Q3 2020 Casella Waste Systems Inc Earnings Call
[music].
Thank you for joining us this morning and welcome.
With us today are John to selling chairman and Chief Executive Officer of Casella waste systems.
Ed Johnson, our president and Chief operating Officer.
Nicoletta, our senior Vice President and Chief Financial Officer, and Jason need our director of Finance.
Today, we will be discussing our 2023rd quarter 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 of course, you'll be shocked to hear that I must remind everyone that various remarks that we may make.
About the company's future expectations plans and prospects constitute forward looking statements for the purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by those forward looking statements as a result of various important factors, including those discussed in the risk factors section of our most recent annual report on form 10-K, which is on file with the SEC. In addition, any forward looking statements represent our view.
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 in detail 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 are available without unreasonable effort.
Well in the appendix to our Investor Slide presentation, which is available in the investors section of our website at IR Dot Casella, dotcom and with that I'll turn it over to John Casella, who will begin today's discussion.
Thanks, Joe Good morning, everyone and welcome to our third quarter 2020 conference call I would like to start today's call by again, acknowledging and thanking our workforce, particularly the dedicated men and women of our front line.
Their hard work and commitment through these unprecedented times has enabled us to continue to safely.
Right or Sushil is Andrew environmental services to our customers as well as the communities that we serve.
Safety is Paramount we remain highly focused on ensuring the wellbeing of our workforce.
As it relates to the CDC guidelines is the orders are mitigation measures in our communications has been well organized and deliberate we are.
Adequately equipped our teams with BP and we've implemented effective standard related to social distancing contracts racing disinfecting procedures, nonessential travel and in person meetings or from in business class two annuity.
Through this with limited the number of cases across the organization as well as minimal minimize business interruption.
Moving on to the quarter as expected solid waste volumes were again down year over year due to covert.
Despite the lower volumes, coupled with covert related expenses, we improved adjusted EBITDA by 5.9% year over year, while expanding margins. We also improved adjusted free cash flow in the quarter, while further driving down our consolidated net leverage ratio over.
Overall, we continue to execute well against our strategic initiatives despite headwinds related to cogan. The pro forma proactive response or sales customer service operational teams benefited our performance in the quarter, we continue to meet our customers' service interval and sustainability needs while effective.
Really scaling very variable cost we are executing our pricing programs and we continue to opportunistically grow the business in a disciplined manner through acquisitions.
Notably as announced last week, we recently completed an equity offering with gross proceeds of $151 million before underwriting discounts and expenses.
This transaction positions us well for further acquisition opportunities and execution against our growth strategy.
Next I'll highlight the recent performance of our operations as well as our continued execution against our key strategies.
From a disposal perspective volumes were down in the quarter again due to cold and this represents a sequential improvement from the second quarter and we continue to see volumes slowly meter back.
Line in fact September landfill tons were down less than 3% year over year that said, we expect modestly negative to stable volumes through the remaining remainder of the year.
With landfill tonnage is expected to be slightly down year over year in the fourth quarter.
Although we are experiencing headwinds related to lower disposal volumes, we've been able to partially offset.
The negative impacts were positive pricing programs and our focus on flexing variable costs across our operations without sacrificing our safety and compliance standards on October nine we received an important permit modification from the New Hampshire, DS four north country landfill permit modification.
Asian increased the size disposal capacity by 1.2 million cubic yards, which will provide approximately six years or additional of additional capacity.
We are pleased with this outcome and we look forward to our ability to continue to provide resource management services to the more than 50000 commercial and residential customers in over 150 communities that we service in New Hampshire.
Now to the collection business as expected volumes were down in the quarter year over year with lower activity levels across certain commercial and institutional customers again due to covance.
Overall effect on the economy collection volumes were down 6% year over year in the third quarter compared to down 10% year over year in the second quarter. So similar disposal volumes, we experienced positive sequential activity level trends in the collection business through the third quarter.
Despite our volume headwind collection, adjusted EBITDA and margin improved year over year in the quarter as a result of our pricing programs rollover effect of acquisitions, and our operational initiatives, including our heightened focus on rightsizing variable cost to the service levels.
System enhancements over the last year have improved our ability to analyze and respond to these key trends and operational metrics in a more responsive and intelligent manner. This visibility and response, coupled with a proactive effort related to our customer service needs enabled us to scale.
Our operations in a meaningful manner driving our costs of the business to better align with the lower volumes again that we're experiencing before big because of Covidien move.
Moving on to resource solutions. This segment is comprised of our recycling organics and customer solutions businesses. In January. These operations were combined as part of our strategy to drive further value and cohesiveness from our sales force and back office teams. The focus remains on enabling our customers to meet their sustainability.
He needs through our service offerings expertise and resources resource solutions performance was again strong in the quarter in particular, our recycling operations executed very well improving adjusted EBITDA and margins year over year. The team has been diligent from the safety perspective, along the path.
Processing lines, while at the same time is focused on achieving operational goals and continuing to improve the business.
Our tipping fee and es or a fee programs are a nimble and are effectively passing recycling commodity risk back to our customers.
Our customer solutions and organic businesses are performing well year to date with a combined year over year adjusted EBITDA growth, even while experiencing the lower activities related to cold.
Lastly, I would like to highlight our capital allocation and growth strategy, we continue to execute well here through October we've completed nine acquisitions, thus far in 2020 with approximately $21 million of annualized revenues.
In the quarter, we completed two tuck in acquisitions on October one we closed three more acquisitions, two of which were tuck ins and the other dental trucking services in the greater Buffalo market, It's a nice strategic fit with our Western New York operations and provides an opportunity to expand our presence in that market is.
Well as build additional vertical integration overall.
Overall, our pipeline remains robust our teams and balance sheet are well positioned to meaningfully grow the business and drive further free cash flow growth.
Recently, the recent equity offering strengthens our position to opportunistically acquire businesses.
With the right strategic fit and certainly the right return profile and with that I'll turn it over to Ned.
Thanks, John Good morning, everyone before we discuss the quarter I'd like to give a brief overview of the equity raise we completed last week.
We achieved 2.7 million shares of class, a common stock and yielded $151 million of gross proceeds before underwriting discounts and transaction fees.
This was an opportunistic equity raise as we said and we do not plan to use the proceeds to immediately repay debt. We plan to use that capital to continue to find smart acquisition and development growth over the coming months in the coming year. It proceeds are not targeted to one single larger transaction, we plan to continue to focus on it.
Inquiring smaller private waste operators to build greater density tried internalization and gain additional operating in GNS leverage.
As of September Thirtyth, we had $549.1 million of debt and $21.1 million of cash in our consolidated net leverage ratio was 2.99 times, if we netted 100% of the equity raise against our debt as of September Thirtyth, our leverage which dropped to 2.17 times our readout.
Action of 0.8 times. In addition pro forma for the transaction our available liquidity was $339 million as of September Thirtyth.
Moving on to the quarter revenues in the third quarter were $202.7 million up $4.1 million or up 2.1% year over year with 3.7% of the year over year change driven by acquisition activity.
Solid waste revenues were slightly up up.
0.1% year over year with price up 4%, we at 4.6% growth from acquisitions and volumes down 8.4%.
Revenues in the collection line of business were up 3.3% year over year with price up 3.7%, we had 6.3% growth from acquisitions and volumes were down 6.4%.
Collection volumes continue to rebound through the third quarter and various commercial customers reopened or increased services construction projects resumed in overall building activity increased and overall economic activity rebound across our mainly secondary and rural markets in the northeast gas.
Then the sequential improvements by September our solid waste volumes were down only 4.8% year over year for the month.
Revenues in the disposal line of business were down 5.8% year over year with landfill pricing up 6.9% landfill tons were down 9.1% year over year as economic activity and construction projects were both negatively impacted by closing.
Resource solutions revenues were up 8.9% year over year with organics up 2.6%, mainly on new contracted volumes customer solutions was up 7.9%, mainly driven by growth of services at existing customers and several new industrial customers.
Recycling revenues were up 18.9% year over year, mainly driven by higher commodity pricing and higher volumes in the business.
Average commodity readying for Tom was up 37% year over year in the quarter and this was mainly on higher cardboard pricing and mix paper pricing, partially offset by lower plastics pricing.
Adjusted EBITDA was $51.3 million in the quarter up $2.8 million or up 5.9% year over year, and our margins were 25.3% for the quarter up 90 basis points year over year.
Improving adjusted EBITDA with a huge achievement given the large co create headwinds we had in the quarter with solid waste volumes down $12.8 million year over year. This translates to roughly an EBITDA headwind $4 million also we had roughly $1 million of Covance specific cost during the call.
Quarter.
Solid waste adjusted EBITDA was $47.4 million in the quarter up $2.7 million year over year. This increase was driven by higher performance in the collection line of business higher performance in the disposal line of business and the positive rollover impact of acquisitions completed in the last year.
Resource solutions, adjusted EBITDA was $3.7 million in the quarter flat year over year with recycling up $1.4 million or higher performance.
Cost of operations in the quarter was down $900000 year over year, and down 180 basis points as a percentage of revenues almost all cost categories improved as a percentage of revenue as our team effectively flex costs to lower revenue levels and we anniversary many as inflationary headwinds.
That had negatively impacted margins in 2018 in early 2019.
General and administrative costs in the third quarter were up two and a half million dollars year over year, roughly $1.8 million of the increase was driven by higher bonus accruals due to timing differences year over year 300000 increase was driven by acquisition activity and a half a million was related to higher bad debt accrual.
Also during the period.
We have done an outstanding job improving our accounts receivable during the quarter and over the last nine months. Our days sales outstanding was 32.3 days as of September Thirtyth and this is down nearly seven days from December 31 2019.
We entered the coded pandemic with a stable and mature credit and collection program and during the pandemic, we've improved our customer outreach and communications increased it created additional flexibility as necessary.
Just had a very positive impact on our collection efforts. However, as we noted last quarter, we have taken a conservative stance on the Recoverability of accounts mid term, especially now that the federal stimulus programs are starting to wind down.
Third quarter, including two unique.
Unique items on the income statement.
One was we incurred $200000 in expense for an acquisition activities into we incurred $2.6 million of expense related to our efforts to close the southbridge landfill. This.
This $2.6 million included $2 million during the period as a legal settlement charge to resolve outstanding litigation at the site.
Net cash provided by operating activities was $111.9 million year to date up $40.4 million year over year, driven by higher operating results and $23.4 million of positive changes in our assets and liabilities year over year, including the great management of accounts receive.
Before I.
Adjusted free cash flow was $60 million year to date up $35.9 million year over year we.
We continue to invest during the quarter and planned capital expenditures at our newly acquired operations to drive operating synergies and integration efforts. In addition, we continue to invest in the development phase six landfill expansion at our waste USA landfill.
As noted in our press release yesterday afternoon, we raised our financial guidance ranges for the fiscal year, given our strong performance in the third quarter and additional visibility into the rest of the year.
With roughly 70% of our business in secondary and rural markets across the northeast, we experienced a stable to improving economy since the low point of co that in late April through October.
Roughly 65% of commercial and industrial collection services on a revenue basis that were reduced or suspended due to co that had been turned back on.
We estimate another 10% will return in the early winter when seasonal businesses in ski areas restart for the season it.
It is unclear to us when the remaining 25% of these services will resume is this translates to roughly $6 million a year or roughly.
1.7% of collection revenues.
Our increased guidance ranges for the year assume a modestly declining to stable economic environment for remainder of the year as the second wave of coal that is emerging however, the ranges do not contemplate a severe relapse and hope and 19 or new stay at home order shutting down commercial and economic activity again.
Please note that we raised our 2020 adjusted free cash flow range that to that original level. We set back in February we plan to pay back the $5 million of cares Act money in December given our strong cash flow generation year to date.
We place great importance on free cash flow generation and we are quite proud to reestablish our original guidance levels. Despite the significant headwinds this year we.
We have forecasted that adjusted EBITDA will be flat to slightly down year over year in the fourth quarter as some landfill volumes that we had expected to receive in the fourth quarter were received early in the third quarter. We also expect certain operating overhead cost to continue to ramp back to more normalized levels and theres a lot of and.
Certainty right now as Kobe cases are ramping across northeast without having to add thank you. Thanks, Ed good morning, everyone.
I'll start with a quick update on our cobot procedures.
John indicated we're staying very disciplined with our operational practices that we've put into place in March.
We continue to have excellent results, keeping our workforce safe and on the job servicing our customers. Although most of our markets have had lower infection rates than larger metropolitan areas. In the last few weeks, we have seen spikes. So we know the risk is still there and we continue to be very diligent.
This has become the new normal for us and I remain proud of our team and their ability to adapt.
Having said that some of the changes on our operating environment that we experienced in the early stages of the pandemic retail.
Returned closer to normal in the quarter traffic as returns so operating hours on labor costs are a little closer to budget and the disposal weights are normalizing as customers either have resumed business or adjusted serves.
Pounds per container yard is back to within 2% of normal on the commercial side and on the revenue side pounds per lift is down to within 6% of norm.
Some of the commercial volume has returned we are now only down about 3.5% from cobot related service suspensions.
And roll off pulls are not quite as robust as a year ago, but.
But even with these factors the cost of ops as a percentage of revenue improved by 180 basis points as compared to Q3 last year and drove a 90 basis point improvement in adjusted EBITDA margin.
With the recent uptick in the pandemic, we're continuing to track activity levels carefully. So that we can respond operationally to a change in circumstance.
Our operating margin improved in all major lines of business, but the largest improvement this quarter came from our landfills as landfill operations are relatively insensitive to volume this was pretty a pretty remarkable results and was.
Both from pricing power and for more efficient operational management and partially due to the fact that we enjoyed a very dry summer.
A quick stats tonnage was down due to coded by about 9%, but revenue was down less than 3% and operating costs were reduced by around $2 million almost 10% most of which would have taken place even a ton emitted remain the same.
Average price per ton was up 8%.
Collection operations also performed well a little more than half of our revenue is generated from our collection activities and we improved cost of ops as a percentage of revenue by 125 basis points with the initial impact of Covance, becoming more stabilized we have returned to our efforts to increase automation and ferreting out.
Inefficiencies pricing remains strong at 3.7%.
Our resource solutions group had another outstanding quarter as well continuing to exceed not only last year's contribution to EBITDA, but our original budget expectations as well. This group includes our recycling operations, which benefited from both higher processing prices and higher average commodity prices on a slight increase.
And tons processed.
The balance of the resource risk solutions group, our organics group industrial and National accounts also exceeded expectations. Despite some continuing service suspensions due to the virus.
We look forward to finishing the year strong operationally and we'll be working through our budgets for 2021 over the next few months.
Thank you for your attention and now I'd like to turn it back to John.
Thanks.
Good.
As reflected in our revised guidance for 2020, we are performing well during these challenging times. The collective response, an effort through this crisis of our devoted hard working teams is something that we're quite proud of in the quarter just before labor day, we took great honor and paying out a $1.8 million special bonus to our frontline.
Personnel and hourly employees, we look forward to a strong finish to the year and continued execution against our key strategies and with that operator, let's open it up for questions.
Thank you, Sir ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your capstone telephone.
Your question has been answered are you we still you will see yourself from the queue Brad.
Well.
Our first question is from the line of Michael Hoffman of Stifel. Your line is open.
Yes.
Good morning, Michael.
Good morning, Hope everybody's well.
We are how the fall foliage is good given that was.
No on why why not an event Hawaii [laughter].
Oh my goodness.
Ski season might open soon.
Net on the free cash flow guide just I am just trying to keep up with how faster we're talking.
My writing.
The new guidance or re visited guide.
Reflects paying back the cares act is that correct, yes. It does okay alright so.
Hey, it's actually better than the original guide.
Because you had the cares actions and Thats the way to think about it right or net neutral and back them even.
Yes, so I mean, the original guidance for the year, we didn't know about that it was no cares at that right right. So we are kind of back even to that we're tracking even better against the guide we put out August because at that point in time I did not contemplate paying.
Okay and then.
When you look at.
Volume trends related to commercial and you think back to the great recession.
And it might have taken four or five years for this to play out our way through kind of 12 13.
Are we basically repeating.
The same amount of lost business.
And it's now stabilized.
And from this point forward, we can talk about sort of a growth on an annual basis the growth pattern.
Yes ill start off and then John can hop in so we're sitting right now at about 5% exactly 5.2% of commercial revenues down.
From.
Service reductions and this is on a revenue basis not on a customer basis, we sat customers reviews.
Or suspend services in certain instances and it's not far to similar.
Except in one way I mean with its happening basically overnight, we're able to flex cost very effectively and re route trucks and you don't step into it by a million different cannot happen quickly. We right size I think that some of the benefit of the T. were you in the whole finance team and the team has done is real.
Given this.
The ability to act very quickly we are able to keep track of the revenues on a daily basis, and we understand what what what divisions or are flexing up and are going.
Going up and down from a revenue standpoint, so we can flex much much much more quickly in terms of getting the costs out and rightsizing the business for the revenues that they actually have so some of the benefit of the work that we've done from a systems standpoint over the last couple of years really has come to play over the last probably the last two.
Two three quarters in particular.
Okay. So if you thought about your incremental margin in January and February before we knew we were going to have this what we've had and now you look at your incremental margin how does that compare.
So when you say for each dollar of new collection revenue or engineering.
Engineered metal margin right. If you think about the operating leverage of incremental growth what did that look like in January February now you've gone through this pandemic nothing like a crisis to get you to focus on and on the cost more intensively we come out of it.
Im assuming the incremental margins better because you are going to be able to do some of this.
Business on also on a leaner cost structure.
I think you're right I'm not sure if we have a perfect number because I think weve, even surprised ourselves over some of where we've been able to flex Ed talked about his script. Some of the work we've done at the landfills today fundamental change.
On the routing routing efficiencies in terms of the rewrote equipment efficiencies putting automation in place in different just there's a combination of everything.
That's really come to bear from an operating standpoint, the operating programs.
That have been put in place with you and and Sean are paying dividends.
It's amazing when you are in your Covance caves, what you can come up with I can really and now with the new IC system, we can really dig into the numbers.
And see where we might develop more efficiencies, yes, we might have said it last quarter I'm not certain but we froze.
Electric Capex $10 million right when cold ahead, and as soon as we really got our arms around or cash flow projections, we started to call our truck vendors to see if we could actually buy more trucks. This year in Ed was able to find a number of corrado can trucks to get onto erode immediately and we accelerated part of our capital plan from Htwo.
Between one to drive greater efficiency late.
Late in the year that just getting on the road now were starting to gain a little bit but thats. The type of stuff, we're trying to do to drive long term efficiency.
Okay M&A.
How would you frame the pipeline and then the last question would be.
Waste connections and invented this phrase cobot fatigue, it'd be interesting and how you're handling the prospects of cobiz fatigue on the employees this kind of intensity of awareness.
Risks and health and compete I think that the pipeline is really strong Michael as you know all of the drivers.
Mobile has created another issue for independence across our footprint. So pipeline is really strong.
We saw a little bit of a low over the last couple of months in terms of activity with people getting out I think we've got a little bit more activity has begun to increase over the last.
Glass from way month or so.
Six weeks, maybe in terms of activity being meeting with potential candidates really getting out in from business development standpoint. So I think that we'll we'll begin to see that improve assuming we don't have a setback and that's that's a big assumption at this point in time, especially in that recently.
Over the last couple of weeks Weve seen obviously the cases go up across the northeast.
Not substantially but certainly up for the numbers that we've been seeing so.
The pipeline is strong and in terms of.
I guess the last thing that I said was how proud we were of our people and the work that they've done and.
As I said, just before labor day, we paid out almost $2 million bonus to our front line in hourly employees and while I think everyone is seeing a little bit of covert fatigue, I think we're well positioned with our people to get through the rest of the year hopefully get to a vaccine vaccine and were.
Thinking about you know what are the things that what's the next thing that we need to do for four people over.
Over the course of the holidays and something that we're discussing now but right now I.
I think with what we've done.
With the bonus the words that the management team has done to protect our people and then the bonus being put in place in early September.
Notwithstanding the fact that I think everyone is little little fatigue of co bid our teams in good shape.
Okay. Thank you very much enjoy your early winter. Thanks.
Thank you.
Thank you Sir we have another question from the line of Tyler Brown from Raymond James Your line is open.
Good morning, Tyler Good morning, Hey, Hey, so Ned so.
Obviously 90 basis points of total margin experience expansion was just.
The answer is really impressive I mean, you had down internal growth I think incremental co bid cost John I think you just said $2 million of frontline payments incremental bad debt I could go on and on so can you help build that bridge for me so.
So I mean, how do you how with all of those bad guys, what where the good guys that were just really working for you.
So it's interesting because I was looking at this from a different perspective, just wondering were down a little bit from Q2 to Q3, and we've had some stuff start to creep back into our cost structure like medical costs were up our overtime is up a little bit. So from our standpoint, you know we started that may be start to know.
Normalized several other cost categories. The on the good side its price its price in excess of inflation. It's our core operating programs. It's the things that existed prior to co that are shining through its reducing our turnover, it's better safety performance. So it's like 30 different.
Things that shop, all over the income statement and they're the same things that were there in Q4 up 19 in Q1 at 20 and Nicole that noise is there as you are saying I mean, a special bonus alone was a 50 basis point headwind in the quarter to our margins. So you know we are performing very well and our.
Long term investments in our programs are yielding nice margin enhancement.
And so as you think about let's.
Let's talk about 2021 since we're so close.
But big picture I mean, you talked about flexibility you talked about planning it feels like youve structurally push the margin ball forward or do you think that you maybe take a step back and margins in 21.
We haven't finished budgeting for the year and you know we haven't guided for the year, but as we as we look at what we're doing structurally as a company and.
What some of the challenges we had in 2018 and 2019, such as labor and turnover and.
Some of the transportation differences, we had we've really moved through does not hold and we had done that ahead of it and then now they are fundamental lasting changes in our business that we have made our pricing programs are in excess of inflation. So as we look to next year, we do expect to have margins up.
Maybe not 90 to 200 basis points I think were up 240 basis points year to date Thats pretty spectacular.
For us success would be up 50 basis points next year, yes, yes, okay. Okay. That's helpful. And then you talked a little bit about this but if I just go back and look.
Historically I think your EBITDA.
Steps down about 15% sequentially on average from Q3 to four I know M&A can impact that there is some stuff in there but.
It looks like in the guide you're looking for nearly a 25% at the midpoint sequential decline.
I think you talked about overhead and some landfill tons, but is there a bit of conservatism in there.
I think there is clear.
Clearly there is on the on net.
Obviously go through even more detail, but when you think about it is a bit of conservatism, we don't know what's going to happen with the ski business across the northeast.
And we certainly are not projecting that thats going to come back 100% because it's not there is no way in Hell is going to come back a 100%, they're trying to figure out now how theyre going to social distance on those and.
Slopes and how many people are being able to put on the hill and what does that mean for the restaurants and.
The additional.
Service.
Support in terms of restaurants hotel motels everything else around it from a commercial standpoint, which obviously is.
As a big part of the fourth quarter, Yes, we've taken up.
We're taking a pretty conservative view on volumes in the fourth quarter, we had a strong fourth quarter last year. As you know we had a huge margin enhancement quarter last year were up 180 basis points year over year. So as we're looking at it.
You know, we're not purposely trying to be overly conservative, but we have developed a model. That's assuming volumes are down 6% at the midpoint were assuming as well that.
Some of the costs as we saw from the second to third quarter with medical costs up OTI appeal.
Little more traffic as Ed said with productivity, we're seeing those trends continue to normalize into fourth quarter.
We have continued to be on a lot of things, but from our vantage point right now with all the uncertainty we're being a bit conservative.
Okay, and then and I got a quick question. So I think you guys said, 70% of your revenue was in call it rural or secondary markets and you throw out a number side a lot of numbers addus, but.
Did you see a demonstrably different in the volumes in your secondary markets versus call. It your big Metro's like Boston.
Yes on the certainly on the collection side the absolute yes, how many though many of the rural markets, where hardly affected or were affected for very short periods of time, whereas places like Boston and Rochester were effective for a longer time.
And.
When when we get to the traffic question.
Rochester in particular, and Boston, which you know is world renowned for their traffic.
Had all.
All this on the streets opened up in the second quarter, and we've seen that traffic start to come back.
Yeah now at I live in Atlanta, So I don't know about your asset.
My last my last one real quickly just on the M&A side, but.
What do you think that the PPP money that if you just look at the data it feels like the vast majority of small private haulers took advantage of.
Has that impacted converting some of that potential M&A.
Almost give some some haulers, maybe a lifeline or has that been in I had meant at all.
I think that I don't think Theres any question, but it's given them or in some cases, Tyler given them a lifeline, but I don't think that I think people that.
Are getting tired and getting ready to you know to monetize their business Theres a lot of different factors that certainly one is certainly helped.
Maybe some people put it off for six months, but reality is not changed right. Yes. They have structurally you have to structurally fix the business in order for reality to change and all that does is just pushes pushes the inevitable off a bit.
But I think I think you're right through to a degree it's it's pushed back a little bit.
Yes, Yes, I was just okay. That's interesting I want to take up too much time, but I. Appreciate the time didn't give me. Thanks. Thank you kind of give thanks.
Thank you we do have another question from the line presented we have hands and Jerry from Jefferies. Your line is open you may ask your question.
Hey, good morning, Thank you.
My first question is just around.
Just just free cash flow.
Is double digit free cash flow going forward sort of the right metric to think about for you guys. I know you spoke a lot about margin today timing of M&A. It probably impacts that you have given and allows so maybe taxes are not a big deal.
So just maybe maybe walk us through the free cash flow side.
Versus I know you've talked a lot about margins.
Yes, thanks, good morning.
So as we laid out our 2021 plan a few years back our goal is to grow free cash flow, 10% to 15% a year or more and as we look to next year and the year. After we think that goal is completely achievable.
This year, even with all these headwinds in moving pieces, what we're well on track to do that we've.
Really had some amazing management on the working capital side your accounts receivable, but we've been trying to work down our accounts payable as well to historically low levels to just make sure. We have an offset there as I said also we're paying back the cares money. So as we look into next year and we're trying to make sure. We have is normal of the pattern is.
Hospital to ensure that that that growth.
Got it and then and then I think you guys have talked about.
400 million as sort of this pipeline on M&A.
But could you maybe talk about you know your appetite to get into adjacent markets and what that does to your pipeline.
And are you seeing any competitive dynamic changes in terms of people bidding against you on M&A. It seems like one waste to energy players looking at has been looking at collection assets that.
And then the boss.
I think thats clear.
Clearly, we're we're sitting with the tremendous opportunity over the top of the existing infrastructure, but clearly we will look at adjacent markets that are just very the Pennsylvania that those markets that are close to the existing infrastructure Hamzah and you're right I mean, I think that the the.
Wheelabrator Tunnel Hill transaction has another competitor in the marketplace for acquisitions.
Certainly that that's a bit of a factor, but again, we've been in the market for 40 years, we won't know most of the players. So I think we'll do just fine.
And just sort of last question just a clarification what is your.
Revenue exposure to sort of the seasonal businesses that you referenced sort of skiing you know.
Restaurants in the resort areas, all that kind of stuff.
It's about $2 million, a year or less guarded guarded small.
Gotcha, Okay. Thank you so much thank you.
Thank you again, ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your Blackstone telephone you have another question from the line of Sean If Glenn from Keybanc. Your line is open.
Hi, guys nice quarter.
Sure sure sure a lot of hard work went into that.
Just in light of the equity offering we've got a lot of color on the strength of the <unk>.
Acquisition pipeline, but I just wanted to maybe approach from the hurdle rate perspective, you guys have highlighted very strict.
Capital or hurdle rates programming, just curious where the market sort of sits today relative to that.
And maybe how that's changed since we launched this program a couple of years ago, and then maybe you could just reflect on the deals youve done over the past couple of years.
In terms of pulling those returns.
Out of that capital that would be helpful discussion I think at this point in time as you know from our perspective, it really hasn't changed we're going we're going to continue with the same discipline in terms of.
The financial discipline that is laid out in that we have been falling for the last couple of years, Sean. So I don't think that there's there's any changes at this point in time.
As Tom just said there is that we have wheelabrator in the market is another competitor, but I think that.
A lot of people.
That are in this market, we have been working with one way or the other for a long period of time and certainly.
That's a little bit different with another competitor in the market, but we think that will as I said before do just fine and I don't know maybe you want to walk through the the margins.
Yes, yes.
We always look at everything after tax Unlevered returns through every opportunity we have just to make sure. We look at risk premiums. The same way they were bidding on new were putting an asset to work or buying a business.
And it really depends on where the risk profile, but we are trying to buy businesses north of 15% returns and even.
In many cases are looking at greater than 20% returns pending upon risk profile had overlays.
You look over the last couple of years and we're paying.
Last year, one EBITDA, six and a half times or so so it's not.
It Hasnt dramatically changed we're trying to find opportunities for assets fit with ours and we can drive some nice synergies that we can do that within achieved year timeframe and we've been pretty successful doing that and we'll continue to focus in the same area.
Okay Super helpful. And then also just also just in context of the equity offering.
You have this sort of 20 to 40 million of annualized acquired revenue target out there.
Even above that consistently on a go forward is that still the right target.
Yes, we think that it is we're not going to change the target in as you.
The question you asked before in terms of changing how we're looking at it from a financial standpoint, I mean, obviously, we're going to be towards the upper end of that range and we've been over that range for a couple of years. So I think clearly at the Conservative view is.
It is likely that we will be closer to the 40, then we will the lower end of the range, but I don't see at this point in time that we would changes yet you know we don't budget acquisitions either it's.
Andrew person opportunistic as you know, we don't guide long range acquisition, so were out knocking on a lot of doors and we've got a lot in the pipeline and we've added resources both on the finance side. The operating the IP side Weve tried to elephants development side, we've tried to position ourselves where we can.
Pick up or cadence and be more effective from an integration H.
HR people use system standpoint, Inc.
And get into operating synergies even faster so we're trying.
Over the last few years, we've had a lot of learning experiences and where we keep trying to improve and make sure we can convert more and more effectively.
Gotcha and last one for me is you guys talked about being conservative on the sort of go forward volume recovery with with the stimulus money coming out of it and you know theres that remaining 25%.
Volume.
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Uh huh.
That you're unclear on.
Something like that.
Big number in terms of revenue.
And then.
So I just wanted to get some context on that comment and then also just around that 25%.
What exactly is in there.
Just to get a sense for what the real risk is in trying to understand like what the inherent feeling is on.
This volume recovery.
Yes, so I was talking specifically about the commercial line of business business in India in three places our business has been hit small commercial customers.
Dan the roll off business, which had some industrial customers who are down some construction and demo that's down and then at the landfills. So this kind of said three different areas to add up.
Were back to roughly a 95% projected run rate at the commercial small can commercial or back a little bit north of that from an instruction standpoint in the landfill. Jason do you have a read recently, we're probably back to about 90% 99.
Or said, so we're a little bit lighter at the landfills in some of that has to do with just you know we get some some volumes out of the Greater New York City area North of New York City, We don't run trucks, there, but we service customers and Thats still an area that hasn't rebounded as much as other of our secondary rural markets. So.
When we talk about the impact and we're talking 5% to 6% overall buying it happens that in solid waste. It's not just that small can commercial that there are some lagging impacts and roll off in that landfills as well.
Okay, that's super helpful clarity again.
Supplements thanks, guys.
Thank you.
Thank you Sir we do have another question from the line we have the next on the Leach from Ben break capital. Your line is open you may ask your question.
Hi, Gary.
What's the environment like for new customer additions across the business in Q3 and then.
So on the on the flipside hows, the bump in holding up for existing customers and custom solutions. I know you mentioned, a number of industrial customer wins, but how's that them on how helpful everyone else.
Demand for it so.
In in resource solutions I'll start there.
Jason dig into this for me over the last week and it's interesting on probably our largest area of growth in the resource solutions are in the customer solutions. Our larger industrial was addition to services for existing customers, which is exactly one of our key strategies growing the share of wallet has very nice to see that trend continue.
Through co bit.
Some of our special project work has been a little bit lower because we had a delta be onsite and working with these customers and working through this project. So our backlog is increase there and I think thats actually nice into the future and then as we.
Look out.
What was the last question so isn't done their estimate.
What was the last part of the question Alex.
Well the first part was whats environment than like full you customer additions across the business in Q3 the.
The second part was just about solutions, yes, sorry, if I answer your customer installations by the new customer addition, part we've actually seen some net new customer additions on the commercial side of the business and new business formation.
Has been outstripped the Cove, it service reductions, but in our secondary and rural markets. There is some new business formation right now and we have seen new customers coming into the business, but it's still not at a pace to outstrip those reductions and I think that we've seen clearly an increase in rule.
Our goals from a residential standpoint, as well with people being home is lot of activity in terms of you know remodeling cleaning out things of that nature. So.
Probably that's an area, where we've also seen some benefit as well.
Okay, great. Thanks.
And then just quickly could you give a bit more color on the lower level of collection price increases this quarter, it's up.
Is that largely just due to pricing concessions full commercial customers, who is struggling with identical if anything else that teva.
We really haven't given a lot of pricing concessions per se. It's more of just a timing. So we got out the door with quite a bit of our pricing in the first quarter ahead of co that and then as our customer base in the world dealt with so that we pause some of our pricing programs through the second quarter into early third quarter.
Okay, and then we'll get back out with them because we do have real inflation in our business and we do need to reflect that through to our pricing.
So I have no real disruption long term, it's just a matter as you know we pushed back some of our start dates for pricing in second third quarter.
And the majority.
Majority of our pricing was done in the first quarter's net said, though majority of our price increase for the year was done in January.
Okay, Alright, thanks, guys.
Thank you.
There are no further questions on the line for Sam. Thanks, You May continue.
Thank you John Thanks, everybody for joining us. This morning, we look forward to discussing our fourth quarter 2020 earnings in our 2021 guidance with you in February of next year. Thanks, everybody have a great day.
Ladies and gentlemen. This concludes today's conference call. You may now disconnect. Thank you for joining us.
Thank you.
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