Q1 2021 Casella Waste Systems Inc Earnings Call

April 30, 2021

[music].

Thank you for standing by and welcome to the Casella Waste Systems, Inc. Q1, 2021 earnings at this time all participants on the listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session and you just touched on.

And then one on your telephone please be advised that today's call is being recorded.

You've acquired this small systems and you may close stores and be worked with an operator on that.

And like to hand, the call over to Joe for yourself.

And the other communications. Please go ahead.

Thank you this morning for joining us and welcome with US today are John Casella, Chairman and Chief Executive Officer of Casella waste systems Ed.

Johnson, our president and Chief operating Officer, Ned Coletta, our senior Vice President and Chief Financial Officer, and Jason Mead, Our Vice President of Finance.

And we will be discussing our 2021 first quarter results. These results were released yesterday afternoon.

Along with a brief review of those results and an update on the company's activities and business environment, we will be answering your questions as well, but first as you know I must remind everyone that various remarks that we may make about the company's future expectations plans and prospects.

Constitute forward looking statements for the purposes of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995 actual results may differ materially from those indicated by those forward looking statements as a result of various important factors, including those discussed and 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 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 the 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 are available in the appendix to our investor Slide presentation, which is available and the investors section of our website and I are dot casella dot com and with that I'd.

I'll turn it over to John Casella Who'll begin today's discussion.

Thanks, Joe Good morning, everyone and welcome to our first quarter 2021 conference call.

Obviously, we're very pleased with our results and continued.

And the execution against our key strategies.

And the real.

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Out of the work that the entire team has done.

Throughout the entire period of time with regards to the pandemic and our management team continues to do a great job of taking care of our people and.

And obviously there are people who are doing a great job taking care of our customers and the communities that we serve.

Our performance.

Really reflects a maintained focus and commitment on our teams on service excellence through this dynamic period over the past year I've witnessed our cultural culture strengthening even further across the organization.

Diving success related to both meeting the needs of our customers as well as executing against key operating metrics and goals.

As expected in the corner quarter, we experienced lower economic activity levels compared to the first quarter of 2020 and as such solid waste volumes declined three 3%.

Despite this headwind consolidated revenues were up three 6% and adjusted EBITDA improved 15, 9% with margin expansion of 215 basis points year over year at the same time, we grew adjusted free cash flow by $6 $9 million year over year in the <unk>.

Quarter through our strong operating performance continued disciplined capital.

Allocation and working capital improvement.

Although solid waste volumes were negative in the quarter. The progression from Q4 through April has been positive the sequential trends and outlook indicate a continued recovery as part of the economic reopening across the northeast.

Some brief.

Brief review of our key strategies first on disposal, while tonnage trends are improving volumes were down and the first quarter. This was largely driven by lower landfill tons year over year as we experienced lower volume from the Greater New York City area into some <unk>.

All of our sites.

While we do not have collection operations in and around New York City, We do accept waste through third party customers within its geographic geography.

As you as we know the city has been one of the hardest hit areas and the country related to the pandemic and one of the slowest to reopen that.

That said, we have seen positive volume trends over the past several weeks related to business and construction activity levels, beginning to come back online and a more robust manner.

Also as you probably know the.

The mayor announcements that we had yesterday.

Mayor Deblasio announce yesterday that the city is going to reopen and it didn't.

Entirely on July one, which is obviously going to be a positive.

With a vaccine rollout and restrictions loosening, we expect to see continued improvement and volumes volume levels throughout the year. Despite lower volumes. We have remained disciplined from a pricing perspective, we.

We advanced three 5% reported price landfill price and the quarter. We also continued to focus on operating programs disposal adjusted EBITDA margin expansion and improved as it reflects certain variable costs in line with volumes without sacrificing safety or compliance.

Overall, our disposal assets are well positioned within the capacity constrained northeast our pricing operating and permitting outlook remains positive.

And our collection business recent volume trends are also improving and the collection business as we're experiencing increased commercial and roll off service levels.

Oser to normal seasonal levels similar to disposal of sequential volume trends are on a positive trajectory.

Over the last year, we've leveraged improved real time business intelligence to better flex our variable costs and we have continued to invest and further automation and.

Route Ottomans and route.

Optimization and technology and in an effort to drive improved operating performance.

We have improved collection adjusted EBITDA margins for five consecutive quarters, and we are up 330 basis points since 2019.

We've advanced collection price by three 5% in the quarter and as the economy continues to reopen across the northeast volumes improve we will consider.

Inflation across various categories, we will analyze further pricing opportunities over the balance of the year, while continuing to enhance our operating programs.

On resource solutions, if you recall in January of last year, we combined our recycling organics and customer solutions businesses under resource solutions and in an effort to better align cross functional sales and operating back office teams, while strengthening our ability to attract win and retain profitable.

And customers within the segments. This January we took another step and further integrating these teams to drive increased synergies by creating processing and non processing business unit loops within resource solutions with this we aim to drive better teamwork improved organization across our sales team and position on.

Business to best meet the needs of our customers.

And within processing, our recycling and boat biosolids facilities, where we receive inbound materials processes and produce and then product <unk>.

And non processing consists of brokerage and resource management services provided to large customers with broad sustainability needs.

Resource solutions performance was strong and the quarter was adjusted a bit of up $1 $4 million year over year, while expanding margins aside from strong financial performance and proud of the work of resource solutions team and regard to the recognition. We received this march from Becton Dickinson as its top global supply.

And sustainability category for resource management services deliberate and delivered to their manufacturing and distribution operations across North America. Finally, I would like to highlight our capital allocation and growth strategy, our acquisition pipeline remains robust with over $400 million of addressable opportunities.

And annualized revenue over the top of our existing footprint in the northeast we are well positioned positioned to continue to execute against our growth strategy and the discipline manner, given the strength of our balance sheet. We are focused on and opportunistically, putting this capital to work on deals that meet our criteria.

From a strategic fit and a financial return perspective, where we can drive higher levels of free cash flow and continue to grow the business.

Wrapping up we are executing well against our strategies as reflected by our continued performance and the first quarter against our 2021 plan. We expect continued strength across our solid waste and resource solutions operations and a paced reopening.

The major cities across the northeast and with that I'll turn it over to net thanks John.

Revenues and the first quarter and were $189 $5 million up $6 6 million or up three 6% year over year with two 1% a year over year change driven by acquisition activity and.

Solid waste revenues were up 2% year over year with price up three 4% acquisition growth of two 9% and volume down three 3%.

This is actually a sequential improvement from the fourth quarter 2020, when our solid waste volumes were down four 6% year over year.

And <unk> and a collection line of business were up three 1% year over year with price up three 5% and volume is down <unk>, 3%.

As we have discussed over the last year, we've kept close track of the commercial and industrial collection customers, who reduced service levels or shut off services due to the COVID-19 pandemic, we experienced a very steady rebound and service levels from May 2020 through October 2020, and then we saw a slight slight decline of service levels and no.

Remember in December as COVID-19 waves hits and northeast this negative trend reversed and early 2021, and we have seen a slow but steady rebound of collection service levels year to date through late April we have recovered roughly another 5% other losses and we have now recovered over <unk>.

50% of the commercial and industrial collection services on a revenue basis that were reduced or suspended due to COVID-19.

Revenues and the disposal line of business were down 2% year over year in the quarter with landfill pricing up three and 5% and our landfill tons down roughly three 8% year over year as John pointed out much of the negative year over year variance is due to lower economic activity and a greater New York.

City area.

Resource solutions revenues were up eight 1% year over year, mainly due to higher recycling commodity prices, partially offset by lower keeping fees. Our average commodity revenue per ton was up 150% year over year and a quarter on substantially higher cardboard and mixed paper pricing higher metals.

<unk> and higher plastics pricing.

Adjusted EBITDA was 38 8 million and in the quarter up $5 $3 million were up 15, 9% year over year, and our margins were 25% and a quarter up 215 basis points year over year.

Our solid waste adjusted EBITDA was $34 6 million and the quarter. This is up $3 $9 million year over year with gains driven by both collection and disposal lines of business or.

Our resource solutions, adjusted EBITDA was $4 million and a quarter up $1 $4 million year over year with improvements from recycling and organics processing.

While our commodity prices were up significantly year over year. This increase was mainly pass back to our customers through lower tipping fees or lower SRA fees. These floating fee structures effectively manage over 90% of our commodity risk today.

Cost of operations and the quarter were down $1 $4 million year over year, and down 318 basis points as a percentage of revenue almost all cost categories improved as a percentage of revenue as our team effectively flex cost to lower revenue levels and continuing to execute very well against key operating initiatives.

And administrative costs and a quarter were up $2 $8 million year over year with $3 $6 million of the increase driven by higher bonus and equity accruals due to timing differences and higher performance this year.

Given the reversal of the tax valuation allowance and fiscal 2020, we now expect the income statement tax provision of roughly 31% in fiscal 2020. One however, our cash taxes will remain low at approximately $1 $5 million in the year, given our net operating loss position.

In the quarter, our income tax provision was $2 $4 million. This is up $2 $3 million from the same period in 2020 and as expected, we only paid cash taxes of $200000 and the quarter.

As of March 31, we had $552 million of debt $152 $6 million of cash and liquidity of $326 $2 million.

Our consolidated net leverage ratio as defined by our credit facility was 266 times as of March 31st. However, if we net 100% of our cash against our debt our true net leverage was 211 times.

We're very happy with our capital structure, where it sits and it allows us to continue to execute against our strategy to grow with investments and acquisitions.

Net cash provided by operating activities was $32 1 million and a quarter up $17 $4 million year over year, driven by higher operating results and $11 $5 million of positive changes and assets and liabilities year over year hits.

This positive change was mainly driven by timing differences related to accounts payable and the continued great work by our accounts receivable team managing our receivables at historically low levels.

Adjusted free cash flow was $11 million and the quarter up $6 $9 million year over year, we continue to invest in our planned capital expenditures and newly acquired operations during the quarter to drive operating synergies and integration and we also continue to invest in the development of the phase six landfill.

And yet the waste USA landfill in the quarter. We expect this expansion to be completed in 2021.

We don't typically raise our guidance levels and the first quarter given the short duration from publishing our initial guidance in February however, given the solid execution year to date combined with our increased visibility of economic trends, we did update our fiscal 2000 and 'twenty one guidance range as yesterday, we have reaffirmed.

And our revenue and net income guidance ranges and we raised our ranges for adjusted EBITDA adjusted free cash flow and net cash provided by operating activities.

<unk> 2021 ranges assume a stable economic environment, continuing through the remainder of the year with only a modest rebound and solid waste volumes as major cities and our markets are very slowly reopening from the pandemic, most notably in New York City.

The increase and adjusted EBITDA and adjusted free cash flow range. It is mainly driven by higher operating margins combined with slightly lower than planned solid waste pricing and slightly higher than planned volumes.

We expect solid waste volumes to be up roughly 8% year over year, and the second quarter and to be up roughly 1% year over year, and a third and fourth quarters to put this into context last year solid waste volumes were down $41 million due to lower economic activity associated with COVID-19 and the current and midpoint of.

Guidance, we only have $10 million to $12 million of volume growth in 2021.

As we typically point out the guidance does not include that impact if any acquisitions that have yet to be completed and we do include one 5% of revenue growth associated with acquisitions, and we completed last year into the first quarter this year and with that I'll hand, it over CAD and <unk>.

And good morning, everyone from.

From an operational standpoint, we had a really strong start to the year, usually the first quarter's uneventful and it's the winter quarter and seasonally is typically a lower revenue and margin quarter for us.

This year, our performance was notably strong.

Improved margins significantly across all lines of business.

As we break down the details and you'll see that the improvement was primarily driven by operational efficiencies.

Holiday and cost of ops as a percentage of revenue improved by over 300 basis points over Q1 last year.

Our landfill results continue to reflect the fundamental improvements we started making over a year ago by focusing on daily filled plans leachate management efficient soil usage and proactive gas collection. We are staying ahead of issues that are costly to fix after the fact, we are now seeing the benefits.

The effect of COVID-19 on economic activity, particularly volumes coming out on New York City kept volumes low and the quarter tonnage was down from last year's first quarter, three 8% and our pricing was a little muted at three 5%.

And as I pointed out on the past landfills are high fixed cost operations and margins tend to struggle and lower volume, but we're continuing to bring down costs and cost of ops as a percentage of revenue improved by over 220 basis points and produced our best Q1, EBITDA margin contribution and over.

10 years.

We're seeing volumes return and April so we're optimistic that the economy and the northeast are starting to come back and certain sectors like construction seem to be leading the recovery.

Our collection operations, which generated a little over 50% of our Q1 revenue had similar results volume was down two 3% and the quarter versus Q1, 'twenty, but cost of ops as a percentage of revenue improved by roughly 240 basis points.

We improved our key productivity metric, which is variable margin contribution per labor hour by 15, 9% over Q1 last year.

The main driver of this improvement was in our residential service, where our focus has been on automation, but the roll off and Frontload lines and service also improve.

And in addition to our focus on automation, we added a corporate routing and support function on a year ago and have improved our routing efficiency routing efficiency is something that deteriorates slowly over time, and a division and can be hard to recognize and quickly at the divisional level.

Adding the dedicated resources to continually review our route has been a powerful driver for cost reductions as a result of increased automation and improved routing our pricing discipline and other key initiatives. We have consistently improved our overall variable margin contribution per labor hour quarter after quarter.

Ever since we adopted that metric a few years ago.

Our resource solutions group produced similar margin improvement, our volume and revenue remained flat and like the other segments. The biggest savings has been on the cost side over time, we continue to tweak the level of automation on our processing lines and this is coming through and labor savings, particularly partially offsetting.

Oh, excuse me and partially offset by the continuing extra cost of COVID-19 protection to keep our workers safe.

Processing volumes have been steady year over year and cost of ops and improved by over 330 basis points and this line of business.

Simply stated.

We had a great quarter and I wanted to close with a comment about our management team and as always I am very appreciative of the extra effort that our division managers and ops managers have made to keep our employees safe to serve our customers through the pandemic and also make operational improvements and their market over the past 12 months.

And additional factors that is helping them make all this possible is our focus over the past three years and building the depth of our upper management, adding a senior VP of ops focus on collection activities, a VP of post collection. The home office op support team I mentioned earlier and two regional office positions.

In addition, the restructuring of our resource solutions group has added structure door operations for processing and non processing and material.

It also helps that we have a very operationally focused HR department that is supporting our divisions and keeping US ahead of Labour challenges with these changes and place I have confidence that our progress will continue.

With that I'd like to and I'll turn it back to the operator to start the Q&A.

As a reminder to ask a question. Please press Star then one.

And for your question has been answered and you'd like to remove yourself from the queue. Please press the pound key.

First question comes from Tyler Brown with Raymond James Your line is open.

Good morning timing Tyler Okay. Good and you can hear me.

Hey, so thanks for the commentary on New York City, and how that impacted landfill tonnage I guess across the broader region.

But I was kind of hoping you could put a finer point on it I mean.

Just how important was the city going to sleep on the volumes over the past year, I mean, maybe I'm not appreciating it but again just a finer point on how important that was.

Yeah that here, our landfill volumes were down 11% roughly 460 to 480000 tons year over year and remarkably about 80% of that decline was related to customers in New York city or the surrounding areas and on.

On.

Historically, it's not that big of a mix, but we saw other parts of our franchise really come back and you and I have had this conversation before with us being 70% and the secondary markets. We saw some really nice economic trends and construction trends later in the year from the secondary market and New York City, just completely lag and that.

Same trend came into Q1 Tyler.

And interesting and then I know Ed you kind of.

Alluded to it but with the weakness and the volume I do kind of wonder did that have a broader impact on landfill pricing kind of late last year and into this year and if so if things do kind of kick back up do you expect that to maybe reaccelerate.

Yeah. So as you know landfills are very volume sensitive so last year and the economy and Q1 pre pre COVID-19 was kind of moving I mean, we've we had all the time and we can handle and we pushed through some pretty heavy pricing, but once COVID-19 hit that slowed down a bit and going on.

And the Q1. This year, we were short of volumes. So we werent out aggressive on price and now aprils Com and now we're actually tracking very nicely in April so the.

The volume seem to be coming back down so it'll it'll help us with the price lever you also and even go to come and back in March right was January and January and February It actually really began to come back fairly significantly in March and has continued through April and I'll make sure.

Two other comments, if you look everywhere other than some of our kind of New York Downstate customers. Our pricing programs are very much intact and we're gaining on the same level on slide you do price increases and the business and you're also seeing a little bit the impacts from last year. So price is not just related to one quarter.

The buildup of the three quarters and the current quarter. So we did do a little bit less pricing and Q2 Q3 Q4 of 2020, given COVID-19 and then coming into this year and many parts of the business. We're back on track and to edge point and certain of those customers and New York were probably eased up a little day <unk>.

And from what we typically would do.

Interesting because if you look back I think you're you've repriced the heavy part of the collection booked early in 'twenty like right before COVID-19.

That's right and then so so do you think the shape of how you're pricing will look net.

Do you actually think your collection pricing will accelerate as the year goes on just with the mathematics of easier comps.

Curious yeah. So the shape of our curve every year is the first quarter is the highest pricing quarter, and then actually declines and given how our price increases rollout.

And we've readdress the shape this year and it's actually going to accelerate through the year given from what we just talked about where the comps get easier year over here and we've held back a little bit of pricing as Ed just discussed as well. So we actually will see a little different trend this year and our pricing model and we're not losing confidence in our pricing power.

And the market nor are we giving pricing concessions, it's just a different cadence of the program.

Right Yeah, no that is helpful for modeling, Okay, and then I don't want to dwell on the guidance too much but just to be clear. So there wasn't any change and the volume assumption in that that changes.

I mean, there was no change and revenue is that right.

No there was and as I said earlier and my comments.

We have price maybe a quarter at the mid point, maybe a quarter percent lower but we haven't lost.

Confidence and our pricing programs and we have volumes and maybe a quarter percent higher at the midpoint and turn on model. So not a drastic change, but a lot changing very very rapidly right now that news that and New York City yesterday is big.

We're seeing some of the best trends, we've seen and construction and over a 10 to 15 years and the northeast. So it's a dynamic environment and our tweak to guidance was just that it's a small tweak we don't typically touch guidance and the first quarter and as we come into the second quarter, we're really going to be reassessing, where we are and the year.

And last.

<unk> was there could be more as we get more visibility into a year and execute further.

Okay. Yeah, no. That's very helpful. And then just lastly, maybe just a quick question on M&A. So John I mean, you mentioned and a robust pipeline I think you said $400 million of addressable revenue out there just any thoughts on what we should expect this year or maybe hope to expect on the on the M&A front.

Yeah, I mean, I think that the debt.

We're we're pretty excited about where we sit there.

With vaccination moving forward and things are beginning to open up a little bit more.

I think that where.

We're working on you know 80 to 100 million of that 400 and.

In various stages, Tyler and I think we'll see some activity towards the second half of the year from an acquisition standpoint.

Okay. All right guys. Thank you so much from the time. Thank you. Thank you.

Our next question comes from Hamzah Mazar with Jefferies. Your line is open.

Hey, good morning.

Just on good morning.

Just on on the M&A side Youre working on a day.

Out of the 400 and how long have you been working on the $80 million and and do you think there.

Capital gains tax changes accelerates transactions for you guys or are you not hearing that.

I think that I think that it probably does but it's probably only recent recently and the last month or two where there's been you know activity discussions around the implications of a bite and a tax increase.

Particularly as it relates to obviously capital gains so I think you know.

No.

Six months is the answer first part of that question Hamzah, we've been working on those transactions for probably about six months now and probably in the last month or so we're starting to hear a little bit of a little bit of noise on on.

Tax.

Ah indication.

Gotcha and just just my second question and I'll turn it over is just on on pricing just following up on on the pricing I understand the deceleration and in Q1 and Bart just just thoughts on what is the sustainable pricing for Casella and.

What I mean by that is you know 2018, four and a half per starting 2019, a little over five <unk>.

And covered lost share for point do malware pre and change, but it builds up as you said, but on a sustainable level going forward you know help us get comfortable is 4% the right number three the right number is it five.

On the just help us think true that a little bit and the reason why I'm on the option as you know we're trying to get comfortable if you've sort of seen sort of this big catch up on pricing and now you know your normal price is three and change going forward.

Yeah.

A good question and I mean that question has a couple of legs to it and as you know not a lot of our business is in markets, where that CPI linked I mean, it's maybe 10% to 15% of our contracts and we've been moving and that contract based and more and more of the trash and garbage index, which is now sitting north of 4%, but most of our <unk>.

Contracts, we can price it will on the subscription residential and small can commercial roll off line of business and.

And we had been pricing pretty aggressively to stay ahead of some meaningful inflation and northeast. If you start to look at our March and improvements over the last year that fit their excellent very very good. So our key operating programs are working good where pricing a little bit lighter than we had a few years ago, but it's partially by design part.

The cadence, we talked about and many co. So our game plan for the year is still that three and a half to four 5% range as we look out to future years, we're still looking around that 4% range, but when it really comes down to it. We're tweaking we're looking at on elasticity and we're looking at our margins and we're trying to have a constant cadence of improving.

Margins as a business and that weighs into the pricing strategy.

Got it very helpful. Thank you so much.

Thank you Hamzah.

Our next question comes from Michael Hoffman with Stifel. Your line is open.

Thank you very much and hey, Mike.

Did you did you're seeing normal seasonality.

From a just overall the business pattern and then things were recovering underneath it and that's part of the help and then you ran it better.

Seasonality, yes, absolutely. So the normal seasonality is still there, but the COVID-19 effect is still and that January and February.

Volume. So now we're seeing almost a totally normal seasonal uptick in March and April.

Got it Okay, and then and it just.

Refining the point of you say, you're sticking with the range is one to two and a half for volume three and a half the four and a half, but but you're now suggesting to all of us.

And we ought to settle in around a one nine or two as your and your full year number for volume and a three five to three seven for the price is that did I hear that message and correct that that's where we are and our model at this moment and Michael and we'll look to update again next quarter, but we probably are shy lighter on price.

And that we held back a little better pricing and Q1, just with some of the New York City impacts and we're seeing a little bit higher volumes, but there is not a massive change there.

And the cadence for the year and as I talked about earlier, we only really have about $10 million of our solid waste volumes coming back. This year that we lost last year of the $40 million. So.

You know the projections not for absolute recovery, it's for a partial recovery.

So.

Digging into the $10 million is the unit price of that 10 million flat year over year.

No.

It's up or down and it's up it's OK. So youre getting some of that 10 million recovery is the price.

As opposed to if I looked at other on the tonnes.

Yeah, I'm not 25% of the tons back yet.

Something less cost price.

Yeah. If you look at it I mean, the biggest laggard and our portfolios on the landfill tonnage side, we're running at let's say, 93% of expected run rate, we're running close to 100% of expected run rate on the temporary roll off side and we're running at about 95%, 96% expected run rate on commercial so.

That's definitely the laggard and as Ed pointed out that there's a lot of leverage on the landfill side to margins as well great. So upper 460% to 480080%. That's New York is more about a high value time like on MSW, and CND tons and that might not be as high value.

And.

Yeah, it's about two thirds, one thirds two thirds MSW, one third cfd, Michael and the mix and we saw you know as you know we have both commercial customers out of the city that bringing us MSW and we have commercial customers screening on CND and the residential waste and the city goes through debt.

The apartment and sanitation contracts right.

So points of leverage here or.

The governor doesn't prevent the mayor from opening on July 1st because their share.

[laughter] Oh, it's gotta distract attention from something right.

Anyway so.

And let's say it happens from.

M S W. As a buyer of quality ton and that starts to ramp back up and and.

And that gives you some incremental pricing levers that helps the spot market and and therefore, that's the reversion of the mean higher.

And as the leverage is that the way to think about it okay. Okay.

And you know this as.

And you run your business appropriately and when that happens you're gonna be on to capture this leverage because of the way you've got the cost structure and leaned out.

The other part of it.

Yes, absolutely okay on.

The M&A World if capital gains ends up being a driver of someone's decision how late can they make the decision.

Or are they work and the other way when do you have to start a process. So if the calendar year was.

Trigger.

And you can get deals done.

Relative to a tax motivation how late because somebody have to say it's by me.

I think it depends on the certainly it depends on the size of the business Michael obviously, the larger the business. The more time it is going to take to get through that especially if you have to.

Go through Hart, Scott, so et cetera, but I think that we're only beginning to see people think about it and the last 30 to 45 days, where prior to that it wasn't really on the.

On the on the radar.

So, but I do think that there's there's there's more activity now people are starting to think about it.

So the timing is going to be.

And really based on the size of the business smaller businesses.

I think much shorter periods of time to get through due diligence and get it and get it done properly and type of transaction as well and asset purchase is typically a lot simpler and faster for us and the stock purchase.

Okay last one from me and we we hosted.

On the CEO when waste on a call recently and asked the question about where he thought 2020 for Boston disposal could end up and he suggested that sort of 110 to $1 20 range versus the low ninety's and it was renewed in 2019.

Hum.

How much of the 4% long term pricing is dependent on that happening where the knock on consequence haul away through the market is.

And that helps with the pricing versus.

Yeah.

What youre doing today.

Yeah, I think if you look at the marketplace. There are some pretty key facilities and are tracking towards closing and the next handful of years nightclubs here, where like brocade and on long Island, and we've got to Allied Niagara facility up and the Buffalo market to Albany landfill. We also have to mirror the burn plant and canal.

And it is scheduled to close in June of 2022.

So it is like two and a half to 3 million tons of capacity coming out into this market and <unk>.

It might be off a year or so either way if you kind of stretch to end of life and there's a lot of capacity coming on is market is not enough places to put all of that garbage. So.

The pricing is not dependent upon the city of Boston and the pricing, it's just going to be a supply demand imbalance and where that waste needs to go and theres a lot of opportunity I think as we look over the next five years.

Okay, and then last one and I forgot to ask with Mckean whats the progress on this sort of thinking out over the next two years being able to open up that rail haul opportunity and how you're doing on that.

And we're in the process right now of the.

The team is working on the permits we're working on design. So I think that we're on track to see how to move that forward and the next couple of years, Michael as you know we've got some other permits are already in place we need some additional permits we've gotta get.

Fully designed.

Two.

The most productive design from a rail perspective so.

Now moving forward and certainly and we think that we're on track right now okay. Great. Thank you very much.

Thank you.

Yeah.

Our next question comes from Sean Eastman with Keybanc. Your line is open.

Good morning, Sean Good morning, Shawn Good morning, John Good morning, Good morning, strong start to the year. Thanks. Thanks for taking my questions absolutely and I just wanted to go back to on Joe's question on it.

The sustainable.

Yields and the business I mean.

It's really great.

You know more a function of the underlying in place and.

And the business right and when we hear companies sort of sounding the alarm bell on inflation and.

Labor.

Guys can be.

Nimble around that.

No.

Given the disposal capacity dynamic and given that on may 10% to 13% on the book is indexed to CPI.

Is that right.

Yeah, you're 100% right I mean, you're pointing out something super important and where we're not relying upon trailing from mid shrimp and statistics like CPI and urban and CPI and whatnot to drive our ability to recover inflation and you've seen over the years and 90% of our collection, but from business, we can price either.

Or a contractor at will and we have a lot and his ability to move rapidly now you don't want to try and catch up to inflation and wanted to try and be ahead of it and we're very cognizant that the economy is heating up quickly. The government has put a lot of money into the economy and labor market shifted rapidly AT&T to be tight so.

We are cognizant of those factors and as I said earlier, our game plan with price really is to expand margins and we're constantly moving that leverage to get to a right point.

And we're doing that on a almost on an immediate basis from a labor perspective, each time that we've had to go and and rethink.

Our competitiveness from a wage rate standpoint, and each market. We're obviously.

And calculating what that's going to cost and going back and pricing net on an immediate basis.

Okay got it that's very helpful and and then the outlook for 2020 one it prudently.

It builds and a partial recovery.

Can you help at all with.

Just how to think about what a full what's sort of the incremental margin on on a full recovery would look like you know given the operating efficiencies and.

No other moving parts. So just wanted to check back and on that.

Yeah. So we lost $40 million of revenues last year due to COVID-19 about half of it was and the collection line of business half of it was at the landfills and as we're coming back this year in the model changed and more of it more of a turn coming back is and collection than at the landfill.

Correct.

So it is I think it's like 60, 40, or maybe even a little more and.

And we look at that.

I think we're getting all the landfill tons back as soon as the economy comes back we have such tightness with sites closing that's all coming back on the collection side of the business you know maybe some of these customers Napa come back I mean, certainly the business has turned and industries, but they'll be replaced by other things and COVID-19 tracking is not perfect and that way because.

We're looking at specific customers specific services and are they coming back online. So I think on the landfill side that $20 million already and when that comes back in and that's coming back here and with greater than 50% incremental margins. It's just a lot of value there and on the hauling side of the business.

I would suspect not all of it ever comes back, but what we have seen coming back in comes back in the 30 plus percent incremental 35% incremental margin type range.

On the flip side, you've got to feel a little bit cautious because we're running all time low on overtime for labor and.

The labor markets are so tight that will have to bring more labor on line. We've also been a little bit cheaper on trucking and certain instances fuel that theres, some things Seth and you know.

Positive and there so I think ourselves and others and the industry were all being a little bit cautious because we've never seen a recovery like debt and you know until we see more water under the bridge, it's hard to fully estimate where that will shake out, but Q1 was a good arbiter with margins up 200 basis 215 day.

<unk> points year over year and net to your point, if I can just add one other comment yes.

Yes, with the margins up 215 basis points year over year, and the first quarter excellent as you look out through the rest of the year as volume comes back and all from that point our guidance implies margins are up roughly 20 to 50 basis points over the rest of the year year over year, so, perhaps a little bit muted on a net point a little bit of.

Cautiousness, there just northern App is volume coming back into the system and is less.

And it's ticked back up.

Yes.

Okay again really helpful and and then you guys have talked about this sort of a 100 million.

The acquisition revenues kind of in advanced stages.

So what's the makeup of that in terms of how many companies are and they're the sort of general size.

And given the common comments on activity heating up on the M&A front.

And how things are shaping up and do you think it's likely that we see greater than that $20 million to $40 million acquisition revenue target closed in 2020 one.

Yeah, I think it's fair to say, Sean and then it's likely that we will be at the at the high and are above our target from a acquisition standpoint at the $40 million yes.

Okay.

And this is you'll continue to see us focusing on on a lot of smaller companies.

Generally where there's a lot of good tuck in opportunities a lot of COVID-19 adjacent markets and that's where primarily our focus is and the marketplace and we've done very well.

Okay terrific I'll turn it over thanks, so much.

Thanks, John.

Our next question comes from Alexander Leach with Bamberg capital market. Your line is open.

The only country out.

Good morning.

So most of my questions were asked but just a quick one from me.

And I know you focus on your prepared remarks, but can we get on update on the automation of your of your fleets.

I believe you were around 40% to 45% of Lafayette and the end of Q4.

And you were planning to make some significant progress on that and in Q1, and so where are you guys now and how much more room is left from frequently.

And so a big mover and that automation is on the resi side, and it's and Rochester. So we had a significant.

Phase one of a two phased process happen.

And in the fall of last year and now we're going to phase two right now it's in process of equipments and.

And delivered and we're training drivers and we're implementing a reroute around the new automation there. So that's going to drive our automation level over 50%.

Just on the ballpark figures.

Okay. So.

You're still around 40% to 45% level and then it should be pushed up to.

50%.

The next few months.

And it'll bump up.

Probably by Q2 right so.

And we have other we have on a whole automation initiatives. So reviewing all of our other operations right now and identifying automation opportunities and automation opportunities and are also combined with the new rollout of our routing software easy route right. So it's kind of in tandem we've got a whole new dynamic routing optimization package.

And then the team is also looking to automate trucks.

And we're using that to reroute and gain efficiencies.

Okay great.

And the first to go back to the volume has gone and scan, but just to make sure my head.

The N y C reopening and captured within the top end of the range or is there upside to us.

There's definitely upside we really haven't assumed a large economic rebound from New York city or any other major areas and the model.

And as we've talked about and even at the upside and the range Chase and we're really coming back and how many millions of dollars of volume do you know.

Good afternoon.

And well have to calculate that but it's not a lot more of it.

$5 million more or something it's not it's not all in there.

Okay, great. Thanks.

Youre welcome. Thank you.

Our next question comes from Tyler Brown with Raymond James Your line is open.

Hey, Thanks for the quick follow up.

Question on Highland.

I think last November you you got the referendum to expand that from 460000 to a million tons.

Number one I'm just curious how that ramp has gone if at all.

And then this is a really big picture question, but to strategically just how important is that expansion to the entire future of your Western Theatre.

I think it's a it's very important.

And so we're in permitting now the process is moving along.

Very nicely.

As you know Tyler that probably the biggest win obviously just getting through the referendum with the community, which went really well hats off to the team that they just did an outstanding job. So that facility is going to be you know a very significant moving to from 470000 to just under around them.

Tons, a year, it's going to have a significant presence and our new York disposal capacity over the next decade for sure no question about it.

And I you know, there's a lot of uncertainty in terms of some of the facilities that are in place, whether theyre going to continue or not.

And that will also impact that Nick talked about brocade and he talked about.

The incinerators shutting down in Buffalo and so there's a there's a lot of capacity that's coming out of the Mark out of the New York market. So that facility will be a you know.

A big part of our capacity on a go forward basis.

Okay, but the full expansion and hasn't been gotten so you know the permit hasn't been actually released to you no not at all so we're not we don't have any of that benefit and our numbers at this point and time and it's true.

And that definitely now John Oh and submarine okay. Okay.

On yours at least a year.

And at least the euro, but maybe maybe.

Got it and I know.

Yeah.

Okay.

And I get where you're going with that okay. I get that we will move on from that but and then net.

Our ad or whoever I made butcher this a little bit, but I'm just curious how much.

On average as transportation as a percentage of the landed cost into the landfill on average big picture.

Generally speaking in the northeast.

Oh man and it depends it depends it depends on where you are but yeah, I mean on a transfer station and it might be.

<unk> 40 per cent and.

Depending on what the transportation ranges of 35%.

The chipping fear that transfer station Bay and kind of depends.

And how far you're going exactly yeah, I mean, yeah, obviously, but anyway I was just kind of looking for broad.

Yeah average.

And I'm, just kind of the further away the higher the percentage and I think that percentage could get much higher than 40%.

And depending upon how far you're you're on.

Traveling and in some cases, you can have 60 $65 $70 a ton and just trends.

I mean, it's obviously, a very tight transportation market.

Obviously know this way too well so just curious I mean, it does that piece is it really moving.

Subcontractor piece, if you will.

It doesn't move kind of linearly because everything we do is either contracted or on our own long haul trucks. So we do subcontract quite a bit out and you typically moving under three and five year contracts because there's a lot of equipment involved so there arent any big resets, we've had recently that impacted but.

It is something we pay attention to.

All right guys. Thanks for the time okay.

Thanks Angela.

There are no further questions I'd like to turn the call back over to John Casella for any closing remarks.

Thank you operator, and thanks for joining us. This morning, we look forward to discussing our second quarter 2021 earnings with you and late July and thanks, everybody have a great day.

Ladies and gentlemen, this does conclude the conference you may now disconnect everyone have a great day.

[music].

Thank you for standing by and welcome to the Casella waste Systems, Inc. Q1, she loves and 'twenty one earnings at this time all participants on the listen only mode. After the speaker's presentation there'll be a question answer session to ask a question during the session.

And then one on your telephone please.

And by that today's call is being recorded.

And requires you smoothed systems, you may cause stars and Cmos with an operator on that.

And hand, the call over to Joe for Yourself Vice President Other communications. Please go ahead.

Thank you this morning for joining us and welcome with US today are John Casella, Chairman and Chief Executive Officer of Casella waste systems and.

Ed Johnson, our President and Chief operating Officer, Ned Coletta, our senior Vice President and Chief Financial Officer, and Jason Mead, Our Vice President of Finance.

And we will be discussing our 2021 first quarter results. These results were released yesterday afternoon.

As 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 and the risk factors section of our most recent annual report on.

And on form 10-K, which is on file with the SEC. 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 and 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 the call we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles rec.

I'll turn it over to John Casella Who'll begin today's discussion.

Thanks, Joe Good morning, everyone and welcome to our first quarter 2021 conference call.

Obviously, we're very pleased with our results and continue to be on.

And the execution against our key strategies.

And they're real.

Real quick.

Proud of the work that the entire team has done.

Throughout the entire period of time with regard to the pandemic and our management team continues to do great job of taking care of our people.

And obviously are our people are doing a great job, taking care of our customers and the communities that we serve.

Our performance.

It really reflects our maintained focus and commitment on our teams on service excellence through this dynamic period over the past year I've witnessed our cultural culture strengthening even further across the organization.

Diving success related to both meeting the needs of our customers as well as executing against key operating metrics and goals.

As expected and the corner quarter, we experienced lower economic activity levels compared to the first quarter of 2020 and as such solid waste volumes declined three 3%.

Quarter through our strong operating performance continued discipline.

Capital allocation and working capital improvement.

Some brief.

Uh huh.

Brief review of our key strategies first on disposal, while tonnage trends are improving volumes were down in the first quarter. This was largely driven by lower landfill tons year over year as we experienced lower volumes from the greater New York City area into several of our sites.

While we do not have collection operations and around New York City, we do accept way through third party customers within its geographic geography.

As you as we know the city has been one of the hardest hit areas and the country related to the pandemic and one of the slowest to reopen that said, we have seen positive volume trends over the past several weeks related to business and construction activity levels, beginning to come back online and a more robust manner.

And also as you probably know.

And the mayor announcements that we had yesterday.

Mayor Deblasio announced yesterday that the city is going to reopen and it's entirely on July one, which is obviously going to be a positive.

We advanced three five reported price landfill price and the quarter. We also continued to focus on operating programs disposal adjusted EBITDA margin expansion and improved as it reflects certain variable costs in line with volumes without sacrificing safety or compliance overall, our disposal assets or what.

Ill positioned within the capacity constrained northeast, our pricing operating and permitting outlook remains positive.

And the collection business recent volume trends are also improving and the collection business as we're experiencing increased commercial and roll off service levels.

Closer to normal seasonal levels similar to disposal of sequential volume trends are on a positive trajectory.

Over the last year, we've leveraged improved real time business intelligence to better flex our variable costs and we have continued to invest and further automation.

And ultimately route Optum.

Optimization and technology and in an effort to drive improved operating performance.

We have improved collection adjusted EBITDA margins for five consecutive quarters, and we are up 330 basis points since 2019.

And we've advanced collection price by three 5% and the quarter and as the economy continues to reopen across the northeast volumes improve we will consider inflation across various categories. We will analyze further pricing opportunities over the balance of the year, while continuing to and.

Hence our operating programs.

And resource solutions, if you recall in January of last year, we combined our recycling organics and customer solutions businesses under resource solutions and in an effort to better align cross functional sales operating back office teams, while strengthening our ability to attract win and retain profitable.

Customers within the segments. This January we took another step and further integrating these teams to drive increased synergies by creating processing and non processing business unit groups within resource solutions with this we aim to drive better teamwork improved organization across our sales team and position.

And our business to best meet the needs of our customers within processing, our recycling and bullet biosolids facilities, where we received inbound materials processes and produce and then product <unk>.

Non processing consists of brokerage and resource management services provided to large customers with broad sustainability needs.

Resource solutions performance was strong and the quarter with adjusted EBITDA up one $4 million year over year, while expanding margins aside from strong financial performance and proud of the work of resource solutions team and regard to the recognition. We received this march from Becton Dickinson as its top global supply.

And sustainability category for resource management services delivered delivered to their manufacturing and distribution operations across North America. Finally, I would like to highlight our capital allocation and growth strategy, our acquisition pipeline remains robust with over $400 million of addressable opportunities.

And annualized revenue over the top of our existing footprint in the northeast, we are well positioned and positioned to continue to execute against our growth strategy and the discipline manner given the strength of our balance sheet. We are focused on and opportunistically, putting this capital to work on deals that meet our criteria.

From a strategic fit and a financial return perspective, where we can drive higher levels of free cash flow and continue to grow the business.

Wrapping up we are executing well against our strategies as reflected by our continued performance in the first quarter against our 2021 plan. We expect continued strength across our solid waste and resource solutions operations and a paced reopening.

The major cities across the northeast and with that I'll turn it over to net thanks John.

Revenues and the first quarter were $189 5 million up $6 6 million or up three 6% year over year with Q1 percent a year over year change driven by acquisition activity.

Solid waste revenues were up 2% year over year with price up three 4% acquisition growth of two 9% and volume was down three 3%. This is actually a sequential improvement from the fourth quarter 2020, when our solid waste volumes were down four 6% year over year.

Revenues and our collection line of business were up three 1% year over year with price up three 5% and volume is down two 3% as.

As we have discussed over the last year, we've kept close track.

Q1 2021 Casella Waste Systems Inc Earnings Call

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