Q3 2022 Casella Waste Systems Inc Earnings Call
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[music].
Yeah.
Good day, Thank you for standing by and welcome to the seller waste systems incorporated third quarter 2022 conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one one.
A telephone you will then hear an automated message advising your hands raised.
Today's conference is being recorded I would now like to hand, the conference over to your speaker today, Charles <unk> Director of Investor Relations. Please go ahead Sir.
Thank you Laura and thank you everyone for joining us this morning with US today are John Casella, Chairman and Chief Executive Officer Casella waste systems.
Our president and Chief Financial Officer, Jason.
Jason meet our senior Vice President of Finance and Treasurer.
Sean Steves, our senior Vice President and Chief operating officer of solid waste operations.
Today, we will be discussing our 2022.
Third 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 I must remind everyone that various remarks that we may make about the companys future expectations plans and prospects constitute forward looking statements for the purposes of this.
Safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in the risk factors section of our most recent annual report on Form 10-K, which is on file with the SEC.
Additionally, 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.
Any date subsequent to today.
Also during this call, we will be referring to non-GAAP financial measures.
These non-GAAP measures are not prepared in accordance with generally accepted accounting principles.
Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures.
The extent they are available without unreasonable effort are available in the appendix to our investor Slide presentation, which is available in the investors section of our website at IR Casella Dot com under the heading events.
And presentations.
And with that I will now turn it over to John Casella, who will begin today's discussion. Thanks, Charlie that's a hell of a debut I know Joe is probably out there smiling.
As he is listening I am sure he is listening.
To the call this morning as well so.
Good morning, everyone and welcome to our third quarter 2022 conference call. This was another great quarter and of course, I'm really proud of our overall performance.
Strong operational execution robust.
<unk> programs a lot of this to outpace inflation as well as the recent sharp decline in recycling commodity values.
We have good momentum carrying into the balance of 'twenty two and looking ahead to 2023, we grew revenues by 22% year over year in the third quarter, while adjusted a bit up.
Grew by about 23% in the same period, thus, we expanded margins, which is notable accomplishment given the environment, we expect year over year margin growth in the fourth quarter and for the full year at the same time, we continue to drive adjusted free cash flow growth, we are on track to it.
<unk>, our multi year goal of 10% to 15% adjusted free cash flow growth per year, which highlights not only our solid operating performance, but also our capital discipline and continued execution against our growth strategy.
We have great balance between organic growth within our core business and in there again inorganic growth through acquisitions, roughly 50% of our revenue growth year to date has been driven by growth within our core business through new customer growth, coupled with higher price and fuel recovery fees. The remaining 50% of revenue growth is.
Driven by acquisitions to date. This year, we have closed on 13 acquisitions with approximately $48 million of annualized revenue outpaced outpacing our target of $30 million our business model remains resilient and we are performing well from a risk mitigation perspective, we ended the quarter.
At our lowest leverage ever further where we fully offset the higher impact.
Fuel prices through our fuel cost recovery program and expect to do so for the full year.
We also have innovative recycling. We also have an innovative recycling risk mitigation programs that will help offset most of the headwinds we will see from the global recycling markets, then I will cover.
More on this topic, but.
All in all we are well positioned.
I'd like to provide a brief.
Review of the execution against that few of our key strategies.
We remain focused on improving returns at our landfill and the positive volume and pricing growth. We posted in the quarter reflects our performance landfill tonnages were up six 6% year over year in the quarter due to our strategically placed in market position of our disposal assets combined with great sales execution.
<unk>.
Is there expectation volume will remain positive as we close out the year.
From a pricing perspective, improving the quality of revenue in our inbound streams is a major focal point.
We measure this through our average landfill price per ton, which was up 8% in the quarter, helping us offset inflationary cost pressures and managed through heightened regulatory costs aside from the operational and pricing programs. We have in place our first renewable gas project, which is expected to come online in the firm.
Quarter of 2023 provides a sustainable solution with a strong return profile.
Moving to the collection business, we posted another strong quarter of year over year, adjusted EBITDA growth and margin expansion above budgeted levels, our investment and return driven technology solutions, along with our business process enable us to be nimble and drive additional productivity and improved performance.
We took fast action early this year to address the inflationary environment by resetting our budgeted pricing programs in the quarter collection price was up over 7%.
In addition to positive pricing combating inflation, our fuel recovery fee program fully recovered higher fuel costs in the quarter.
From an operational perspective John's work further deploying automated trucks and onboard computers across our fleet is also mitigating higher costs, while driving improved margins we.
We're making return driven investments across our collection fleet and we see a runway of opportunity into the future. We believe these enhancements will continue to improve our safety profile profile service employee attraction and retention sales growth and operating efficiency.
Next on resource solutions on Tuesday, we published our 2022 sustainability report highlighting our vision and the progress we are making to achieve our sustainability goals. This is a collaboration collaborative effort by many and demonstrates how sustainability is intertwined within all add.
<unk> of our business and strategy our resource solutions segment is not only a key part of that focus but a business segment that we continue to invest in as we aim to drive economical and environmentally balanced solutions for our customers.
We are making technological upgrades at several of our recycling facilities. The early results are quite positive with increased safety throughput and operating efficiencies, but the focus doesn't stop there customers continue to ask for ways to reduce their environmental footprint. In fact, I recently visited a large customer who is looking for.
<unk> solutions to reduce their scope three emissions by driving higher recycling and materials management. This is just one example of a growing opportunity and I believe we are very well positioned to support this trend going forward, while generating solid financial returns.
With regard to the recent performance of the recycling commodity prices as you know the team has done a fantastic job, creating risk mitigation programs with the sustainability recycling adjustment fee, we implemented our SRA fee several years ago and it shifts to the vast majority of the recycling commodity price exposure.
To our customers.
Finally, I'd like to highlight our capital allocation and growth strategy. We continue to have success executing against our growth strategy through our disciplined approach targeting strategic fit and follow through on integration to achieve expected returns are.
Our pipeline remains robust.
Over $500 million and revenues of identified opportunities of our existing operating footprint. We are currently working on several acquisitions currently have approximately $30 million of annualized revenues under LOI clearly, we have a great opportunity to continue to drive value by way of growing the business through <unk>.
Acquisitions.
Wrap it up.
Obviously very proud of the performance thus far in 2022 from our team's execution against our key strategies, but before I turn it over to Ned for more details on the financials I'd like to take a moment to recognize our team's tireless dedication and commitment to our core values.
Which is apparent day in and day out they've weathered the worst of the pandemic and are working together to ensure exceptional service to our customers and the communities that we serve in recognition of this in early December we're paying out a special bonus to our hourly employees as a thank you for contributing to the company's success.
I am exceptionally proud of the hard work in service of our entire team.
And with that net the floor is yours.
Thanks, John and good morning, everyone I'd like to start also by thanking our team for another great quarter, we beat our plan during the quarter and year to date, despite the challenging backdrop of the historically high inflation rapidly rising fuel costs and a significant drop in commodity prices our team once again did an.
<unk> job accelerating cost efficiency programs to help moderate inflation realigning, our pricing plans to offset the heightened cost and ensuring the eligible customers were on our fuel cost recovery program further as John mentioned, our recycling risk management programs worked as intended and have done a great job.
The significant decline in recycling commodity prices.
This is a great testament to our ability to remain nimble and agile dynamic economic environment. I believe that we are well positioned to course correct to execute in any environment at this point in time.
Moving on to the quarter revenues in the third quarter were $295 3 million up $53 3 million or 22% year over year with eight 5% of the year over year change driven by acquisition activity and 13, 5% of a year over year change from organic growth.
Solid waste revenues were up 24% year over year with price up six 6% volumes up 2% acquisition growth of 5% and our fuel cost recovery fees up six 4%.
Revenues in the collection line of business were up 21, 2% year over year with price up seven 2% and volume slightly up.
Revenues in the disposal line of business were up 19% year over year with price up 6% and volumes up six 4%.
Landfill pricing was up 5% year over year. However, this doesn't tell the full story our average price per ton was up 8% as we continue to improve the mix at our sites landfill tons were up over 6% in the third quarter and after a slow start to a year now we're up close to 3% year to date.
Resource solutions revenues were up 7% year over year with 18, 2% growth from acquisitions, and seven 7% volume growth our processing fees and other price up 12% with all of this offsetting the lower commodity prices in the quarter.
Our commodity prices were down roughly 37% year over year on lower cardboard and mixed paper pricing lower metals pricing and lower plastics pricing.
In fact commodity prices hit a high point back in April and have declined roughly 55% of time from April through September with weakness across all classes.
Adjusted EBITDA was $70 million in the quarter up $13 8 million or 22, 5% year over year with $10 $7 million of the growth driven by improvements in our base business and a little over $3 million derived from the rollover impact of acquisitions.
Given our strong performance in 2022, as John said earlier, we accrued $1 2 million in the third quarter and plan to accrue another $1 2 million.
In the fourth quarter for a special one time bonus for all of our hourly frontline and back office employees that worked so hard to help us excel in this environment, we plan to pay this bonus out in early December .
Adjusted EBITDA margins were 25, 4% in the quarter up 10 basis points year over year, a strong sequential improvement in exactly on plan for the quarter.
Once again, our pricing programs covered cost inflation in the quarter with solid waste price up six 6% offset by a five 9% headwind from inflation excluding fuel.
Further margin infringing items include an 80 basis point improvement from general operational improvements and volume gains a 50 basis point improvement from a fuel recovery program net of higher fuel costs at <unk>.
75 basis headwind from acquisitions of 75 basis point headwind from recycling commodity prices and roughly a 40 basis point headwind from the special bonus accrual.
As fuel prices peaked and began to decline during the third quarter, our fuel cost recovery fees began to catch up both with the cost and margin under recovery experienced during the first six months of the year.
Solid waste adjusted EBITDA was $67 1 million in the quarter up $14 $8 million year over year with strength in both collection and disposal.
Resource solutions, adjusted EBITDA was $7 8 million in the quarter down $1 $2 million year over year with improvements in the industrial and organics operations offset by lower performance in our recycling nerves.
Cost of operations in the quarter was up $36 $4 million year over year or up 84 basis points as a percentage of revenue with most of the increase due to higher fuel cost and mix changes driven by acquisition activity.
General and administrative costs in the quarter were up $3 $4 million year over year, but down 120 basis points as a percentage of revenues as we continue to gain cost leverage on higher revenues, our efficiency programs and technology investments have also made a positive difference.
As of September 30, we had $596 $8 million of debt $47 9 million of cash and liquidity of $319 $7 million or.
Our consolidated net leverage ratio was 216 times as John mentioned, that's a historically low level and our average cash interest rate was approximately three 3%.
Our balance sheet is in great shape and positions us well to continue to grow while also providing stability in this rising interest rate environment with fixed interest rates on approximately 73% of our debt and our next major debt maturity in January of 2025.
And with our leverage now in Q1 six times, we've reached the lowest pricing point on the grid for a senior secured credit facility and our spread will drop to LIBOR, plus one and one 8%.
Adjusted free cash flow was $81 $7 million year to date up $3 $4 million year over year with higher capital expenditures more than offset by higher net cash provided by operating activities.
Mainly driven by improved operating performance, partially offset by negative changes in our assets and liabilities.
As stated in our press release yesterday afternoon, we have increased our fiscal year 2022 revenue net income adjusted EBITDA and net cash provided by operating activities guidance ranges and reaffirmed our adjusted free cash flow guidance range.
We increased our guidance ranges for the third time this year, mainly due to our stronger than planned pricing programs continued execution against our operating efficiency initiatives.
Excellent cost offset from the mature fuel cost recovery fee and the positive contribution from recent acquisitions.
As part of our updated guidance ranges, we have contemplated that recycling commodity prices will decline another 20% from September through December resulting in about a $2 million headwind in the fourth quarter.
We expect higher net cash provided by operating activities to be partially offset by higher capital expenditures for the year, including our continued investments in newly acquired operations growth capital investments for new contracts and customers additional investments to accelerate operating efficiencies.
And just higher inflation on things we're buying.
Our internal rate of inflation is currently running at roughly five 8% to five 9%.
We expect that outpaces inflation increased adjusted EBITDA margins by roughly 10 basis points for fiscal year 2022, with more significant year over year margin improvements in the fourth quarter.
As we discussed last quarter, if our cost inflation increases further we have great flexibility to advance additional price increases and roughly 70% of our collection book of business and our floating fees are doing a great job mitigating risk.
And with that I'll turn it back to the operator for questions. Thank you.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone Star one one on your telephone.
Please wait for your name to be announced please standby for your first question.
Our first question comes from the line of Sean Eastman with Keybanc. Your line is now open.
Thanks for taking my questions and complements the team on the quarter.
Since since I got in before Tyler here I'll ask.
For the early look on the on the.
The bridge to 2023 EBITDA may be just a preliminary.
On some of those key.
Puts and takes just between recycling.
Operating leverage that would be great.
Great. Yes. Good morning, Scott, we haven't finished our budgeting for 2023, nor have we guided a year, but I think a lot of the building blocks that we expect to be in place for the fourth quarter really will roll into next year, unless there's something unexpected right now if you roll forward, we're recycling commodity prices.
Into next year.
We'll be looking at for the full year of $60 $70, a ton decrease which would result in about a $4 million headwind to EBITDA next year from recycling our programs are working great.
A really nice job offsetting that the headwinds some of our newly acquired customers and operations of course don't have a risk management program in place and something we will look to advance on the pricing side of things things are looking good there, we're putting together our pricing strategy for 2023, and we will look to outpace inflation.
Again next year and.
More than likely look for pricing programs in excess of 6% six 5% for the year.
Adding on where inflation is and on the volume side, we don't see anything tailing off right now in our greater environment.
Both on the commercial side the residential construction side, we just haven't seen a volume decline. So we're looking at.
Our early next year to see a stable environment, there unless something changes and we'll have more information on bridging items and guidance coming into next quarter and then maybe just to add one element there just on the M&A rollover Oes over here on the bridge so Sean as you know we've completed 13.
<unk> this year with about $48 million in annualized revenues.
See about $12 $5 million of revenue rollover next year related to those acquisitions.
And a couple of million dollars of EBITDA, which is typical.
15% to 20% EBITDA margins on those acquisitions.
So typically we see lower margins first year post acquisition as we get those acquisitions onto our consolidated margin levels as well another data point, Jason one more thing. There is we will end this year with about EBITDA margins up about 10 basis points and I went through some bridging items.
Earlier, but we will be exiting the year in Q4 with a little bit stronger margin enhancement. We're up about 50 60 basis points. In Q4 will look next year to get back onto a normal cadence of advancing margins.
Gains year over year, a little higher than 10 basis points back to that 40 to 50 basis points.
Okay. It's a lot of helpful color in there I'm just curious within that 40% to 50, how much of that is sort of operating library, John price led growth versus.
The operating efficiency gains which seem to be.
Gathering momentum if anything.
Yes, I mean, if you look at our quarter Theres always some one time stuff in our numbers. So it's hard to separate both but we had great advancement of our core price ahead of our core inflation and we had probably one of our best quarters from an operating efficiency standpoint, we'd be on core price.
Miss against inflation, almost 70 basis points and our operating programs deliver close to 80 basis points Bottomline no. They are bridging items that worked against that debt.
Health and mute some of those gains, but what we're seeing on the history and what we're seeing with our programs is really positive.
Okay excellent and one last one just we've got.
A lot of things defined around the EBITDA walk, but maybe just rounding that out with.
Free cash flow.
Capex seems a little more elevated.
Other companies are talking about interest tax elements anything to point out there.
Yes, So I mentioned in my script that we've got a really nice job on the balance sheet and.
We have our lowest leverage rate ever as a company and right now we've got 73% of our debt fixed through fixed positions.
Physicians and through interest rate swaps. So for 100 basis point move in LIBOR or another right of similar like so far we'd expect roughly $1 6 million of higher interest costs. So we are going to see a little bit of a headwind. There next year on their Tac side, our NOL position continues to serve.
<unk>, well and serve shareholders well, we will continue to offset the vast majority of federal taxes, and we will see more and more state taxes coming in into 2023.
Youre right on the Capex side, we are a bit elevated and I would say, we're running about 5% to 6% inflation on Capex and then the rest is the higher spend is really on good things. There are contracts. We've won there on great investments accelerated operating efficiencies and to continue to invest in.
Acquisitions, we've completed so we'll give more color on that coming into next year.
Specific investments also the.
<unk> is doing from an automation standpoint, and just taking taking opportunity to move that more aggressively yes.
Okay excellent. Thanks, so much I'll turn it over thanks.
Scott. Thank you one moment for our next question.
And our next question comes from Tyler Brown with Raymond James Your line is now open Hey.
Good morning, guys.
Good morning, Tyler Good morning, Hey, Hey, Jason real quick on the M&A rollover. So I think you said $12 5 million.
How does that split between solid waste and resource solutions.
Yeah. Good question. Thanks, Tyler so of the $12 5 million.
Split as roughly $5 million and resource solutions next year, and $7 5 million in solid waste.
Thanks for the modeling help there.
But if you want to kind of go back to price a little bit I noticed that if you look at your total solid waste pricing in the quarter I think it was up six six but that was actually a slight deceleration from six nine last quarter and frankly, it's a little bit different than what we saw at waste and Republic, where Q3 actually accelerated so I'm just curious there could be some mix in there I'm not sure but can you talk.
About any puts and takes there.
Yes, Youre right, we did see a little deceleration we usually we.
We don't have a lot of CPI linked contracts with the company. So I think maybe way serious public if they had June 30th resets. They probably saw some acceleration into Q3, whereas we had very few.
Large muni contracts that are linked to CPI as a company as youre well aware and we are very.
We've got allocate SaaS in January February had some really strong pricing programs get some course corrections through the spring and then things kind of settled out through the summer time and as we finish budgeting over the next few weeks, we will start to advance strategy for next year. So I don't think its atypic.
<unk> for us to have higher pricing earlier than here and then see it come down a little bit for a year. This year, we saw price climb all the way to June and then start to decline a little bit in Q3, it's not that we're losing a price are seeing big rollbacks or anything like that it's just the cadence of what we've done in the marketplace.
Right and I think the bigger maybe bigger picture here, because I think you mentioned it.
We're still looking for something on the order of six to six five next year. So it's going to be somewhat flattish at least as we see it today its still hanging in there.
Yeah, I think we need to really get a good read on inflation, our core internal inflation running around 585, 9% right now which is the highest read we've had on that and we might need to step that pricing set up even a little bit more and we're working on that right now.
We'll have we'll have a better strategy in the next four to six weeks coming into next year, but as you know we had a great amount of flexibility through both our collection and our disposal book of businesses, where we can.
Yes of course, correct through our contracts, we don't have a lot of things are just linked to fixed price increases.
Right, Okay, and then on volume.
Just be me, but I thought the volume was better than expected can you just talk a little bit about what drove that was that New York and Boston kind of coming back together was there a big project in there just anything anything unique.
Yes, Tyler there was nothing that was.
Significant that was a one timer in the quarter from a volume perspective, it was really just I.
I think overall, we saw positive trends across the northeast at many of our disposal sites and year over year frankly, that's what drove our solid waste volume.
Up 2% in the quarter year over year was was through disposal collection was a little bit flatter.
In the quarter from a volume perspective, which is okay. Fine we have advanced a lot of price in fees in this environment as appropriate.
With inflation so.
It was it was primarily landfills, so Tyler and we expect.
Do you see that trend continue through the fourth quarter barring any unforeseen.
Weather in December , which is always a little bit TBD right right.
Alright.
Okay. No. That's helpful. Yeah go ahead.
The commercial line of business had a lot of strength through the summer as well it really was a bright spot in the collection line of business, which makes you feel good about the overall economic environment as well Tyler.
And then just congrats on the balance sheet I know, that's a big point for John really for all of you congrats on that.
But I'm a little unclear. So do you think interest will be up next year or will the grid moving down in the grid and the facility offset that.
It's still going to be a headwind next year, but.
I don't know what your general thoughts, yes, it will it will.
I haven't done the calculation, but if we assume across the full year that LIBOR is up say 300 basis points or so.
Maybe that's not enough, but let's just assume 300 for the full average year that would put us up $4 $8 million of interest expense and then moving against us our reduction and that created which would take off.
Really less than $1 million of that so.
See some headwind next year.
We're doing a lot to keep leverage low and the business and make smart decisions on where we invest money.
Then my last one and this is more of a conceptual question around <unk>.
Cost of capital and about capital access. So I think you had $50 million accounts I think you have plenty of liquidity.
Through the facility.
When you when you approach M&A are you, losing some of your assumptions around pricing on M&A I mean, how.
Or are you contemplating this higher cost of capital how are you thinking about financing future M&A is it mostly going to be metered by just pure free cash flow or just any broad thoughts about that.
Yes, I'll take question. So if you flash back a couple of years ago, when tax policy changed and our cost of capital really started to decline as an organization. We didn't change our internal hurdle rates as a group for either smaller M&A or a little bit larger M&A or internal investments we kept our hurdle.
At the same place so now that interest costs are creeping up and.
Does that mean, we're going to change hurdle rates something higher probably not because as we've looked at transactions. We've tried to have a good risk premium and they're already to ensure that when we put money to work.
We make enough and it's hard to foresee things that go against you. Some time. So I think we've tried to be conservative there and our track record shows four of the 53 acquisitions. We've done in the last several years, we have a really good track record of hitting the pro formats.
As you know, we look at everything and an after tax Unlevered return and we build out discounted cash flows and we're very disciplined in how we're buying businesses are investing money and there is not going to be a big shift there.
We definitely see a lot of opportunity in our markets and John surprise speak about there that I had about the pipeline and the opportunity we see.
Thanks.
There is no question that the opportunities continue to grow I think if anything.
Depending upon what happens from a.
A recession standpoint multiples could contracted a little bit in terms of from.
Competitive standpoint, which could be a positive actually.
Sitting where we are with the capability that we have.
In the balance sheet. So it's.
It's really when you look at it really positively.
The opportunities are.
Really significant.
Excellent 53 deals you guys have been busy so thank you I appreciate the time.
Thanks Tyler.
One moment for our next question please.
Sure.
Our next question comes from Stephanie more with Jefferies. Your line is now open.
Hi, good morning.
Good morning.
We can get maybe an update on just general capacity trends in the northeast and I think you don't really overlap.
Finally, seeing a grind lower but maybe you could also just kind of update on that and really your thoughts on makena and where when do you expect that to come online.
So.
I don't think Theres any question, but we continue to see the supply.
And demand imbalance in the northeast it continues to move in.
In that direction capacity continues to come out of the marketplace.
Very little capacity is being added to the market, we're probably more adding more capacity than anyone else to the market currently.
Makena is on track.
<unk>.
Our currently in permitting.
For Mccain for some changes that we made to the rail infrastructure.
That is going forward very nicely.
Real support all the way around so.
We're on track probably to get into.
Construction in 'twenty, three and probably early 'twenty four.
Early to mid 'twenty, four be up and operational but as we ramp will be ramping it up.
Don't expect that we're going to be at full capacity or anything like that but we'll start to ramp it up in 2024 and a few of our other key initiatives continuing to advance really well our permitting at hakes is going well permitting at Highland landfill is going very very well Highland is extremely well placed in western.
In New York.
50 miles away from <unk>.
Landfill, that's scheduled to close in $2025 2026 at that landfill. It takes about a half a million tons a year. We're looking to increase island from 460000 tons, a year 10 million tons a year. So there is some other initiatives out there we're working on that.
We will have a really nice impact over the next couple of years as we complete permitting and sites come offline.
Great. Thank you and then just as a follow up to your margin performance I know that you have several tuck in digital initiatives underway here are you starting to see any meaningful benefits from weather it here.
Fleet planning or automation or even some of your back office ERP implementations or should we expect the lion's share of those gains to be more apparent in 2019 2024, I mean any color there would be helpful. Thank you.
Yes, maybe I can start and then Sean can step in on some of what we're doing on the automation in the encore computing side, but we are making a lot of progress. It takes up that when you are investing in technology, you oftentimes have a few years, where he's spending a little bit more and then you start to yield some really nice benefits and probably our biggest bet.
This year has 2022 into 2023 are really coming from some of our procurement initiatives. So its net suite and then our addition of Cooper and what we've done to really drive more standardized procurement in the business and there is simple things like increasing.
Utilization of the stream, increasing digital payments across the stream using our single use for our P cards and driving rebates through the business catalog based per procurement, where we're getting more and more purchasing power in buying through digitally late catalogs through Cooper to thing.
Like containers or two parts. So yes, there's a lot of really nice work being done in the back office to streamline and simplify what we're doing to take costs out and frankly, just to make us more effective for our people in the field.
Got it great a pilot that's being launched.
What we call service management, which is our order to cash cycle that is really exciting as John reminds me. We can run the same system for 35 years, and it's served us amazingly well, but in today's day and age both our people from an operating and customer service side and our customers are demanding more and more digital tools and we're really.
Cited about the work we've done there in our pilot launch and on the truck side and the fleet side, Sean We've got some great initiatives Theyre, taking a real dollars out today, yes from an automation and conversion standpoint, we are booked through the end of next year. So we will do at least as many of those projects next year as we did this year.
And from a technology perspective, we plan to do to escalate that a little bit next year and do more units for onboard computing on the trucks.
Through about about 45% of our fleet today, Sean on the onboard computing they won't be through about 60 plus percent by the end of next year and maybe you could just make a couple of comments about what that does for us having computers in the trucks, yes. The return profile on the onboard.
Computers is to put it slightly very nice will say.
It gives us it touches so many levels of our business that allows our customer service reps to have service verification capabilities whether that.
A picture of a dumpster thats blocked or residential home that may or not may have forgotten to set there have been out for the night.
We have revenue opportunities with overloaded containers and that allows us to pay our drivers and incentive program and what we found.
Early indicators are in those markets, where we're paying these driver incentive programs are the turnover in that line of business has dried up to almost nothing so staff.
Staffing in the solid waste industry is and has been a big concern. So that's a nice silver lining, allowing the technology.
To help the drivers make it a little more a few more bucks and just to put it bluntly. The drivers it's overwhelming they loved the system they love not dealing with paper anymore. So they love the tablets and we've had some great safety.
Incidence as to where we're able to prove we werent the causative instances and really push that liability to others, which is great. Yeah. The camera system allows it's a driver behavior system as well so with the camera, there's a camera and every calf facing the driver.
So it helps with coaching if they may.
If they may need some pointers on their techniques and then as Ned mentioned, yes, we were able to.
Exxon rate ourselves for claims that we that we did not commit.
Right now we still have a fairly significant opportunity in terms of the work youre doing for the future with regard to further automating the fleet, particularly on the residential side getting to fully automated. So you still have some opportunity. There. Yes. We're like I said were planned out through the end of next year and then it's a competitive.
<unk> for capital with all of the divisions and then we picked up the highest return for each one but.
John I can plot it out on a couple of years, we will get to our goal of automation, but.
As you guys know for sure on the phone, we're probably not going to stop buying companies anytime soon so that gives me.
Plenty of work in the future usually when we bought security, yes, so Jonathan impurity, because there was a move by a mom and pop they don't have the technology. They don't have this jambor computing and a lot of times. They don't have the automation conversion. So there is always a new crop of rear load containers to convert to frontload enhanced service waste and recycling to convert to.
Siloed drugs.
Great well know fantastic color and thank you so much.
Thank you Stephanie.
Thank you.
<unk> for our next question please.
Our next question comes from Michael Hoffman with Stifel. Your line is now open.
Hey, everybody in Vermont, and thank you for taking the call.
Good morning, Michael.
In Virginia.
Am I am.
Good for you, we're having milder sort of.
Yeah.
So very quick detail question on <unk>, what's your interest rate for <unk>, what's the interest rate for 2023 based on where we are right now.
Yes.
Q do you have the chase can pull it.
So our effective cash interest rate over the last.
Five quarters on average Michael has been roughly <unk>.
Three 4% or so so.
Having a calculation in front of me for the fourth quarter, it's up modestly from that but.
In that realm.
As we briefly hit on earlier, we did.
<unk> stepped down one pricing level to the lowest pricing levels within our credit facility based on our.
Based on our leverage.
At September $32, one six times and our credit facility. So that's helping a little bit as well and I think that has the stat here, yeah, I think it's around four 1%.
Income statement.
Second interest rate okay.
And then.
With regards to fuel.
When you share with us headwinds tailwind are you accounting for that on a constant engine hour or miles driven basis, because you're doing a lot of M&A theres been good volume growth. So there's there's more fuel consumed period that drove the cost up plus the price of the fuel went up.
Yes about that.
Yes, really good question, we should probably be more specifics. So when I gave the good guy of about 50 basis points for fuel during this period.
During the quarter our fuel.
Cost recovery fees offset our cost of fuel and we had some margin enhanced at 50 basis points that we're seeing just our core business is not any newly acquired businesses, so and that breaking I said that we had a bad guy of about.
75 basis points from acquisitions.
The fuel in with those acquisitions in almost all cases acquired companies don't have fuel cost recovery programs and that theyre seeing some level of inflation takes us months, if not a year to get our fee programs into those companies and if you don't bifurcate the M&A from the base business year.
To date, it's been about a 40 basis point margin headwind, which is also what we expect in the fourth quarter and for the full year as it relates to fuel being offset by our energy and environmental fee.
But inside that.
You had more volume on the core business and you drove more miles so there's a.
There's a volume in.
Angle there on the increased cost of total dollar spend on pure it's not just the price increase you're going to spend more in fuel anyway, because you had more volume.
Yes, good point I mean, the program is meant to generally offset the increases in <unk>.
Price of fuel and to your point, we're at the point right now we're offsetting any price increases in fuel with our core program. If there are some volume increases.
It could be another component that hasnt been materially large this year.
Most of the acquired customers will all right into the program by earlier in the year.
Is it hasnt driven.
Big variance, Okay, Alright, and then.
So just to be clear for everybody listening youre going to have a margin headwind in <unk> for fuel based on where it's trending right now.
That's our expectation. So these are trailing fees right. So we saw fuel dropped like a rock from July through September after a risen like a rocket ship in the first part of the year. We are behind all in Q1 Q2, we're behind from a margin standpoint, we've got a little bit ahead in Q3, we're estimating to be slightly behind.
In Q4 about 40 basis points on margins for the full year, we're estimating to be about 40 basis points behind on fuel. This C. As youre well aware, we're just trying to recover costs and it can have margin headwinds Q3 is a little bit of an anomaly with that.
Pick up right.
Bring some clarity to that and then.
Great news on the volume, but we do have to acknowledge that 'twenty. One <unk> 'twenty. One you had a pretty mediocre tourism season, and this is your best volume quarter anyway.
Based on a hotel occupancy data tourism data out of the states. There was a great tourism season in your regions.
The quarter. So that's part of the driver as well just so people don't get it Thats fair over there is on.
That's very fair, Michael you're well positioned you have great position to take advantage of it but we want to make sure that we don't get over our skis on volumes are running away.
Exactly okay disposal price. So I was recently moderating a panel at a conference.
They were participants all from the northeast one of them was the big burner, operator asked the question what they thought Boston reset in 2024.
And the answer was no.
North of $180 a ton.
What is the current spot market.
Four at the transfer station and argue are you fully pricing that upside and yet or is that a lot more room for.
Landfill pricing be that much better.
I think that there is I would say Michael that.
The transfer station pricing.
It's probably what they were talking about as opposed to disposal pricing. So I think that theres, probably more opportunity there because we're not seeing a $180 a ton at.
At this point in time, but it is over $100 a ton the transfer stations. So.
It'll be.
I think it is an opportunity going forward and this year, we definitely that's one area, where we need to do a bit better job on advancing pricing our transfer station, we've seen a lot of inflation in the third party transceiver transporter side Chase.
Chase and created a new transfer station energy and environmental fee that we launched late in Q2. It was effective in Q3 started to help with that but there is just a lot of moving pieces there with change.
Changes in where waste is flowing higher end disposal prices heightened costs on the transport side, It's a big focus point of ours to your point of you know that market does need to staff up again on the transfer side into 2023.
Add momentum to why you have a six handle or better on price in 'twenty three.
Yeah, absolutely I mean pricing that sometimes don't tell the full story and we often will talk about the difference between.
Our disposal price, which is third party customers same customer going to the same landfill same type of waste has seem a little bit muted. The last few years at 5%, but that's because we are constantly looking to rebrand our book of business and we're looking to vertically integrate more if you look at the average price of one eight times.
Into our site.
Total revenues divided by total tons.
That's gone up 8% and Thats a real good indicator to us that we are making good decisions in the marketplace to attract new customers. We are blending our own internal prices up at the landfills that theyre appropriate rate and things are working well.
Okay and then.
With regards to 'twenty, three just to get a little better clarity on the guardrails.
Can you give us a little bit more direction about how to think about what the compounding looks like and are we having a conversation that's.
Double digit revenue growth double digit low double digit profit.
Better than that in free cash.
And 23 or two are there headwinds that are pulling me back into high single digits, just want to understand directionally.
Think we're high single digits right now in revenues double digits on EBIT da low double digits on EBITDA growth.
Mid <unk> kind of like 10% to 15% on free cash flow.
And that's yes, we havent finished budgeting, yet, but as we look at the basic building blocks Thats, where we are because we are going to see some recycling headwind.
The other thing that could pull you back into the high single digits on pricing, it's kind of if we have seen some movement here from the fuel fees. So.
That's not something that's making profit for I speak and see that pull back against revenues a little bit, but we are looking to have double digit growth on the EBITDA side.
Okay.
That helps.
And then lastly on the self help question that was asked earlier have you put dollars around what you thought the scope of what self help would do over time and then what you've captured so far.
Oh man.
There's a lot of opportunity there and we were talking about earlier that if we can pick up 20 to 30 basis points of margin enhancement each year through Sean's automation efforts onboard computing back office technology and.
This year's like that that's a great cadence for us.
And we don't see it and insight in the next three plus years is a lot of opportunities we have across the franchise.
And is that incremental to you're talking about being up 30 to 50.
No thats part of that I mean.
Hopefully we can beat those numbers, but if we say we're up 50 basis points on margins some combination of price self help offsetting.
Things that are out there that will always work against you.
Okay, and then just I would make a comment more than anything else. If you if everybody looks at your pricing history, you always are stronger than the first half and what.
It's narrowed in the second half.
Then this is the first time, we've had hyperinflation in 40 years, but prior to this that's been your pattern because that's the way you price.
Yes sure.
Wake up freak out about that.
No and we're not either but we're definitely conscious of what's going on in the external environment and really looking at whether we need to advance some more price okay alright.
Alright, Thank you Michael.
Alright.
Thank you one moment for our next question.
And our next question comes from Michael Feniger with Bank of America. Your line is open.
Yes. Thanks for taking my question guys you highlighted the internal cost inflation in the quarter or 5859, just what are the moving pieces there.
What's kind of driving that and how do we kind of think about some of those moving pieces into 2023.
Yeah, Great question. So we.
<unk> had our team Jack Vandewater put put together own inflation index, because it is hard to separate the price volume components. Other inflation and we wanted to have a very consistent way of measuring the components of our own inflation. This is on just the expense side the capital side.
Look at separately, but our aggregate basket, which goes across labor tires facilities cost.
<unk>.
Does it include fuel.
Outside repairs parts.
Operation support we go across every part of our business and things.
Things are trending higher than that five nine right now our maintenance parts outside repairs Les.
Labor is actually tracking underneath that labor it stabilized and start to come down a bit from inflationary standpoint. This spring into early summer which is good.
Facility costs are definitely a bit more stable.
We haven't seen as much inflation on that side.
Fair enough and I know you touched on it earlier.
When we think about Capex in 2020.
There is inflation driving some higher capex, but a lot of it's also you guys have growth projects ahead, just does the capex intensity is it a bit higher in 'twenty three 'twenty four as you guys are going through these projects just how do we kind of think about that.
Yes, so we've been running for.
A number of years now because if you look at pure running our business in keeping the lights on 10, 5% of revenues from a Capex perspective, and then we have been doing more than that because we've been growing and we've had a lot of great opportunities to put money to work and we see that coming into 2023 as well.
<unk>.
We've got some new contracts, we've won that will be putting capital to work on we've got acquisitions, where we're investing to drive synergies and integration and then mckean.
We'll be looking to invest about $20 million into bringing Mccain online in 2023 into 2024, I don't have an exact split yet but that will be some really good money put to work for shareholders for long term value.
Great and just lastly, like I know Theres got asked earlier, but the pricing like on the collection or maybe even disposal.
There is always a ceiling at some point do you feel like that we're approaching that or is it just the cost inflation, it's understandable with the with what everyone's dealing within their own business. Just how do you guys kind of think about that and is there any type of.
<unk> cutting or ceiling. There that you guys are starting to bump up against thank you.
Yes. So if you look at the fed data and you look at waste services as a percentage of consumers, while that or our businesses, while it's less than four tenths of 1% of that wallet and frankly, we're just doing what we need to do to get the high cost of our business back to our customers whether it be.
On the labor side, the truck side, the environmental side and I think our people are doing a really good job of assessing what we need to do and how to get that price back to history, and we don't look at it as whether it is a ceiling or not as ceiling. We're just trying to establish fair programs that get that inflation back to the market.
Thank you.
Thank you.
One moment for our next question.
And I have a follow up with Tyler Brown with Raymond James Your line is open.
Hey, it's Super early days.
Yes. He is RMG a material benefit next year, maybe $1 million in Q box.
It's not really I wouldn't characterize it as material.
As we know well.
Probably.
What can get you the exact number but we've got to our LNG facilities coming online one in Q1, and then one probably a Q3 or Q4 and.
And in total we will have $1 $3 million MTT use coming online and I think as everyone remembers we did not invest capital in these facilities. We have partners that invested capital we get royalties for our gas sales and for Rins and I think across those two projects you know Charlie how much yes.
So just kind of.
Assuming the first one will come online.
In the first quarter and then the second one is going to be towards the end of the year Tyler.
We remain pretty conservative.
$2 <unk> RIN price.
Looking at revenue contribution of about two and a half million or so.
Next year.
Okay.
Okay. That's helpful. I think I can work with that alright. Thank you.
Thank you Tyler. Thank you as a reminder to ask a question Thats Star one.
And I'm currently showing no further questions at this time I would like to hand, the conference back over to Mr. <unk> for closing remarks.
Thanks Norma.
Thanks to everyone for joining us. This morning, we look forward to discussing our fourth quarter 2020 to earnings and our 2023 guidance.
With everyone in February thanks, everybody and have a great.
Weekend. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect everyone have a wonderful day.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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