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Earnings call: Casella Waste Systems reports growth amid challenges

EditorAhmed Abdulazez Abdulkadir
Published 11/01/2024, 09:28 PM
Updated 11/01/2024, 09:30 PM
© Reuters.
CWST
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Casella Waste (NASDAQ:CWST) Systems, Inc. (NASDAQ: CWST), a regional solid waste, recycling, and resource management services company, reported its third-quarter earnings for 2024 on October 31, 2024. The company announced a revenue increase of 16.7% year-over-year to $411.6 million, attributed to both acquisitions and organic growth. Adjusted EBITDA also saw an increase of 14.9%, reaching $102.9 million. Despite these gains, the company faced challenges with lower landfill volumes and increased expenses, leading to a decrease in adjusted net income to $15.9 million.

Key Takeaways

  • Revenue increased to $411.6 million, up 16.7% from the previous year.
  • Adjusted EBITDA grew by 14.9% to $102.9 million.
  • The company completed the acquisition of Royal, contributing to growth expectations.
  • Landfill volumes declined, but average price per ton increased by 7.1%.
  • Solid waste revenue grew by 17.3% due to price hikes.
  • Adjusted net income decreased to $15.9 million, impacted by higher expenses.
  • Net cash from operating activities and adjusted free cash flow both increased.
  • The company raised over $500 million in financing for future M&A activities.
  • Casella remains optimistic about 2025, with anticipated growth in EBITDA and free cash flow.

Company Outlook

  • Casella expects 12% to 15% growth in adjusted EBITDA for 2025.
  • Projected 10% to 15% growth in free cash flow for 2025, assuming no further acquisitions.
  • The company is focusing on smaller acquisitions while prioritizing recent integration efforts.
  • Anticipated improvements in margins due to operational efficiencies and internalization of waste.

Bearish Highlights

  • Challenges in the quarter included unusual events impacting EBITDA and lower landfill volumes.
  • Construction and demolition debris issues resulted in an EBITDA drag of $8 million to $10 million for the year.
  • Adjusted net income and GAAP net income were both down from the previous year.

Bullish Highlights

  • Margins increased in the collection and resource solutions segments.
  • The strong balance sheet with a net leverage ratio of 2.57x.
  • The acquisition of Royal Waste expected to improve EBITDA margins through operational enhancements.

Misses

  • Adjusted net income fell by $4.2 million year-over-year.
  • The company incurred an $8.5 million charge related to the Southbridge Landfill's closure.

Q&A Highlights

  • Insurance expense accruals due to two unusual incidents affected financials.
  • The company is managing cost inflation, which has been consistent at 4% to 5%.
  • M&A activity is a focus, with a robust pipeline valued at $600 million, and $1 billion available for smaller deals.
  • No significant additional competition is expected in the M&A landscape in the Northeast.

Casella Waste Systems continues to navigate a complex market landscape with strategic acquisitions and operational improvements. The company's solid waste revenue growth and increased EBITDA reflect a resilient business model, despite the challenges faced in landfill volumes and increased expenses. With a positive outlook for 2025 and a strong balance sheet, Casella is positioning itself for sustained growth and market leadership. The next earnings call is planned for February, where the company will discuss Q4 2024 results.

InvestingPro Insights

Casella Waste Systems' recent financial performance aligns with several key metrics and insights provided by InvestingPro. The company's revenue growth of 16.7% in Q3 2024 is consistent with InvestingPro data showing a robust revenue growth of 26.53% over the last twelve months. This growth trajectory is further supported by an InvestingPro Tip indicating that analysts anticipate sales growth in the current year.

The company's focus on acquisitions, such as the Royal Waste purchase, is reflected in its strong market position. With a market capitalization of $6.22 billion, Casella Waste Systems is trading at premium multiples across various metrics. InvestingPro data shows a P/E ratio of 299.52, which aligns with the InvestingPro Tip noting that the company is trading at a high earnings multiple. This valuation suggests investor confidence in Casella's growth prospects and market strategy.

Despite the challenges mentioned in the earnings report, such as lower landfill volumes and increased expenses, InvestingPro Tips highlight that Casella operates with a moderate level of debt and that its liquid assets exceed short-term obligations. This financial stability is crucial as the company navigates market fluctuations and continues its acquisition strategy.

For investors seeking a more comprehensive analysis, InvestingPro offers 13 additional tips for Casella Waste Systems, providing a deeper understanding of the company's financial health and market position.

It's worth noting that while Casella does not pay a dividend to shareholders, it has delivered a strong return over the last five years, as indicated by InvestingPro Tips. This aligns with the company's growth-focused strategy and reinvestment in operations and acquisitions.

As Casella Waste Systems looks ahead to 2025 with optimism, investors may find value in the additional insights and real-time data available through InvestingPro to make informed decisions about this dynamic player in the waste management industry.

Full transcript - Casella Waste Systems Inc (CWST) Q3 2024:

Operator: Welcome to the 2024 Third Quarter Casella Waste Systems Conference Call. At this time, all participants are in a listen-only mode. After the speakers' 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 today, Charlie Wohlhuter, Director of Investor Relations. Please go ahead.

Charlie Wohlhuter: All right. Thank you, Marvin. Good morning and thank you for joining us today. We'll be discussing our third quarter 2024 results, which were released yesterday afternoon. Here with me today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems Ned Coletta, our President Brad Helgeson, our Chief Financial Officer and Sean Steves, our Senior Vice President and Chief Operating Officer of Solid Waste Operations. After a review of these results and an update on the company's activities and business environment, we will be happy to take your questions. But first, please be aware 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 recently filed Form 10-K and Form 10-Q, which are 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 in 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, October 31, 2024. Also during this call, we'll 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 included in our press release filed on Form 8-K with the SEC. And with that, I will now turn the call over to John Casella to begin today's discussion.

John Casella: Thanks, Charlie. Good morning, everyone, and welcome to our third quarter 2024 conference call. Once again, it was a busy, but very exciting quarter as we continue to execute against our strategic growth plan. I will review these highlights and provide comments on our results. Brad and Ned will then discuss details on the financials and our strategies. As we announced in our press release last night, we recently completed our 6th acquisition of the year closing Royal on October 1. This is a company that we've known and respected for decades. They are focused on delivering excellent customer service, taking care of their team and supporting their local communities are admirable and aligned with how we operate. I'd like to welcome all of our new team members to Casella and look forward to serving our new customers with the same outstanding customer service that has helped make Royal successful for nearly 70 years. As always our initial focus is on integration, which I'm happy to share is going well at the 3 larger acquisitions we completed this year LMR, Whitetail and now Royal. With nearly 5,000 employees, I'm very excited about what the future holds. Shifting to our results for the third quarter. Revenue topped $400 million while we generated over $100 million of adjusted EBITDA for the first time in a quarter. These achievements reflect the power of the hard work at all levels and underscore the strong foundation of our company. Beginning with our landfills, volumes were down year-over-year, C&D tons remain the driver for almost the entire decline. Special waste was down marginally and MSW tonnages were mostly flat in the quarter. While this is presented a recent headwind, our strategy has not changed as we remain dedicated to preserving our valuable airspace for the long term. To this point, our average price per ton at our landfill increased over 7% year-over-year. And just recently we received support from the State of Maine on the expansion of our Jupiter Ridge Landfill. This is a critical asset for the communities in Maine and will continue to provide a dedicated disposal outlook. Moving to the collection side, I am especially happy to report the strategic investments in our frontline operations are making positive impacts. Adjusted EBITDA margins were up 130 basis points in the quarter on same-store basis. This is impressive and a testament to the strong operating program Sean Steves and his team have developed with plans for continued automation, automated truck conversions, rollout of onboard computers and leveraging Power BI tools, we see further opportunities across our base business and acquisitions for more value creation. These benefits also flow through to our recruiting efforts, employee safety and turnover trends as well. In some cases, these are at the best levels in the company's recorded history. Applications are strong in both TRIR and turnover rates are moving lower. In Resource Solutions, we also posted strong results across both adjusted EBITDA growth and margins. On a same-store basis margins were up 90 basis points year-over-year in the quarter. We worked very hard at making strategic investments that answer the demand for sustainable solutions while generating strong returns and the broad based strength in the results shows it. Beginning with our MRF results benefit from higher commodity prices. This provided a tailwind to our performance. However, this was only part of our success. The equipment upgrades at certain facilities have increased productivity, throughput and safety levels, while material recovery and quality have also improved. Our Boston MRF is a great example for how technology can enhance our operations and is a blueprint we are applying to other facilities namely our Willamette facility. This facility is offline now, but is expected to be up and running early next year. Our national accounts business remains strong and it's a very strong area of growth. We won new commercial, municipal, industrial businesses in the quarter and now entry into the Hudson (NYSE:HUD) Valley with Royal provides opportunity to target commercial and institutional customers with a focus on sustainability much like our strategy in the Mid-Atlantic. Speaking of sustainability in late September, we published our 2024 Sustainability Report highlighting our vision and achievements in creating and sharing value with the customers and communities that we serve. Our sustainability strategy is deeply rooted in our company from building our first MRF in the state of Vermont back in 1977 to further investments across our MRF network, our Resource Solutions segment is one part of our focus. The other key areas are the resources we are devoting to our people and safety, training, recruitment and retention. These investments support the backbone of our company and allow us to better serve our customers and communities. Finally, I'd like to emphasize the solid waste results our team has delivered. The strength of our base business positions us very well as I look forward and the recent acquisitions we completed add to this foundation and looking forward to a strong finish in 2024 and a set up for 2025 and beyond. The outlook is very promising giving the opportunities in front of us and our continued potential to grow the business. I will now pass it on to Brad to walk through the details from a financial standpoint.

Brad Helgeson: Thanks, John and good morning, everyone. Revenues in the Q3 were $411.6 million up $58.9 million or 16.7% year-over-year with $37.5 million from acquisitions including rollover and $21.3 million from organic growth or 6%. Solid waste revenues were up 17.3% year-over-year with acquisition growth of 13%, price up 5.5% and volumes down 1%. Within solid waste, price in the collection line of business was up 6.1% and volume down 0.7%. In the front load commercial business, price was up 7.5% and volume up 1.7% while volume declines in the quarter were concentrated in residential and roll off as we work to improve the quality of revenue and margins in those businesses. Revenues in the disposal line of business were up 1.7% year-over-year with transfer revenue up 3.6% and landfill revenue down 1.5%. Landfill price growth of 4.6% was offset by lower volume of 6.1% in revenue terms. MSW tons into the landfills were essentially flat in the quarter year to date but we saw continued weakness in C&D tons down 16% year-over-year. As we have discussed, the C&D market is currently under pressure with the impending closure of landfill site in the Metro New York market. We expect this dynamic to continue through the end of the year, but it should abate in 2025. The average price per ton at the landfills was up 7.1% year-over-year reflecting a mix shift away from lower price streams as we held the line on price in the face of volume pressure and prioritize preserving our valuable airspace. Resource Solutions revenues were up 14.5% year-over-year with recycling and other processing revenue up 25.8% and national accounts up 8%. Within processing operations price was up 7% driven by an increase of over 60% in average commodity revenue over Q3 last year. Of course, most of the benefit of these higher commodity price is shared with our customers under our contract structures which were designed to mitigate risk. So the net benefit to our revenue was only $1.6 million in the quarter. We expect favorable year-over-year price comps to continue through year-end as recycled commodity markets remain firm and current prices are well above last year. Processing volume was up 13.9% with higher recycling volumes benefited by production enhancements at the Boston MRF. Within national accounts revenue, price was up 1.1% and volume was up 7.2%. Acquisitions contributed 1.8% across the Resource Solutions segment. Adjusted EBITDA was $102.9 million in the quarter, up $13.3 million or 14.9% year-over-year with $9.3 million from acquisitions including rollover and $4 million from organic growth. Adjusted EBITDA margins were 25% in the quarter, down 40 basis points year-over-year. Bridging the year-over-year change in EBITDA margin, a few specific headwinds drove the decline in the quarter. As noted in our press release, we incurred over $3 million of expense in the quarter related to 2 discrete insurance events which impacted margins by 80 basis points. Insurance events are part of our ongoing business, so we don't treat these as adjusted EBITDA add-backs, but the magnitude of these two events was certainly unusual and had a material impact on the quarter. In addition lower year-over-year volume at the landfills, particularly C&D materials as we discussed continued to weigh on results and impacted margins by another 30 basis points in the quarter. Rest of our business performed well and in line with plan. Our pricing programs continue to outpace inflation and we benefited again from ongoing cost efficiencies in the collection business. On a same-store basis, adjusted EBITDA margins in the collection and resource solutions line of business were up 130 and 90 basis points respectively. So the underlying margin trend in our base business remains strong. The year-over-year benefit of higher production at the Boston Merck was essentially offset in the quarter by the shutdown of the Willimantic Merck for the retrofit and upgrade of that facility. We look forward to having both facilities operating at new higher levels of production in early 2025. Acquisitions were net neutral to the quarter on consolidated margins. Cost of operations were $267.1 million in the quarter, up $40.8 million year-over-year with $25.8 million of the increase from acquisitions and $15 million in the base business. Excluding the impact of large insurance events that I mentioned, cost of operations were down 40 basis points in the quarter in the base business. Adjusted net income was $15.9 million in the quarter, down $4.2 million compared to prior year with the accelerated amortization of identifiable intangibles associated with recent acquisitions and higher net interest expense weighing on earnings. Intangible amortization was up $3.9 million year-over-year, while excess cash balances related to the company's financing activities in Q2 2023 resulted in higher interest income in the prior year period. GAAP net income was $5.8 million in the quarter, down $12.4 million compared to prior year driven by an $8.5 million closure charge at the Southbridge Landfill as well as higher D&A and acquisition-related expenses. The Southbridge charge resulted from the revision of accrued post-closure costs following the receipt of requirements contained in the final closure permit including increased well monitoring and testing for emerging contaminants. These requirements were more onerous than previously expected and could not have been reasonably estimated prior to receipt of the final permit, which represented the official closure of the site and transition to the post-closure period. Our effective book tax rate was 44.6% in the quarter and is projected at approximately 42% for the full year as certain non-deductible expenses and discrete items push the rate above our statutory rate of approximately 27% including state taxes. The reason this effective rate is higher than previous years is that a reduction in forecasted GAAP net income for 2024 driven by the items I mentioned magnifies the impact of permanent differences and discrete items on the rate. As a reminder, we expect to pay approximately $5 million in cash taxes this year. Net cash provided by operating activities was $171.6 million for the first 9 months of 2024, up $13.8 million year-over-year. This increase was primarily driven by EBITDA growth and came notwithstanding higher cash outflows from net changes in assets and liabilities in the first half. Adjusted free cash flow was $98.8 million in the first 9 months, up $4.4 million year-over-year with stronger operating cash flow partially offset by higher capital expenditures. As we announced in September, we completed two important financing transactions in Q3 raising over $500 million in equity and extending and upsizing our senior credit facility to $1.5 billion including increasing our revolver from $300 million to $700 million. These financings position us well for continuing to execute on our M&A and growth investment strategies. As of September 30, we had $1.1 billion of debt and $519 million of cash and our consolidated net leverage ratio for purposes of our bank covenants was 2.57x. We closed on the acquisition of Royal on October 1 and pro forma for that transaction our bank covenant leverage was less than 2.5x and we still have approximately $1 billion of potential financing capacity between excess cash and undrawn revolver. As we announced in our press release yesterday, we reaffirmed our guidance ranges for revenue, adjusted EBITDA, cash flow from operations and adjusted free cash flow for 2024 and revised our guidance range for GAAP net income primarily to reflect the Southbridge Landfill closure charge. With acquisitions close to date including Royal, we now expect to be at the high end of our guidance range for revenue. However, for adjusted EBITDA contribution of one quarter of Royal will be roughly offset by the unexpected insurance charges in Q3 that I mentioned keeping anticipated results within the existing guidance ranges. Looking ahead to 2025, we are excited for another year of strong growth across revenue, adjusted EBITDA and cash flow. As you build your models for next year, we expect approximately $125 million of rollover acquisition revenue primarily from Royal, Whitetail and LMR. In the base business, we anticipate tailwinds from solid waste pricing of approximately 5%, improved landfill volumes year-over-year, the completion of the Willimantic MRF retrofit and continued benefits from our operating programs and acquisition synergies driving margin improvement across all lines of business. Taking all this into account, we expect growth in the range of 12% to 15% on adjusted EBITDA and adjusted free cash flow growth in our long-term range of 10% to 15%. Of course, this outlook assumes no further acquisition activity. And with that, I'll turn it over to Ned.

Ned Coletta: Thanks, Brett. Good morning, everyone. As John said, we had another busy quarter with further execution against our growth strategy. With the purchase of Royal Carting on October 1, we completed our 6th acquisition year to date, bringing total acquired revenues to over $200 million on an annualized basis. We remain selective with our acquisitions focusing on opportunities to have the right cultural and the right strategic fit. We're excited to welcome the Royal team to Casella and believe that this adjacent market presents a unique opportunity to drive landfill internalization and organic sales growth. The early stages of integration are going well with efforts to integrate the back office sales and operations progressing according to our plans. From an operating perspective, we continue to execute well against our core programs, including automated truck conversions, route optimizations and extra revenues generated through our onboard computing capacity. These efforts continue to boost safety, operating and financial performance. Our recent acquisitions all present great opportunities to apply these same successful programs. Given the lingering softness in special waste and C&D landfill volumes, we focused efforts over the last several months on increasing landfill internalization across both newly acquired markets and markets entered over the last few years. Along this vein, we have purchased additional long haul trucks and trailers and have established new transportation lanes from 4 markets to our New York landfills. With these moves, we expect to drive an incremental 120,000 tons per year of internalization. We are working on additional opportunities for 2025. Turning to our development projects. The first phase of investment in our rail served McKean, Pennsylvania landfill is now complete. To date, we have received over 50 railcars and 6,400 tons of waste at McKean, allowing us to test equipment and processes. We are very excited about the future promise of the site. Currently, our infrastructure includes a gantry crane to offload boxes and over a mile of rail spur. We can offload roughly 5,000 tons per day of containerized solid waste, sludges and special waste asset site. As previously discussed, this site provides a great long term risk management to preserve our flexibility in the disposal constrained Northeast. As such, this won't be a meaningful driver of near-term volume growth and the site will be operated under the same return-driven focus that we apply across all opportunities. As Brad mentioned, during the Q3, we began the full technology upgrade at the Willamette, Connecticut recycling facility and we expect to have the project completed by the Q1 of 2025. Taking the site offline is a negative drag for the second half of 2024. However, we expect the project to generate roughly $4 million of EBITDA in 2025. We continue to evaluate other opportunities to advance our circularity infrastructure. The RNG projects being developed by our partners are also progressing, albeit slowly. The RNG facility at our Juniper Ridge Landfill finally came online in the third quarter. Looking ahead, the 3 Waga-led projects continue to advance with commercial operations expected to begin in late 2025. As a reminder, we have invested $0 in these projects and are receiving a royalty payment from the sale of gas and RINs, which we believe is the most appropriate risk-mitigating path for us. As we look ahead to late 2024 and into 2025, our M&A pipeline continues to be very active with roughly $600 million of revenues across a number of excellent opportunities in various stages of diligence. The strength of our balance sheet and our robust liquidity positions us well for continued return-focused growth. With that, I'd like to turn it back over to the operator for questions. Thank you.

Operator: Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Trevor Romeo of William Blair. Your line is now open.

Trevor Romeo: First one, I was just wanted to ask for a progress update on some of the landfill development and expansion initiatives. John, I think you mentioned the Juniper Ridge Landfill. Good to hear you received some support from the state there. Just wondering if you had thoughts on kind of the size and expansion of what the timeline could look like there? And then on McKean, thanks for the update there towards the end. Just curious how that ramp could look like for tons as we head into 2025 and beyond?

John Casella: The Juniper Ridge facility received its public benefits permit from Maine and that's a very significant permit very positive in terms of being able to provide additional capacity for a number of years. Keep in mind it's not necessarily to expand the facility in terms of total tons. It's really to bring the facility out for the next 10 years. So that capacity is really well received and it's going to give us the ability to continue to provide those services to all of our main customers both commercial as well as municipal. So it's a great step in the right direction now. It's walking through the technical reviews of the additional permits that we need to go to an operating mode. So very positive move, great job by the entire team there. Our McKean facility as Ned said in his opening statement, we really begun to shake it down. We've limited amount of tons 1,000 under 10,000 tons into the facility, but that's hundreds of containers and really it's given the team the opportunity to go through test everything run and really begin to shake down the entire facility and really give our people real experience from a rail perspective. So again exciting facility in place ready to go. But it's really we don't anticipate a significant ramp up early in the process. As Ned said, it will be more on the basis of need and as pricing continues to move in a positive direction.

Ned Coletta: Yes. And two other kind of positive points there. Today, we have 3 rail-served transfer stations that they're moving waste to other sites. We'll look to transition those over time to McKean as appropriate. We've also brought on a really talented rail logistics professional on to his team, someone who has over 25 years of experience that's helping us to work through the ramp up there and siting an additional rail transfer station in the appropriate market kind of Southern New Hampshire, Northern Mass markets where we'll have needs over time. So this is a long term strategy. We're excited about where we sit right now. But the team is coming together and it's really progressing right where we want it to be.

Trevor Romeo: And then just wanted to ask for maybe a little more detail on the Royal acquisition, one from a strategic perspective, can you just talk about the importance of extending into the Middle and Lower Hudson Valley? And then from a financial perspective, just any thoughts on kind of the EBITDA you'd expect on that $90 million of revenue and any synergy potential? Thanks.

John Casella: Yes. I will give you a little bit of perspective with regard to the strategic piece of Royal. Royal has been a small customer of ours for 30 years. We have had a relationship with them for 30 years. It's a spectacular company driven by the Panichi family and in place for 70 years really an exciting opportunity for Casella in Westchester, Dutchess County great market area very, very exciting a great opportunity for us to advance our resource solutions offerings to all of those companies both industrial, commercial, colleges and universities, medical centers in terms of helping them meet their sustainability goals. So it's a very exciting it's an area that we had no presence from a hauling standpoint. We did as I said take a little bit of waste from their transfer stations, but obviously, now we will have the opportunity to internalize a lot more of it. So, and there is significant relationships from a strategic standpoint with the county which we will continue as well. So it's strategically just a terrific fit. We're excited to have the entire team come on board. Very similar culture in terms of taking care of their people. The Panichi family really did a very great job of taking care of their people and obviously the communities that they served as well. Can you walk through some of the financials Ned?

Ned Coletta: On the financial side, it's kind of like a mid-teens EBITDA margin company. From our vantage point though as John said, there's a few things we can do over the course of 2 years to drive it to a mid-20s-percent margin company. And one is just focusing on core operating programs, the stuff we do great route optimization, onboard computing, automation. Yes. There's some really great opportunities there.

John Casella: A little more work for Sean.

Ned Coletta: A little more work for Sean. And then the other thing as John mentioned landfill internalization, we've got a game plan to move about a quarter of the tons that they generate into our sites over the next year plus and that will be some real great value creation over that time period. Longer term, probably opportunity to internalize more, but in the near term about a quarter of the way. So these adjacent markets are excellent because we weren't there. We get that great internalization benefit, extends our footprint. And also from a sales standpoint, we've got a great playbook with larger institutional industrial customers that we think can create a lot of value.

John Casella: That’s a great group of talented employees that all really come on board with us and just really a very exciting transaction.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Tyler Brown of Raymond James. Your line is now open.

Tyler Brown: Hey, Brad, I think you did a good job explaining the guide, but I just want to kind of be crystal clear. So effectively the slightly weaker Q3, again, we had these insurance accruals that were maybe unexpected largely offset the Royal deal. So for all intents and purposes that is why the guide really doesn't change, just to be clear.

Brad Helgeson: Yes, that's right. Just netting the two together it just didn't result in a significant enough move to adjust the guidance range either way. But yes, essentially that's the punch line.

Tyler Brown: Okay. That's fair and helpful. I want to come back to the C&D issues. I know that these are not new. I think you mentioned it was a $2 million headwind in the quarter. I think it's been a headwind basically all year. So has that been as much as an $8 million to $10 million EBITDA drag? And does that site close on 12/31? And I get that you probably won't get it all back in year one, but won't that be a positive delta into next year or should be?

Ned Coletta: Yes. This has been a pretty significant drag throughout the year, Tyler. I mean, we're down close to 150,000 tons year to date on C&D and this isn't like the construction demo market has weakened or something has permanently changed. As you laid out, there's a site on Long Island Brookhaven Landfill that's going to be permanently closed on 12/31/24. They're in the final stages where you need the volumes and the site to grade shape get it permanently closed. So the market will resolve coming into 2025. We're really confident as I talked about in my comments. We're also it's been hyper-focused and just making sure internalization is where it needs to be. We have the right transportation lanes. When our third-party vendors can't support those lanes, we've been buying trucks and trailers and putting assets on the ground. And I think we probably should have focused on that a little bit more earlier in the year and pushing faster and harder. We pushed throughout the summer to do that, to also help with some of that headwind we've had. I don't think it's like a light switch on January 1, but we've seen the progress of getting back some of those construction and demo tons even now into the Q4. Some of our really great long term customers from the New York market who had a nice opportunity to go out to Long Island over the last year and have a good price reduction as the site was getting closed. We've been talking to them. They're slowly starting to ramp tons back to us into the Q4. So we expect some positives there in coming into next year.

Tyler Brown: Okay. No, super helpful. And I know you guys are going to put obviously a much finer point on ‘25, call it 90 days. But there are a lot of moving pieces here. So if I just think through some of these, I mean, you've got organic growth, you've got Willimantic that goes from a negative to a positive. We just talked about C&D. Maybe McKean ramps up, though that's somewhat debatable. It sounds like you've got internalization opportunities. These insurance accruals don't recur. You got a big rollover impact of M&A. So there's a lot of things going on. I mean are some of those the key pieces to the bridge or is there anything else that I should be thinking about?

Brad Helgeson: Tyler, it's Brad. You hit on a lot of the key drivers. I mean the way we think ‘25 is shaping up over ‘24. There's a lot that's lining up to position us well on a year-over-year basis and the biggest one is what you and Ned were just talking about is landfill volumes in that market returning to some form of normalcy. So the way I would think about it is kind of everything you talked about is encompassed in the high-level of EBITDA guidance that we gave. We're of course in our budget process right now. So we're going to work through that over the next month or two and going to have a much more refined view when we talk again in February but we're feeling good about the year.

Tyler Brown: Yes. Okay, perfect. My last one here Ned, can you kind of go back over all the internalization numbers? So I thought you said that you are buying some long haul tractors for something like 100,000, 125,000 tons via truck. But then you also mentioned that you've got 3 rail serve transfer stations that are sending waste elsewhere. So can you kind of just talk big picture because this could be a big and that's not I know it's probably not just a ‘25, it's a multi-year story. But can you just talk a little bit more about that and just maybe again put a little more shape around it? Thank you.

Ned Coletta: Yes. Sure. So we have bought additional tractors and trailers and we've established 4 new transportation lanes to hit our New York landfills from some major population centers where we weren't moving enough waste to internalize think Rochester, Buffalo, Capital District. So that's ramping up as we speak into the Q4 and will be a positive benefit into next year. And as I also said, we do have 3 rail transfer stations today. We haven't flipped the switch and moved those tons to McKean yet. We will do some of that over time. But we are more focused on moving MSW and sludges into McKean. A lot of what's leaving via rail today from Casella's construction and demo debris and we feel like there are better outlets in other locations for that. So we're more focused on moving containerized MSW and special waste and sludges to McKean. We think that's a higher value creation over the long term for the site. So that's why you haven't seen us just go out and move those transfer stations to date that they're moving today to Ohio landfills that their effective T&D rates and it makes sense today. We will be looking at those sites and at potentially a new site as well to really start moving some of that containerized MSW in the next year to year plus.

Operator: Thank you. We'll open for next question. Our next question comes from the line of Adam Bubes of Goldman Sachs. Your line is now open.

Adam Bubes: I was wondering if you could just provide a little more color on the insurance expense accruals related to the 2 discrete events. What is that exactly related to? And does that roll off next quarter?

Ned Coletta: Yes. So we had a really tragic accident in one of our transfer stations where a third-party truck hit one of our employees and caused some pretty significant injuries to our employee. He's alive. He's recovering. But with a workers' comp incident like this, we got hit with a full accrual even though much of this will be subrogated back over time to that third-party's insurance provider. So really unfortunate in many ways. We're just thankful that our employee is on demand and has a fight ahead of him, but is on the mend. The other is just kind of almost one part insurance, one part legal where we had at a third-party transfer station municipality unloading a truck bumped such truck into a third-party. That third-party was injured and we had to pick up a large accrual this quarter associated with that that we always thought was a GL claim and it's turning out to be an auto claim. So there's just two like really unusual claims that don't fit within the normal accruals of what we look at and they hit us unexpectedly in the quarter that's not something we normally would see.

John Casella: And just to finish off to your question about this is one time. There's a potential that the accrual could change up or down in the future, but this is our best estimate as of today.

Adam Bubes: Got it. Understood and hoping for the best for everyone involved there. And then on the 2025 outlook, there's a lot of moving pieces in terms of the margin bridge shifting from bad guys to good guys when you think about Willimantic, Leachate headwinds this year, C&D volumes potentially returning. How are you thinking about the early puts and takes on potential for an outsized 2025 margin expansion year?

Brad Helgeson: Yes. I think thematically you're thinking about it the right way. I think it's premature for us to put a finer point on the margin bridge. But because of the things you mentioned, our expectation is that likely 2025 is looking like above trend in terms of margin expansion given the headwinds that we face this year.

Q – Adam Bubes: Got it. And then last one from me, really high level of M&A contribution flowing through the portfolio. Great to see that level of growth. Is it prudent to expect a pause here in M&A spend over the next couple of quarters as you integrate over $200 million annualized revenues acquired this year?

Ned Coletta: It's always opportunistic. So we have a number of transactions that we've been working to develop over years and a few of them continue to move through the pipeline, not larger, but smaller tuck-ins that will fit very well into existing markets, especially into the Mid-Atlantic. So I think you should expect to see over the next 6 months a continued focus on some tuck-ins and just real accretive value. Our team is hyper focused on integration work though. That's where the money is made and that's the most important part and we've added some great select resources to help us expand our capacity to do integration work more effectively, more rapidly. So we are focused in that area. I wouldn't say it's a full pause on acquisitions, because there's definitely deals that are in the pipeline that continue to kind of move along.

John Casella: I think it's fair to say though that for the Q4 certainly a significant effort from an integration standpoint and only doing what is necessary for those transactions that are in the pipeline to continue to move them. But certainly from now through the end of the year, a real focus on the integration of the businesses that we've bought in 2024.

Operator: Our next question comes from the line of Timna Tanners of Wolfe Research. Your line is now open.

Timna Tanners: I wanted to follow-up on the M&A discussion. I thought I heard in your preliminary remarks that you had by Carter, sounded like you were implying up to $1 billion or so, I want to check-in that. If that were the case, would that be an amount up to which you wouldn't need to tap debt or equity markets to do any of those tuck-ins or other deals up to that amount?

Brad Helgeson: Yes. The $1 billion was just the excess cash that we have on the balance sheet. So following the acquisition of Royal, we have about $300 million left sitting on the balance sheet. We upsized our revolver as I mentioned and as we announced. So that's $700 million. So $300 million plus $700 million is the total between those two. That isn't taking into account potential available liquidity given pro form a leverage. Obviously, that assumes that we would exhaust all of that liquidity without wouldn't necessarily be our approach. So, really it was just a kind of an overall sense for how much room we have.

Timna Tanners: Okay. But is it safe to say that some of the smaller deals you would be able to absorb pretty easily then with your available liquidity? I didn't want to assume too much there.

Brad Helgeson: Yes, absolutely.

John Casella: Yes, absolutely. No question.

Timna Tanners: Okay. Helpful. And then also along those lines, I know a lot has been said about the election. I don't want to beat it dead horse there. But I think with regard to M&A, there's some thought that there may be some ease in FTC approach or replacement of that head. Is there has that changed much for you all in terms of how you look at M&A? Has that been a constraint?

John Casella: I don't think that it's going to change much. I mean I think the real question is whether in terms of what direction it goes and if there are significant issues from a tax standpoint it could have an impact from an M&A standpoint in terms of people's behavior. But from our perspective it's not going to change much. I think the opportunities that we have, the things that we have been working on, keep in mind some of the development work that we are doing from an M&A standpoint goes on for a year or so before we're doing something from an M&A standpoint. So constantly building relationships, constantly talking with people. So our activity is not going to change but behavior may be impacted in terms of which way the election goes.

Ned Coletta: And bonus depreciation stepping down is a real impact to M&A and it has been. And I think as you're aware, Timna, we've been really effective on how we've bought companies. We've been able unlike Royal, for instance, it was an F-reorg, which we bought the stock of the company, but able to get asset treatment, step up basis, shield a lot of taxes. So we've been really effective on how we bought things. But stepping down next year from 60% bonus to 40% changes to NPV value of the tax assets and brings in multiples for M&A. So I think that might be one way if the election plays out one way or the other that you could see M&A accelerate or maybe stay around the same levels.

Operator: Our next question comes from the line of Stephanie Moore of Jefferies. Your line is now open.

Stephanie Moore: I wanted to touch a little bit about the synergy realization from prior deals, maybe specifically if you wanted to touch on some of the deals last year, GSL and Twin Bridges, and then kind of what you've seen early on from the synergy capture or potential for synergy capture from deals announced this year. Thank you.

Ned Coletta: So Twin Bridges, we are ahead of plan. We've had a really great job of capturing synergies both with collapsing routes and taking trucks off the road and also advancing some landfill internalization and collapsing facilities as well. We've been able to reduce the number of total facilities by two over the last year. So we're well ahead of our plans and achieved every synergy in our model already. The Mid-Atlantic assets we acquired from GFL were behind our plans there and kind of netting neutral between the two and our biggest negative there being behind was just the complexity of the transition services. It's hard to buy assets out of another company. And we didn't have enough visibility on our revenue book of business, collections associated with that and the like. Everything is on our systems now and we have much better data visibility and we're back to executing the plan and growing the business. So those 2, we're going to capture synergies in the Mid-Atlantic and there's a lot of work to be done there. The other thing I'd point to in the Mid-Atlantic and we had said this all along that automating trucks and moving from old rear loads to automated side load trucks is like a 5-year or 6-year run for us where we have a lot of work to do over 200 trucks. And this year, our truck deliveries have been pretty significantly delayed. We primarily buy from Mack and Kenworth. And we have about, let's say, 30% of our truck deliveries have been delayed and might push into next year and a number of those were in the Mid-Atlantic as well, which has weighed on us getting some of those early synergy benefits and automation in that market. It's a little early with LMR, Whitetail and, of course, Royal, but the teams are executing very well on the ground in each of those acquisitions. The former owners have been extremely gracious, are working very, very hard to complete integration work and help us to be successful. We couldn't be more thankful. And that's the most important part, making sure teams are secure, we maintain employees, customers are maintained and that transition goes well. So with each of those acquisitions, you got an A-plus effort by the former owners making sure things are stable and running well.

Stephanie Moore: Great. That's helpful color. And then I just had one follow-up on the 2025 high level guidance. I think you called out margin expansion across all lines of business. So if you think about the margin drivers for next year, clearly the pricing commentary looks strong. So we should see another year of pricing in excess of inflation and the benefit there. But what are the other major drivers as we think of next year? Thanks.

Brad Helgeson: Yes. It's the continued efforts of Sean and his team on reducing operating costs in the collection line of business. As both John and I commented in our prepared remarks, we are really seeing the as you kind of dig down to the next level below the consolidated numbers, we're seeing real benefits from those quarter after quarter in the collection line of business. Resource Solutions, of course, Willimantic, Murph coming back on, we talked about that, and really having both Willimantic and Boston firing on all cylinders pretty much from the beginning of 2025 that will be a nice margin tailwind. And again, maybe we're beating a dead horse here, but the real drag this year from a margin perspective has been the landfill business and specifically the C&D market. So with that, again, returning to some normalization, that should if we do nothing that should be a nice margin tailwind. So we see opportunity across all lines of business for margin expansion. This year it's really been 2 out of the 3 and next year we expect landfill to participate as well.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Brian Butler of Stifel. Your line is now open.

Brian Butler: The first one, can we go back to the landfill closure and kind of that happening at the end of this year? I mean that 150,000 tons you're down. I mean what would keep that from coming back I guess? Is there really any other place for that volume to go?

Ned Coletta: Well, a bit of it has gone to a competitive site on Long Island as well. Not to get too much into the weeds, but there's a little 2 private sites on Long Island Brookhaven the municipal site Brookhaven and their private site. And they've both been kind of battling it out over the last year with the closure of Brookhaven. So our expectation is vast majority of that waste returns to us in 2025. But some of it did go to the other private site.

John Casella: Yes, it would be 100% of it, but maybe 60%, 70% maybe.

Ned Coletta: Yes. But you're right. I mean, there aren't a lot of places to take it and we expect those flows to return to our landfill.

Brian Butler: And that 60%, 70% that maybe comments back, is that part of what's built into the 12% to 15% EBITDA growth for 25% I mean, how much is in there I guess, if any?

Brad Helgeson: Yes. That's encompassed in the 12% to 15% kind of high-level guidance. I mean, again, we are not at this point parsing through the specific growth associated with each driver, but that's reflected in the outlook overall.

Brian Butler: Okay. And then let's circle back again just on M&A. Maybe a little bit more color maybe on the $600 million pipeline. What's kind of the makeup from a deal perspective on size? And then maybe just your thoughts on how competitive has the M&A market been? I mean, this has been a huge year in 2024. Is that carrying into 2025?

Ned Coletta: Yes. So if we look at our pipeline, there's a great mix between sub-$21 million revenue companies that are really nice tuck-ins to existing markets or adjacencies. There's a lot of focus there. And then there's a handful of adjacent markets that are a little bit larger like some of the transactions we've done over the last year. We continue to have a balance of party-to-party acquisitions where owners of companies we have direct discussions with and we come to a fair price and then some come through a banker-led process as well. So we're not it's probably less than 10% of our deals are coming through an auction process still. So we're really effective on The Street with the relationships that John's built over a lot of years. Another great pipeline for our growth is our National Accounts Group. So we've had a team for over 35 years that wins large multi-site commercial or retail or industrial customers. And some of them we service with our trucks, some we broker out to third parties. And those third-party companies that we do business with we get to know them over time. We form relationships and trust and it really helps with our pipeline development as well over time.

John Casella: Now, keep in mind that we stepped into the Mid-Atlantic which gives us a significant opportunity for additional tuck-ins throughout the entire Mid-Atlantic. And then stepping into Royal and Duchess and Westchester County, again additional opportunities to continue to grow around that market area both opportunities were new opportunities to Cassella in the last year. So exciting very exciting opportunities from a continued growth standpoint. As Ned said, some of those transactions are the $10 million, $15 million, $20 million, $30 million businesses that just will fit in very nicely and very exciting in terms of the future growth.

Brian Butler: And then last one for me just with the acquisition the post-acquisition development capital spending, does that come down in 25%, now that we are kind of through the GFL assets in the Twin Bridges?

Brad Helgeson: Well, it's a sort of thing where if we were to stop acquisition activity that it would naturally roll off and that's going to be, but the reality is, it's going to be a function of how active we are in deploying new capital. So it's no way of saying it's impossible to answer that, depends on how next year plays out from an acquisition standpoint.

Operator: Thank you. One moment for next question. [Operator Instructions] Our next question comes from the line of Michael Feniger of Bank of America. Your line is now open.

Michael Feniger: I'm just curious on some of the M&A. We've seen some public players announce some acquisitions in New York and the Northeast market as well. I'm just curious if you're seeing more out there in competition in terms of your M&A pipeline. Is it getting more competitive to these assets or on the flip side, is it are we seeing some more discipline out there as we are starting to see some more announcements of the Northeast market from some of the public peers?

John Casella: I think that from our perspective we don't anticipate any significant additional competitive activities. As Ned said, we a lot of the transactions there will be deals, the larger deals are going to be competitive, they always are with other public companies. But for the most part, I don't think that we would characterize the market currently as seeing significantly additional competitive no more so than what we have seen over the last year.

Michael Feniger: And just I am curious I know there is a lot of noise in moving parts. But I'm just curious what you're seeing for your underlying cost inflation in the third quarter as you move into the fourth quarter? Obviously, there's labor, there's a lot of moving pieces, but how you think that kind of sets up just bigger picture what the cost budget kind of looks like for 2025 and how you're thinking about some of the pricing to offset that? Thanks, everyone.

Brad Helgeson: Yes. The cost inflation this is Brad. The cost inflation has been stubborn, I would call it, over the course of this year. So in the Q3 consistent I think with year-to-date, we've been running in that 4% to 5% to sort of mid-4s as an average across our cost stack and kind of within that there are some areas where inflation remains a big issue and other areas where it's eased, but sort of that 4% to 5% is kind of overall. Looking ahead to next year, we certainly don't have a crystal ball, but we're budgeting assuming no easing. And so what we're going to have to do is continue to try and reduce costs in other ways and drive price.

Operator: Thank you. I'm showing no further questions at this time. I would now like to turn it back to John Casella for closing remarks.

John Casella: Thank you. Thanks everybody for joining us this morning. Hope you all have a safe and fun Halloween. Look forward to discussing our Q4 2024 earnings in February. Thanks everybody. Have a great day.

Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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