourselves on a path that allows us to achieve our goals.

Ned Coletta, CFO

Our cadence has averaged about 10 acquisitions a year, although this could vary. Since we've reinvigorated our M&A strategy in 2018, we've completed 38 acquisitions.

John Casella, CEO

We’ve had increased acquisition sizes, which provides a good opportunity moving forward. While we haven’t set a different expectation at this stage, we will stay disciplined in our approach.

Michael Hoffman, Analyst

I talked to the largest private market recently, and they have been running down 15% in New York but now it is down 10% to 12%. Is there any thought on how that might improve?

John Casella, CEO

Yes, we expect this will improve to some extent. Transportation is vital, and drivers are necessary to realize that potential.

Edwin Johnson, COO

We observed that volumes built through the quarter; July was a little softer year-over-year, but September was strong with a positive trend.

Michael Hoffman, Analyst

Okay. Can we get an update on the status at Dalton and the rail permit developments?

John Casella, CEO

We are moving forward with obtaining the necessary permits and submitting wetland permits by the end of this week or next week. It’s a challenging process but we hope to progress successfully.

Michael Hoffman, Analyst

When do you think you might be able to move volume by rail?

John Casella, CEO

We believe it’s more likely to be see movement in 2023.

Michael Hoffman, Analyst

In regards to the 2024 plan, I know you were pleased with the 2021 plan’s achievements. Have there been discussions about the upcoming 2024 plan?

Ned Coletta, CFO

There are no fundamental sea changes in strategy. We are still focused on driving free cash flow growth of 10% to 15% a year while developing our foundational structure.

Michael Hoffman, Analyst

Thank you. Just curious, how could capital spending potentially look in 2022 due to previous delays?

Ned Coletta, CFO

We are planning like multiple years ahead for the ongoing fleet needs; we are getting approval for trucks well in advance due to the delays.

Edwin Johnson, COO

As noted, the planning is forward-thinking, and we are planning for customary growth issues, not expressly budgeted CapEx.

John Casella, CEO

However, we are also ordering additional chassis to support acquisition growth; we aim for maximal efficiency.

Michael Feniger, Analyst

Thanks, guys. Just following up on the prior question regarding your disposal volumes and dynamics around contracting next year.

Ned Coletta, CFO

Thus far in budgeting, we aim to stay cautious and plan for next year while considering various dynamics. We don’t want to present overly optimistic figures despite sound logic.

John Casella, CEO

We navigate carefully. Expanding volumes, optimizing margin, and adjusting pricing policies will guide our future actions.

Operator, Operator

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

John Casella, CEO

Thanks, everybody, for joining us today. We look forward to discussing our fourth quarter 2021 earnings and our 2022 guidance with you in February of next year. Have a great day.

Operator, Operator

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