Q1 2021 Covanta Holding Corp Earnings Call
The webcast will be available two hours after the end of the conference call and can be accessed through the Investor Relations section other covanta website at Www Dot <unk> Dot com. The transcript will also be archived on the Companys website at this time for opening remarks, and introductions I'd like to turn the call.
Over to Dan Mannes.
Cause intuit's, Vice President of Investor Relations. Please go ahead.
Thank you, Jason and good morning, everyone welcome to <unk> first quarter 2021 conference call joining.
Joining me on the call today will be Mike Ranger, our president and CEO, Derek greenhouse, our CLO and Brad Helgeson, our CFO on today's call Mike will provide an update on the strategic review Derek will discuss our operating performance and Brad will provide a more detailed financial update 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 go to slides can be accessed now or after the call.
On the Investor Relations section of our website Www Dot command and accounts. These prepared comments should be lets do in conjunction with few slides now on the safe Harbor and other preliminary notes. The following discussion may contain forward looking statements and our actual results may differ materially from those expectations information regarding factors that could cause such differences can be found on the <unk>.
<unk> 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 David. This live broadcast April 30 from 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 Cabana is prohibited.
The information presented includes non-GAAP financial measures because these measures are not calculated in accordance with U S. GAAP. They 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 on how we use them as well as limitations as to their usefulness for 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 to now turn the call over to our President and CEO, Mike Granger, Mike Thanks, Dan and good morning, everyone. Let.
Let me start with the strategic review I know it is on your minds and it has certainly been a major focus within the company in recent months.
When we talk in February I describe the scope of our initial review, which aimed to identify each of the fundamental elements of our business and assess how we could unlock value.
We have now completed that initial review and I'm, even more confident that the underlying value is there and it is substantial our plan is now in motion.
While the strategic review has moved at full speed, our operating businesses have performed exceptionally well as you can see from our first quarter results.
And this highlights another observation that I have that the business platform is very solid which allows our strategic work to proceed with full focus and with confidence that our operations will continue to form an outperforming high levels.
In the past we have provided a fair amount of information regarding matters that affect our results on the margins each reporting period, specifically movements in energy and metals pricing.
These factors are important to your understanding of business. The results on a commodity market driven our strategic review is force focused more on the core of our businesses and what we can control to increase our profitability and enhance shareholder value.
At a macro level. The strategic review has clarified that our business has four principal components, each with different characteristics and value and each representing a different business model. A review has identified opportunities in cost control capital allocation asset rationalization.
On medium to long term cash flow generation.
The steps, we will take will be different for each component and I wanted to spell. These out. So you can understand our framework for approaching the strategic review. So let me address these components one at a time.
First our 21, North American waste to energy plants, we own 100% of these plants and benefit from long term contracted waste supply and strong local waste markets and as a group. They represent the vast majority of the value of our business is configured today.
Second our Irish and UK waste to energy business as you know we own these plants in partnership with financial and waste industry participants.
Both the Irish and UK markets are much more favorable in North America in terms of waste and energy pricing and policy support.
When the U K plants go into operation, we will have a new fleet of waste to energy plants in these markets and as a group they will make a meaningful contribution to both our near term results and growing future equity value.
Third our environmental solutions business, which is an adjacency to our waste to energy business sources high value non hazardous waste from commercial and industrial customers.
It has more of a sales and logistics focus and is less capital intensive than our core waste to energy business.
Fourth the 18 sites in North America, while we operate waste to energy plants owned by the public sector. While some of these operations are profitable as a group they are contractually and financially challenged and we are developing plans to improve the value they represent through renegotiations and explorations.
As we think about each of these components of our business in the context of our strategic review, we are engaged with third parties to obtain focused value discovery for each of these business lines.
These are presently ongoing and we will highlight whether opportunities and they will highlight whether opportunities exists relative to certain of our discrete assets when measured against our consolidated valuation.
The outcome of this exercise will of course help us shape our path forward.
Another area of focus in the strategic review has been our overhead structure and our resource and capital allocation decision, making as I mentioned in February. This work is focused primarily on the overhead resource that support our north American business given.
Given the very different business models in each component of the business. It makes sense to adjust the resource support to serve each appropriately we.
We have developed a detailed plan to streamline overhead cost and our work. So far is expected to result in about $15 million to $20 million of run rate savings as we enter next year and about $30 million as we enter 2023.
We have already taken certain actions, including a voluntary early retirement program and expect to recognize approximately $5 million in savings in 2000.
We will continue this work to yield additional savings I consider what we've done so far as a first step.
Another area of our strategic focus as we discussed in February is to improve the cash flow contribution of each financially challenged operation and if we see no clear path to doing so close it down.
We have now identified a number of sites, where we intend to shutter operations over the next several years, including several several public sector operating contracts, where we have already notified our clients that we do not intend to extend contracts when they expire at the same time, we are in active negotiations with other other public sector clients to NIM.
<unk> contract extensions on improved terns, but but again, if we are unable to do so we will extend operating we will extend operating agreements at these sites.
If in fact, we can make them more profitable. However, if we cannot we will we will close those plants as well.
We estimate that the incremental overhead savings, resulting from the planned shutdown of underperforming sites will yield $10 million to $15 million in reductions, which will offset related near term reduction in reported adjusted EBITDA and cash flow.
More fundamentally though these efforts will resize and reshape our asset portfolio in ways that will make us leaner and better able to grow shareholder value.
Lastly, as part of our strategic review, we have taken a comprehensive look at our long term financial outlook with a focus on the impact of factors within our control specifically added contributions from UK activity as it moves to an operating business overhead expense reductions prioritizing capital spending.
And organic growth plans, we intend to implement.
What has become clear from this exercise is that the business is capable of generating increasingly meaningful profits and cash flow over the medium to long term.
Through 2024, we expect cumulative cumulative free cash flow will exceed $800 million, which would be available for payment of dividends share repurchases debt repayment or reinvesting in the base business or a new opportunities and we expect that by 2022, adjusted EBITDA will be well in excess of five.
$1 million.
And by 2024, it will exceed 600 million with free cash flow exceeding $250 million.
This is the base case against we will against which we will compare future strategic actions.
Regarding our balance sheet leverage in the near to medium term, we are targeting to reduce our ratio of debt to adjusted EBITDA to less than five times by the end of 2022.
With capacity for further reductions over the following several years towards four times an area. We believe reflects a sensible target.
Capital structure target to support the business over the long term the pace at which we approach these longer term reductions will be a function of capital allocation decisions to maximize shareholder value.
Our long term financial outlook is largely driven by factors within our control and that we have already set in motion and as I noted at the outset of my remarks. Our review has been singularly focused on steps, we can take with the core of our business to improve profitability and enhance shareholder value of course, our results may be.
<unk> by factors not within our control, but that is not our focus and as I look forward. There is no question that we are solidly positioned for predictable increases in profitability and cash flow and we see a clear path to meaningful enhanced equity value.
Let me shift to an update on the U K clearly the transition of our UK portfolio from construction activity to an operating business is in.
As an important aspect of our profitability improvements in the near and medium term.
And critical to our strategic review is ensuring that the full long term value of our UK projects alongside Dublin is recognized in our share price.
Through our partnership with the Green investment group.
We have moved our four projects into construction totaling one 5 million metric tons of waste processing capable capability.
Construction has proceeded remarkably well across the portfolio, especially considering the challenges presented by both Brexit and the pandemic.
This achievement now positions us to transition to a valuable operating business in the UK generating significant financial contribution from these four projects, where we're getting that transition and by early 2024, we will have when coupled with our Dublin project five new assets operating in one of the best markets in the world in terms of waste price.
<unk> and policy support.
Our rookery project will be the first to move into operations, we expect it will begin with.
Receiving waste within weeks and we're commissioning the plant now with full commercial operations early in 2022.
We expect <unk> 2022 contribution to our adjusted EBITDA will be $25 million in an annual run rate thereafter exceeding $30 million.
Beyond rookery or other projects now under construction, we will enter operation sequentially through early 2024, specifically, we expect that Earls gate will begin operations in Q1, 'twenty three with an annual run rate of $8 million on adjusted EBITDA, New Hirsch, who will begin operations in Q.
<unk> to 'twenty, three with an annual run rate of $15 million.
<unk> will begin operations in Q1, 'twenty four with an annual run rate of $20 million.
To highlight the sizable contributions we expect from these projects. This UK portfolio together with planned improvements to our Dublin operation will add at least $85 million on annual adjusted EBITDA by 2024, resulting in an annual run rate for this group of assets of between 105 and 115.
And adjusted EBITDA.
And we are very confident this will be realized Owen michelson, our new president in the UK and Ireland is laser focused on driving the successful completion of the four construction projects building out the operating and management team and creating additional value through development of more projects in our UK pipeline and.
Even beyond our Paiute pipeline, our strategic work has identified several areas, where we can enhance value from this portfolio reinforcing our belief that the Ireland and U K remain our primary growth Avenue and a source of tremendous potential value for shareholders.
Turning to the first quarter, we had very strong operating and financial performance, achieving adjusted EBITDA of $106 million.
These results, which Derek and Brad will discuss in more detail where possible only with the impressive effort of our teams and conditions remain challenging it is a credit to the resiliency of our people and business and to the essential nature of our services.
As we look ahead several factors position us well for strong operational performance across our North American business through the end of 2021, notably.
On a really solid Q1 results from the waste to energy fleet, even with an aggressive program of planned maintenance.
Very good performance from our environmental solutions business with a strong pipeline of new volume our increased focused on cost control and strengthening wasting commodity markets as conditions improve across the broader economy.
As we announced last night with these factors and trends, we are increasing our 2021, adjusted EBITDA guidance to $460 to $480 million and increasing our free cash flow guidance to $125 million to $155 million.
To conclude my remarks, we are committed to creating value through the strategic review process as we execute on that commitment I.
I am confident 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.
Thanks, Mike and good morning, everyone I'll be referring to our investor presentation, and we will begin my comments on slide four.
We are off to an exceptional start in 2021.
Despite the obvious obstacle of navigating an ongoing pandemic our employees performed at the highest level in the first quarter operating efficiently and providing superior service to our customers and our communities.
From a waste market perspective, we achieved solid growth with same store tip fees, increasing by 4% on average across the fleet.
Notwithstanding adverse winter weather conditions residential waste volumes remain robust and our pricing continues to reflect the strength in our core disposal markets, where our position allows us to be very disciplined around re contracting activity.
Our contracting and portfolio mix, which is weighted to residential has helped support prices during the quarter and we will pay further dividends throughout the year.
As commercial volumes, including profiled waste continue to build and normalize we will have very good opportunities to realize further price growth. Despite our highly contracted profile.
We are operating.
Against the backdrop of limited and declining landfill capacity on our core markets.
As well as a growing demand for zero landfill options at.
On a macro level, we do not see these trends changing and we view capacity scarcity as a long term tailwind to our business that will support tip fee growth above inflation across the across the fleet for some time.
Our environmental solutions business continues to generate pricing improvements into our waste to energy assets as the team continues to focus on improving our mix of customers and products, while first quarter profile.
<unk> revenue was lower year over year against 2020. This was a result.
Salt of challenging weather and residual COVID-19 impacts as compared to our record first quarter in 2020 debt also benefited from event work.
However, we were able to increase realized profiled waste prices during the quarter and March represented both a record month of profiled waste revenue in the first month with positive volume trends in a year with strong economic growth predicted for the U S. Our profiled waste business should be a very positive contributor to our overall tip fee mix.
Moving on to the commodity markets one of the biggest stories of the quarter has been the strength in metals metals prices with continued economic recovery in a very tight supply chain for industrial metals prices further scrap products, we produce have strengthened when combined with our upgrading and processing capabilities, we were able to narrow.
We double our realized pricing.
During the quarter metal sales volumes rose by 14%, which was a function of improved recovery and some timing benefits realized from record ferrous processing volume at our <unk> plant in March.
Recovered metals, our global commodities and while we can't control the market clearing prices, we believe that our strategy of increasing metals recovery and upgrading nonferrous material are adding meaningful value. The investments. We have made over time in these areas provide leverage to pricing upside and more optionality on sales.
Further we see solid market fundamentals and we are well positioned to continue to capture value and what is looking like an improved market going forward.
On the energy side, we saw year over year improvement in the first quarter, given the colder weather in the northeast.
From a historical perspective, our realized energy prices remain low in absolute terms, but stable much like natural gas prices, we remain highly hedged in the near and intermediate term and we continue to seek opportunities to manage and mitigate our risk while capturing upside.
I am extremely proud of the accomplishments of our operations team and successfully executing an ambitious first quarter maintenance program.
During the quarter, we executed on a 16% increase in planned boiler outage days compared to last year in order to put us back on our preferred schedule are focusing a good quantity of major outages in Q1. This timing works well in conjunction with the seasonally lower waste volume generation and enables us to effectively coordinate on.
The outages with the needs of our customers.
One obvious result of the amount of planned maintenance was that waste intake and energy generation was lower by about 5% versus the same quarter last year.
This was to be expected and we will make up all of this ground in the coming quarters.
Given the substantial amount of work accomplished thus far we have a high degree of confidence and visibility to strong plant production for the balance of the year.
As you heard Mike say, we plan to continue to keep a tight rein on costs. This cost focus was visible in the quarter, a strong waste and metal revenue generated significant operating leverage.
Before we move on to the financial discussion I wanted to remind everyone on the positive environmental aspects of Covanta business and our commitment to.
To sustainability.
This quarter, we were able to reduce lifecycle greenhouse gas emissions by $4 2 million metric tons through our operations.
This is a function of the avoidance of methane emissions the generation of renewable electricity and the benefits of metal recovery and recycling.
We expect to report our progress on this every quarter as these savings are fundamental to our value proposition.
A key component of our business relates to our locations in and amongst the communities and customers that we serve as a primary means of local waste treatment.
We are highly attuned to the communities and our clients and believe we can engage with them and help mitigate impacts on the environment.
We initiated our own environmental Justice policy, a decade ago and most recently.
Recently supported landmark environmental Justice legislation in New Jersey in 2020.
This area of work and involvement is never complete and we continue to have a number of environmental improvement initiatives across the fleet.
Be assured we will always strive to be a leader in environmental performance.
With that I'll turn it over to Brad to discuss the financial results.
Thanks, Derrick I'll begin my review of our financial results on slide five.
Total revenue for the quarter was $498 million up $30 million from prior year, driven primarily by a 4% increase in waste to energy tip fees of $10 million increase in market index prices for ferrous and nonferrous metals, a $5 million increase in energy prices, including electricity capacity and Rex and <unk>.
$7 million from new wholesale load serving contracts that we won last year.
Other contributors to higher revenue included service fee escalation sales growth in the environmental solutions business and higher realized metals prices relative to the underlying indices due to improved processing.
These were partially offset by the greater amount of scheduled plant downtime in the quarter, which impacted waste energy and metals production by $8 million compared to last year.
Now moving on to slide six.
Adjusted EBITDA was $106 million in the quarter up $9 million over Q1 2020.
The $15 million increase in revenue from higher commodity market prices fell directly to the EBITDA line.
In addition, we saw strong net organic growth and adjusted EBITDA across most of the business as revenue growth and tip fees service fees environmental solutions and metals processing generated substantial operating leverage.
To the negative the higher planned maintenance schedule from the quarter resulted in a $14 million increase in maintenance expense and a $6 million net impact from related plant outage downtime.
As Mike discussed we are revising our full year 2021, adjusted EBITDA guidance range to $460 to $480 million, representing a $20 million increase at the midpoint and tightening of the range.
Building from strong Q1 results our outlook has improved significantly relative to our original range.
Execution of the Q1 and early Q2 outage plan has positioned the fleet for strong production for the balance of the year with increased visibility to plant uptime as much of the year's planned maintenance scope is now behind us.
Metals prices and to a lesser extent energy prices have improved further from original guidance.
I will note that our forecast assumes a degree of mean reversion in metals prices over the coming months. So our outlook would continue moving higher to the extent that the current market holds all else being equal.
We also expect to begin to realize some benefit from our announced overhead cost plan as we move through the year.
Looking out over the next few years there are two key drivers that bridge to our outlook for 2024 that are under our control.
Our UK projects come online and we execute on growth opportunities in Dublin.
K in Ireland business will contribute $80 million to $90 million of new proportional adjusted EBITDA and approximately $50 million of incremental free cash flow.
This will begin with the Rookery project transitioning to full time commercial operations in less than a year contributing approximately $25 million to adjusted EBITDA in 2022.
The second driver for which we have clear visibility on control is our overhead rationalization plan, which will target $30 million and run rate cost reductions as we exit 2022 with $15 million to $20 million to be implemented as we exit this year.
As Mike described we have developed a detailed plan to achieve these reductions.
Plan is broad based and we will address all areas of our overhead spend to varying degrees with specific opportunities, including reorganizing and consolidating certain corporate functions improving business processes.
Other leveraging technology.
And reducing spend as we've refocused priorities.
From a cash perspective, there will be costs to implement the plan over the next two years, including severance and outside expertise.
We'll get more specific on these onetime costs as we move forward, but in any event there will be excluded from adjusted EBITDA.
Between the UK and Ireland and the cost plan. These two items comprise a substantial majority of the bridge.
Beyond that we will continue to grow our core business organically, most notably through waste prices and expanding sales in environmental solutions.
In addition, as cash flow growth and we delever the balance sheet, the cumulative effect of capital allocated to reinvest in growth <unk> reduced interest expense will increasingly become a driver as well.
Commodities will remain a variable around our underlying growth trajectory.
<unk> 2024 outlook assumes energy prices at today's market forward curves and metals prices at approximately 10 year averages, which would effectively represent a modest pullback from where we are this year.
None of this reflect any potential transactions coming out on the strategic review. If for example, we choose to sell a particular part of the business. It would obviously impact this outlook, we would do so in order to advance our overall objective of fully recognizing the component values of the company and growing shareholder value.
The key takeaway here is that the baseline outlook for the company as currently constituted is already highly compelling.
Now please turn to slide seven.
Free cash flow was $19 million in the quarter essentially flat compared to the first quarter of 2020.
However, excluding movements in working capital, where we saw a strong inflow last year free cash increased by $14 million driven by higher adjusted EBITDA and lower maintenance Capex.
We're also revising our full year 2021 guidance for free cash flow to $125 million to $155 million.
<unk> of $20 million increase at the midpoint and tightening of the range in line with the increase in adjusted EBITDA guidance as the drivers of both metrics are largely the same.
Yes.
Now please turn to slide eight where I'll touch on capital allocation.
As I discussed last quarter, we remain well positioned to generate free cash flow in excess of our planned growth capital spend and dividend with the excess available to reduce debt.
As our outlook for growth investment this year remains unchanged.
Our revised expectation for free cash generation will increase the amount of excess cash available to allocate to debt reduction this year.
All else being equal.
Now please turn to slide nine where I'll conclude our prepared remarks with a brief update on the balance sheet.
At March 31, net debt was approximately $2 5 billion, a $21 million increase from year end 2020.
Our total leverage ratio was six one times and our senior credit facility Covenant ratio was two times.
Available liquidity under our revolving credit facility was $422 million at quarter end.
As Mike noted, we expect our leverage ratio to fall below six times this year and below five times by year end 2022, both without any potential further actions in connection with the strategic review it might accelerate this improvement.
With that operator, we'd like to move on to Q&A.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
Please limit yourself to one question and one follow up.
Our first question comes from Noah Kaye from Oppenheimer. Please go ahead.
Good morning, Thanks for taking the questions and.
For all the color on the strategic review and the very helpful walk on the UK projects you know Mike the 18.
Our waste to energy operated sites once you're operating for the public it sounds like that's going to go down, but I wonder if we could sort of level set here would be helpful to have some color.
Can you help us understand what the actual contribution of that line of business is to the profitability of the company today and then.
As you think about some of the actions that could be taken over the next couple of years.
What can be done to increase that profitability and by how much.
Sure so on a on a baseline.
So if you think about it.
There's $110 million of plant level gross profit from the 18 plants in North America. If you took our pro rata share of overhead against that there's about $50 million of of of overhead expense and then there is.
About.
$35 million to $40 million of plant level Capex that is recorded so just those are those are all within $5 million or so.
Refinement. So you can see that there's probably $40 million of reported EBITDA and there is probably <unk>.
$15 million of free cash flow on a net basis. So if you just if you put that through a filter that's what would come out.
And what would have what would improve that would be reduce our obligations or responsibility for <unk>.
Actual capex at facilities that would be.
Our first line of improvement that we are negotiating for which Derek and his team is on point.
The other would be the change base fees for the services that we provide.
R R.
We have been negatively impacted by low inflation, which are the basis for our escalators over time, which may not be in line with what our increased costs have been so it really comes down to we want each individual facilities or to be able to stand on its own two feet from a contractual perspective, so that each is positively contributing <unk>.
Mentally to the overall value of the company. We have as you know exploration dates coming up now over the next five to seven years that effect about 35% of our portfolio to 40%.
And we're going to make sure that each plant and our determination about whether or not to let the contract expire or extend would be based upon that level set of profitability from both an EBITDA fully loaded basis with overhead included plus contribution to free cash flow and if those hurdles on aren't met then exploration would be the.
Logical conclusion, so that's the framework in which we're operating as as Derek is negotiating with those public sector clients.
Okay, that's extremely helpful.
Next question again.
Again I appreciate the walk on the growth in the EU.
<unk> portfolio can you just give us a little bit of color on how you plan to boost the profitability of Dublin, because I see that taking a step up in the coming years.
So let me just there is a permitting processes presently going on right now to expand the throughput of that plant. It was designed to handle about.
10% to 15% more throughput than what the original permit.
<unk> four and so we're going to try to capture that because.
It should logically be that for very little increased.
The incremental costs that the throughput, which there is demand for in that marketplace could be pushed through with the permit.
Increase without any other meaningful expenses associated with it. So that's that's in the process of working its way through that.
The legal requirements to expand that permit.
Okay. Thanks.
60 million tonnes.
A year.
Okay. That's very helpful and I guess, just the last one and I think it just kind of.
Echoing a little bit, but what Brad said at the end here, but you know if you execute to this outlook.
From a deleveraging perspective, but you don't.
Necessarily really need to do anything.
In terms of asset divestiture so.
And obviously this cost reduction program is helping in April that I just wonder if.
You kind of benchmark, you're thinking now to where you were at when you started this review Mike.
Do you feel any sort of less urgency now to.
Divest certain assets just given the improved outlook.
And can you talk a little bit about.
I would say the interest levels that youre seeing for some of the assets out there.
In the market at this point, yes.
Pretty clear question. So I'll answer the first part and let Brad address the leverage question. Our view has always been that.
Debt.
The hurdle for an asset sale determination had to be based upon that the execution of that would result in an uplift in the overall consolidated value of the remaining company and so on neared our near term objective of reducing leverage is one component.
<unk> in that mix right, because you'd be you'd be.
Eliminating certain interest expense.
And you'd be gaining greater flexibility, but if in the end you werent able to capture the uplift in the contribution from the value of the sale and the reduction of the cost of the leverage in the overall valuation of that sale relative to the overall company then you wouldn't do it right.
On that objective isn't worse I mean, the way I think about it is you don't take the shingles off the house and Burnham in the fireplace to keep the house warm right. So that it can't be shortsighted and they can't solve a near term problem and I don't think that the problem of our leverages acute enough to have to take actions like that so that's that.
How we've approached this and Theres a fair amount of interest.
In the discrete assets of the company and we need to fashion that against what the value indications are and what the contribution that is to the resultant overall consolidated remaining entity.
Yes, and in terms of its Brad in terms of the leverage.
Following on on Mike's comment and we've always said this debt we have a view on what is all all things considered probably the right level of leverage for us to work towards over time and.
And that's never been a function of.
Any any immediate discrete pressure from a cash.
Covenant perspective or ratings or any other.
Near term driver.
The takeaway and it sounds like.
You are taking the right message away is.
The underlying business plan is going to give us some really nice optionality over the next few years I think we have pretty clear visibility to at least through 2022.
Getting leverage down below five times debt sort of step one.
And then.
As we continue to move lower over time.
The speed at which we do it will be a function of what the other alternatives are in front of us at the time for allocating capital but.
But the takeaway is and Mike mentioned it in his prepared remarks, our outlook has us generating Q.
Cumulatively about $800 million of free cash if you.
If you take away that the dividend at its current rate and our planned investments in the U K, that's $4 million to $500 million of excess cash.
We can either deploy to accelerate deleveraging or potentially deploy.
Other way to generate a higher return on capital.
All of which would be along that long term path towards four times.
Okay, great. Thank you so much.
The next question comes from Michael Hoffman from Stifel. Please go ahead. Thank you.
You for taking my question.
That's two points I wanted to sort of get at the long term view or you've shared some insights on incremental EBITDA contribution so I'd like to come back to that but if I take the $600 million in the $2 50.
Can you give us some high level basic assumptions that are there like are you is it the existing.
Existing business anything you do around improvements or has it shrunk what are the pieces because let me give you some math I'm done quickly at your midpoint of your guidance at $4 70 this year.
I pulled out $20 million for metals upsides, because they normalize so call it one $4 50.
One O five.
Between cost savings then.
Day, Ireland.
You know that puts me in a force call. It a $5 45, and then I just need organic growth off the domestic portfolio to make up the difference, but that's a path.
You do the similar thing to cash so what what's in your assumptions.
Yeah, So Michael it's Brad let me.
Kind of walk through the same bridge and maybe adjust the numbers a little bit and kind of get to in a different way. So.
Your midpoint of guidance for this year is on EBITDA is $4 70.
We talked about UK on Dublin, obviously, primarily UK projects.
Moving into operations, that's 80 to 90.
And then $30 million from our cost plan.
And then what that then leaves us with just to get to 600, and certainly are our plan on our expectation all else being equal would be that we would exceed 600.
Is $15 million of organic growth.
Whats implied in this is.
At least.
For metals prices.
A bit of a headwind from a mean reversion to 10 year average on metals prices. So that's another I think you said 20.
By my math, that's it's $10 million to $15 million of EBITDA.
So that would then imply.
And organic growth piece just to get to 600.
$25 million $25 $30 million, which is a 2% CAGR.
And in my mind, that's kind of the high level of the.
Of the bridge components.
<unk> for for free cash essentially works the same way.
With the added kicker that as we delever the balance sheet, we're going to reduce our interest expense.
And underlying all of that is the existing portfolio.
Net debt is currently here so you haven't.
We walked away from any of the 18 or sold anything it's everything you own a day is all part of that assumption.
Generally yes.
So to put a finer point on that.
And without getting into specifics because it's not appropriate at this point for us to do so.
There is an implicit assumption in there that we will be exiting certain of our operations over this timeframe.
But.
As you could probably tell because I didn't noted in the bridge, we don't expect that to frankly have a material impact on EBITDA and cash flow, particularly when you factor in additional overhead reductions that would come in connection with that.
But it certainly doesn't assume.
Any anything materially.
From a transaction standpoint from the strategic review, whether it be a sale or or on acquisition.
Terrific. So my second question would have to ask it since subtract the door open if we have $40 million of EBITDA from the 18 service fee.
Sure with the EBITDA breakdown is for the 'twenty, one on electricity and metals.
To get to the $4 70.
Well, it's everything other than.
What what the $20 million in EBITDA is from.
Environmental solutions and then the contribution from Dublin presently otherwise, it's everything everything else comes directly from those 21 plants, yes, net net of the remaining overhead net of the remaining overhead.
Okay, alright so.
Sure.
Yes, I mean, just to put a pin on it.
That's $400 million of generation of.
Net EBITDA from that portfolio from the 21.
The way to think about it.
It's the right way.
Sometimes people try to disaggregate electricity and metals, but they all they're all interrelated because the plants have to be operating period. So.
Got to generate a wasteful you get electricity from it they produce metals, it's all integrated and that's 400 million on 'twenty one.
That's right correct alright terrific. Thank you for a lot of clarity. This transparency helps so I appreciate that you gave us.
The next question comes from Mario <unk> from Jefferies. Please go ahead.
Hi, Thanks for the time.
I just wanted to touch on the the negotiation process that you guys have underway.
And just I guess wanted to understand how those conversations are going in and I think.
Is there any potential or how much potential is therefore some of those contract negotiations to be expedited I feel like obviously you already have a few in mind for some that you're already going to close and the ones that you still have hope for.
You have to wait for those contracts to come up for expiration or be closer can use can you go to them today and how much leverage do you have over them to be able to get what you want.
And a good timeline.
Hi, Mario this is this is derrick.
I'll attempt to answer your question as best as best as I can so in terms of where are we in negotiation. We are in negotiation with several of these clients today.
<unk> been in dialogue with all of them.
Obviously through this strategic review process and keeping them abreast.
Uh huh.
As appropriate so we are on dialogue, we feel pretty good about the clients. We are in dialog with at this point in time in terms of their understanding of.
Where we need to go as a company and why we need to change. These service agreements. So I think.
Generally speaking.
There can be a pretty good outcome for both on.
Our client.
For our clients and Covanta there are win wins within that within that negotiation. So and then on on the other side.
There are going to be some.
That may not be successful.
And.
As already pointed out by Brad and Mike.
The contribution around some of those contracts hasnt been great.
<unk>.
We're just going to exit at that point in time, so be it in terms of leverage.
Don't really look at it that way I suppose thats appropriate but.
These clients have been with US a long time, we respect that and this has always been about trying to formulate win wins.
And moving business forward, so productive conversations each day.
<unk> has its own its own degree of leverage.
Each side uses that as we go about so.
Over the next few years, we're going to have a very clear picture of what remains in terms of our client our client business and just to follow up on that one thing. One question you did ask that Derek didn't address but as part of the overall thought process is one of the levers as in exchange for extending the contract.
Into a timeframe, where this doesn't have to be front of mind constantly for the client is to address ones that are not at their exploration yet, but you can find the longer dated relationship that works for both sides. So Derek has already started down that path, there's the near term and the midterm at this juncture and then some longer term ones.
That he is also looking at but it's clearly to come up with a more sustainable relationship with the clients for the longest period of time possible.
Great. Thank you and then just one follow up.
And I think you've heard you've already talked about this in the past and I think.
<unk> made it clear that you're not really interested in collections in doing deals and I know you had the strategic review going on and Thats not really in the cards right now, but maybe you can help us understand why buying collection businesses, even longer term just doesn't make sense for for covanta or in the coming years as you Delever quicker.
It would be a philosophy change and maybe you go and do deals like that.
Mario you back to Derrick again so.
Historically, we've not been in that space.
And.
With the distribution of our assets and their locations.
Never really had a fundamental problem of sourcing waste into the plants and I suppose if we did have a problem that would be a route that we would debt that we could revisit and look at it and see if it was accretive to our model that hasnt been the case to date, we focused on the intermediate hubs transfer stations.
And the security of long term deals with large municipalities.
Provided us plenty of coverage the second aspect to that is there are other people in the collections business and that's quite obvious and they are quite skilled at what they do we respect that we view ourselves as an independent player in the marketplace for disposal.
And it would be very difficult for us.
Up to their levels of sophistication on on collection.
That's well.
Put your money, where you're really good at.
Yes, and just adding on to that it's Brad I mean, there are two reasons sort of stepping back or two reasons why.
We would consider vertically integrating one would be to address an issue around waste supply and thats an issue, we don't have and I've never seen the need given our other infrastructure on our contractual profile and market position, we've never seen the need to.
To go down that road in order to to address an issue on waste supply.
The other reason would be is there a is there an opportunity to leverage our disposal assets in certain markets to grow the company in that direction as Derek said.
That is a very competitive market with competitors, who already do a very good job.
That would be an entirely new business for us.
And then also.
It's been a matter of capital allocation certainly we've had other priorities, including most notably building the business in the UK and Ireland.
In the environmental solutions business as well we've had other priorities for our capital beyond getting into what is a competitive business.
One last one last piece on that is when you think about it since the question was asked by Enel.
Another analyst is when you think about the value of the company owned plants and their locations to have a mix of and the plants are always full and they're always managed for profitability on the margins in terms of finding the highest value waste available beyond the long term contractual.
<unk>.
Being agnostic in a market like that is got to be helpful. Right. Because then municipalities and then virtually vertically integrated waste companies view, you as a partner and a resource as opposed to a competitor and I think we do benefit from that.
Thank you so much.
Yes.
The next question comes from Brian Lee from Goldman Sachs. Please go ahead.
Hey, guys. Good morning, Thanks for taking the questions.
So thank.
I think you've kind of answered this but just to just to be specific on the asset sales and shutting down on select assets and some of the renegotiations are these actions, we should see more clarity around.
Moving through the next several quarters in 2021, I know it sounds like it's going to be a multiyear effort, but just.
How are you thinking about the timeline or are we going to see some updates around that.
And then if you kind of force rank the priority and timing potential of each set of these actions.
I suppose it's going to be asset specific but just in general what's easier to get done is it is it the contract renegotiations is it.
Just waiting for certain contracts to expire and then moving away from those assets whats how should we be thinking about that.
Yeah, Hey, Brian it's Brad So I would.
Divide potential changes to the portfolio into two categories. The one category is where we're working through underperforming operations and the the next steps for those will.
We will be specific to the situation. Some of those are our assets that we own where we would shut it down some of them are operating contracts, where upon exploration potentially we no longer operate that asset for the client.
As far as timeline I would say that's going to play out over and over.
On a number of years as opposed to quarters I, probably wouldn't put it in terms of quarters.
It's a focus area, we're having conversations today for contracts.
That that have explorations over the next several years. So there's a long lead time there.
But I wouldn't expect.
You Shouldnt expect a flurry of announcements in that area in the coming quarters.
I draw a distinction between those and other transactions that might potentially come out of the strategic review.
That I would characterize as transactions to bear.
Better realized value of discrete assets.
Those are our potential transactions that we're focused on right now and we would anticipate having more announcements in that area over the balance of the year.
Okay fair enough that's helpful.
And then.
I don't know if you covered this I might have missed it but.
Thank you mentioned, 15% to $20 million of savings here on some of the cost actions.
Through this year.
And then getting to the full $30 million in 2023.
It sounds like the $30 million is going to flow dollar for dollar to EBITDA are there any offsets.
In the near to medium term on the sort of $15 million to $20 million or are we going to see that also just flow through to the EBITDA line and then specific to the kind of modeling I suppose it sounds like it's a lot of different items, but.
Where specifically should we be expecting to see those cost savings materialize. When we think about the modeling of it.
Yeah, Hey, Brian it's Brad so.
The $15 million to $20 million and then ultimately the $30 million the right way to think about that is that it will flow directly to the adjusted EBITDA line.
We would.
As necessary in the period, we would adjust for any onetime cost to implement.
I mentioned this in the prepared remarks.
Two that come to mind would be potential severance costs and to the extent that we are.
Engaging with third party expertise to help execute certain aspects of the plan. So those are things that.
Would be cash in the period and so therefore.
Good day.
Reflected in our free cash flow, because we don't adjusted free cash flow, but we would adjust them for adjusted EBITDA. So.
Just to make sure there is total clarity the $15 million to $20 million as.
As we exit this year on a run rate basis, another way to say that as we would expect a 15% to $20 million reduction to overhead.
And I will get back to what exactly that means in a second in 2022 and the $30 million on run rate as we exit 2022 would be seen on a full year calendar basis in 2023, so you've heard us talk about overhead.
On the addressable.
Put a little more.
Detail on this the addressable overhead that were focused on primarily supports the north American business is approximately $190 million.
Last year, we reported $120 million of SG&A, so the balance of that overhead actually flows through the.
The operating expense line and the way just for for financial statement presentation purposes. The way, we allocate that is based on the nature of the functions. So for example, derek's team.
Flows through cost of operations.
<unk> flows through SG&A as kind of a simple way to think about it.
In terms of the income statement, you will see the impact in those two lines as the as the plan is implemented.
Sure.
Alright, Thanks, a lot I appreciate the color that's it on.
The next question comes from Scott Levine from Bloomberg. Please go ahead.
Hi, Good morning, guys can you hear me.
We can hear you.
Great.
I'm not sure. If you mentioned this I don't know if this is the question.
Question for Brad, but I know you guys have talked in the past about four times kind of being a target range for leverage and I'm guessing that's under review as part of this broader strategic review, but I was just wondering if you can comment on your thoughts on.
What you see is a comfortable we're on.
Target leverage range for the company.
And if so.
Elaborate maybe a little bit more on.
When you reach that.
Is the philosophy at this point, maybe more growth oriented or capital returns oriented.
And or are we getting ahead of ourselves there given the fact that I think youre, saying you expect to be below five times by the end of next year, just trying to get a sense of of whether growth and capital returns maybe re enter the picture and a more meaningful way in 2023 or whether it takes four times.
Leverage to kind of get to that level.
Yeah, Hey, Scott, it's Brad long time no speak.
So.
Nothing nothing has come out of the strategic review that has changed our view on four times plus or minus as.
Inappropriate.
The level of leverage from.
The business that doesn't mean that we're not comfortable if the opportunity warrants it to run the business at a higher level and it doesn't mean that once we get to four times, we won't continue to delever.
But I think in terms of.
North Star for where we're going to be heading over time four times is still is still the number I think what we what we might do and how we might.
Prioritize capital return versus investing whether it be in the existing business or or inorganic growth.
I think it is a little too early to start to handicap those we'll.
We will see what the opportunity set is in front of us.
Where we are as a company and make those decisions as appropriate at the time.
I think.
Compared to where we've been in the past because four times is not a new number we've talked about four times.
For a long period of time now I think the real difference.
Now.
As we see a clear path over a.
Relatively short timeframe, so between now and 2024 to where the business with the UK projects coming online primarily will begin to generate cash at a level that makes that.
On a very real option in reality for us as opposed to something Thats.
Little further out over the horizon, which is really how we.
More how we've talked about it in the past.
Gotcha. Thank you one quick follow up I guess, maybe you want to know is questions at the outset.
So I'd ask you have.
Have any options I know at the beginning of the strategic review. The mantra is always you know everything is on the table have any option has been taken off the table. As you guys have progressed through this review or maybe any any changes in philosophy regarding the business. Since you initiated this process I think last October.
Okay.
Scott the answer is no nothing has been eliminated at this point and where we are in the phase of having <unk>.
More facts in front of us to evaluate whereas before in our discussion at the end of October was more instinctual and yet we've gotten lots of confirmation on some of our original thoughts and.
Some other.
Their eye opening alternatives. So in that regard we are going to work through that once again every.
Every everything that you do as a lost opportunity, but it also is a big gain if you do it the right way. So that's how we're looking at it everything has got to be measured against what the current.
Our expectations are in this current valuation of the company is and if we if we can enhance that and change that trajectory than those alternatives are still available to us and we will act on them Accordingly at the right time and as Brad mentioned just to underscore that category was the second that he talked about and we would see actions taking place through the <unk>.
Remainder of this calendar year.
Got it understood. Thanks, guys.
Okay.
This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Okay.
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Okay.
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Yeah.