Q4 2019 Earnings Call
Later, we will conduct the question and answer session and instructions will follow at that time, if anyone should require assistance. During the conference. Please press Star then payroll on your Touchtone telephone.
As a reminder, this conference call is being recorded.
Now I'd like to turn the conference over to Mr., Joe That's go Vice President Communications. Please go ahead.
Thank you for joining us this morning, and welcome with US today, or John Casella, Chairman and Chief Executive officer to sell the leases.
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 fourth quarter and year end results.
These results were released yesterday afternoon.
Along with a brief review 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.
Format 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 factor 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. These forward looking statements should not be relied upon as representing our views as of any date. Subsequent to today also during this call we will be referring to.
Non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures to the extent they're available without unreasonable effort are available in the appendix to our investor Slide presentation.
Question, which is available in the Investor section of our website at I.R. Dot Casella dot com and with that I'll turn it over to job to sell it will begin today's discussion John.
Thanks, Joe and good morning, everyone and welcome to our fourth quarter 2019 conference call.
We're pleased with our fourth quarter results in a results for 29 tea.
This was another strong an exciting year as we continue to execute well against the key strategies over 2021 plan, we meaningfully route the business with nine acquisitions in the year with approximately $53 million annualized revenues.
And as we announced yesterday, we've closed on two acquisitions. So far in 2020 with estimated $6 million. The the annualized revenues, making a strong start to the year in terms of our continued execution against our acquisition strategy.
Our success in 2019 is reflected within our numbers for the year.
As we grew revenues by over 12%.
Increased adjusted a bit of by over 13% and improved normalized free cash flow by nearly 18%, notably our 2019 revenue adjusted to the normalized free cash flow results met or exceeded our guidance ranges that were raised in October.
These accomplishments for team or perhaps even more impressive given that during fiscal year 2019, we experienced an $8 million adjusted a bit a headwind related to the November 2018 closure of our Southbridge landfill.
So the rest of the business improved by over $26 million in the year, which emphasizes the strength within our solid waste recycling organics and our customer solutions businesses, coupled with the success of our acquisition strategy. In 2020, we will remain focused on executing against or 2021.
The plan the five key strategies are consistent with a plan.
[noise] as announced in August of 2017.
Which includes increasing landfill returns driving additional profitability in the collection operations, creating incremental value through resource solutions using technology to drive profitable growth and the fixed.
Now with Keating capital to them de levering with Smart wrote.
Our first strategy and our 2021 plan is increasing landfill returns as a vertically integrated resource management company, we're highly focused on providing services to our customers that meet their needs and future environmental service needs.
Continuously strive to help our customers meet their sustainability goes through increased resource recovery and diversion programs, we've developed leading recycling programs and we're one of the most prominent organics companies in the northeast that said landfills also play a critical role within today's sustainable.
Pretty infrastructure these necessary highly regulated states not only provide safe environmentally sound destinations for products and material at the end of the consumption lifecycle, but they also serve is outlets for various special waste and other time sensitive materials, such as the brief and clean up from natural disasters.
We're proud of our long track record of developing an operating safe landfills that meet the needs of our customers, while creating tremendous value for whos communities and other communities stakeholders, while we continue to work.
Work to find tire and better uses for all of the materials in the waste stream, there's not a silver bullet solution that magically transformed waste into new products or resources landfill remain the safest lowest greenhouse gas footprint in the most reliable means to dispose of waste today.
In 2019 or a teams achieved two important landfill experiences that will allow us to continue to meet the needs of our customers.
In 2019 received the 2.7 million cubic yard expansion at our eighth facility, which will provide roughly five years additional capacity as we look to bridge. The Knicks site next phase and in September 29 team. We received a 13.7 million cubic yard expansion at our waste USA facility in Vermont.
We started to work through the initial excavation phase and we'll continue to do so in 2020. This expansion extends the life of the site by an estimated 20 years.
Despite these great successes, we faced and expected set back at our north country landfill located in New Hampshire, two weeks ago.
When we learn from the New Hampshire Department of Environmental services that has decided to interpret the state's public benefits that you in a manner that we believe was different than how would it consistently interpreted in the past given this we have withdrawn our air spree airspace expansion permit and we're working diligently.
To resubmit it to meet the requirements of this new interpretation of the long established that you. This will result in us having to ramp down volumes to the site in 2020 as we have incorporated and we have incorporated this impact into our guidance.
Our second strategy in 2021 plan is driving further profitability within a hauling business Ed will provide further details on our performance key metrics in various initiatives, but we continue to execute well our pricing it operational strategies, we again advanced strong pricing, 4.8% in the quarter as we are.
Our focus on offsetting continued labor disposal in recycling cost inflation.
Operational excellence is an important initiative as we aim to ensure that we have the highest levels of service compliance reduce safety incidents and operating efficiency. Our teams are also continue to work diligently and integrating acquisitions we continued.
Do you recognize that follow through is an important element in driving high free cash flow and additional shareholder value.
The third strategy in or 2021 plans in creating incremental value through resource solutions.
We approve recycling adjusted EBITDA by $4.6 million year over year in 2019, even with commodity prices down roughly 20% over the same period. This exemplifies the strength and success of our risk off taking programs with greatly mitigate our exposure to volatility in declines in the global recycling.
Markets 2019 was an exceptional year for the team as we reset to major recycling processing contracts, including the city of Boston on July one as well as two completed.
Up equipment upgrade projects that target, reducing operating costs through increased automation as well as and probably most importantly, improving the quality of our outbound materials as we looked at 2020 and beyond we plan to continue to focus on partnering to build modernized economically sustainable recycling programs.
We plan to continue to make investments in recycling equipment operating initiatives and customer education programs. We also plan to target further refinements to our contamination fee program, along with resetting our remaining legacy third party contracts overtime underlying all of this remain focused on generating an.
Folks <unk> return on a recycling assets.
The customer solutions and organics team also performed very well during the year would combine adjusted a bit a growth of over $700000 in 2019.
[noise] before strategy.
The 2021 plan is using technology to drive profitable and efficient growth. We continue to make great progress unlevered, leveraging our 2018 implementation of net suite well, we've grown the business considerably through acquisitions, we're realizing better scale through more streamlined purchasing processes.
We plan to focus our efforts in 2022 further digitizing and modernizing our procurement process as we drive better scale and work towards further reducing cost of existing processes. We also aim to continuously enhance our customer experience in our proactiveness and responsiveness to their needs.
The recent upgrades to our CRM and early success related to our new case management system or a meaningful and our ability to achieve these goals through better integration of our sales and customer gear teams.
Moving to our final strategy in our 2021 plan, which is allocating capital to balance Delevering with smart growth, we executed very well against this strategy in 2019.
As part of our 2021 plan, we outlined the goal to acquire $20 million to $40 million per year of annualized revenue in 2019, we again outpaced this target acquiring 53 million of annualized revenue through our disciplined approach overall, we remain pleased with the performance of the acquisitions thus far.
Our focus remains high and operational integration in achieving reformer returns.
As I mentioned, we have completed two acquisitions, so far in 2020 with approximately $6 million of annualized revenues. This is a strong start to the year as part of our growth strategy and we're excited to welcome. These new employees to our team and to provide a high level of service to our new customers.
In January we acquired and industrial recycling processing facility in Albany, New York, which is a great complement to our September 19 market entry with the acquisition of select solid waste assets assets from Republic services.
In February we acquired daily son, which is a great.
Perfect fit to our Massachusetts collection operations.
Our near term pipeline remains robust and we are positioned well to continue to opportunistically grow the business and further drive free cash flow. We believe that there is over 400 million of acquisition opportunity in the mid term across their market areas and we'll continue to selectively look at opportunities and adjacent markets.
One area that is not specifically outlined in our 2021 plan, but is very important to or continued long term success underlies all of our initiatives is the focus on further building our team over the past year, we've made significant progress and enhancements to our human reach.
Source programs are ongoing goals include being the preferred employer within the markets that we operate.
One of our key programs career path career development.
We found early success by way of providing greater transparency of advancement opportunities within key roles such as drivers technicians and operators such line of sight bolsters, our ability to attract and retain quality employees, which would result in lower tenant turnover.
Lower safety incidents, while simultaneously improving operational efficiencies and employee morale.
Further strengthening our efforts is continued investment in the dedication to improving the recruiting more rigorous and timely onboarding employee engagement on would training and development.
As an example, we've developed in train hubs across their operations and enable us to recruit in train our own CDL drivers and a present apprentice level technicians.
Ultimately, although our programs.
Our early on they are yielding benefits, including improved applicant flow higher job candidates across key operational rules a positive in indicator that are programs are really beginning to work well.
Wrapping up as reflected in our 2019 results in our 2020 guidance, we're tracking well against our 2021 plan, which displays continued execution of our key strategies with the goal of driving additional shareholder value.
With that I'll turn it over to net.
Thanks, John revenues in the fourth quarter were 193.6 million up 18.9 million or 10.8% year over year with 7.4% of the increase driven by acquisition activity.
Hi, good waste revenues were up 18.4 million.
Year over year with price up 5% volumes down 0.9%, 9.9% Chris from acquisitions.
Revenues in a collection line of business were up $15.2 million here every year with price up 4.8% across all lines of business volumes slightly down risk recovery fees up 2.2% in acquisitions up 10.9 million.
Revenues in a disposal line of business were up $2.3 million year over year. Despite the closure of the Southbridge landfill in November of 18, which resulted in a $1.2 million negative year over year variance the landfill pricing environment environment remains strong and we increase reported landfill pricing by 7.6.
Percent year over year and in addition, we increased average price per ton at the landfills to 7.8% as we improved our mix of customers in volumes.
Leading the Southbridge landfill closure landfill tons were up 3.1% year over year.
Recycling revenues were down $700000 year over year with $2.7 million lower commodity pricing and $300000 lower volumes, partially offset by $2.2 million higher third party tipping fees. In addition, we also had higher intercompany processing.
[noise] commodity prices were down 38% year over year.
This is mainly on lower LCC lower mix taper plastics and metals pricing.
Pricing was also down 28% from the first quarter through the fourth quarter 2019, organics revenues were down $300000 CRB year on lower volumes as we continue to shed sledges that do not meet our lower tolerance for odors and management at or landfill sites and processing sites.
Customer solutions revenues were up $2.2 million year over year due to several new multi site retail customers and strong growth in our industrial services business.
Adjusted EBITDA was $41.1 million in the quarter up $7.3 million or up 21% year over year.
Adjusted EBITDA margins were 21.2% for the quarter up 185 basis points year over year, we saw margin improvement across almost all lines of business during the fourth quarter, we anniversary the margin headwind from the closure of the Southbridge landfill and began to recognize easier comps on disposal and labor and.
Flaishon that we faced over the last few years.
Solid waste adjusted EBITDA was 39.3 million in a quarter up $7.4 million year over year, mainly driven by strong pricing higher landfill volumes in acquisition activity.
Recycling adjusted EBITDA was flat year over year with $2.7 million lower commodity prices.
Mainly offset by higher third party tipping fees and also intercompany tipping fees.
Adjusted EBITDA was a half a million dollars than the other segment. This is down slightly year over year.
This is mainly driven by lower project work through customer solutions. The organic script was up slightly year over year. They did a great job during that period optimizing disposal outlets and driving pricing in this tough slightly environment as we work to reduce these volumes into our landfills in other sites.
Cost of operations was up $9.2 million year over year, and down 195 basis points as a percentage of revenues.
Only $8.7 million at the increase was driven by acquisition activity and most of the remainder of is driven by inflation across direct labor third party disposal vehicle maintenance.
General and administrative costs were up $2.9 million year over year end up 30 basis points as a percentage of revenue roughly $1.7 million of the increase was driven by acquisition activity.
However for fiscal 2019, DNA costs were 12.5% or revenues and this is down roughly 80 basis points from fiscal 2017 as a direct result of our efforts to drive back office efficiencies through our technology plan combined with the scale, we continue to gain as we grow our revenues.
Depreciation and amortization costs were up $2.7 million year over year, mainly due to higher depreciation trucks and equipment related to our fleet in yellow iron plans and acquisition activity.
The fourth quarter includes several unique items on income statement, we had $600000 of legal and transaction costs related to our ongoing efforts to capping close to Southbridge landfill and we incurred $450000 of expense from acquisition activities [noise].
As of December 30, Onest 2019, our consolidated net leverage ratio was 3.07 times. This is down from September 30, it as we generate significant cash during the quarter and continue to grow EBIT da.
Consolidated funded debt net was $521.3 million with liquidity of $152.1 million. In addition, we have fixed our interest rate and roughly 68% of our debt.
During the fourth quarter, we completed the remarketing of two of our existing solid waste industrial revenue bonds, but October onest, we re market, our $11 million, New Hampshire, Epay senior unsecured bonds at a 2.95 fixed rate through the 2029 maturity date and then on December Threerd we.
Okay $25 million of New York FC Senior unsecured bonds at two in seven 8% fix rate for 10 years, both excellent rates for us.
Going forward.
Net cash provided by operating activities was down $4 million year over year for the full year with higher operating results offset mainly by the reduction in short term liabilities. This negative change in working capital was mainly driven by.
$5.3 million negative through the adoption as assay a 42 on January Onest 2019, we've talked about this the last several quarters it shifted payments on landfill operating lease contracts from investing activity 10 operating activity and statement of cash flows.
This change only impacted the financial statement positioning us to ask.
We also had a in half million dollars negative impact associated with the reduction of accrued liabilities due to cash outflows from the Southbridge landfill closure and the remediation project that a former scrap yard owned by one of our subsidiaries and pots and New York.
There was also a nine in half million dollar negatively impact due to timing differences in cash outflows and inflows from accounts receivable accounts payable and prepays and other liabilities.
Overall normalized free cash flows $55.5 million for fiscal 2019, this is up $8.4 million or 17.4% year over year.
As stated in our press release yesterday afternoon, we announced guidance for fiscal 2020 by estimating results in the following ranges revenues between 800 $815 million are up 8.6% at the midpoint adjusted EBITDA between 170 and $174 million.
Were up 9.9% at the midpoint and normalized free cash flow between 60 and $64 million were up 11.8 million at the midpoint.
2020 guidance includes 4.7% revenue growth from the rollover impact of acquisitions completed in 2019 in those already complete in early 2020. However, our 2020 guide does not include the impact from any acquisitions that have not yet been completed.
We expect adjusted EBITDA growth to be driven by falling factors in 2020, we expect our collection line of business to be up $5 million to $7 million of EBITDA, driven by robust pricing and partially offset by wage and disposal cost inflation, we expect all of our disposal sites excluding north.
Country to be up $78 million, driven by robust pricing and some very limited volume growth.
As John discussed, we expect that north country landfill that we have four and a half million dollars as we're slowing tonnage is into this site.
Our resource solutions group recycling organics and customer solutions, we expect to be up $2 million to $3 million as we continue to approve our revenue model off take risk and improve operational efficiencies, we expect roughly $6 million to $8 million of rollover benefit from acquisitions completed in 2019 in early 2020.
And we expect that slight headwind of $2 million to $4 million, mainly from DNA growth in a few other factors in the business.
Overall, we expect about 30 basis points of EBITDA and margin expansion during the year.
Working capital and net cash provided by operating activities will be negatively impact in 2020, as we spent plan to spend roughly $14 million on the final cap enclosure at the Southbridge landfill, we expect to substantially complete this work during 2020.
One other quick note we have changed for segment reporting for 2020 with the recycling organics and customer solutions for it now rolling off into the resource solutions segment. So we'll have the eastern region Western region resource solutions, and corporate entities and with that I'll turn it over to add thank you.
Thanks, and good morning, everyone.
We finished the year strong we continue to be a price leader in our markets. Our legacy businesses are performing well and we made considerable progress integrating our acquisitions during the quarter consolidated cost devops as a percentage of revenue improved by almost 200 basis points over Q4 last year, driven both by price and by.
Improved operating cost at the landfills and better performance on our recycling organics and resource solutions businesses.
Our collection operations, which generate about 50% of our revenue grew 18% over the same quarter last year, primarily through acquisitions I have mentioned in the past acquisitions tend to dilute our margins in the first year as it takes time to get pricing, where it should be and to increase the level of automation appropriate.
The operation.
Given that margin headwind, we're really happy with the overall performance in the quarter on a same store basis, excluding the acquisitions. We grew collection pricing by 4.8% were slightly negative on volume and improved our overall variable margin contribution per driver hour, which is or Keith.
For the metric by 1.5%.
Recycling is odd subject and I know that many industry participants are struggling in this low commodity price market side I think it's worth repeating some of our comments from before.
We along with our customers on the northeast believe recycling as an integral part of a long term sustainable economy, and it's our obligation to provide our customers with the best possible outcome and keep the recycling model economically and environmentally sustainable.
We continue to make investments to increase throughput and operating efficiency as well as to produce cleaner products that will demand a higher relative price and the commodity markets, but we provide a service we do not take on the commodity risk and we look for an acceptable return on our investment.
Just on several years educating the market and transitioning our business model Accordingly, and although there remain a few minor legacy contracts you have to roll off we have effectively insulated ourselves from commodity risk and our recycling operations are positive contributor contributor to our financial performance.
A quick update on our progress with integrating our acquisitions and the Rochester market, where we acquired for collection operations and a transfer station in late 2018, we've completed the first three phases of our integration process.
Management integration and back office system conversions were completed first initial operational integration, followed including route optimization and service changes where appropriate and more recently the careful elevation of pricing to market rates were now entering phase for increasing the level of automation and we see.
Some significant opportunities our team in Rochester has worked very hard to get these things done and I. Thank them for their exceptional effort.
We're also making progress with our more recent Albany, Western mass southern Vermont acquisitions, and integrating them with our forward Edward and existing southern Vermont operations.
It is one is complete and we're well into phase two with a good management structure in a solid market area plan in place.
Last quarter I mentioned in the enhancements, we've been making to our operational management capabilities, adding foundational elements to both run our existing business as well and integrate newly acquired businesses smoothly.
We're making significant progress on furthering develop further developing our operational processes and systems that are continuing to add resources, where needed to expedite the integration of future acquisitions, we've learned over the past year and a half where the pinch points are and as we improve our processes, we will be able to realize synergies.
Mr and increase our capacity to take on more in the future.
We finished the year strong and we're excited about the opportunities in front of us and look forward to your questions with that I'd like to turn it back to the operator now to start the Q on a.
Ladies and gentlemen, if you have a question at this time. Please press the star and then number one key onea attach term telephone. If your question has been answered or you wish to remove yourself from the Q. Please press the pound team.
Well pause for a moment to come Talbot Friday roster.
Your first question comes from the line of Tyler Brown with Raymond James.
Good morning, guys.
Morning.
Hey, I'm, so I'm, a little unclear on the north country update so to be clear the decision to pull the permit expansion was based on a governmental interpretation issue. It wasn't related to a vote does that right now.
No that's exactly right Taylor the.
Agency interpreted those that you differently than they had in the past and we will.
Take that into account and reapply.
Based on the information that we've given this it's a it's deviation from how they view that statue for my view, probably over 20 years. So we will we apply with the in in fairly short order. Okay. So you do plan to resubmit and then in conjunction with I guess governmental approval north.
Country. It does require a local vote.
No. It does not we do you have approval for for this permit we have approval.
This is this is a permit that will give us probably four or five years of capacity, we have local approval for that if we go on beyond that we would need.
Local vote, but not highs affirming that's in front of.
We'll go back in front of DC shortly.
Okay, and so maybe at the 2020 tonnage levels. How many years does that site have does it have a handful maybe four or five.
Yes.
I would say, it's a four or five years, Okay. And then obviously, it's a pretty big drag, but where where are those tons going are you are you going to try to internalize them elsewhere in the fleet.
Some of them certainly will be internalized other facilities. Some of them. We'll go to third some of their phones will go third party facilities, but we will internalized as much as we can within our system. Yes, we serve its roughly 150 towns and cities in the state of New Hampshire, and having a move tonnage is out of state New Hampshire is not.
Because you take out of state waste into main you can't take it into Vermont, Massachusetts, Doesnt have capacity, you're left with trying to move it out to New York, which could be as much of the 50% increase.
Wow, Okay. Okay. That's helpful. And then net so you mentioned that it's a four and a half million dollar EBITDA drag from north country, specifically, but then you also mentioned that Theres, a plus seven to eight from everything else, but I was wondering if you could parse that seven to eight between maybe hakes shimon and pricing or.
Any flavor would be helpful.
On its overall most of its price and there's some extra time to New York as you know last year Siobhan ran a little bit lights. So we'll ramps and tonnage is to get that upto till level.
The rest is sites.
Our lucky to have a pretty good year normal pricing operations operating efficiencies and there's no. There's no fundamental change in the northeastern pricing dynamic I mean, it still feels very not scarce capacity.
Yes, I mean, I think the supply and demand.
And really hasn't changed.
For sure.
[music].
Exactly right, Okay, and then maybe not on the Capex side. So you know I appreciate that you've got a number of one moment call at one time capex items this year.
Waste USA Buildout Southbridge capping and you have some other nonrecurring items, but.
To be maybe little bit more clear will the waste USA in the Southbridge spend basically be done in 2020 or does that also linger into a 21 or 22.
So southbridge, it's a combination of capping closure the majority of its their short term liabilities that will be worked down about $14 million and we expect the majority of that to be done in the year.
We need to get construction season to get off the work done that theres quite a few acres, so we'll be cap and waste USA.
The major part of the excavation will be done in 2020, and then we will construct the sale and 2021 and then we'll be into the new expansion area.
Okay. Okay, and then so if I was to sum up those three call. It nonrecurring items I mean that is $47 million out the door in cash does that does that restrict your ability to do M&A or do you still feel like you have plenty of financial flexibility for for good deals out there.
I think that we we would characterize it with no significant.
Availability from an acquisition standpoint.
In terms of the existing credit facility.
Okay. Okay, so not up not a limiting factor and then maybe my last one this is kind of in the same fain, but and maybe just a question for all for all three of you but.
How do you feel from a bandwidth perspective be it ITD be it human capital financial capital I mean, all of the deterrent limiting factors how do you guys feel from a bandwidth perspective for future M&A.
I think that you saw us take a little bit of a pause in the third to fourth quarter Tyler in terms of acquisition. We did a lot of work in terms of really taking look at the success that we've had from an acquisition standpoint.
We've added people to HR, we've added people to ICTI.
A few not a lot of overhead, but certainly reflective on the work that we've done to integrate.
The the businesses that we bought over the last 18 months or so so yes, I think that we're feeling good about where we are we've got a few more resources that were going to put in place from a development standpoint.
But we think that.
Back office customer care payables. The work that we did you know that net did with the finance team to implement net suite is really paying dividends to us in terms of the back office and we've added a few people both from an I.T. as well as from an HR standpoint.
Because we've added about 600 employees.
Last year.
Year, an actor, so and maybe Ed what from a from a operational bandwidth perspective do you feel you have enough integration.
Color manpower if you will yes, if you if you remember on the last quarter I talked about our expansion of our structure. So we now have of regional VP of ops and the east on in the West.
Plus we've added resources at the home office to support the transitions and win as Tom mentioned, we have.
One or two additions coming on in the near future.
Okay. Okay. Good net I really appreciate the the bridge I feel like maybe you've been asked that question before.
[laughter]. Thanks, Thanks, Thanks, Alex.
Your next question comes from the line of Khamsin, sorry with Jefferies.
Hi, This is John filling in for Hamzah.
I'll just comment Hey can you just comment on whether you think landfill pricing is at peak right now in your system and how much runway do you think it's out there.
I think that we'll continue to see.
You know reflection of the supply and demand.
Equation. So I think we're likely to continue to see fairly robust pricing because of the supply and demand equation.
So I think it's it's fair to say that that will you know I don't know that we would anticipate being exactly as strong as it was a 19 on a go forward, maybe a little bit more modest but.
So relatively the same seems as though.
Great.
So I have one more question I'll turn it over can you also comment on your margin target of 29% in the solid waste and how quickly you think you can get there also any execution risks, we should be thinking about as well.
Yeah. So on we that's the one target into 2021 plan that were probably tracking a little light against we.
We ended the year in solid ways.
Matt.
Size.
That.
20.
Rob, 26% and as you know we've had a couple headwinds there over the last year, whether it be wage inflation or the south branch closure or some of the long haul transportation, we got back to improving margins in the fourth quarter, we added gray overall quarter of improving margins.
And solid waste our margins were up over 200 basis points 210 basis points in the fourth quarter and we're looking any year next year, where we believe we've anniversaried a lot. It the fundamental changes we made from wage rates at transportation third party disposals will get back to the cadence of.
30, 30, 50 basis points of margin enhancement and solid waste.
North central weigh on a little bit in the year.
So we're probably you know there's no reason, we shouldnt get set destination, but we are tracking a little behind I think we and 2021 closer at 27.
As for said 20 center half percent.
Got it. Thank you that's very helpful. Yes.
Your next question comes from the line of Sean Eastman with Keybanc capital markets.
Gentlemen, thanks for taking my question.
I wanted to go back to I, just wanted to go back to the north country landfill setback.
I just want to understand better the timeline of the re submission process and.
Just based on that is likely to this becomes a tailwind as we look into 2021.
I wouldn't anticipate it would be a tailwind for 2021 at this point, but we obviously we've got to go through the process. We're in the process of doing that now we'll get the resubmission in as soon as we can but I would not into space.
At this point it being an issue in 2021.
Okay got it and on the volume shedding.
I just wanted to get some color on whether this was.
This has been contemplated for some time based on the strategic initiatives or whether there's been any shifts.
In terms of competitive dynamics, and you know any I think therapies for the business.
[music].
We started a process early in 19 of reevaluating our customers our profitability basis, particularly in the roll off line of business, but also the rest of the business.
And simply Readdressing customers that over time had eroding margins and so we started pushing price selectively.
Those customers or talking to them about how to change their operations so that they can.
They can.
There are cost the same but not hurt our margins and in that process. There are customers that simply go to a competitor and.
That's okay as long as were.
Keeping our price discipline, and we're keeping our profitability in place.
Got it so no.
Really sort of.
Expected kind of.
Yes, exactly are no surprises not at all.
Got it and then and then just im trying to understand.
Fourth quarter again price price growth ahead of and turn all budgeted expectations.
Yeah, just understanding the dynamic there isn't that the underlying inflationary environment was also higher than budgeted or.
I think it's fair to say that you know the entire industry is feeling pressure from a wage standpoint.
Which.
In one sense is a positive.
Sure.
For drivers mechanics, but the entire industry and transportation industry is feeling a lot of wage inflation currently seeing inflation from a recycling standpoint inflation from a disposal perspective, so there's a lot of inflation inherent in the business model at this point in time.
Yes, if you look at the year, we ended up solid waste at 5.1% overall price and we had budgeted around 4%, but we also ended up with.
About 75 basis points more inflation and it was on third party transportation third party disposal and direct labor lines.
Got it okay that makes market as we talked on the fourth quarter, we started to really cost a lot of that and start to travel more to the bottom line again.
Yes, Okay that makes sense and then lastly from me you know just given the bolstering of the HR and back office staffing the leadership role our vision.
For any material sort of EBITDA drag I guess from a year over year perspective in 2020. So I'm just wondering you know considering.
Those elements and then some of the efficiencies around the CRM and the ERP have yet to be harvested.
How we're tracking over the next couple of years relative to that 12% SGN a margin target.
Yes. So we've we've made quite a bit headway already as I talked about about 80 80 basis points and it's a combination of a lot of different names would occur gaining some scale on key roles, but we're also gaining efficiency in the back office in 2020, we're focused on a couple key technology initiatives one is.
On the procurement side as you know we put in new ERP in place on the year and a half ago and we are focused on digitizing, taking paper out automating processes in 2020, and we hope to start to drive even more efficiency, there and modernization of our systems.
We haven't announced a target to street, but this will be a self funding initiatives and will generate margin benefit over the next two years.
Other major initiative is really looking at enhancing what we talk ordered a cash cycle from how customers interact with us to how we detach route trucks onboard computing and we're in a pilot phase.
Looking at some new technology, there and and this could have a really meaningful impact over time to make us easier to do business with on and also enhance our ability to service our customers safely and efficiently. So it's exciting a little early on that one to lay out a lot of dynamics, but from our standpoint.
We will continue to gain scale as John was talking about that there's some interesting.
Growing pains when you grow as much as we have with growth 35% of our employees in the last two plus years and my Here's a funny example, our payroll and benefits team very small recourse absurd my team and we added 35% new in place we had an added a single head inaccurate. So it's almost like a step function we need.
To add someone there to help support our employees and then you kind of growing to that role so little bit that coming into 2020 were adding key people to help us continue to grow effectively.
Really helpful. Thanks for the time, everyone. Thank you. Thank you.
Your next question comes from the line of Michael Hoffman with Stifel.
Thank you John Ned How're, you doing you okay.
Yeah.
[laughter].
Are you.
What's that I'm on crutches for now.
Ending injury.
Yes.
So we understand I think theres congratulations for you John go another grandchild.
I do I do absolutely.
No question gradually.
So to the business of trash if we follow up on the underlying inflation could you actually quantified as a percentage.
Im understanding that's because you are getting terrific pricing so.
But it sounds like is no we're doing 5%.
Land to celebrate its pricing, but we're sitting here, 5.5% inflation, but as I want to her.
No no no opposite way, Okay, yes out.
Yes, well earlier in the year unique.
There were a few margin headwinds here a little unfortunate so.
Ontario that the Southbridge copier few things like that that weighed on margins also as we brought in acquired businesses say weighed on margins. So you know our to rats programs. Our pricing programs are outpacing inflation, you just look at year to date.
Yes acquisitions alone first here, a little bit margin dilutive they weighed on margins 60 basis points on.
Ontario weighed on.
20 basis points, and Southbridge 80 basis points, you've got a 160 basis points, there and our margins were slightly backwards here every year. So all of our other proceed pricing programs are outpacing inflation in markets, but we had a huge because.
You know unfortunate headwinds through the year, but I think.
We're setting up nicely for 2020 to outpace inflation.
Okay. So to that end thinking about cadence the first half the year gets pretty good margin comparison second half its a little tougher to net out for up 30 to 50 is what you're trying to get too.
Yeah and.
Yes, we were we were going to guide a little bit stronger than that but with the north country slowdown defines as high margin business that weighs on margins a little bit here.
Okay, and then John just some clear understanding your.
Answers to the north country question.
Are you expecting it to be permitted and therefore online and 21 or or we should assume on carrying this headwind Soc any worse, just so I still have 5 million ahead. When then the 20 it stays in 21 and then it comes off.
Yes, I think the [noise] where.
We are hopeful we'll get through the process.
And.
We.
I have the facility operational by 2021.
Okay.
All right. So this is 5 million, maybe lift and why we push back on on tonnage is willing to make sure. It's.
Obviously, there's.
Got to get through the process, Michael So, but we think that we will get through the process and be able to minimize any impact to 2021.
Perfect. Okay that helps and then.
Are you have done a terrific job and price on the collection side. It feels like it's kind of settled into you can sustain middle threes landfill urine, this and still exploring sort of.
The market corrections given the disposal reduction.
What do you think it settles.
It's obviously seven eight thought sustainable.
But where do you think you settle on its we're taking out and trying to model out five six years since we think about landfill being able to do a four consistently once you kind of worked through all of the market corrections.
Yes, that's what we have in our internal models smoothing out. The next several years as you know we've been working through if you look at our landfill book of business about a third little more assertive tons going in our from around trucks about a third or from long term municipal contracts about erudite from independent third parties and ever.
Anything on our own tracks, we push through intercompany pricing each year, and we're pushing interpreted that since 8% range third partys, we've moved more to shorter term contracts.
So we can more perfectly reflects the constraints in the market and as we've been working through some of the longer term municipal contracts you see some larger step ups. So some of those larger step ups are also I'm, probably shading it above 5% a little bit right now and I think we believe as we look forward to the next couple of years that.
4% to 5% range is sustainable.
Okay.
It's very helpful and then when do you think.
Some market rate gets to a level, where discard distant assets become attractive in volume could move away from the market Trutrak trains and what have you because there is there a risk to that that it causes.
Hey, shifting in this pricing environment cause railing gets it was accessible.
So.
I think we still have a ways to go Michael and I don't think that were at the levels, where you know the capital intensity of Rio.
You know you you know what those numbers look like in terms of the intervenes on the capital. It has to be deployed to move that same thousand tonnes. A day that you can move by trucks. So I think that we've got a ways to go before that's going to be effective.
At some point in time.
May very well be but I think were years away from.
It really being effective in terms of moving it moving waste.
From a rail perspective also two weeks ago. It also depends on what state. So if you're in New Jersey, or Pennsylvania, where you can't get overweight permits for tractor trailer truck different still little different stories CMC more rail transfer stations to Val if you're in New York State and you can get overweight permits is pretty effective see me with the waste.
Via truck and our sites are well positioned for major population centers and we believe many of the moves or.
Sustainable long term.
Okay, Great and then on the deal side.
So the pipeline full and you're still active and theoretically you could absorb similar levels like you did a year ago is there any sense that vicki.
The current election environment spoken people to get things done in 22 would have a certainty on.
Tax position, where we just seeing.
I think it depends on the level of sophistication in the size of the company Michael but for the most part I think the drivers there are the inflation that all of the independents are feeling from a labor standpoint.
From a from a.
Disposal perspective, as well as from recycling standpoint, the value in.
The value.
Disruption from a recycling standpoint is a big big driver for a lot of the smaller companies as is the labor if they can find the other thing that we've done as we've changed our system, we've put training programs in place we're.
Now, we're trying to hire people trying to attract as many people coming at a high school that are not going onto college and give them a career.
We are doing an awful lot of work there and as we said before we've beefed up HR to really and we've been successful we're filling we've filled the slots from a driver standpoint.
At one point in time, we had 40 openings for drivers across the system and so there's a tremendous amount of pressure on the independence because of wage inflation.
Recycling inflation and disposal inflation.
And so would you say that your retention has gone up or your current drivers has gone down one whichever way you want to refer to it you have retention is going up I mean, one of the things that we did was the Kelly Ramazan Cummins, our new VP of HR about two years ago now, but the first year.
Spent just doing career development. So if you come to work for Casella has reload driver.
Well, we'll try and you as reload trivia do good job and you're safe will train you as a.
Rollout driver will train you as a frontload driver will train you as a swing driver and then you can become a trainer and there you can see how you can go from 18 to $35 an hour in a five year period of time and really have a clear understanding of what your career could be it casella and it's really paying dividends because you know what we found.
And was the majority of our turnover was in the first year and a lot of or accidents and safety issues. During the first year. So we're doing additional training and we're doing a lot of work some too.
To really impact.
The turnover. So it's a programs are really beginning to work in take hold and the first thing that we were able to do with those programs was to fill the seats and now it's about retention then.
Bringing people skill sets up and allowing them to progress along that career paths. So they can do a better job of taking care of their family.
Okay. Thank you very much appreciate it thank you might use Michael.
Your next question comes from the line up high low Brown with Raymond James.
Hey, Hey, guys just a couple of quick follow ups, if I can.
Oh first off there were there was no CNG tax credit benefit in Q4 up there is a very small ones. So we use about 400 I'm sorry about 200000.
Balance per year.
And.
So we had about $200000 benefit.
Sure.
Okay. That's helpful. I, just want to make sure there wasn't something there secondly, the so net when you talk about resource solutions being a positive two to three.
I'm, assuming that's now including the recycling piece, because I would assume that theres. Some recycling benefits rolling into 20, yes, yes, yes, and I I kind of quickly made that comment we've we've reorganized our internal teams to be more effective where our recycling our customer solution.
Our organic scripts are now under one leader.
And it has very common fit business plans and goals and.
So next year, we see our segment reporting you'll see the east and west to solid waste troops that resource solutions group and then other corporate entities and on that two to 3 million is mainly driven by recycling with a little bit of growth in organics and customer solutions. Okay.
That's what I.
Thought and then just lastly, you won't come back to the seven to eight.
Again on the disposal the positive seven to eight which excludes north country, but isn't there a couple million benefit from Ontario, presumably not re occurring again, we talked about chemung, but it doesn't feel that there's a huge assumption in there from a price perspective, I could be wrong, but are you kind of.
Thinking about.
Landfill pricing moderating in 20.
Yeah in our model, we had and moderating we had at around four out of half percent and you're right, Ontario.
We have us a little easier year over year comp, we ran some higher costs operating costs in the first half of the year as we are addressing some gas issues at the site.
And thats around $2 million.
Tailwind per se coming into 2020 I'm sure among as we mentioned earlier, we got a permit increased several years ago, but we had it.
Exercise our option to get into that additional annual capacity and we started to ramp it late in 20.
19, so we'll fully ramp that this next year, so probably about $2 million to $3 million of benefit and the rest is shutout various sites through good pricing could operating discipline.
Okay. Okay I appreciate it.
Thanks.
We do have a follow up question from the line up from Michael Hoffman with Stifel.
Sorry, I forgot to ask this interest rate question have rates basically the banks are tied to the giving money away to the garbage industry do you have an opportunity to.
Meaningfully lower your rates.
I'm not sure if we have an opportunity can meaningfully lower rates, we did a great job in 2018, we refinanced our senior secured.
Credit facility and term lumpy into that new revolver in a term loan and we put a pricing grid in place as we get leverage out of business our rates dropping we're currently paying on that LIBOR plus 175 and.
And we can step down in that create all the way to L plus 125.
Well look at that we're also looking at whether there's an opportunity to do a blend and extend their and improve our position we've been active with tax exempt bonds and we expect to have some more in 2020, they'll help fund growth and we've been getting very low fixed rates, there and they're extremely.
Effective so you know the I don't think is a big step down there Michael because we've done such a nice job taking interest cost down, but we'll look at it.
Well I mean, you're over five at this point and by that get their multi billion dollar revenue companies and they're getting money it to a half percent.
You get this below five so our revolver. So LIBOR plus 175, so that puts got like 3.5%. We've got some fixed swaps that puts it more like Florida quarter for part of that money.
Our tax exempt at everything were doing today sub 3% fix some of the historic staff is more like four and a half the 5% so as us rollover, but they have non call provisions in them. So generally well, we'll look to work it down but there's you know there's not as except at expected.
Okay, and then lastly, what tax rate am I supposed to using.
26% is our effective tax rate in 2020, though will essentially case and will have very little income state seven taxes, how much we haven't a model.
We're anticipating close to close enough and close.
Yes, we've got a million dollars.
Yeah.
Million dollars Hacco division in 2020, and cash taxes should be around the same.
Okay. Thanks.
Okay.
Thank you Michael.
Yep touch let's say.
I'm showing no further questions at this time I would now like to turn the conference back over to Mr. John.
I'm sorry, we did just have a question to come into Q.
Okay.
We've done operator, I'll turn the call over back to Mr., Sean Casella.
Thank you operator, and thank you all for attending this morning, we look forward to discussing our first quarter 2020 earnings with all of you in early May thanks, everyone have a great day.
Thank you for participating ladies and gentlemen. This concludes today's conference call you may now disconnect.