Q3 2019 Earnings Call
Archived webcast will be available two hours. After the end of the conference calls and can be accessed through the Investor Relations section of the Covanta website at Www Dot Covanta Dot com.
Http. Colin forward Slash sport fashion, Www Dot Covanta dot com forward slash.
The transcript will also be archived on the company's website at this time for opening remarks introduction I'd like to turn the call over to Dan Menace, Covantas Vice President of Investor Relations. Please go ahead.
Thank you and good morning, welcome to Cabanas third quarter 2019 conference call. Joining me on the call today will be Steve Jones, our president and CEO and Brad Helgeson, our CFO will provide an operational and business will be review, our financial results and I take your question.
During their prepared remarks, even Brad will be referencing certain slides, we prepared to supplement the audio portion of this call.
Those slides can be accessed now or after that.
Investor Relations section of our website www Dot Cabana dot com.
His prepared remarks should be Watson to in conjunction with T spot.
Now onto the safe Harbor and other preliminary notes.
The following discussion may contain forward looking statements and our actual results may differ materially from those expectations information regarding factors that could cause such differences can be found the company's reports and registration statements filed with the FCC.
The content of this conference call contains time sensitive information that is only accurate I wasn't able to swap broadcast October 25.9 team, we do not assume any obligation to update our forward looking information unless required by law.
Any redistribution retransmission rebroadcast recall in any form without the expressed written consent of Covantas grid.
Yeah for men. The information presented include non-GAAP financial measures. Because these measures are not calculated in accordance with U.S. gap. They should not be considered in isolation from our financial statements, which had been prepared in accordance with go.
For more information regarding definition of our non-GAAP measures and how we use them as well limitations as to their usefulness for comparative purposes. Please see our press release, which was issued last night and it was first the FCC on form 8-K.
With that I'd like to turn the call odour, President and CEO , Steve Jones deep.
Thanks, Dan and good morning, everyone for those of you using the web deck. The quarterly results are summarized on slides three and I'll begin my discussion on slide four.
During the third quarter, we continued executing on our operating plan generating $125 million of adjusted EBITDA and $22 million a free cash flow.
With solid performance in the quarter and line of sight on the remainder of the year. We are affirming our full year guidance of $420 million to $445 million of adjusted EBITDA at 120 $245 million or free cash flow.
Taking a moment to provide more context around our results bear in mind that the adjusted EBITDA of $125 million represents 2% year over year growth.
Even as we've seen 20 plus percent declines in the price of many of the commodities we sell.
We overcame this headwind because we're able to drive organic adjusted EBITDA growth of 9% in the quarter.
The reliability performance of our fleet of energy from waste assets is critical to our ability to grow organically during the quarter, we process 5.5 million tons of waste and 8% increase over last year.
This production includes 2.5% same store tip fee volume growth some of our largest tip fee plants continue your run at or near record lever levels as well as inclusion of the Palm Beach contracts acquired in September last year.
These improved operating results are no accident.
Over the last several years, we've revamped our operating in supply chain management and instituted lean six sigma techniques to improve the operations and reduce costs.
Further we have invested in our plants and those maintenance dollars are paving the way to consistent operating performance for three quarters of your complete we're right on track.
From a maintenance perspective, and we expect 29 team to be another year of record production.
Our primary end market, a sustainable waste disposal and our ability to capture improving waste prices across our Efw fleet. That's been a key driver of the financial performance.
Fees were up over 4% in the third quarter on a same store basis.
Higher spot prices affect of re contracting and strong profiled waste growth overcoming typically muted contractual escalation.
As I like to say, it's a good time to be a waste company, especially with our assets in northeast.
We expect to deliver tip fee price growth of over 4% for the year.
[noise] Covanta environmental solutions drove 10% growth in same store profiled waste revenue to our efw plants.
This increase was a product to both unit price and volume improvement.
In order to facilitate these high value waste flows are efw facility into our efw facilities.
Focus on maximizing the volume of material that is internalize through our material processing facilities are MPF.
The revenue internalize through our MPS increased by 25% in the quarter as we continue to utilize these complementary assets.
[noise] to service more customers and increase our profiled waste sourcing <unk> capabilities.
We expect this rate of internalization to grow further overtime supporting our expanded expanding profiled waste business.
Well profiled waste comes in many forms a key area of opportunity is regulated medical waste.
During the third quarter, we grew regulated medical waste revenue by over 40% as we continue to ramp volumes to our three energy from waste plants that are permitted.
To accept this waste.
Well I still representing a modest amount of the overall profiled waste revenue, we see we see very strong growth potential and are working with regulated medical waste collection companies to source more volume.
We aspire to be the a leading provider of wholesale regulated medical waste disposal services to that industry.
[noise] in order to reduce our long term cost the ash disposal.
As well as to become more sustainable why creating new revenue opportunities. We've been developing our first total asked processing system more taps. The first taps plant is currently under construction at the Fairless Hills, Pennsylvania metal processing facility.
Well, we had expected to be fully operational by the fourth quarter. This year, we've extended the construction timeline a bit to optimize the equipment. This is the first system of its type an exciting long term opportunity for covanta. So we want to make sure. We kept this first one right. We now anticipate beginning to start up some components later this year.
We more before moving into commissioning of the entire system early next year.
In the metal processing area as we mentioned in the last couple of quarters. We've recently invested in technologies to further separate the various types of nonferrous materials, we recover.
This equipment began operations late in the third quarter, and we're now separating higher value heavy metals like copper and zinc from lower value mix nonferrous scrap.
As we discussed on the second quarter call. We continue to see a soft environment for many of the commodities, we sell and this has not improved over the last three months.
On scrap steel or faris after a decline in the second quarter HMS pricing appeared to stabilize in the third quarter in the 220 dollar per ton range.
In October prices took another leg down with the index, reaching $192 per tonne.
At these price levels, we believe that the markets, we'll see a reduction in scrap flows which should then stabilized prices. That's what these markets do.
Longer term, we expect to see continued domestic demand growth for ferrous scrap as new meal, New mill capacity comes online over the next few years.
However, while history tells us the prices should fund market equilibrium again, a price is well above current levels the timing of the recovery it's difficult to predict.
On the non first side the largest product we sell volumetrically scrap aluminum for much of the year pricing has softened as China reduced the volume of this project it will accept.
And the smelters and the rest of World has struggled to absorb the excess material. This has led to severe price pressure with the old cast index now pricing at 37 cents per pound in October . This is down meaningfully from 2018 when price averaged just under 60 cents per pound.
This is another reason why we're investing in technology to separate the non aluminum components of the nonferrous stream as they often trade at three or more times the price.
Lastly on energy, we've recently seen some stability in price, albeit at historically low levels. As you know we have a formulaic program to hedge our energy exposure to reduce volatility. This has served us well in this market.
I'll conclude my remarks with a brief update on our UK development activities.
Green Urls gate are now well into construction and we continue to progress Protos, new Hearst towards financial close.
Those projects are attractive.
And well structured and we're actively engaged with our project partners lenders and the PC contractors to swiftly moved the projects forward.
The protest project remains positioned to reach finance close in 2019.
While the new Hearst project is right behind with finance close more likely in early 2020.
Further and as I mentioned in the last quarter, our partnership with good goes beyond these four project.
There are other earlier stage projects that are moving along as well we look forward to provide anymore color on these projects as well as our efforts in other geographies. When we have reached materials development steps.
With that I'll hand, the call over to Brad to discuss the financial results in greater detail.
Thanks, Steve Good morning, everyone I'll begin my review of our financial performance with revenue on slide six.
Total revenue for the quarter was $465 million up $9 million from the third quarter of 2018 organic growth excluding the impact of commodities contributed 12 million as higher waste prices and strong efw plant production outweighed lower construction revenue in the quarter.
Commodities had a negative impact as we saw a $13 million decline in revenue related to lower market prices for energy and metals.
Transactions at a $10 million to revenue in the quarter with the September 2018 acquisition of the Palm Beach operations and Q1 startup of the Manhattan Marine transfer station, partially offset by divestitures.
Long term contract transitions added $1 million in the quarter.
Moving on to slide seven.
Adjusted EBITDA was $125 million in the quarter 3 million dollar increase compared to the third quarter of 2018.
Excluding commodities adjusted EBITDA improved by $12 million organically as the benefit of higher waste prices and plant production more than offset higher planned maintenance this quarter.
As we look ahead to the fourth quarter and full year I would remind you that we will lap $11 million and $17 billion, respectively in business interruption insurance proceeds received in 2018.
We knew coming into the year, there would be challenging to meet our 3% to 5% annual organic adjusted EBITDA growth target given this year over year comparison and this remains the case.
However, we expect to be in our target range, excluding the impact of insurance proceeds.
The 13 million dollar headwind from commodity prices as I just discussed translated directly from revenue to the adjusted EBITDA line.
The net benefit of transactions added $5 million to EBITDA in the quarter as the contribution from the Palm Beach acquisition and Manhattan Marine transfer station, we're again, partially offset by divestitures.
For the full year 2019, we continue to expect adjusted EBITDA in the range of $420 million to $445 million.
As Steve noted we've seen a further reduction in metals prices since last quarter's call.
We've revised our outlook range for metals revenue by a further 10% $20 million compared to previous expectations. As you can see in the appendix to the slide presentation.
This reflects lower scrap ferrous and aluminum market prices as well as a lower average sales price on nonferrous, given the timing of startup of separation equipment at our Fairless Hills processing facility.
Further impacting nonferrous sales. This year, we historically have recovered mutilated coins and delivered to the U.S. meant for currency value.
However, the mint has temporarily closed its redemption program. This year in response to fraudulent activity. So as a result, we're currently holding coins and processed inventory waiting shipment.
In total and all else being equal these factors in our metals business will likely move us to the lower end of our guidance range.
So it should be noted that much of this is essentially essentially represents sale timing.
Turning to slide eight free cash flow was $22 million for the quarter as compared to $85 million in Q3 last year.
While adjusted EBITDA was $3 million higher in the quarter working capital in restricted funds were a net cash outflow in Q3 and lower by $63 million compared to the cash inflow in Q3 2018.
The two largest components of this where the final payment of hold back and dispute settlement amounts related to the construction of the Durham York plant, which we had previously accrued for.
And a shift in the timing of interest payments on high yield bonds, following last year's refinancing, which reduced cash interest payments in Q3 last year.
Our full year guidance for free cash flow is unchanged and these items were always contemplated in the range.
Therefore, you should expect a sizable improvement in working capital and free cash flow in the fourth quarter, which is a fairly typical seasonal pattern for us.
Now please turn to slide nine were all review our growth investment activity.
Over the first nine month for the year, we invested just over $40 million in growth, most notably equipment to support the startup of the Manhattan Marine transfer station.
Year to date, we've spent a little under $5 million on tops, but with equipment now being delivered and installed we anticipate increased spend in the fourth quarter with further spend in 2020 as we complete construction.
In the UK, we have spent $10 million year to date, which primarily represents our investment in Urls gate, where we fully funded our proportion of the equity as well as Preconstruction site work primarily at rookery.
A couple of reminders here first our equity investment in Rookery was bridge financed at the project level and net of the premium and cost recovery received from our partners of financial close we anticipate a remaining funding requirement from the parent company of about $40 million in 2022.
Second this forecast does not yet include our equity investments in Protos, a new hearse until they reach financial close we'll provide more specifics on the amounts and timing of funding requirements for those projects at that time.
Please turn to slide 10 were all provide an update on our balance sheet.
At September 30, net debt was 2.5 billion up about $30 million from Q2.
Consolidated leverage ratio was 6.0 times unchanged from June 30, and the senior credit facility Covenant ratio was 2.4 times.
Our available liquidity under our revolver was nearly $400 million.
During the quarter, we issued our first series of tax exempt green bonds, primarily to fund spending on taps and our energy from waste plants in Pennsylvania.
With a 20 year term and three in a quarter percent coupon. These unsecured bonds represent very attractive long term funding that further enhances the cost tenor and flexibility of our capital structure.
We now have over $500 million, a corporate tax exempt bond like this outstanding and we'll look to tap into this market in the future as an efficient means of funding domestic investment.
Before I turn it over to Q and I'd like to hand, it back to Steve for some concluding comments, thanks, Brad and I want to take a moment and reiterate a few things operationally year is going well and our investments in our plants and people are yielding the growth we expected.
The benefits of these investments are evident in our operating performance over the last several quarters in the west market. We continue to benefit from a very supportive waste environment with strong volumes and declining alternative disposal options, which is driving waste pricing at our irreplaceable assets.
I also reram remained very excited about our progress on several growth initiatives taps remains a major opportunity to improve our profitability and sustainability.
Broad based opportunities throughout the fleet.
The development front, we're well on our way to reaching our initial target of four plants in the UK and we see broader opportunities in international markets.
As well as growth in the U.S.
With that operator lets move onto culinary.
As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound for hash key please standby, while we compiled acuity roster.
Your first question comes from line of Michael Hoffman from Stifel. Your line is open.
Thank you very much for the questions, Steve I Hope you feel better.
I know I I was going to say something wondering first started off I last Friday couldn't speak at all so this is an improvement so thanks for an excess.
Well I just got a clarity on the guidance I understood.
Q4, 20, 450 remains if you were able to sell the mutilated coins you'd still be at the midpoint.
So you're saying well.
I think the mutilated coins is one of a few issues that are that are impacting us on the nonferrous revenue on of course. The first one is the underlying commodity prices.
The second is.
Our progress on on increasing the average sales price by separating as Steve alluded to this.
The heavy metals generally speaking from the lights of the scrap aluminum.
And then another piece of it is the muted coins. So I wouldn't I was certainly wouldn't pin it all and mutilated coins, but it was significant enough relative to where we thought we were going to be that it was it was worth mentioning.
Okay, but if you if you could sell them the related coins would you be telegraphing, we're in the lower asps.
Yeah, the mutilated coins alone wouldn't move us backdrop, Seattle that's right.
Okay. Okay, that's what I was trying to understand.
Yes, Okay, you have a target of 250 million in free cash.
Over then a five year period.
And 15 million a year supposed to come from us domestic leverage and 45 comes from.
The UK and Thats, assuming you do the 130 this year, that's the midpoint of your guidance.
Is there anything that's as you look out in the business model under the conditions you are now living with this.
Lousy commodity environment like that would preclude you from doing the 15 million a year on average.
To get that 75 million in place it would seem to UK part seems reasonably goods.
Yes, so not just the short answer is no I mean, the I think the underlying drivers of of the target. When we originally put it out in that and the components of our strategic plan are.
Our our unimpacted by by commodity prices I mean, thats the production of profitability in the plants.
Growing the metals recovery Ash management capabilities with taps growing component Covanta environmental solutions profiled waste regulated medical waste I mean, there are a number of initiatives that we're focused on none of which are impacted by commodities and thats, what underpins the $15 million that ship that you referenced and then of course on top of that we're looking to grow our portfolio focused.
Immediately is in the UK.
But we have our eyes out over the horizon on other international markets as you know and then ultimately opportunities domestically so.
All of that is unchanged.
I think as regards to 250, specifically commodities, obviously impacts our results and so.
I think we do have to recognize that if commodity prices are are materially lower than where they work when we set the guidance as they are today on the order of probably $50 million when you step back and that's going to impact.
Our results and all else being equal probably the best way to think about it is it just makes the path to 250, a little bit longer.
Okay, So you'll still get to the 250. It starts you it's.
The stuff that you have permanently lowering the number et cetera, so you're going to take your water.
Yes, thats exercises cyclical yet because it's Steve Yeah, that's that's what we're saying.
Okay and some of it depends on what's when does the commodity environment snap back to the mean right. We're not sure and everybody can everybody on the call can ticket take a view on that obviously, but.
That's and that's important consideration when you start to think about.
The time it takes to get to 50.
Okay.
To kind of high level housekeeping type questions you have a peer company that has not had particularly good press lately one around a landfill expansion for ash and the other air pollution equipment can you contrast, why you are different.
Yes, so yes, we saw those too if you look at let's take the second one first air pollution equipment I think out of our 40 facilities now we have two facilities.
That that don't have.
Baghouses and so and Thats and this other companies I think dealing with issues around.
Not having not having a bag house on particulate facility I think thats, what you're referencing.
Yes, we're in the process now determining when we're going to add back houses to the two facility. So it's limited in.
And number and and we'll think about it'll it'll it'll present lumpiness in the year that we decide that decide to add to baghouses.
But as a general matter, our maintenance isn't really going to very much from the inflationary.
Bogey that we put out there so.
So we've got a good handle on on air pollution control.
From that perspective.
With respect to the first part was again.
Ash they got denied the permitting Astra is currently I think after died at no. Yes, we have we have multiple and most of our plants that we were responsible for the as we have multiple options in order to be able to get our ash put into an ash land for ash Mana fill so we're not particularly worried about.
We've got I think we've got really good programs in place to be able to backup what we need to do from a Nash standpoint, and then the other side of that is taps right. So we're one of the reasons, we're interested in taps and I used the words.
Financially and sustainability and from a sustainability standpoint in my prepared remarks is that.
Taps allow us allows us to reduce the volume of assets going to go into a Nash Mona Phil So.
We're very excited about what's going on at Fairless Hills, right now and that'll that'll help us to reduce even if we had issues, which we don't that would reduce the volume of asset needs to find to home.
Alright, and then last from me Brad can you tell us what the hedging great we should be using for 2020 at this point.
In terms of price.
Yes.
Yes, I think it's a little or will they all that out in February so little or lead up to two because we're still hedging for next year.
Put a specific number on that though I think a reasonable expectation would be but it's going to be modestly lower than the hedge rate overall for this year.
But the emphasis on the word modest.
Yes, I would I think that emphasis is appropriate.
Okay alright. Thanks.
Thanks.
Your next question comes from the line of Noah Kaye from Oppenheimer. Your line is open.
Thanks.
I want to ask your question around operations and in particular, increasing the plant throughput.
You've got two and half percent same store volume increase growth this quarter.
And just broadly I think this is an area you've talked about getting stable operations and improves uptime, yes, I mean, I think about half a million ton increase in the tip fee plans, that's $25 million to $30 million bump in revenue.
So I guess the question here is really can you give us a sense of how much of the fleet is operating close to permitted capacity.
How much cushion you have under permits increased throughputs would you need to seek expansion the permitted capacity as you improve through lean operations, just how much runway you see for the sort of stable operations lean operations to to drive higher throughput.
Let me start with this and Brad can jump in so stable operations first off we're not we're not using it all our plant yet we know we picked our biggest plants.
So they're the ones that that that actually came through this quarter. So the reason you see 2.5% same store growth is these big tip fee plants think think.
Places like Essex for example, or Hempstead.
They're operating early well at this point and that's because we've been using stable operations, which is basically you've heard me talk about this before it's as if you had your your best operator on the board 24 at 24 hours a day seven days a week so.
So that that's working well, we will get more leverage from stable operations as we move it out to some of our other plants.
Which are a little smaller in size. So this is this will be a.
A path that will continue for some period of time.
I would say on how.
How we operate from a permit standpoint, we try to operated the limit over permits all the time.
And so and with the waste market. The weight is right now which is a great waste market, there's plenty of waste out there. So we can we can operate.
At the limit of our permits the the issue in the benefit you saw particularly in this quarter as we had less less downtime. So.
We were able to we always have some downtime at our plants because a stable operations, we were able to limit that downtime as you look at this past quarter and that's what we're expecting stable operations to do as we move forward.
Yes ill just add as it relates to the permits were seeing at a few of our big plants.
The permit limitation is now relevance to the production, whereas in the past it hasnt been.
So in those situations.
Well look to see if there is flexibility for us to to modify the permits if the plan to sustainably operating at a higher level.
Okay. That's very helpful. And then on the taps facility. The first one that you're standing up I think you've talked in the past about.
Targeting around a 20% Unlevered I R.
I guess, just how long do you need to see that facility operate.
Before you would get comfortable enough in the returns to put capital than traditional plant.
And just give us an idea of how long do you think it might take to put the processing capacity in place to cover the full fleet.
The the plants that were going to start to commission some of the aspects of the plant.
Later this year.
And then kind of full commissioning next year and I mentioned that my prepared remarks, I think the point needs to run for I'd say a couple of quarters.
In order to make sure everything's working the way we expected it to this is not new technology, So I'm not particularly worried about the technology risk. There is this technology, it's been used in other industries.
So we're putting its novel if you will as it relates to our industry and the ramp up in the sizes is bigger than than it's been used in some other places.
So that's what we're going to need to test out over these let's say couple of quarters.
We also want to make sure that the the fans and the aggregate that we produce.
Get Steve wasted, which is effectively cut to go through our testing process.
In order to then be used in the OTI approve roadway so can be used in other applications before then but and so that's going to ticket thats can take a couple a couple of quarters to work that out.
And then quite frankly right now we're in discussions with clients and also looking at our own plants on when we roll out the next taps projects, so they're going to move where the long lead time I mean, you sold on the Pennsylvania taps. The one apparel sales was permitting so we're in the process now of lining up.
The permitting the resources to get the permitting.
Well underway, so thats, the leading indicator and civil start that process, even as we're waiting these couple of quarters too.
To see to see how the Fairless Hills taps operates.
How long it will take the rollout over the whole fleet I'd say, probably two three years.
Something like that.
Probably on the later into that a that time timeline.
Again, the pacing items going to be permitting so and as you saw in this first one it was a little variable depending on the state.
That is very helpful. Thank you.
Sure.
Your next question comes from the line of Tyler Brown from Raymond James Your line is open.
Hey, good morning, guys.
Good morning, Fortune Teller, Hey, Hey, great job on controlling the Controllables, but I do want to come back to HMS can you guys give us any color on whats exactly going on in that market do you think that it's been influenced by the U.S., Turkey relations or do you think its destocking at domestic mills to see additional color there.
Yes, probably a little bit above.
The noise around Turkey, and then Thats recent is.
And you saw the leg down in October on HMS number one index. It could have been it could it be it could have some impact from from the Turkey situation.
We certainly think Theres destocking going on.
We saw some go take a look at Nucor's comments, there has been some comments out from other companies that they generally they think there were at the bottom and now we're going to start to move back up again.
We'll see how that we'll see how that plays out.
I think as as a general matter.
We'll we'll continue to reclaim all the metal that we can you know the alternative for us. Unlike some other folks is we'd have to pay to get rid of it pay to put it in staying the action than we'd have to pay to get rid of the asked so it makes a lot of sense for us to kind of collect the metal and then we'll we'll see where the HMS index comes out.
But it does feel that made that we're kind of.
At and around the bottom and it's going to its going to start moving up from here.
Okay, and then Brad on free cash so I just want.
Kind of get to the bottom of this restricted cash benefit so I see that the flows from restricted funds was increased I think this quarter to 15 to 20 for 19. So wondering if number one you can just talk about what's going on there but.
But maybe too if you can talk is this is this a cash flow there will be recurring in 2020 and beyond.
Sure I was there's really two pieces to it so all I will take the first one and that this explains the increase.
We have a movement in restrictive account under one of our service fee contracts with a client earlier this year.
And so really the increase in the in the range accounts for that essentially you had cash come out of restricted funds and went right back out the door through through working capital. So essentially net neutral. It's just a and Thats why you saw an offsetting change to the to the the guidance range for working capital change, but just in it out and that was about 5 million.
Ian.
The other piece is one that it has been more permanent and and will go away next year. So for the last few years, we've been receiving on an annual basis cash distributions from.
Trust related to the ownership structure of the Delaware Valley facility.
Those those cash distributions concluded earlier this year so.
All else being equal you should expect of restricted fund line look to maybe.
Plus or minus in a quarter, but.
On a sustained basis.
It should be should be essentially zero overtime.
Okay. Okay. That's helpful. And then maybe on the working capital side and I know it's early.
I Havent done all your budgeting, but is that so I think thats positive. This year is that something that is recurring as well maybe into 20 or even ball beyond that.
Yeah, I guess I'd, probably say a couple of things one.
As you know as we talked about several times in working capital efficiency is a long term initiative and we've gotten a lot of value out of that over the last few years and that's a our collections primarily but it's also a p. management.
So I would hope that we're going to continue to get efficiencies over time.
That being said this business working capital can be lumpy quarter to quarter year to year.
And ultimately out over the long term and this isn't necessarily a comment specific to 2020, but over the long term.
It's probably appropriate as a modeling assumption to assume that working capital isn't going to be.
Persistent 10 $20 million benefit to us indefinitely, I will will ultimately reduce the opportunity will will reduce over time so.
As far as 2020 again, it can be lumpy and so we're just not related positioned at the moment to put a finer point on it yes now that that's that's very helpful. And then maybe maybe on the total efw maintenance spend so I think this year you guys are looking for for 15 at the midpoint.
Maybe 30% of that is attributed to maintenance caps capex.
But I'm curious does that exchange or should we just grow that maintenance spend and assume that it's about 30% is maintenance capex or is that the right way to think about it.
My response to that unfortunately are going to sound a little similar to my response on working capital in it it can be lumpy and it could move up and down in particular for maintenance and Steve alluded to this earlier.
Really what we look at as an underlying trajectory of what's the annual spend now and going forward, it's going to be required to to maintain these plants and keep them that at.
Peak operating condition and Thats, a spend that is going up plus or minus going to grow with inflation or inflation, plus or minus overtime in any given year the profile of spend.
This is subject to the long term maintenance plan.
Thats, Okay, how much of it is more weighted towards expense versus capital and also what is the aggregate spend so.
I guess in summary, vol that.
You can't necessarily look at 2018, and extrapolate so sorry, 2018, 2019, and extrapolate to what would that be in 2020.
Okay. Okay interesting, Okay, and then my last one.
Steve with these two plants without bag houses are these large tip fee facilities.
Yes.
Yes, both in the Maher Devin I mean.
There is a different technology and so these are these are plants that.
That are that we own and.
We're looking at Okay, what do we what do we want to do the other the other technology non bank accounts technologies called SP.
It works just fine.
Back houses are becoming more more popular at this point so.
We're looking where as I mentioned, we're looking right now it okay. What do we want to do with the timing on changing out to a bag house rather than the SP.
Okay. Okay I appreciate the time thanks.
Yup.
Your next question comes from the line of Brian Lee from Goldman Sachs. Your line is open.
Hey, guys. Good morning, Thanks for taking the questions.
Maybe just going back to the free cash flow topic for a moment.
Brad It seems like the free cash flow is obviously much more for Q weighted than it has been in past years, I know you've talked to.
Some of.
The moving pieces here, but can you can you kind of walk us through again, a little bit of the dynamics driving that this year versus the cadence we've seen in past years, and then that steep ramp that you do need in Fourq you to the full year target kind, how how you how de risk do you see that mean right now.
Yes so.
We actually have had Preston historically for the.
The free cash to be heavily weighted in the fourth quarter, we saw that a couple of years ago.
I mentioned this earlier really really put the drivers going to be who is going to be working capital.
Based on how we see the rest of the you're playing out.
And from a de risk perspective, you see that as being pretty.
Pretty solidly in hand at this point I know you're.
Taken the EBITDA guidance down to the lower end, how you kind of thinking about where you are settling out from a cash flow perspective.
Yes, we feel comfortable with the with the guidance, yes, we're comfortable with that guidance.
The working capital to side as we showed in the past whether its accounts receivable or accounts payable. There's there's there's levers that we can adjust in order to too.
To get positive working capital in the fourth quarter.
Okay fair enough.
And then just maybe switching gears a bit I know earlier in the call you mentioned this.
Investing in technology to remove some non aluminium metals, given the higher pricing potential there can you.
Maybe elaborate a bit on what goes into that the potential timing of deploying that and then just in terms of impact.
Does that does that really move the needle from a volume perspective, if you're successful just trying to get to handle around whether or not that could be a strategy to help on the metal side of the business.
Yes that it's clearly something it's actually in prop in operation now so what we've looked at was and it's interesting I don't think some other companies aren't necessarily doing this I got to note for Mike from Steve The Saudi who does our metals management about this yesterday.
This is color sorting. So basically you are looking at taking non ferrous and using technology that color swords.
In order to take out in order to split the non ferrous.
In the into its kind of piece parts and in some of the some of the.
Darker nonferrous metals, the heavier in darker non first metals traded three times.
Three times the price some of the other metals. So it can move the needle you don't need a lot of it to to make it impactful.
And as I said where that.
I've been out to see the unit, it's seen operation now in the third quarter and we actually had stockpile some of our non first in order to to run it through this unit in order to take advantage of its capabilities.
Okay fair enough. Thanks, a lot guys.
Sure.
Your next question comes from the line of Angie strove and ASCII from Macquarie. Your line is open.
Thank you so I have bigger picture question.
Nobody.
Really asked a question about it.
For the guidance and I understand that.
Got it but can you at least Directionally tell us.
If you think that.
If the current commodity price environment what to persist.
And you would continue to see the the pickup in sales.
Volume's, so what do we see a year over year gross and EBITDA.
So thats one and two.
How should we.
Get more comfortable with your ability to us.
Your dividend given that.
You know the commodity prices are weighing on your free cash flow and your net debt to EBITDA is ready at six times.
Sure It has its Brad.
So on 2020.
And you said it at the top we're not we're not giving guidance for next year, whether that specific or directional but I.
I think there are a few.
Building blocks. If you will do you think about 2020 that.
I will mention one is is the underlying rate organic growth.
Just sort of all encompassing with the.
The initiatives that we're focused on three.
3% to 5% nothing has changed it would impact our view on that so that's something you can you can count on from us when we rolled out our 2020 guidance.
The other big when of course is commodities, it's a variable that.
We can't predict I think if you.
If you if you look at current spot prices and you extrapolate that across calendar year 2020, that's not necessarily our view, but if you did that that would imply a headwind year over year.
Course to the kind of handy rules of thumb that we've talked about to help people kind of frame what that impact could be are for HMS for every $25 move.
It's about a four to five on a full year basis 12 months, it's about a four to 5 million dollar revenue EBITDA impact.
For broadcast which is the underlying index for aluminum.
Every five cents is about two to 3 million.
So based on what's your view is going to be for commodities for next year, that's how would it would flow through into into an estimate for 2020.
The other the other question.
Around the dividend.
Our dividend policy is something that we we stand behind and as we've said many times you have the dividend policy is based on what we view as the long term sustainable cash generation in the business.
Not based on the cash flow in any particular period or certainly not based on commodities in any particular period.
And to the extent that our long term view.
Is that we're going to be growing cash flow sustainably.
Yes, Thats what supports the dividend so I'm not sure.
How better I could I could answer within that yes, I mean, let me be clear we're committed to dividend clearly don't see a case where.
Where we don't we're not going to be able to.
Support that that dividend as we as we look out in time for us even consider changing our dividend we'd have to have a persistent reduction in free cash as Brad mentioned in and quite frankly, we see free cash growing with our up to 50 over the next several year next several years and we talked a little bit about that earlier in the call. So.
We're where we think we're in a pretty good place.
Thank you and just one bigger picture question so.
Are you trying to basically changed the design of some of your contracts to make them.
Yes.
Depending on commodity prices.
I'm asking while not only because we have this downturn, but also.
If you look at the northeast you have that okay.
Actual reasons why pellet prices could continue to decline Ucas offshore wind you have this issue would know and New York ISO about that she putting a carbon price on the on the.
Power generators can you can you talk us through how you perceive.
Your market positioning and some that prospectus.
Yes, it did a tricky question.
The markets clearly had are changing.
In a lot of respect the drives our business is the way started there, but the business and then the powers in some respects the by product so.
One of the things we've been trying to do is figure out how to sell that power.
Not ended to just into the grid and very difficult. These days.
To get long term contracts, we have a long term contract in a.
In long Island for example, but to get those types of contract is difficult. So one of things that we've been looking at is whether we can sell this theme. Rather then turn the steam into electrons is still the scene steam directly.
To customers in and around our plants, we do that in places like Niagara for example, our Niagara facility. We're looking at other options around that I've talked about a few of them.
On prior calls and then on the electrons itself.
We we got involved in the Bgs auction.
We're looking at other ways to sell these electrons.
In a way that's more valuable to our investors and.
We'll look at direct lines for example, so theres a couple of our facilities that are close to.
Other large users of of electricity and can we sell directly to those large users and at some middle price. So we when we'd be selling at higher than wholesale and they'd be buying it at lower than retail.
But to make both parties happy so there's a types of things that we're looking at right now but.
Those business development efforts to take some time, it's been my reaction because we've been looking looking at these for a couple of years at this point just because of the way the market has been playing out.
Okay. Thank you.
Sure.
Your last question comes from the line of Henry Chen from BMO. Your line is open.
Hey, guys good morning.
Good morning.
I figured I'd just add question.
For a little bit more.
Maybe not.
Necessarily explicit guidance.
The one area.
Beyond the organic growth.
What are the projects or factors I guess.
Impact free cash flow and even if we think about 2020.
Well, our big focus Henrys Brad.
On in the project area is of course, the the pipeline in the UK and that's something that's going to impact us when those plants come online in the.
Lease for the first for that we're developing that we've been talking about in the 2020 to 23 timeframe.
Do you think about 2020 really the drivers for us are.
Our the ongoing.
Initiatives under the organic growth umbrella and Thats encompassed in the 3% to 5%. So you think about things like waste pricing metals written additional metals recovery taps continuous improvement profiled waste regulated medical waste.
Covanta environmental solutions, they're all those all the things that we're undertaking in order to grow to company and a lot of that is that thats more on the domestic side, Brad mentioned more the international side and then on the international side and I'll mention this were looking at other projects outside the UK I mean, there's other there's additional projects inside the UK.
On the GE GE is.
With one of the reasons with we partner with GE IEG in the UK outside UK.
You may have seen some publicity around a project in the Philippines that were involved in theres projects in China that we're looking at.
Theres a lot of energy from waste.
New plant activity that's occurring.
In places like China quite frankly.
They are they build these plans very quickly it doesn't take them three years to build a plant in China, it's half the time and so.
Depending on what we do with some of these other markets that will also flow into maybe not 2020, but not too many years further out from 2020.
Got it okay that makes sense and and.
And I guess, maybe just for the next.
12 months so not.
With that sort of view.
Hi, any kind of milestones.
No you're looking at going forward.
Just kind of.
Regulatory.
Thanks.
You guys it looking out.
I think the keep the key milestones I'm not sure. If this is your question, but the key milestones that we're focused on our having all for getting all four of the of the initial projects in the UK into construction. So two down to to go we're focused on the on the on photos to numerous now to get those going.
It's getting taps up and running and then as Steve was was talking about based on the operational performance of that unit rolling that out across the fleet. So.
I think if we can if we can meet those milestones and build from there will be in a really good position and that's where we're focused.
Yes, and the other thing I'll mention too and this is a us comment for new energy from waste there are opportunities for new energy from waste in the U.S. Lee you've seen.
So there's been some public announcements and some some of the some of our clients. Some of these are our client opportunities some of them may be tip fee opportunities, where we own the plant. So even in the U.S. I would have told in the beginning my tenure.
It wasn't going to be a lot in new energy from waste in the US I think now I'm changing my view, a little bit I think theres going to be opportunities for us here in the U.S. and.
They'll they'll also be bearing timelines associated with those opportunities.
Got it okay.
Good morning. Thanks.
Thanks.
There are no further questions at this time in turn call back over to the presenters.
Well, we want to again, thank everybody for joining us for the call today, we appreciate your ongoing interest and support and Covanta.
Have a good data have been weekend. Thanks.
This concludes today's conference call you may now disconnect.