Casella Waste Systems, Inc. (NASDAQ:CWST) Q3 2023 Earnings Call Transcript

Casella Waste Systems, Inc. (NASDAQ:CWST) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Good day and thank you for standing by. Welcome to the Casella Waste Systems Q3 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker, Charlie Wohlhuter, Director of Investor Relations, Casella Waste Systems. Please go ahead.

Charlie Wohlhuter: All right. Thank you, Amanda. Good morning and thank you for joining us on the call today. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ned Coletta, our President and Chief Financial Officer; Jason Mead, our Senior Vice President of Finance and Treasurer; and Sean Steves, our Senior Vice President and Chief Operating Officer of Solid Waste operations. Today, we will be discussing our third quarter 2023 results, which were released yesterday afternoon. After a brief review of those results and an update on the company’s activities and business environment, we will be happy to take your questions. But please note that various remarks we may make about the company’s future expectations, plans and prospects constitute forward-looking statements for the purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by 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. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to today, November 2, 2023. Also during this call, we will be referring to non-GAAP financial measures.

These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures to the extent they are available without unreasonable effort are available in the appendix to our investor slide presentation, which will be available in the Investors section of our website at ir.casella.com under the heading Events and Presentations. And with that, I’ll now let John Casella begin our discussion.

John Casella: Thanks Charlie, and good morning, everyone and thank you for joining us. Welcome to our third quarter 2023 conference call. I would like to begin by offering our sincere thoughts and prayers to everyone affected by the tragic events in Lewiston, Maine last week. It’s a community that we’re proud to serve be a part of and support in any way we can. This quarter marks a pivotal and exciting time in the company’s history as we execute against our growth strategy. We closed on three acquisitions in the quarter, which were tuck-ins to our adjacent markets across our Northeast footprint where we see lots of opportunity to fold these assets into our operating plans and grow our services. Included in this is Twin Bridges, which we completed on September 1.

This is a great platform in the Alvin, New York market with young assets, including a state-of-the-art recycling facility that provides greater capacity for us to continue to grow our Resource Solutions business around the region. I’m also pleased to report that our early results in the Mid-Atlantic are on track to hit or exceed pro forma. Operations in service are excellent and we are quickly working to establish our culture and core values. We’re building our sales pipeline and continue to work on acquisition opportunities in this market. Integration efforts are going well for all our acquisitions and our nearly 900 new team members are all making this possible. Speaking of new members, last night we also announced the hiring of Brad Helgeson as our new Chief Financial Officer effective Monday, November 6.

Brad has been a very well respected finance executive in a solid waste industry over many years and we believe that his experience values and leadership style fit very well with our company and our entire team. As you know Ned has been instrumental to this company’s success in many ways over the last 11 years as CFO. I’m both proud and excited for him to devote his complete attention to the President’s role where he will continue helping to profitably grow this company and drive further shareholder value. Moving to the results reported in yesterday’s press release, we grew both revenues and adjusted EBITDA by over 19% in the third quarter on a year-over-year basis along with strong adjusted free cash flow generation. This shows the excellent job that our team is doing to serve our customers and communities and deliver strong operating results in our core business while onboarding and integrating our recent acquisitions.

We remain keenly focused on executing a high level over the remainder of this year and carrying this momentum into 2024. Above all, I’m very excited about the performance of the company and the larger platform that we are building. We are once again updating guidance for 2023 and remain very excited about the opportunities looking ahead. Now, a brief review related to our key strategies and recent performance of our operations. Our disposal assets are an important part of our overall solid waste strategy in the Northeast, we are focused on increasing returns across these assets. In doing so, we focused on improving the quality of our revenue and our operating programs. Our landfill price was up 7.4% in the quarter as we work to stay ahead of higher capital cost items at our sites and ever-increasing regulatory compliance costs.

For costs we can control we continue to refine our operating programs for better productivity and efficiencies, while keeping safety at the forefront. As we communicated last quarter, special waste remained weak but MSW C&D, which together are the majority of the volumes we accept our landfills, continue to track in line with budgeted and historic levels. Timing of special waste volumes can be choppy since most of these volumes are project-based and can be deferred into future periods when there is economic uncertainty. That said we do have a solid special waste pipeline and have a few projects that just started in October. Despite the volume decline, we still drove 75 basis points of year-over-year margin expansion at our landfills in the third quarter our collection line of business.

We posted another solid adjusted EBITDA growth and underlying margin expansion in our core collection operations. This success is a direct result of Sean Steves and his team’s focus on executing our operating plans. The plan is concentrated around operating efficiency initiatives, flexible pricing programs focused on returns. Ongoing implementation of fleet automation and conversions route optimization, and onboard computers are delivering increased efficiencies and commitment to safety improvements for our team members. From a pricing perspective, collecting price was up 7.6% in the third quarter, exceeding budgeted levels. Volumes were softer in the quarter as a result of our efforts to improve margins in the residential line of business.

This shows the deliberate changes we are making for profitable growth. As always, we will continue to be nimble with our operating strategy and maintaining a focus on returns. Resource Solutions, we take great pride in providing our customers Resource Solutions that help them meet their sustainability and economic goals. As noted in our press release yesterday, our fully upgraded Boston recycling facility is back online and again making positive contributions. We are seeing increased productivity throughput and safety levels, while increasing material recovery and quality on the back end. These early results are very exciting and we look forward to this positive contribution over the remainder of the year. Our national accounts business has also been a positive area of growth.

We continue to win new contracts and have a plan to overlay our national account sales strategy across our Mid-Atlantic region where we see a lot of opportunity for further growth potentially targeting large commercial and industrial customers. Finally, I’d like to highlight our capital allocation and growth strategy. We remain focused on continuing to integrate our larger acquisitions completed over the last several months. We will also keep an eye on the opportunities that meet our return guidelines and review process. Our acquisition pipeline is robust and roughly $500 million of annualized revenue over the top of our Northeast operations with approximately $400 million more around our Mid-Atlantic operations. On the organic side our near-term development project pipeline is strong as well and provides a number of building blocks over the next several quarters including further contribution from our upgraded Boston MRF and the RNG projects that are commencing.

Overall, we have a nice organic and inorganic growth runway that positions us well to drive long-term shareholder value. And with that, I’ll turn it over to Ned for more details on the financials.

Ned Coletta: Thanks John and good morning everyone. Before I get into the quarter, I also want to welcome Brad to the role of Chief Financial Officer. This is a bit better suit for me. I’ve been doing this for 11 years, but I’m excited to pass the torch to someone who’s so talented and really fits the value system of our company and will be a great partner for our team. Moving on to the quarter. Revenues in the third quarter were $352.7 million, up $57.5 million or up 19.5% year-over-year. With 18.9% of the year-over-year change driven by acquisition activity, solid waste revenues were up 28.9% year-over-year with price up 6.9%, acquisition growth of 25.5%, and volumes slightly down at negative 3.3%. Revenues in the collection line of business were up 43% year-over-year with price up 7.6% and volumes down 1.9%.

As John mentioned, volume declines were primarily driven by our efforts to improve the quality of revenue and margins in the residential lines business. Revenues in the disposal line of business were up 0.3% year-over-year, with landfill pricing up 7.4% and landfill tons were down 10.1%. MSW and C&D landfill volumes were roughly flat year-over-year, while special waste and contaminated soils volumes were down 35% year-over-year on lower regional activity levels. It’s important to note a few things about this decline in landfill special waste volumes. One, the third quarter last year was particularly strong for special waste. We had a tough year-over-year comparison. Two, we’re not losing these tons to a competitor in the market. Our special waste soils and pipeline remains very strong.

However, we have experienced project delays as customers continue to gauge the economy and when to initiate projects. And three, we have finally seen special waste lines click up over the last several weeks as anticipated projects kicked off. However, in the spirit of conservatism, we are guiding for special waste volumes to be down, both sequentially and year-over-year in the fourth quarter. As expected, our Resource Solutions revenues were down 5.9% year-over-year with our average commodity revenue per ton down roughly 28% year-over-year on lower carport and mixed paper pricing, lower metals pricing and lower plastics pricing. This decline in commodity prices was partially offset by a 10.9% growth in processing fees. Industrial and multisite retail revenues were nearly flat year-over-year, with pricing gains offsetting slight volume declines.

Adjusted EBITDA was $89.6 million in the quarter, up $14.6 million year-over-year with $14 million of the growth derived from acquisitions. Solid waste adjusted EBITDA was $82 million in the quarter, up $14.9 million year-over-year with collection and disposal adjusted EBITDA both up year-over-year. Lower special waste and soil volumes at the landfill weighed on our adjusted EBITDA by roughly $2.6 million. This partially offset very strong performance in the collection line of business. Resource Solutions adjusted EBITDA was $7.6 million in the quarter down $200,000 year-over-year. Lower year-over-year commodity pricing was offset by strong performance at the Boston recycling facility, with adjusted EBITDA up $1.3 million year-over-year at the facility.

As John mentioned, we completed the full equipment upgrade in late June and the facility is now operating at pro forma levels. Adjusted EBITDA margins were 25.4% for the quarter, flat year-over-year. Once again, our pricing programs fully offset cost inflation in the quarter with consolidated price as a percentage of total revenues up 5.8%, partially offset by a 4.8% headwind from inflation or this is a 100 basis point positive spread between price and moderating inflation. Further margin bridging items include a 45 basis point headwind from lower special waste volumes and soils at the landfills, a 35 basis point headwind from rising fuel costs net of our fuel recovery fees, a 15 basis point headwind from the July flooding in Vermont and parts of New York and New Hampshire, and a five basis point headwind from acquisitions.

Our fuel recovery fees under recovered rising fuel costs by approximately $2.6 million during the third quarter, as fuel prices increased sequentially throughout the quarter and our surcharge program calculation lags in a rising environment. Cost of operations in the quarter was up $36 million year-over-year or down 30 basis points as a percentage of revenues with approximately $37.7 million of the increase from acquisitions. General and administrative costs in the quarter of $6.8 million year-over-year or up four basis points as a percentage of revenues. Depreciation and amortization costs were up $15.2 million year-over-year with $13.5 million of the increase resulting from the recent acquisition activity. We do expect heightened D&A for the first few years after each acquisition, as we rapidly depreciate or amortize many of the assets acquired.

To give some further perspective, D&A associated with the acquisitions was actually 24.2% of acquired revenues in the quarter as compared to D&A at 11.5% of revenues in the remainder of the business. On a dollar basis, we expect acquired G&A to drop roughly 20% by year two and roughly 50% by year five. So this will resolve in the next several years. It was another strong M&A quarter for our team. On September 1, we completed the previously announced acquisition of Twin Bridges, including hauling, transfer and recycling assets with approximately $70 million of annual revenues. As Sean mentioned, our team has been busy working through the integration of the newly acquired businesses including the work with the GFL Mid-Atlantic operations. We continue to make very good progress against our integration plans and most importantly, we have achieved our operating and financial targets through this initial period with each transaction.

As of September 30th, we had $1.58 billion of debt, $219.1 million of cash and liquidity of $491.4 million. Our consolidated net leverage ratio was 2.89 times. Our average cash interest rate was 4.5% and we had fixed interest rates on approximately two-thirds or 66% of our debt. We are maintaining significant liquidity and balance sheet flexibility to continue to support our M&A and organic development pipeline. While adjusted free cash flow started the year light due to working capital and capital expenditure timing differences these headwinds were resolved through the second and third quarters as expected. Adjusted free cash flow now is at $96 million year-to-date through September, or up $14.3 million year-over-year and on track to hit our increased fiscal year 2023 guidance range.

Given the expected contribution from acquisitions closed year-to-date and continued pricing above our cost inflation, partially offset by the recent weakness in landfill special waste volumes, we increased our revenue, adjusted EBITDA and adjusted free cash flow guidance ranges for fiscal 2023 again this quarter. The revised guidance range assumes a conservative view of special waste for the fourth quarter with volumes forecasted to be down again. As part of our updated 2023 guidance ranges, we increased our adjusted EBITDA guidance range by $3 million at the midpoint. With an increase of $8 million for the newly acquired operations offset by a $5 million decrease in our core business associated with the lower special waste volumes at the landfills.

Our internal rate of inflation is currently running at 4.8%. We expect to outpace this inflation and increased adjusted EBITDA margins by roughly 70 basis points in total for fiscal 2023. We are forecasting solid waste price to be up 6% to 6.5% and the volumes to be down slightly in the fourth quarter. As you may have recognized, we did lower our net income guidance ranges for 2023 with the reduction associated with the recent acquisition activity most notably the changes in our depreciation and amortization. We have conservatively increased our fiscal year adjusted free cash flow guidance range by $2 million with all of this increase associated with the newly acquired operations. While we expect continued operating cash flow growth, inflationary pressures on capital expenditures and higher interest rates have partially offset this growth.

Looking forward to 2024, we’re exiting 2023 in great shape and continue to grow margins and cash flows into next year. We expect roughly 14% rollover revenue growth as a percentage of our total revenues from acquisitions already completed in 2023. We expect organic pricing of roughly 5% to 5.5%, adjusted EBITDA growth of roughly 20% year-over-year, margin expansion of 30 to 40 basis points year-over-year and continued adjusted free cash flow growth in a target range of 10% to 15%. And with that, I’ll turn it back to the operator for questions.

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Q&A Session

Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Adam Bubes from Goldman Sachs. Please go ahead.

Adam Bubes: Hi, good morning. Thanks for taking my question. Your guidance seems to imply for 4Q margins of 22.8%, which translates to down 260 basis points sequentially from 3Q. Historically, it looks like you folks have stepped down around 430 basis points Q3 to 4Q. So it looks like this guidance implies margins that are trending better than normal seasonality. Can you just help us think about the different moving pieces 3Q to 4Q that might be pushing margins ahead of the normal seasonal cadence?

Ned Coletta: Yeah. So if we look to last year, we had a larger step down than typical. We had some headwinds in the business into the fourth quarter most notably into December. Right now we’ve actually seen some business trends that they were improving from September to October, which is a little bit different than our normal seasonality. As we mentioned earlier, landfill tonnages we had some of the largest days of our entire year in October from a landfill tonnage standpoint. So we are seeing some slight changes to business seasonality. We also have a couple of new contracts rolling on in the fourth quarter in our Resource Solutions business that gives some positive tailwind. And one other factor is our recycling business. Last year, we still had negative year-over-year comps into the fourth quarter.

We expect a positive tailwind this year. And then the Boston recycling facility is firing on all cylinders right now and we expect a really positive contribution from that project into the fourth quarter. So you’re right. Probably the seasonality is not quite as much of a step down, but we have some trends that are showing a lesser step down into the fourth quarter.

Adam Bubes: And then if I assume you hit 4Q margins and trend margins in line with normal seasonality off of Q4 through 2024, I’m getting to somewhere in the range of margins up 70 basis points 2024 just based off normal seasonality. Meanwhile, price cost seems to be accelerating. There’s certain operational initiatives in the business. I think you mentioned 30 basis points to 40 basis points year-over-year. Can you just walk me through if I’m missing any moving pieces there?

Ned Coletta: Yes. So we haven’t faced share budgeting for the year. And we usually don’t give a lot of visibility in this quarter on the next year. But we thought just with the acquisitions and the moving pieces it was important to give a quick snapshot, Adam. So there still is work to be done on our side. As you’re well aware we have a lot of flexibility with most of our collection pricing programs. So we’re taking the temperature on where inflation is trying to set up the right pricing programs into next year. Sean and his team have an excellent slate of operating efficiency program scheduled for next year and we’re deep into budgeting for our new business unit. So we don’t want to get ahead of ourselves great opportunity I think to expand margins again into next year and we’ll give more visibility in the coming months on where that will be.

Adam Bubes: Terrific. And then last one for me. At the start of the year I think you had expected to have two RNG facilities coming online by the end of 2023 or 1.3 million MMBtu. The industry has obviously had some issues with project delays since. So just wondering if there’s any update on those two facilities in terms of timing?

Ned Coletta: Yes. Good question. So in both cases we’ve partnered with third parties who are investing the capital building the facilities and bringing them online. Our one facility associated with our North Country Landfill in New Hampshire is close to commercial operations. Still they’re working on a couple of details to get online and we hope that will be online in either the fourth quarter or first quarter. So that is a negative headwind this year. We had expected that to start to give a positive contribution in the third and fourth quarters. Our second project partnered with at our facility in Juniper Ridge in Maine is also a little bit delayed. We had expected that to come online in the fourth quarter and that’s probably first half of 2024.

So your perspective is right. We’re probably running about six months behind on these projects. Once again, we’re not driving the boat there. It’s our third parties and I think they’ve had some issues sourcing certain components and bringing these online exactly on time not huge delays though but a little bit of a headwind in our guidance as well. We expect about $1.5 million of contribution in the second half of the year. So that’s something that’s been a headwind for us as well.

Operator: Thank you. Our next question comes from Michael Hoffman from Stifel. Please go ahead.

Michael Hoffman: Hi. The other question I have with regards to the guidance is that you did have this disruption because of all the storm debris and the like. Is there any benefit of it coming back through as just like you saw in the hurricanes years ago?

John Casella: I think it’s fair to say Michael that there’s not significant benefit. Keep in mind that we really didn’t talk that much about it because net-net it’s probably somewhat neutral. I think the real question is how long will it take those businesses to come back up into operation. We still have a lot of businesses that have not recovered and not back operational from a commercial standpoint. So that’s been a little bit of a headwind. But net-net, obviously, we received more tons to the landfill from the damage offset by the lack of commercial activity. So net-net..

Ned Coletta: Access period as well John

John Casella: Yes.

Ned Coletta: With being down, especially, in Vermont for several days.

John Casella: Sure. Yes. I mean high expenses in terms of bringing in the priority response team from other areas to handle the issues. Our Montpelier operations, obviously, were underwater for a week and shut down completely and we brought people in from other areas of the company to service those customers and get ourselves up and operational not only in – obviously, that was not only in Montpelier, but Waterbury Berlin, Ludlow, Londonderry and Weston — large portions of Vermont, smaller activity in upstate New York and smaller activity in Pennsylvania as well. But net-net a few more tons to the landfills but offset by lack of commercial activity.

Michael Hoffman: Okay. That helps. And then it’s not a confusion. I just want clarity more than anything. So in the press release you talked about transfer and disposal price at 59 you shared on the 7.4. So there’s pieces to this. Given the supply imbalance, or the availability of the disposal capacity imbalance the likelihood the Bostons and disposal rates go up a lot in 2024. Shouldn’t we see incremental improvement in the landfill side of the price? And then what’s the drag in the blend of transfer and disposal so that it would have pulled the whole thing down to 5.9% and sort of well below your collection number?