Q4 2020 Covanta Holding Corp Earnings Call
Good morning, everyone and welcome to the Covanta holding corporation's fourth quarter and full year 2020 financial results conference call and webcast and.
An archived webcast will be available two hours. After the end of the conference call and can be accessed through the Investor relations.
And of the Covanta website at Www Dot Covanta dot com and the transcript will also be archived on the company's website at this time for opening remarks and introductions I'd like to turn the call over to Dan Mannes called Dantas, Vice President of Investor Relations. Please go ahead.
Thank you Lisa and.
And good morning, everyone welcome to <unk> fourth quarter, and full year, 'twenty and 'twenty earnings Conference call. Joining me on the call today will be like Grainger, our president and CEO Dirk Van Hoff, our CLO and Brian <unk> and our CFO on today's call Mike will provide an update on the strategic review tariff will discuss our operating performance and Brad will provide a more detailed financial update and afterwards, we will take your questions.
During their prepared remarks, Mike Derrick and Brad will be referencing certain slides, we prepared to supplement the audio portion of this call those slides can be accessed now or after the call on the Investor Relations section of our website Www Dot Cabana Dot com. These.
And these prepared remarks should be listened to in conjunction with these slides now onto the safe Harbor and other.
And <unk>.
The following discussion may contain forward looking statements and our actual results may differ materially from these expectations information regarding factors that could cause such differences can be found and the company's reports and registration statements filed with the SEC.
The content of this conference call contains time sensitive information that is only accurate as of the date of this.
Eliminating our cash February the 19th of 2021, we do not assume any obligation to update our forward looking information unless required by law.
Any redistribution retransmission or rebroadcast of this call in any form without the express written consent of Covanta is prohibited.
The information presented includes non-GAAP financial measures.
Because these measures are not calculated in accordance with.
Brian This should not be considered in isolation from our financial statements, which have been prepared in accordance with GAAP.
For more information regarding definitions of our non-GAAP measures and how we use them as well as limitations as to their usefulness for comparison per comparative purposes. Please see our press release, which was issued last night and was furnished to the SEC on form 8-K.
With that I'd like I'd like now to turn the call over to our President and CEO, Mike <unk> Mike.
Thanks, Dan Good morning, everyone.
When I stepped into this role about three five months ago to lead the company and the strategic review process I brought a good perspective on the issues and opportunities given my experience with the company.
Company and similar situations. However, we did not bring a fully formed plan at that point and we committed to let our analysis and the data direct our decisions and actions.
As we announced in October our initial focus has been and in depth review of the company's businesses and strategies to understand where value.
Can be unlocked and how to do so.
With our efforts to date I see a clear opportunity to deliver more value to shareholders and we are now and the process of selecting how exactly to do just that allow.
Allow me to lay out some of the specific objectives and initiatives.
First we believe that some assets of the company are undervalued by the market.
And as such we will evaluate the best alternatives to recognize this value and some cases this could result and.
And are testing the market demand for certain parts of our business in order to capitalize on potential value differentials.
Second and our core waste to energy business the profitability of our operations.
<unk> is not uniform.
Subset of our plants derives the majority of our current cash flow.
Our efforts here will be to improve asset level contributions or if not possible, we will work to exit less profitable operations.
The specific levers we will use for this effort will be unique and each plant situation.
Situations, but we will act decisively to reduce risk and improve cash flow.
In many ways. This will be the most challenging part of the strategic reviews the execution, but it is an area of great importance as we look to best position the company for the future.
Our third objective and a likely consequence of.
Any re sizing of our asset portfolio would be and evaluation of our costs and capital allocation I expected. The company that emerges from this review will be leaner and more focused and importantly, we expect to be better able to pursue and fund growth and the remaining business.
Lastly, and expected outcome of our activity.
And we'll be reducing financial leverage while the company is under no market rating agency or liquidity pressure the board and I believe that the current leverage is an overhang on our public equity valuation by Delevering, we can both increase the mix of equity and the enterprise value and potentially increase our trading multiples.
As a broader universe of investors are able to participate and our story.
And added benefit of a less leveraged capital structure over time is increased optionality on capital allocation, whether for aggressive growth opportunities or shareholder returns.
But we are not making any discrete announcements today I.
Activity that the strategic review will occur through a series of steps that will play out over the coming quarters and I anticipate that we will begin to make announcements on specific actions by the middle of this year.
A key component of the strategic review that we have discussed explicitly is ensuring that the value of our.
International business is fully recognized in the share price.
This is a critical piece of our growth and we have made remarkable strides and meeting the goals that we set.
Three years ago, when we announced the partnership with <unk>.
Since that time, we've moved four projects totaling one 5 million metric.
<unk> tons of waste processing capacity into full construction. This.
And this was no small task has this occurred during the debate over Brexit and the last two projects reach financial close in the midst of the COVID-19 pandemic and related Lockdowns.
And the result is that we will soon have when coupled with our Dublin project five.
Five new assets located in one of the best markets and the world in terms of waste pricing and public support.
As you consider our portfolio I'd also highlight the notable construction progress we've made over the last two years with no material pandemic related delays on the three English projects, which represent the vast majority.
Of the profitability and our UK portfolio.
As a company we took the lead on development and construction on these projects and will be the operator of all three construction once construction is complete.
Looking at the project photos and our Investor presentation, you can see the progress and some of the projects, which.
Which reached financial close over the last two years.
And most advanced as you know as Rookery, which reached financial close in March 2019, So roughly two years ago Rookery is right on schedule and budget with major construction nearly complete.
Around the middle of this year, we expect to begin.
And receiving and processing waste as the plant moves into the hot commissioning phase given.
Given our progress to date and experience.
And new plants, we expect <unk> to be in full operation and generating EBITDA in the first half of next year.
With the transition to commercial operations.
And as at Rookery approaching next year I wanted to highlight the sizable contributions we expect from these projects when construction is completed.
Including the already operational Dublin facility, we anticipate generating at least $100 million to $110 million of annual adjusted EBITDA from our UK and Ireland portfolio with.
Operating cash flow of at least $50 million to $60 million.
And now leading this effort is our new president of Covanta, Europe, and fellow Board member <unk> and Michelson Owens role will be to drive the successful completion of the four construction projects build out the operating and management team and create additional value through development.
With <unk> of projects and our pipeline.
And that vein I would remind you that the UK market remains attractive for additional waste to energy development, given the significant regulatory support and market demand for landfill alternatives.
From that perspective, you should view the financial outlook for international as a floor not.
<unk> plan.
And some of the UK remains a primary growth Avenue, and we believe our source of tremendous potential value for shareholders.
And now to move on to our financial update with the strategic review ongoing it would be easy for the team to lose focus but.
But we finished 2020 with strong results reporting full year, adjusted EBITDA of $424 million, which fell inside of our original pre pandemic guidance range.
We also generated free cash flow of $95 million, even as we undertook a greater than typical volume of planned maintenance capital investment.
These results.
Sales, which Derek and Brad will discuss in more detail where possible only with a tremendous effort of our team and incredibly challenging conditions. It is a credit to the resiliency of our people and business model and to the essential nature of our services.
Looking ahead, we expect to build on these results and 2020.
Prior.
<unk> pact of any actions from the strategic review, we are initiating 2021, adjusted EBITDA guidance of 435 million to $465 million and free cash flow of $100 million to $140 million.
We are committed to creating value through the strategic review process I am.
And to the eminent that this team will remain focused on the core business and on driving improved financial results.
With that I'd like to turn it over to Derek to discuss our operational and business highlights Derrick.
Thanks, Mike and good morning, everyone I'll be referring to the Investor presentation, and we will begin my comments on slide four.
2020 was obviously.
Coffee unique year that tested our people assets and plans and ways, we never could have anticipated and overall I think we passed the test handily.
And for that I'd like to take a moment and thank all of our employees and our customer base for meeting the challenges of the pandemic and for the personal sacrifices people made along the.
Obviously.
And it really will be a year, we will never forget in this regard.
From a waste market perspective, we witnessed a significant contraction and commercial waste volumes beginning late in the first quarter due to the impact of the pandemic and.
And our response, our waste marketing team leaned heavily on our integrated portfolio of assets.
And including strategically located transfer stations, along with our strong client relationships to ensure a steady flow of waste into the plants.
Given our preferential locations and the quality of our Counterparties and we kept our tip fee plants full throughout the year.
After volumes and prices bottomed during our second.
And the way our weighted average tip fee prices ticked up sequentially and both the third and fourth quarter.
And total EBIT with a greater reliance and typical on lower priced spot waste.
We drove 3% same store tip fee price growth for the full year.
At the same time, we opportunistically increased the total.
And quarter of contracted residential waste, which we believe provides even more stability to our mix going forward.
Looking ahead I am pleased with the stabilization, we're seeing and waste flows and our core markets.
We continue to see trends and our market markets that support longer term higher prices and.
Including a tightening.
Inning of disposal capacity.
Similarly, we continue to see increased demand by companies looking for solutions to meet their sustainability goals when combined with ongoing increases and new contract pricing. During 2021, we expect to see 3% to 5% same store tip fee price improvement even in this low.
Low inflation environment.
On the operations side I am proud of the fact that even with all the challenges of operating during the pandemic, we were able to maintain and 91, 3% boiler availability, demonstrating our strength and execution and the success of our robust protocols.
This level.
Availability enabled us to process $21 2 million tonnes of solid waste.
2020 was also a year of significant planned investment with maintenance capex of $160 million to.
To take on this volume of work during a pandemic required incredible planning and diligence.
Level of FX included a number of large work scope projects that will ensure the long term reliability safety and environmental compliance of our fleet.
Looking ahead, we expect maintenance capital to be significantly lower in 2021.
And as we look to future years I expect.
This <unk> will be a high watermark for maintenance capital spending.
Our maintenance schedule for 2021 will have a more typical cadence than we experienced in 2020 assume.
Assuming the operating environment continues to normalize you should expect a heavier weighting of spend and the first half of 'twenty and 'twenty, one compared to our 2012.
20 and.
As we deliberately deferred outage activity at the onset of the pandemic. This timing difference will be more acute and the first quarter.
On the commodity front 2020 was a very challenging year with weak prices for both energy and metals and both cases we.
<unk> focused on maximizing throughput and managing our risk.
In particular on energy, we remain highly hedged for the next 12 months and we will utilize our load serving business to drive incremental margins for our base load renewable energy facilities.
And the latter part of 'twenty and 'twenty, we began to see improvement.
We remain and metals prices.
There are multiple drivers, including and improving global economy limited inventories of finished steel and the increased demand for recycled metals as the U S steel industry transitions towards electric arc furnaces that rely heavily on scrap steel as.
As a result, we entered 2012.
Improvement with better pricing as compared to 2020, and both ferrous and nonferrous metals.
Yes.
Moving on to slide five I'd like to remind you of Covanta is ongoing commitment to sustainability.
The foundation of our company is our ability to provide and environmental.
And one environmentally preferable alternative to landfilling of waste.
This mission drove the construction of our plants initially and really defines our commitment as a business.
All of our growth initiatives are centered around providing sustainable solutions to our clients and customers.
When we look at waste to energy, we see a multitude.
Mental efforts to the broader environment.
And we reduce waste going to landfills, which mitigates land usage avoids leach egg production and significantly reduces greenhouse gas emissions compared to the methane released by landfills, we also generate electricity, which offsets the need to burn fossil fuels and in 2020, we produced enough.
To the best load renewable electricity to power 1 million homes.
Through our metal recovery efforts, we recycled materials, which reduces energy intensive mineral extraction.
Activities.
Taken as a whole for each ton of waste, we process, we reduced greenhouse gases by.
Net nearly one ton on a lifecycle basis compared to the same waste going to landfill.
And 2020, our plants to reduce greenhouse gas emissions by a total of almost 19 million metric tons.
And a time of increasing awareness of the risks of climate change.
And a clear focus of the new administration we.
We think it is essential to highlight our role and decarbonization.
Outside of our beneficial greenhouse gas impacts we also continue to prioritize sustainability throughout our organization and and the communities, where we live and work.
We have a diverse workforce today and we have.
Have goals in place to even better represent the communities where we operate.
Our work force is the backbone of our company and we believe their safety is Paramount.
During 2020, even with the additional challenges of operating during the pandemic our safety protocols proved highly effective as we achieved a recordable injury rate.
0.73, and 9% decrease compared to last year, and the lowest and our history.
This is a testament to our team and their commitment to operating safely.
As you can see from an ESG standpoint, we have a solid cultural focus and continue to drive improvement.
With that I'll turn it over to Brad to discuss the financial results.
Brett Thanks, Derrick and I'll begin my review of the financial results on slide six.
Total revenue for 2020 with $1 9 billion up $34 million from 2019, driven by higher tip fee prices, which added $16 million.
And new electricity load, serving revenue, which added $31 million.
These were partially offset by lower environmental services revenue related to the pandemic slowdown over the spring and summer.
And lower project refurbishment activity and client owned facilities for which we earn revenue.
Commodity market prices had a $6 million negative impact on.
And 2020 split roughly evenly between energy and ferrous metal.
Transactions overall reduced revenue by $10 million with asset divestitures and closures, partially offset by a full year of operation at the Manhattan Marine transfer station <unk>.
Completing the year over year bridge long term contract transitions added.
Revenue.
Now moving on to slide seven.
Adjusted EBITDA was $424 million and 2000 $24 million decline compared to 2019.
Positive drivers were 3% tip fee growth, the new wholesale load serving contract higher EBITDA from Covanta environmental solutions.
Six and lower overhead costs, reflecting the cost savings program that we instituted and response to the pandemic.
These items were essentially offset by higher cost of operating during the pandemic and higher planned maintenance expense.
Commodity prices represented a $5 million headwind to adjusted EBITDA, while transactions and long term contract.
<unk> added $3 million in total.
Now turning to slide eight.
And free cash flow was $95 million for the year compared to $140 million in 2019.
With adjusted EBITDA relatively flat the primary year over year driver was higher plant maintenance capex consistent with our guidance at the beginning of the year.
<unk> trends this was partially offset by increased cash flow from working capital, which reflected a $20 million upsize of our accounts receivable securitization program during the fourth quarter.
And I will review our outlook for 2021, please turn to slide nine.
We are initiating 2021 adjusted EBITDA guidance.
$435 million to $465 million.
The year over year increase is driven primarily by our forecast for higher recycled metals prices as Derek discussed.
Before commodities, we're expecting results to be generally similar year over year. However, there are a number of variances under the surface both positive and negative.
Guidance is the pandemic leads to some noise and the comparisons.
We expect to fee growth of 3% to 5% as waste markets have largely returned to normal and we resume trend growth. This remains the key driver for our results.
On the expense side, we expect to see some difficult comparisons.
Our pandemic cost.
Cost reduction program saved nearly $25 million and 2020.
And while we remain highly focused on controlling costs and 2021 most of those savings were onetime in nature, most notably the temporary salary reductions and furloughs and will not recur in 2021.
In addition, like many companies we experienced a reduction.
And medical benefit experienced in 2020.
Our guidance range assumes a return to normal towards normalized levels. So we'll see how that plays out.
Lastly, with macro pressures and the insurance market, specifically adverse claims experience and low interest rates, we're seeing an increase in property and casualty insurance costs of approximately 10 million.
And this year.
I will note that our guidance discussed today does not reflect any potential actions taken as part of the strategic review.
When we announced specific steps, we'll update guidance at that time, if and as appropriate.
Now turning to slide 10.
And we expect to generate free cash flow and the range of 100.
And to $140 million and 2021.
The main drivers are the year over year improvement and adjusted EBITDA as discussed and significantly lower maintenance capex.
Lastly, we expect working capital to represent a 10% to $30 million headwind on a year over year basis, essentially implying relatively flat working capital.
<unk> and 'twenty, one compared to the positive cash inflow in 2020.
Now please turn to slide 11, where I'll discuss capital allocation.
We're expanding our usual presentation here to look at the overall utilization of free cash flow.
From a discretionary growth perspective, we're planning approximately $20 million.
<unk> and 'twenty this year, primarily funding construction and the UK.
During 2019, and 2020, we garnered premiums and development cost recovery as our partners bought into the rookery, Protos and numerous projects and financial close.
This helped to defray our investments and these projects.
Our dividend policy change.
<unk> and April resulted in a $44 million reduction and dividend payments and 2020 with an annualized reduction of approximately $90 million at the new rate reflected in 2021.
We can now confidently point to a path of reducing our leverage before taking into account and the actions, resulting from the strategic review.
And of invest baseline expectation is to have $40 million to $80 million available for debt reduction and 2021, all else being equal.
Now please turn to slide 12, where I'll provide an update on the balance sheet.
At December 31, net debt was $2 5 billion to $16 million increase from year end 2019.
19.
Our consolidated leverage ratio was six two times, which has remained largely flat during 2020.
And our senior credit facility Covenant ratio was two times.
Available liquidity under our revolving credit facility was $443 million at year end.
I'll conclude my remarks with an.
<unk> date on our growing business in the UK and Ireland, Please turn to slide 13.
We now have four projects under construction and the UK, which are expected to move into operations in the following order.
<unk> and the first half of 2022, new Hearst and Earls Gate, and 2023, and Protos and 2024.
<unk> schedule and the top right of this slide presents Covanta is required equity investment into the UK projects sales proceeds and premiums received and the net of the two.
We estimate an additional $140 million of net investment through 2024 to complete construction of the four projects with the majority to come in 2022.
We have more than ample cash flow and liquidity to fund these amounts.
As you can see the initial sale of a 50% interest and the Dublin project and 2018, when we formed our partnership with <unk>.
Along with premiums received from the U K to date will in effect fund the entirety of our investment and the four new projects.
And with.
Projects are operational we estimate that our business in Ireland, and the UK will generate $100 million to $110 million of adjusted EBITDA proportionate and for our ownership and.
$50 million to $60 million of free cash flow, reflecting project equity distributions and our O&M piece.
Given these estimates along with our proportional share of the unconsolidated.
And all debt of approximately $650 million on a fully funded basis, you have the necessary data to estimate the emerging value of this business.
As I mentioned rookery is expected to reach commercial operations in the first half of 2022.
For modeling purposes as this date approaches rookery will generate approximately 30.
<unk> million dollars of adjusted EBITDA to Covanta on an annual basis.
As Mike discussed we're pursuing additional projects and we look forward to providing details as these investments mature.
Given the continued need for landfill alternatives and the U K attractive economics, and a supportive regulatory framework, we see more opportunities for growth here.
And view the financial estimates that we're providing today is our starting point.
And that operator, we'd like to move on to the Q&A portion of the call.
Thank you and they will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
And are using a speakerphone please pick up your hands.
Before passing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question today comes from Noah Kaye with Oppenheimer. Please go ahead.
Good morning. Thanks.
And second the questions and I hope, everyone and as well.
Mike can I start with a question for you.
I appreciate all the color on the priorities for the strategic review I guess I would just ask.
After 100 days or so.
I'm getting started with this review what can you share with us about what you learn.
Further what you kind of have come to incrementally appreciate about the business and and about the opportunities you see.
Okay.
A couple of things first of all the one conclusion that we came to quickly was.
The business is largely <unk>.
Organize.
And Ah Homogenize fashion, so it's very consolidated.
And without.
And I think enough scrutiny for capital allocation and directed at the most profitable assets, and we still need to and where and the process of rationalizing what.
What the expense structure should look like once again to.
<unk>.
Fences directed at the most profitable operations, so that would be the first.
The other is is that some of that consolidated.
Character is helpful. When it comes to things like our environmental services business, where we bring the breadth of services.
Towards that having waste to energy facilities have plus our dedicated environmental services facilities and together can supply and alternative for our commercial customers that is a a zero landfill opportunity at premium pricing. So that's one where and together that's a pretty strong.
Services from are facing business that I think is somewhat unique and then clearly the UK is completely different and Ireland. Because those are now the newest technology newest plants and a and a waste environment that is looking for non landfill solutions. So that's very different than a client service.
Cost business in North America, obviously, where <unk> got much more dated assets and you've got contractual both obligations and contractually constrained pricing.
So being in AR and AR.
More merchant market and for our own plants in North America, and and the U K is obviously.
Service preferential.
Alright that makes sense and then it looks I mean theres a lot of detail here as I think Brad said about the UK portfolio with which we can make our own valuation judgments, but it does look like.
You may have nudged expectations for the profitability of portfolio.
Very pleased with higher.
And I'm just wondering what has improved and your view about the sort of run rate profitability of the portfolio can you give us any color on what youre seeing and the and the UK and Ireland waste markets or anything you've seen improving and the economics.
<unk>, yes.
And good morning, its Brad.
We're a few a few things that led us to nudging, it up and the U K.
First off as we always said when we provided preliminary ranges.
And those will be finalized based on our our final equity ownership positions and the projects.
We ended up increasing our our our ownership percentage and the Protos project relative to what had been assumed in that range number one number two is currency.
And see the pound has strengthened pretty significantly here recently, so we've updated and we notice on the slide we've updated for current and forward currency.
<unk> rates.
And then also the range contemplates certain asset management.
<unk> opportunities, we see at the Dublin project now that we've been operating it for a few years and so.
And that shouldnt be viewed necessarily as a static level of contribution.
Okay. That's.
Very helpful. Thank you.
Sure.
Your next question comes from Michael Hoffman with Stifel. Please go ahead.
Alright, Thank you very much.
Back to the strategic review.
Yes.
Have.
Have you actually concluded.
Certain assets should be marketed and advisors have been hired and if such if youre asking us.
To apply a valuation to say U K could you give us what you're thinking about selling what that EBITDA looks like so we can incorporate that also and the analysis.
At the point now where we're organized to seek third party value.
And from from the market in terms of some specific assets. So once once we have a sense of.
What the market would be interested in and what those value differentials could.
Relative to our publicly trading traded multiples, we will have a much better sense of that but clearly.
Until we get market feedback, we would be guessing at what.
Was up greatest interest to the market, but as we said from the beginning that everything really is on the <unk>.
Table to try to maximize the value of the company so that interaction with the market is what we're going to be engaged and here and I'm pretty short period of time.
Okay. So.
I'm pretty simple fellas.
Very specifically you are shopping certain assets and if you get appropriate values and you're prepared to supplement if youre not.
And B is that what I'm hearing.
Yes, that's that's fairly accurate right okay.
On the capital spending side, Mike you made a comment and then beginning about allocation across the portfolio versus cash flow and if I look at total.
And spend between.
And you would what goes through the P&L and what goes to the cash flow statement, how would I proportion.
And that's where the service fee side versus the company owned side.
Okay.
That's a good question.
Some of it would be volumetric in terms of.
The biggest plants.
And most volumes would warrant more continued investment so and clearly the skewing across 39 plants in North America would be the merchant plants garner greater capital allocation and the client service plants do.
With me and this and then what.
If you had to do a split you would say maybe two thirds one third might be about about right. One third being the client owned plants and two thirds being the merchant plants that covanta earns.
Okay Alright.
Alright, that's very helpful and then from a.
Standpoint, and proud of.
Okay.
Guidance around this transparency on slide 13.
Dublin is about $30 million now you're suggesting <unk> about 30, that's the EBITDA sort of coming into the EBITDA contribution of the 100 to 110.
If I apply sort of a proportion of.
Tons versus ownership I can kind of map out the rest I I'm, assuming that's not a bad way to look at how to map out the rest to get to the range of 100 100 and time.
No its not I suspect you'd come pretty close.
Methodology and.
And then and my using 50% of the EBITDA is the cash generation and sort of a reasonable multiple.
Alta to sort of drop the cash down from each one.
Yes, more or less okay.
Alright.
And then.
Lay out the same kind of pathway about it's our first year middle half contribution and then you know kind of roll it forward.
So if I get to 2025 2026, and that's one.
Multiple at 100 to 110 full contribution.
Yes, I mean of course, we haven't been specific yet as to first half second half on Protos, new Hearst and and Earls Gate.
But if you want to assume mid year and absence of any more specific guidance, which we'll give as we get closer.
Thats.
And that's not inappropriate.
Okay, and then given the.
Evolution of the metals markets and your one comment and I agree I cover some company and so do electric arc furnace does recycling.
Is there a growing opportunity to be able to hedge some of this volatility.
And historically you have.
And payable to but can we start to head some of the volatility. So we take that out of the business model.
Yes, we can and I would say for us it's an emerging opportunity as we have increased our and improved our <unk>.
<unk> and sorting of nonferrous.
Arris materials, I think there'll be opportunities for us to for.
And for example, specifically hedge copper.
As opposed to a mixed product, which really was not hedgeable historically, we havent yet hedged on the nonferrous material, but we see that as an opportunity going forward on the ferrous side.
And we face is that the index we sell against.
And for our our with our off takers is not one that's currently hedgeable effectively with a traded contract. There is a traded contract that we would hope to.
And to transition to overtime that essentially equivalent.
The channel has a corresponding traded financial contract we've done that at one plant so far and actually have begun as a result hedging ferrous prices again from the output at just one plant so baby steps so far.
But absolutely our objective would be.
To hedge this revenue.
But have recently going forward.
Thank you very much.
Thank you.
Thanks.
And from Tyler Brown with Raymond James Please go ahead.
Hey, good morning, guys.
Good morning, Tyler.
Hey, Derek and nice job on the tip fee pricing I think all things considered.
Each year, I know and the deck, you talked about CPI being muted in 'twenty, one, but if we do see some higher CPI prints through this year should we expect those to kind of flow through into 2022, and then can you just remind us maybe how much of the book is directly tied to CPI.
Well first.
First of all thanks, Tyler for the compliment on the tip fees I appreciate that and a lot of work went into that.
And so on.
Inflation escalation on the waste on the waste side.
<unk>.
I would expect a lot of our indices move either at the mid year or towards the end of the year.
<unk>. So yes I think your question is would you see a benefit if CPI is less muted would we see it in 2022 the answer to that would be yes.
And then when you look at the overall revenue base between the service fee plants and.
<unk>.
The waste.
<unk> and <unk>.
And have roughly about $1 billion of revenue tied to some form of escalation.
Okay. So some of it being fixed within the contract some of it being exposed to whatever indices.
That contract is governed by.
<unk> revenues.
And they'll move in sympathy with CPI I would say yes.
Okay. Okay, and then you mentioned, yeah, and you mentioned, yes, perfect you mentioned.
And 3% to 5% tip fee growth here in 'twenty, one so how much of that is simply mix versus say call. It core pricing and do you have any bigger call. It chunkier.
Volume is such a rebid over the next couple of years and the northeast.
So.
And it's always going to be mix because.
We can keep the plants full generally speaking.
Absent a major snow storm or two.
So it's always going to be on the mix side, So right now Tyler.
Junkier were.
And over the last few years, we've been we've been pretty heavily contracted committed we actually have increased our committed alignment again I think we're.
On the merchant side, roughly 83% committed.
For this fiscal year, so there's not a lot of work.
Taylor room left on what's exposed currently.
And I do feel pretty strongly that as contracts roll off we're repricing into and Youre seeing it and our results were repricing into much stronger markets and stronger opportunities.
And we can be a lot more disciplined I think than.
If you go several years back we had a lot of exposure at a lot of these plants and the reality is.
Because of our contracted nature now we've got a lot more flexibility to be choosy about what we chase them.
Okay very helpful. And then Brad just appreciate the simple EBITDA bridge, but I was.
And we're a little more color in that core business piece. So I think you you gave a little bit of color on some of the I'm going to call it costs comebacks, but specifically how much of a headwind or all of those costs coming back which includes health care and insurance and everything basically I'm trying to figure out how strong the core businesses.
Hoping to basically offsetting that.
Yes.
It does yes, I mean, the three that we can point to relatively discretely or our insurance, which I mentioned in my prepared remarks is about $10 million year over year, that's mostly driven by a pretty substantial increase and our premiums for property.
Pretty and casualty coverage.
Which is a market phenomenon and it's not a covalent and specific phenomenon.
Medical benefits for employees the experience there, our our forecast and what's assumed in our guidance.
Has that higher by close to $10 million as well.
Yes.
And Thats based on actuarial estimates and so we'll see what happens.
Happens there.
It's just an estimate at this point and then the other that I cited that I would describe as relatively discrete.
Was the specific cost reduction program that we put in place last year.
We.
Benefited from that.
We calculated $24 million and total cost savings specific to that program.
We will retain some of those cost reductions and certainly.
Travel for example has not gone back to where it was.
We.
<unk>.
Given the macro environment and other reasons we've.
Maintained a pretty tight grip on new hiring is another example, and the corporate office. So we will retain some of it but most of it was by definition temporary and that was by design. So.
I don't have a specific number for you but.
<unk> Dougherty to vast majority of that 24 should should come back.
So there could be some lingering comebacks I guess and 22 alright.
Alright, and then there's probably some structural saves as well but.
<unk>, well and as Mike and Mike said at the beginning and one of the things we're looking at with the strategic review of course is.
Which business evolves, what's the right cost structure for this business.
And so nothing we've talked about today regarding guidance reflects of course any of those thoughts and just to follow up on that I mean, if you just think about it from the perspective of having and.
North American portfolio of 39 plants, plus and environment.
As our services business, if you make some moves to streamline the business by definition youre going to have a step function change and cost structure. So that's one of the one other things that we're spending an enormous amount of time on was you want to come out of this.
And a very advantageous position and when you think about cost structure.
So that's all.
We're working and we're trying not to do it from the top down but from the bottom up and figure out what we need what is essential.
What will allow us to continue to operate with the integrity that we've that we've had and in the most cost effective way. So that's why it's taking a little more time, but it's better than trying to enforce from the top.
Top just across the board kind of reductions without that kind of thought behind it okay.
Okay. Okay. That's helpful. And then my last one if I can squeeze just one and so I'm just I'm just not much of a utility guy, but basically what is load serving that line keeps creeping up you've talked about it quite a few times and the call.
But basically just what is that what drives.
And how do we think about that into the future.
It's really a stabilizing force.
It's the <unk>.
Derek you used the term so I'll use it I'll use it as well is.
It's a renewable sustainable base load.
<unk> facility, which is unusual in that regard and so.
It's able to be on call to support the system. So if a utility like for example, and New Jersey, where we've got more.
And I mean more solar power now because of the public policy support for it.
So that intermittent power needs to be level is against.
When it can't operate right and so having the load stabilizing facilities like we have.
Basically.
Level is as some of the ups and downs that you would get and the system now and so the system's just more volatile I mean not to get into all of this but you could.
Could see.
And the perfect storm and Texas was.
Too many things.
That all correlated to each other so when you've got something like we have that can operate this way, it's very different because it's not correlated to natural gas prices. It is not going to have constraints of pipelines and so its going to operate in a way that.
That is somewhat counter to those things that are most sensitive on our electric system.
Okay, and that's very helpful. I didn't want to go down a rabbit hole. Thank you appreciate it.
Praful from Mario cryptography with Jeffrey from collateral.
Hi, good morning.
Just on the strategic review and I think you touched on and obviously you're shopping some of the assets, but I guess just could you give us a sense for whether you. If this could be a plant or two or three and maybe separate sales or is this something where you're even considering bundling a few plants. If if the offer is right from a.
Particular buyer.
All of the above and.
And that's the whole idea of value discovery and the market has to figure out what is the most attractive.
Configuration to the market and what kind of valuation could differentials can we get bored so.
Everything that you. Just described is is what is.
And process are being pursued.
Got it and then obviously youre still and the process.
Just thinking about potential buyers.
Do you expect something to be more from a PE perspective are you selling to municipalities and obviously like I said, it's this is more or less I guess speculation but.
If you had to guess one way or the other I guess, what do you think would be the best.
Strategic buyer for something like that.
While our assets fit a lot of categories. So it depends upon where the value would come in and and clearly the nature of our business fits pretty well with <unk>.
Private equity infrastructure focus.
And the pools of capital. So I mean, that's that's clearly one alternative and and there are strategics and every one of our business. So we wouldn't want to discount that either but clearly theres a cost of capital advantage that some pools of capital would bring to the profile of our various business segments.
Got it okay.
<unk> just last one from me.
And Im profiled waste and thank you guys were up 3% on and the year.
And does that imply you were negative in Q4 and is that just driven more from the the resurgence of the virus and I guess more and more restrictions or Lockdowns and then what are you guys thinking for for profiled waste and.
And then in 'twenty, one in terms of volume and price that you can get there.
Yes, and Mario it's Brad.
I'm not sure.
What numbers Youre looking at to implied down Q4, we were up Q4. So maybe we can take that offline to help help reconcile that.
But looking ahead.
And <unk>, we're looking at 5% to 10% growth and profiled waste again, which has been the <unk>.
Rate of growth.
We've had and that business as.
And as far back as I can remember.
Got it thank you.
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