Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Casella waste systems Inc. third quarter 2019 conference call.
At this time all participant lines are in a listen only mode.
After the speakers presentation, there will be a question and answer session.
To ask a question. During this session you will need to press star one on one of your telephone.
Please note that if you like it was probably your questions press the pound key I would now like to turn the call over to Mr., Joe Fusco, Vice President of communications. Thank you.
Thank you for joining us this morning and welcome.
With us today, or John Casella, Chairman and Chief Executive Officer, Casella waste systems at Johnson, our President and Chief Operating Officer, Nicoletta, Our senior Vice President and Chief Financial Officer, and Jason meet our director of Finance today, we will be discussing our 2019 third quarter results. These re.
Results were released yesterday afternoon, and 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 FCC.
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.
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.
non-GAAP measures are not prepared in accordance with generally accepted accounting principle.
Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures to the extent they are available without unreasonable effort are available in the appendix to our investor Slide presentation, which is available in the Investor section of our website at <unk>, our dot com.
Well dot com.
And with that I'll turn it over to John Casella, who will begin today's discussion.
Thanks, Joe and good morning, everyone welcome to our third quarter 2019 conference call. We continue to be pleased with our execution against key strategies over 2021 plan and with their performance and results. Thus far in 2019, our third quarter revenues and adjusted a bitter were up 14.9% in 14.
1%, respectively from last year, our core solid waste recycling customer solutions business remains strong as we continue to advance key pricing and operational programs.
We remain highly focused on the base business as we growth who are disciplined acquisition strategy, where year to date, we've acquired eight businesses with approximately 52 million an annualized revenues exceeding our target of 20 to 40 million.
Acquisitions for 2019 for these acquisitions were completed in the third quarter given the timing of these acquisitions in 2019, we expect a 4% revenue growth contribution in 2020 from the rollover impact.
As with the past that we'd like to provide an update on five key strategies of our 2021 plan, which were consistent with the plan as announced in August of 2017.
Our first strategy in increasing landfill returns, we continue to enhance returns through price execution operational programs sourcing of new volumes at higher prices and our efforts to advance key permits the pricing environment remains strong and we are continuing to find success.
And driving price in our landfills in the capacity constrained northeast as we recognize the scarcity value these assets and heightened regulatory cost inflation.
Landfill price was up 6.6% in the quarter as we continue to advance robust pricing at the same time, we're also replacing lower priced tonnages with higher priced customers, which blends up overall pricing it enhances our returns as such our average landfill price per tonne was up.
7.8% in the quarter.
Notably in the third quarter operating costs as the Ontario landfill moderated as we work diligently through the first half of the year to resolve odor issues and made various site improvements. We're pleased that these operational challenges are behind us and we will continue to ensure the sizes operated at our high standards.
Third quarter. We also received an important permit expansion at our waste USA landfill in Vermont decided is critical outlay for much of Vermont waste in our continued investment in facility will drive significant shareholder returns with this expansion the line disposal area will increase by approximately 51.
Acres, which should provide roughly 13.7 million cubic yards of airspace Ics extending the life of the site for by about 20 years, well, we have several years of capacity remaining within the current operational footprint. We recently began construction for the new large expansion area.
This is a unique construction project as we plan to invest over $20 million of capital. During the next several years building out the necessary long term infrastructure for the expansion area.
The second strategy and our 2021 plan is driving further profitability within our hauling business. Our hauling teams did a great job offsetting continued disposal labor and recycling cost inflation as we advance 5.2% price during the quarter and continue to advance key operational initiatives.
And we'll get further into the details on our efforts to drive operational excellence through increased process to ensure that we had the highest levels of service compliance reduce safety incidents and operating efficiency at the same time, we were working hard to integrate our acquired collection operations.
Third strategy value through resource solutions.
For the fourth consecutive quarter, we improved recycling adjusted EBITDA year over year, even with commodity prices down roughly 25% in the third quarter versus last year. This speaks to the success of our off.
Taking a brisk programs.
And certainly the efforts from the entire team.
Built a recycling infrastructure that helps to insulate us.
From volatility in declines in the global recycling markets through a third party recycling processing contract structure.
Which allows us to pass commodity risk back to the customer coupled with our essay sorry program, which is fully offsetting commodity risk on our intercompany volumes the year to date declines in recycling commodity prices not materially impacted our 2019 recycling forecast and we remain.
On track to improve recycling adjusted a bit of by $5 million in 2019.
With the reset of the city of Boston recycling processing contract on July one two an appropriate market level. We have now passed over 90% of the recycling commodity risk back to our customers. We will continue to ensure that we generate an appropriate return on recycling assets as we are focused on recycling.
The on restructuring the remaining legacy third party contracts overtime, improving our contamination fee program furthering the education of our customer base.
We have also completed two recycling equipment upgrade projects doing.
That will reduce operating costs and improve the quality of our outbound materials.
The customer solutions and organics team performed very well with combined adjusted EBITDA growth of over $400000 in the quarter.
The forward strategy and our 2021 plan is using technology to drive profitable and efficient growth.
We're pleased with the progress we've made against this initiative as we continue to drive better scale and further reduce costs out of our existing processes.
Well, we have grown the business significantly through acquisitions with the 2018 launch of next we we've been able to leverage simplified and better automated purchasing processes, which has allowed us to not add back office head count.
We've also experienced early success related to our new case management system and upgrades to our CRM system, which enable us to better integrate our sales and customer care teams will continue to target enhancing our responsiveness to our customers and improving their overall experience.
Moving onto the final strategy into 2021 plant, which is Alan allocating capital we're balance growth.
We continue to execute very well in 2019 against the strategy. We've completed eight acquisitions year to date with annualized revenue of roughly 52 million of the four acquisitions completed during the quarter. The most significant was the previously announced acquisition of select sold with assets in Albany, New.
Sure and Cheshire, Massachusetts market from Republicans Republic services that are expected to produce roughly $30 million of annualized revenue.
This is a great strategic fit to our assets and operation and have transitioned well through the first two months. Our teams are working hard to fully integrate this acquisition and given its size and new market entry, we expect synergies will take over a year to fully recognized in the quarter. We also acquired three solid waste business.
This is with collection and transfer operations in New York These businesses will integrate well and complement existing operations. We look forward to continuing to provide excellent service to their customers. We welcome their hard working employees to our team.
As we look across the acquisitions, we've completed over the last year and a half we're pleased to say that most are tracking well against performer in all cases, we were generating expected revenues now it's a focus on deepening our top targeted operational synergies as we integrate the operation and expand margins.
Looking ahead to 2020, our near term pipeline remains strong we are positioned well to continue to open it opportunistically grow the business and further drive free cash flow growth. We believe that there is over 400 million of acquisition opportunity in the mid term across our market areas and we will continue to select.
If we look at opportunities and adjacent markets.
One area that was not specifically outlined in our 2021 plant, but is very important to our continued long term success and underlies all of our initiatives is our focus on further building our team.
We are focused on ensuring that the so as a choice employer in the markets by actively engaging with their employees investing in development programs and development career paths for all of our employees, our efforts and programs targeted towards attracting and retaining drivers and maintenance mechanic make maintenance technician.
And.
And a variety of other operations operational roles are working well through the early innings, we have achieved stronger applicant flow coupled with more rigorous and timely recruitment process that has improved the quality of our job candidates.
Help of our human resources team. We're also in the process of creating a robust apprentice onboarding and training platform.
Goal is to develop programs that enable us to train our own CDL drivers and are from this level technicians.
Who are committed to high levels of service and safety for many years with the company. We have established several training hubs across our operations. We're having great initial success in attracting trainings through the program a number of the initial trainees have received their CD cbls and its help fill.
So open driver positions within the company the success of our human resources strategy should yield reduce turnover, which will lower safety related incidents and enhance productivity.
Wrapping up as reflected in our updated guidance in 2019 2019 is tracking well against our 2021 plan and displays continued execution of our key strategies with the goal of driving additional shareholder value. We expect continued strength in solid waste a robust acquisition pipeline.
And recycling tailwinds and with that ill turn it over to net.
Thanks, John Good morning, everyone revenues in the third quarter were $198.5 million up 25.7 million or 14.9% year over year, with 10.6% or 18.3 million of increase driven the acquisition activity.
Solid waste revenues were up 21.9 million or 16.7% year over year as a percentage of solid waste revenues with price up 5.3% volumes down <unk>, 0.1% and 14% of this growth driven from acquisitions.
Ladies and the collection line of business were up $19.4 million year over year with price up 5.2% across all lines of business volume slightly down and rich recovery fees up 0.7% mainly to asset array in any fee acquisitions drove 15.6 million of this growth.
Disciplined pricing strategy has been working very well balancing customer retention and new business growth with appropriate pricing levels to offset inflation across our operations revenues in the disposal line of business were up $1.8 million year over year. Despite the closure of the Southbridge landfill in November of 2018, which result.
All to 3.2 million dollar year over year headwind the landfill pricing environment remains very strong and we increase reported landfill pricing by 6.6% year over year and as John mentioned, we increased the average price per ton at the landfills by 7.8% as we improved the mix of our customers and.
Hi, James excluding the Southbridge landfill closure landfill tons were up 1.8% year over year as we ramp volumes during the higher price summer months, while still maintaining strict pricing discipline, one unexpected headwind in the quarter with the construction delays at arch among landfill we originally.
Hey, ramping volumes in August and September , but we're not able to do so until the last week a September given this delay will not be able to maximize our permit in 2019 cents among landfill has quarterly permit limitations.
While this delay negatively impacts our forecast for 2019, it presents a great opportunity to increase volumes in 2020.
Recycling revenues were down slightly year over year with $2.7 million of lower commodity pricing offset by $2.3 million at higher third party processing fees and 300000 of higher volumes commodity prices were down 33% year over year end the call.
Quarter on lower Harcourt mix paper, plastics, and metals pricing and a readout, 5% sequentially from the second quarter to third quarter, mainly on declines in mix paper and cardboard.
Our organics revenues were up $800000 year over year higher volumes in the customer solutions groups revenues were up $3.2 million year over year due to several new multi site retail customers and strong growth in high margin industrial services group.
Adjusted EBITDA was $48.4 million in the quarter up 6 million or 14.1% year over year.
Adjusted EBITDA margins were 24.4% in the quarter down 15 basis points year over year as you'll remember last quarter. We did lay out that we expected a slight margin headwind in the third quarter, but then margins ramping into the fourth quarter.
The southbridge landfill closure negatively impacted margins in the third quarter by 80 basis points, while acquisitions completed in last 12 months pressured margins by additional 90 basis points as we work to integrate operations and drive synergies.
Excluding these two items margins for the remainder of the business were up 155 basis points year over year.
Solid waste adjusted EBITDA was $44.8 million in the quarter up $4.3 million year over year, driven by strong pricing higher disposal volumes in acquisition activity, partially offset by operating cost inflation.
And one thing to note is we had a $3 million year over year headwind in adjusted EBITDA with the closure of the Southbridge landfill. So ex that factor. Our overall adjusted EBITDA was very strong and the rest of the business.
Recycling adjusted EBITDA was up $700000 year over year, with 2.7 million lower commodity prices as I said offset by higher tipping fees and processing fees lower rebates to customers and higher volumes in the period. Adjusted EBITDA was 2.3 million into other segment for the quarter up a million dollars here.
Every year customer solutions had a great quarter with adjusted EBITDA up 12% year over year on strong execution of our strategy Organics group had a very strong quarter with adjusted EBITDA up $600000 year over year and this was despite our efforts to reduce internalization of slides volumes the team did.
Great job optimizing disposal outlets and driving higher pricing.
Cost of operations was up $17.2 million year over year with roughly 14 in half million of this increase driven by acquisition activity and most of the remainder driven by inflation across direct labor third party disposal in transportation in vehicle maintenance.
Gionee costs were up $2 million year over year, but down 54 basis points as a percentage of revenues as we began to gain further leverage from our acquisition activity and our five year technology plan roughly 1.6 million of this increase year over year was driven by acquisition activity.
Depreciation and amortization amortization costs were up 2.7 million year over year, mainly due to higher depreciation trucks and equipment related to our five here fleet in yellow arm plan and acquisition activity during the period.
The third quarter included several unique income item income statement items, we incurred $600000 of legal and transaction costs related to our ongoing efforts to cap and close the southbridge landfill were incurred $1.1 million of expense from acquisition activities completed in the period and we recorded three points.
$6 million charge from the withdrawal from our Multiemployer pension plan. This is the only multiemployer defined benefit plan. We had added as a company that withdrawal from this pension plan with a positive step for the company as we limited to ongoing financial risks associated with this multiemployer plant and exited the planned for approximately.
77% discount to the stated withdrawal liability.
We expect to have a $1.7 million cash payment in the fourth quarter and the remaining payments will be made over the next 16 plus years.
As of September Thirtyth 2019, our consolidated net leverage ratio was three point Q4 times. This is slightly up from June thirtyth, mainly due to acquisition activity during the quarter I total debt net was 533.7 million with liquidity of roughly 137.
In dollars.
We believe that this capital structure is in a great position to allow us to continue to execute against our strategy of growth through smart acquisitions and investments.
Year to date, our normalized free cash flow was $24.1 million as compared to 37.3 million for the same period last year normalized free cash flow is down year over year due to lower net cash provided by operating activities, which I'll explain in a moment and higher capital expenditures.
Net cash provided by operating activities was down $18.4 million year over year with higher operating results offset by 28.5 million dollar lower shift in working capital. This negative change in working capital is mainly driven by three factors one timing differences in cash receipts associated with.
Our and cash outflows in timing differences with a peak the adoption of assay a 42 as we've discussed previously on January Onest, 2019, which shifted payments on landfill operating lease contracts from investing opportunity to an operating activity on the statement of cash flows.
This change only impacted the financial statement positioning of this cash outflow not the amount in three a reduction in accrued liabilities due to cash outflows associated with the remediation project and a former scrap yard in Pakistan and the Southbridge landfill closure.
Over the last month, we refreshed our 2019 forecast and we expect strengthen our solid waste recycling a customer solutions operates operations to continue through the remainder of 2019 and into fiscal 20 as previously discussed we expect EBITDA margins adjusted EBITDA margins to expand by 100.
Basis points or more in the fourth quarter as we anniversary at Southbridge landfill closure and we begin to recognize easier comparisons for labor and disposal inflation as such we have raised our revenue guidance raised.
And also updated and tightening the ranges for adjusted EBITDA in normalized free cash flow guidance ranges for 2019, we expect normalized free cash flow to increase sequentially in the fourth quarter, mainly due to improved operating results and working capital swinging to us positive $10 million.
As in the quarter as we regained historical DSO and DPO levels.
And with that I'll turn it over to add thanks, Thanks led and good morning, everyone.
Operationally this was a very good quarter, we've continued to lead the industry on price were growing at a strong but manageable pace and we are making a lot of progress with our acquisition integration work.
In addition, our innovative approach of providing clear career paths for our drivers mechanics and equipment operators are starting to bear fruit as we're seeing a stabilization of our workforce.
Consolidated cost Devops as a percentage of revenue was roughly flat as compared to Q3 last year, increasing slightly by seven basis points, but improving considerably over Q2.
Collection operations generated about 50% of our revenue growing 24% over the prior year, primarily through acquisitions, we grew 5.2% per price and were slightly negative on volume as we continue to process the process of managing our low margin customers towards either better pricing or discuss.
Renewing their relationship.
Variable margin contribution per driver, our RK productivity metrics continued to improve.
The landfill line of business, which generates about 13% of our third party revenue performed very well in the quarter. Ned mentioned this among delay which provided a little headwind, but ontario's back on track.
Overall, our landfill volume was up 1.8% reported price was up 6.6% and the average price per ton was up 7.8%.
As you can imagine the cost of ops as a percentage of revenue for our landfill operations improved by over 300 basis points.
We continue to be a price leader in this ever tightening disposal market in the northeast and we look forward to continued strong pricing in a good finish to the year.
Recycling processing was a little less than 6% of our overall revenue and cost of ops improved about 5% year over year during the quarter, we completed significant equipment upgrades in two of our merchants and there are two points I would like to highlight about them.
First despite several weeks of downtime in each of these facilities our recycling line of business increased to two EBITDA contribution by 700000. This.
This is partially due to better pricing immunity contracts like Boston that were renewed under our new pricing structure over the past 12 months and partially due to the continued effectiveness of RSR a fee structure.
More importantly, these tumors of not only increased capacity they are producing cleaner products that will demand higher pricing in the commodity markets you might ask why that would matter. If we have an effective fee system in place.
We believe we are an integral part of the sustainable economy and as our obligation to provide our customers with the best possible outcome and keep the recycling model sustainable and then the long run we will share on the upside.
Last quarter I talked about the initial lower margin contribution of the acquisitions on the margin compression of passing through significant disposal on labor cost increases on the collection line of business.
Our focus this quarter was to start to recover those margins through both price and operational efficiency, we're not all the way there yet, but we ended the quarter in a much better positioned than we started it so I'm pretty happy with our progress and comfortable that we will have recovered the margin on disposal and labor for our legacy operations in Q4.
I wanted to talk a little bit about the integration process for acquisitions and why as I mentioned last quarter. They tend to dilute our margins in the first year.
Clearly not all acquisitions are alike, but we generally follow for integration phases and the complexity of the acquisition determines the length of time that each phase takes the first phase as management integration and back office systems. This is where we convert customer billings to our customer information system converter related dry.
Over route sheets integrate payables, all the admin stuff the second phase as operational integration. This includes route optimization and could include service changes such as converting recycling service to a more efficient every other week service with carts.
Once we've become operationally efficient and the customers become accustomed or billings structure and any changes in service. We can then focus on pricing.
Many of our acquired companies has not kept pace with the pricing in the market and this can be a significant long term opportunity, but takes time to execute thoughtfully.
And then what I will call phase four we look for opportunities to improve automation. We plan for this upfront such as providing recycling cards, but it takes more time to implement as it entails equipment replacement under a prudent asset utilization plant.
So even if acquisitions dilute margins a little in the short run we're very happy with where we are in the process. We are on track and commend our team for their hard work they've done today.
Before I move on what to extend a warm welcome to our new team members that have joined us through these acquisitions.
Our philosophy as one of inclusion we recognize and need your talents and hope that each of you find a long and rewarding career that allows you to grow with us as we grow the company.
The last thing I want to comment on as the enhancements, we've been making over the past year to our operational management capabilities, adding foundational elements to both run our existing business well and to integrate newly acquired businesses.
In addition to the vice President of operations that we added a year ago. We have now added regional operational executives to each of our solid waste regional teams and have initiated several programs to improve pricing management monitor and improved service levels standardize internal metrics on operational.
Reporting and improve our ability to replicate operating processes as we grow. We've also added a vice president of landfills to oversee operational improvements at our nine sites and in the long run improve our prospects for expansion.
We will continue to tweak our structure and improve our capabilities that we as we move forward and the size of the company in the demands of the market dictates.
With that overview I'd like to turn it back to the operator to start the question and answer session.
As a reminder to ask a question. Please press star one on your telephone to withdraw your question press the pound King.
Paul for your first question.
Your first question comes from the line of Sean Eastman with Keybanc capital markets.
Dan This is speaking for Sean.
Congrats on the quarter.
One main question I had was the guidance rents congrats.
Came in slightly lower than expected, maybe walk us through the puts and takes of the additional revenue from the RSC assets and the lower volumes on the among landfill. Thank you.
Yes, good morning, Hamzah this is NAD.
Great question. So when we looked at the quarter, we've had forecasted ramping up among the.
As you know we got a permit expansion at the site several years ago to go from 180000 tons a year to 417000 tons a year, we held back executing an option with the community until 2019, and we'd always envisioned debts as a step up to help handle volume some southbridge landfill.
Their market needs, we executed that option successfully this here and we actually began construction of our new cell in late 2018, and there are several construction delays in certification delayed that really brought.
US getting into that new cell until late September Unfortunately, and that weighed on our results by about on two two and a half million dollars compared to where we expected to be in 2019, So a little bit has a negative this year in you're right. We did some great acquisitions in the quarter and a.
We drove about $30 million of new annualized revenues, which this year should add about $10 million of revenues or roughly $2 million of EBITDA. So there was a direct push between both of those so we're able to tie in our EBITDA may and our free cash.
Well ranges by increasing the lower end of the range.
We were not able to increase both ranges because of this amount delay the positive here, though is we're now ramped up ish among the sites running great. The teams done a great job where into the new Sal and with our current run rate. It does give some great tailwind coming into next year, but for the company.
Okay. Thank you and then on.
Especially with.
Lot of the peers are talking about more slower pace of growth I was wondering given the north east footprint, if the especially with talent, especially with.
Pipeline look relative to the national average.
Thank you.
Right now we haven't seen any sort of major break in projects and I think you have to remember with our sites and the northeast in general things are so tight out there that many sites at bursting at the scene and as you remember.
We've been running strong pricing programs, our landfills and we're also trying to manage volumes for the summer months in later in the year last year. In 2018, we were out of state by like November at several of our key landfills and had to spend a lot more money moving tons around.
And we really were able to access some of the special waste contaminated soils market late in the year and this year. We've saved some space. We continue to run our strong in special waste and I don't know John eliminated reductions area No I think the plus the offices in northeast and one of the other problems that is that.
Is being experienced across the northeast is a lot of facilities are reducing the amount of slugs that theyre, taking which is also.
Creating an issue in terms of special waste as it relates to sludge most facilities are at their capacity from a slug standpoint. So there is.
Additional pressure being put on.
The facilities in the marketplace because.
Again.
Facilities were full before both lot of facilities are reducing the amount of slips through taking because of the sensitivity to odors and other issues.
So thats, becoming more and more of an issue for municipalities and one of the things that I think everyone is doing is.
Pushing the responsibility from an older controls standpoint back to municipalities.
Because it's it's an issue that's problematic for everyone at the disposal facilities, because being managed well by our team. There you know having those conversations with our municipalities from a slowed standpoint, helping them to better manage the slowed jet the sites.
And it's working fairly well, but from a practical standpoint.
The marketplace from a special waste standpoint.
The supply and demand situation is is.
Very very favorable from a price standpoint.
That's good and maybe my last question was you know I just wanted to going to congratulate the team on the execution on the SGN a front maybe walk through some of the effort to being taken place and the long term implication. Thank you.
Yes, a lot as it really comes back to our multiyear technology plan and we've done a great job looking at foundational systems in the back office, we recognize several years ago that we needed to become more efficient and easier to do business with for our customers and also in turn.
Really looking around at fundamental processes and number of touch points, we had in the amount of paper in the back office and we started with a couple key systems as you know we upgraded our financial ERP in one year time on time on budget to net suite in the cloud. We also updated our CRM to Microsoft.
Dynamics and we recently put in a new case management system, which allows our customer care, our salesforce and our operating some more effectively communicate we continue to drive in each of those areas because we really theres a lot more opportunity here, both from a technology standpoint, and from a process standpoint.
Well the lot of focus in 2020 on procurement and we'll have focus in the technology side on dynamic routing and optimization and scheduling on the truck side another opportunity that we have.
On the for 2020 in beyond disease investments that we've made in nature Kelly Robinson came onboard just under two years ago now and really what we did there was a recognition a couple of years ago that the driver issue is going to be a significant issue and at the time I think.
We started we probably had 50 to 60 openings for drivers across the company and probably 25 or 30.
Mechanics, and when you have that kind of vacancy from the drivers standpoint, it puts pressure on the entire organization increases issues from the safety standpoint.
I'm happy to to layout for you after a year in half and the work that the whole team has done from an HR standpoint were we can count the number of drivers that we need on one hand, and really what it's going to do is helped to drive down.
Cost related to safety cost related to turnover and there are significant costs associated with turnover as well so the better job that we can do from a career development.
Training programs and things that we're doing from a safety standpoint.
Are all going to on a go forward basis really make a difference so.
It's.
It's another exciting program, that's going to have some significant returns for us in the future.
Thats good idea as return into the queue. Thank you.
Thank you welcome.
Your next question comes from the line of Tyler Brown with Raymond James.
Hey, Good morning, guys can you hear me, Hey, Hey, I've spoken to.
Hey, I just want to start on USA waste USA. So congrats on that expansion, but it looks like you're spending some 5 million in capital on cell development. There I think this year. John you talked about 20 million total will next year be something like 10 million or is it like 555 or how do we think about that yes.
Next year should be around 12 to 13 or so we're still in budgeting sets a bit of a moving target and frankly, if we can do more work next year, we'll do more work to faster we can get that done in into this new cell that better off we are.
Okay, and then bigger picture, obviously, that's an unusual capex item, but will there be any lingering unusual capex on southbridge or pop Sam.
So the hot.
Sam is great story, we're able to complete the project here and one thing that's a little bit unique at Potsdam flashing back to 1999. When this transaction was completed there was some fore sight that there may be some environmental issues. There and we had put 59000 shares of casella stock that we're going to be paid to the sellers.
Into escrow, we were able to sell those during that period, and we yielded a $2.6 million of cash to offset our roughly $4.8 million liability a clean that up so.
That was a positive as well during that period to help to offset where almost done with that we will just have some modest monitoring going forward Southbridge continues to chug along we've just finished some of the capping there some of it will move into next year. It won't be capex per se, but we will continue to work down that liability.
City for closure and capping at Southbridge over the next year and we expect the case and how much like five or so million Nexus six say five to six or seven.
Between capping enclosure, maybe little bit even north like you said I think we still need to go through our.
The fully our budgeted auditing process, yes, yes, okay. No. That's that's helpful. And then so John at this point have the issues that Ontario been largely resolved.
Yes.
They have.
There's still some work to do there together as to exactly where we want to be from.
Quality standpoint, but the vast majority of the as behind US at this point in time to other absolutely and we okay and then to the third quarter yes.
Thats NEDS comment would be budget in the quarter, which is a clear indication that the.
It's the vast majority of the cost associated with that is behind US Okay, and so what was the total PML impacts from rectifying that situation. This year. My presumption is it won't recur next year.
Yeah, we're sitting at about really too.
A little more like a little more than three this year will now kind of Morgan.
Okay, and then as of right now you would expect of rollover benefit on revenue from M&A at 4%. So I think that's about $30 million is the right way to think about that as six to 7 million up EBITDA or couldn't be better on synergies.
Yes, the earned the right ballpark.
We're looking at.
Six to 8 million in our model from a rollover benefit for next year from acquisitions.
Okay, Perfect and then this John or add on the M&A side. So should we expect a pause as you kind of move this ramp through the snake can digest I think this year, you outlined maybe $80 million.
Or should we expect that the M&A cadence will just continue to keep up.
I think that it's fair to say that.
We're in the process of really getting our arms around from an integration standpoint, what we bought this year.
Thats, probably the activity in the fourth quarter.
We still see a very robust pipeline Tyler, but I think clearly for the fourth quarter were going on you know really digestion and do the job from an integration standpoint for what we bought so far this year, so a little bit of pause probably in the fourth quarter I wouldn't really call.
Cause of the pause as much as I would.
So I think that after.
What we've achieved already from an acquisition standpoint.
We're going to focus on the integration who the ended the year certainly stuff that we have in the pipeline if would need to close that we will but.
No I suspect that we're going to be more focus we are more focused on the integration for the rest of the year. Okay. That's helpful. So net so I want to come back to the disposal fleet. So.
Correct me, if I'm wrong, but theres going to be some moving pieces in the disposal fleet next year. So.
Is it safe to assume that Chemung will be a good guy as it ramps and should be a material good guy.
But you would also be pulling back at north country in headaches.
Yes, I think it's really QB determine right now we.
We haven't finished budgeting, yet, but as you point out both of those dose our Q sites.
They have less than five years of permitted capacity remaining hakes, we're very close to getting the new long term permit there so really depending upon the timing of headaches and the timing of construction into at new Sal will determine how we run. This site next year and you could see at ease up a little bit of biological or we could renee.
To the same level is 2019, depending on when we receive that Permian, what construction looks like north country.
No Thats, a complex permitting and community horizon over the next five to six years with our remaining capacity and we probably will ease up a little bit there. It's a tight market place right now, but if we can push some additional price and run slightly lower volume set that they'll probably be our strategy into 2020.
Okay, and then just big picture, though you would expect EBITDA contribution from the disposal, we excluding Ontario next year and maybe even meaningful contribution.
Yes, we do expect a positive across our asset, Ontario will have.
Good comp year over year as Weve resolve some of these issues chemung as we talked about earlier will ramp up volumes there year over year.
And then the rest franchise I mean pricing continues to get into better and better spot, we don't see any headwinds across the franchise, except for as you pointed out maybe we run it takes a little bit lower and north country, a little lower so a couple of million dollars potentially at those two sites but.
Generally we feel good year over year, Okay, and my last one just on the Multiemployer plan. So did I hear right as of now you have no off balance sheet multiemployer liabilities at this point.
Yes. This list at this is the only one so where party to a few other.
Collective bargaining agreements with several teamsters units at but each of those are defined contribution plans, where you don't have multiemployer exposure and this was the only one so we're pretty excited about this was roughly 18 and a half million dollar off balance sheet liability.
Associated with that and it's actually a business unit, where we've been growing so we've been picking up other people's liability. So we're able to flash back in time to 2011, it's away this work and negotiate and acts as it to happen in 2011, So really favorable we're excited our team did a great shot Nicole.
Operating EPS.
Okay perfect guys I appreciate the time. Thank you. Thank you.
Your next question comes from the line.
Michael Hoffman with Stifel.
Sorry, you're working on the railroad today, John can you are right.
Okay.
Usually at 10 o'clock.
Okay.
Train thoroughly you've got to retail Kimberly.
So.
Ned.
You all had the benefit of positive move in your credit rating. This year, how do I think that through with the landfill accounting going into 2020.
Oh.
Complex complex accounting question here so.
One at the elements of landfill accounting is how you discount future liabilities and then how those get reflected onto our balance sheet retirement assets and retirement liabilities and to your point, but the last.
15 years, we've used.
A credit adjusted risk free rate based upon a single B high yield index that was an adjusted.
For the tenor up our landfill liabilities future closure liabilities. So to your point, we've moved said double B credit which is great.
We'll bring down that discount rate.
Also.
Right now high yield rates hurt our interest rates are lower as well. So when finished all the math for our budget next year, but what you'll actually see happening is you'll see on the few balance sheet moves where our.
Asset retirement obligations liabilities will click up a little bit and you'll see.
Slightly higher amortization and slightly lower accretion and.
It's hard to say right now what that will result him, but the net result is a little no difference at the operating income line, but slightly higher EBITDA potentially haven't done all the math, yet Michael but it is a positive move in that regard because you'll see a shift between accretion expense and.
Landfill amortization once again no difference to the operating income line, a few balance sheet moves, but it will change the complex and slightly and I'll. Once we get that math that I'll, let you know.
Okay. Thanks for that and then.
You mentioned earlier the commentary about sludges, Mississippi fast sees issue or is that had an older issue.
We're picking up that out in the west coast northwest theirs.
A couple of.
The public companies and stop taking PFS sludges, Sir you focus they are just timber.
I think that it's more of the ordered but the beef us issues and issue as well, particularly as it relates to.
Land application another.
I think that Thats, certainly something that is in the in.
In the marketplace, but the major component really is older.
Look I really have and then we have to control the orders at the facilities Michael because even.
Traveling from the.
Wastewater treatment plant to the landfill has been problematic in some some cases.
And I.
So I think that the majority of the issues that we've seen has been have been odor.
Okay, Alright that helps and then Ned if you pro forma at all your acquisitions this year into an EBITDA what were the leverage ratio b.
If we took them out of our.
No no put a pro forma.
Sure. Yes, you owned them since January one so you had full credit form an EBITDA and you did your leverage ratio, what's the EBITDA of whistle laboratory.
I don't have that calculating down like on any follow up with the I'm sorry.
Really it's less it's back down.
Yes, okay.
Yes.
The way the where credit agreement works so to be clear is when you bring on an acquisition you actually yet.
Full credit at that point in time, so I'm not sure change anything so if we take on an acquisition on.
September Onest for instance.
You have some additional debt, but our credit agreement I think most you. They allow you to take 12 months of EBITDA at that point in time based upon an improved pro forma so I don't.
I guess I Gotta look at I don't think it would change anything with our leverage ratio.
Okay, well if it does we let me know yes.
And then John I always have to assets as we come looming into a year, where youre going to beat your goal by year. So it looks like you are likely to be close to 70 million in free cash in 2020, which is a year ahead of plan.
So what's the 2024 plan look like.
You sound like a board member.
I know you're brown dense.
Oh, you did who.
Obviously is to its premature for us to two really comment on that I mean, I think that we'll have to make a determination Michael as to when when it's appropriate for us to start.
Looking about that.
But obviously, we've got to get our budget done for 2020.
Good to look at where where that lands and.
Maybe at that point in time, we may have a comment we may not and May is it's a little premature right now to really start thinking about 2024 2020.
Five.
Fair enough, but if I were sitting out there are having conversations some thought $100 million would that make you Blanche.
If you if you what.
As having conversations with people and I said $100 million would that make you Blanche.
We add on.
We havent.
We haven't done that math and the though.
It's.
I think that it's fair to say that we're going to drive as much free cash flow as we can I think we obviously have demonstrated the capability to do that over the last five years.
I really wouldn't comment on the 100 million.
But I think that.
Obviously, we're going to drive as much as we can yeah, we've been driving consistently as Michael roughly 15% to 20% a year of free cash flow growth and at the start to roll forward I may be how you got to that that debt position, but we expect that the.
10% to 15% next year and seeing that gets us off track.
Yeah that was a little bit behind.
And then lastly are we getting close to a market rate where close top rail.
Comes into play out of your region for disposal.
Closed on Brlten. So so we continue to see some CND contaminated soils knows that there are several moves are happening in the marketplace with containerized municipal solid waste.
If they are costly and their capital intensive as you know.
And were not we've done a few test flows were not moving a considerable amount of MSW or even seen year contaminated sales out of the marketplace. We're trying to really maximize our capacity, but as you point out that it's going to be the relief valve for the northeast because it will be additional sites that close over.
Next five years and.
Whether there's a new capacity comes online Thats, a long shot so I think from RFP, you'll continue to see more to your point a those prices are higher than where the market is today. So I think gives us room from a landfill pricing standpoint.
Okay, and you have holyoke, which.
It does have a real.
So maybe.
Mckean comes into play in some future I think that I think that we view Mckean, obviously is is that option.
From a capacity standpoint to the extent that there's an opportunity you know to have long term.
Contracts.
From a municipal standpoint to take care of.
Long term need obviously, that's an option for us in the future and certainly we could connected to Holyoke. There's no question about that Michael I think that's a that's a that's an option for us in the future and who will continue to drive it right now.
Now.
Mccain is is operating at a level, let's not not that painful so from a practical standpoint, it's a real significant option for us in the future if we need it.
I think I would agree with I agree with that we're we're ways away from.
I think really effective.
Pricing from a real standpoint.
Okay. Thank you very much it. Thank you my welcome. Thank you.
Your next question comes from the line of Tony Bancroft Gabelli Fine.
Yes, good morning, gentlemen, nice work.
Hey.
Yes.
Maybe.
You backing on Michael's questions sort of where big picture, but with your strong performance outside.
And a strong balance sheet the land fight it landfill dynamics in Massachusetts.
Maybe further.
Going along and maybe some more where areas.
Along with the margin and growth.
Differentials and outside markets.
Any change maybe sort of some puts and takes on how you view the northeast versus other markets adjacent markets that you.
Maybe expanding potentially could stand it too could you sort of sort of talk big picture on that I think that we're still very much focused on our 2021 plan.
Michael I think that it's fair to say that we've got significantly.
Sorry, Tony.
We.
Pathologize.
I think as a big high complement.
[laughter] fair enough.
I think that we're still focused only on the 2021 plan.
Got significant opportunity over the top of the existing assets that we own in the northeast and certainly we'll take a look at adjacent opportunities if they come to the market, but we're focused on executing the strategy that we put in place for 2021.
I think that there's again more opportunity.
Then what even what we had anticipated year to have two years ago. When you look at the pressure that's out there from a disposal inflation standpoint labor inflation.
And recycling inflation.
The opportunities are even more robust than what we had originally thought so we're going to continue to stay focused on the 2000.
Anyone plan stay focused on.
The northeast, but certainly we'll look at opportunities that come to the market.
If something were to divest that in Pennsylvania from the waste in advanced.
Transaction I would certainly be something that we would be interested in as an example.
But we're already in Pennsylvania now currently.
So we'll look at opportunities as they come but we're really staying focused on our 2021 plan.
Sounds good thanks.
Thanks, Don Thanks.
And there are no further questions at this time.
Great. Thanks, operator, thank you everyone for joining us. This morning, we look forward to discussing our fourth quarter 2019 earnings entered 2020 guidance with you in February of next year. Thanks, everyone have a great weekend.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you.
May now disconnect.