Casella Waste Systems, Inc. (NASDAQ:CWST) Q4 2022 Earnings Call Transcript

Casella Waste Systems, Inc. (NASDAQ:CWST) Q4 2022 Earnings Call Transcript February 17, 2023

Operator: Good day, and thank you for standing by. Welcome to the Casella Waste Systems, Incorporated’s Fourth Quarter 2022 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. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Charlie Wohlhuter, Director of Investor Relations. Please go ahead, sir.

Charlie Wohlhuter: Thank you, Norma, and thank you everyone for joining us this morning. 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 2022 full-year and fourth 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, but first, I remind everyone that various remarks that we may make about the company’s future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by 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. 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, to 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 Web site at ir.casella.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.

John Casella: Thanks, Charlie. Good morning, everyone, and welcome to our fourth quarter 2022 conference call. This was a great year for our company marked by strong execution during a period of historically high inflation, volatile recycling commodity market. I’d like to spend a few minutes highlighting our performance in ’22, and our forward look to ’23, and our strategies. Ned will provide some color on the quarter. I’d like begin by saying that I’m extremely proud of the performance at all levels of the company during the year. Our entire team stepped up and executed well against our key strategies, which led us to achievement of several notable milestones. In the year, we surpassed $1 billion in revenue, and also generated over $100 million in adjusted free cash flow for the first time in the company’s history.

This reflects the focus and determination of our culture that our employees demonstrate every day in carry forward into 2023. Looking more closely at 2022, strong operating and pricing programs worked well to offset inflation. We grew revenues by 22%, adjusted EBITDA by nearly 21%. I’m also proud of our continued capital discipline and execution against our growth strategies which helped drive adjusted free cash flow growth of approximately 17% in the year, exceeding our long-term 2024 plan of 10% to 15% growth per year. We laid out our 2024 plan last year. We set a target to optimistically grow revenues by $30 million or more per year through acquisitions or development activity. In 2022, we outperformed the goal and acquired 14 businesses with roughly $51 million of annualized revenues.

We currently have two potential acquisitions under LOI that we expect to close by some time in the second quarter, with total annual revenues of approximately $30 million. This reflects the continued strength of our acquisition pipeline. As I look to 2023, we remain well-positioned to continue to grow the business in a disciplined manner while generating strong returns. With a strong balance sheet, low leverage, and ample liquidity, we’re in excellent position to support the further growth in our business. In terms of the base business, the fundamentals are strong. However, in the fourth quarter, we experienced a headwind from commodities that were slightly greater than anticipated. This was mainly driven by several recycling contracts that we have acquired through acquisitions over the last couple of years, which do not yet have our modern risk mitigation features.

Over time, as these contracts reset, we intend to incorporate these mechanisms. As it relates to early 2023, we have rolled out another robust pricing program for the year to stay ahead of inflation. I’d now like to provide a brief review related to the execution against a few of our key strategies and the performance of our operations. We remain focused on improving the returns at our landfills through a combination of operating programs, pricing ahead of inflation, and key permitting initiatives that support the future disposal capacity needs of our customers and in the markets in which we operate. Improving the mix of our inbound customers is a key area we are focused on. This year, it is measured through our average landfill price per ton statistic which is up 7.4% in the year, helping us offset wins from cost inflation and the heightened regulatory costs.

In addition to price, volume, and operational strategies we have in place, we’re excited to have two renewable natural gas operations coming online, in 2023, through partnerships with third parties. These facilities further enhance our sustainability profile and present no financial risk as our partners invested 100% of the RNG capital at our sites. We will benefit from the sharing of cash flows related to these projects. The first facility is expected to begin operations in the second quarter this year, followed by an anticipated start date at our second facility in the fourth quarter. Further, we are very excited about our McKean Landfill rail project; we received our wetlands permits and are moving forward with plans for rail service at the landfill beginning in 2024.

Photo by zibik on Unsplash

This rail-served site provides much needed long-term disposal outlet for our customers and for the Northeast. Moving on to the collections business, ’22 marked an exceptional year for Sean and his team from an operating standpoint, and for our collection line of business. We posted another strong year and exceeded our budgets in both adjusted EBITDA growth and margin expansion. Our flexible pricing and operating programs work well to offset inflation. As inflation began ramping early in 2022, we took quick action to address rising costs. We reported 7% collection price for the year. Our fuel cost recovery program worked well in the year and fully offset over $27 million of year-over-year increased fuel costs. This risk mitigation program is working as intended, but higher fuel costs did result in 40 basis points of margin headwind in the year.

Our ongoing investments across the collection fleet are making positive contributions to productivity. Replacing reload trucks with automated trucks and deploying onboard computers is driving value while improving safety and employee engagement. Nearly 50% of our addressable fleet is automated and equipped with computers. We expect that success of this operational strategy will continue as further investments are made in 2023. Resource Solutions, our business model is naturally — has a natural alignment to sustainability. We continue to create additional value for our stakeholders by having measurable goals that enhance our focus on areas such as safety, turnover, Resource Solutions tonnage, and so on. As our execution against these key metrics improve so does our performance as a company.

Last week, we closed on an amendment to our credit facility that links borrowing costs to progress in achieving our safety and Resource Solutions goals outlined in our recent Sustainability Report. The sustainability-linked loan further strengthens our accountability and our alignment to these areas. And our Resource Solutions segment is important to achieving these goals. Ongoing technological investments at our recycling facilities are aimed at improving safety, recovery quality, increasing throughput, and reducing labor. In 2022, we invested in and installed robotics and optical sorters at several of our facilities. Further, our most significant upgrade is taking place at our Boston facility which is one of the largest in the country. Over the last two or so years, we’ve invested approximately $20 million in new equipment and technology for this facility.

The plant will be offline for several months this year as we expect the installation to be completed by midyear 2023. And 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 on targeting acquisitions and pursuing development projects that have strong return profiles. Our pipeline remains very robust with over $500 million in revenues of identified opportunities across our existing operating footprint. We are currently in the late stages for several acquisitions and expect another year of strong activity. On the project development side, as I mentioned, in 2023, we are looking forward to RNG facilities coming online in addition to the finalization of equipment upgrade at our Boston recycling facility.

And on the heels of these projects, we expect our rail operations at our McKean landfill to be operational some time in 2024. Wrapping up, I’m proud of the success that we had in executing in 2022 against our key strategies. And we started 2023 on solid footing. The building blocks are in place for us to continue to drive value while growing the business. And with that, I’ll turn it over to Ned.

Ned Coletta: Thanks, John. I’d also like to start by thanking our team for a very strong year. We beat our plan for the year despite the challenging backdrop of the historically high inflation, the rapidly rising fuel costs, and the significant drop in commodity prices. Thank you, everyone. Moving on to the quarter, revenues in the fourth quarter were $272.1 million, up $30.3 million or 12.5% year-over-year, with 3.6% of the year-over-year change driven by acquisition activity, and the remaining 8.9% or $21.6 million of the year-over-year change resulting from organic growth. Solid waste revenues were up 13.2% year-over-year, with price up 6.2%, acquisition growth of 2.2%. Our fuel cost and recovery fees up 6.1% partially offset by 1% lower volumes.

.: Our solid waste pricing increased plus in the quarter up 12.3% in total adding the two categories together. Revenues in the collection line of business were up 16.5% year-over-year with price up 6.7% and volume slightly down. Revenues in the disposal line of business were up 7.6% year-over-year with price up 5.4% and volume slightly down. As John discussed, our landfill average price per ton was up 6.7% as we continue to improve mix at our sites. Resource Solutions revenues were up 10.6% year-over-year with 7.5% growth from acquisition, 6.9% volume growth, and 17% growth in processing fees and other price partially offset by lower commodities down 21.5%. Commodity prices or the average commodity revenue per ton was down 67% year-over-year on lower cardboard, mixed paper pricing, lower metal, and lower plastic pricing.

Commodity prices hit a high point in April of 2022, and then, significantly declined sequentially declined sequentially through the remainder of the year. Prices did stabilized December and now have risen into January. And they are up about $5 a ton sequentially from December to January, and are sitting ahead of our budget in the month of January. Adjusted EBITDA was $56.2 million in the quarter. Up $4.8 million or 9.3% year-over-year with $3.1 million of the growth driven by improvements in our base business and $1.7 million derived from the rollover impact of acquisitions completed. Given our strong performance in 2022, we had accrued a total of $2.5 million during the third and fourth quarters for special onetime bonus to all of our hourly frontline and back-office employees that worked hard to help us excel in this challenging environment.

This bonus was paid out in early December. Adjusted EBITDA margins were 20.7% in the quarter, down 60% basis points year-over-year. As we dig into that margin decline, it’s important to really look at the categories. As we look at it, we did cover our inflation with our pricing programs. Our solid waste price was up 6.2%, offset by a 5.4% headwind from inflation excluding fuel. Other margin increasing items include a 20 basis point improvement from our fuel recovery program due to timing differences. But then, we had a 90 basis point headwind from recycling commodity prices, A 45 basis point headwind from the special bonus that we just discussed, and a 20 basis point headwind from lower volumes. Solid waste adjusted EBITDA was $51.3 million in the quarter.

Up $7.6 million year-over-year with strength in both in the collection and disposal lines of business. Resource Solutions adjusted EBITDA was $4.6 million in the quarter. Down $3 million year-over-year with continued growth in industrial services business offset by lower performance in the recycling line of business. As John mentioned, our risk mitigating commodity programs including the SRAC for hauling customers and the processing fee or rebate structure or recycling facilities continue to work well and offset most of the significant drop in commodity prices. Unfortunately, these programs are not fully implemented in several of the markets that we have acquired over the last two years that had legacy contracts that did not allow us to pass recycling risk back to customers.

These markets accounted for over 80% of the year-over-year adjusted EBITDA decline. As of December 31st, we had $603.5 million of debt, $71.2 million of cash, liquidity of $337.2 million. Our consolidated net leverage ratio was 2.08 times. And our average cash interest rate was approximately 3.6%. Our balance sheet is in great shape and position us well to continue to grow while also providing stability in this rising interest rate environment with our fixed interest rates on approximately 73% of our debt, and our next major debt maturity, not until 2025. In recognition of our continued balance sheet improvements, we recently received one notch upgrades at both Standard & Poor’s and Moody’s. And also as announced last week, we completed two amendments to our credit agreement, including the early adoption of term SOFR to replace LIBOR as a benchmark rate.

And as John mentioned, we instituted the sustainability link loan feature to further align our long-term sustainability goals with enhancing shareholder value. Adjusted free cash flow was $111.2 million for fiscal year 2022, up $15.9 million, or close to 17% year-over-year, with higher capital expenditures more than offset by higher net cash provided by operating activities, mainly driven by improved operating performance and a small improvement in our changes in assets and liabilities versus last year. As stated in our press release, yesterday afternoon, we announced guidance for fiscal 2023. And those ranges are laid out in our press release. Our guidance ranges for the year assume a stable economic environment, continuing from the fourth quarter into the remainder of 2023.

In addition, our 2023 guidance includes $15.5 million of revenue growth from the rollover of acquisitions already completed in 2022. However, as we mentioned in our press release, we have two acquisition targets, with approximately $30 million of annualized revenues under Letter of Intent, and we expect to close on these transactions by the end of the second quarter. However, they are not included in our guidance for the year, and no other acquisitions are included in our guidance. Our pricing programs continue to increase sequentially from late 2022 into 2023. And we expect solid waste pricing of positive 6% to 7% in fiscal year 2023. We have already rolled out the vast majority of our plan pricing for 2023 and we have not experienced any meaningful pricing rollbacks and our solid waste price for the month of January was over 8%.

We believe that we’ve established appropriate pricing plan for 2023 that positions us well to offset inflationary headwinds, while still improving margins through our investments in technology and core operating programs. Our internal rate of inflation is currently running at 5.4% as I mentioned earlier. As discussed in previous quarters, if cost inflation increases further, we have great flexibility in advanced pricing increases and roughly 70% of our collection book of business. Overall, we expect adjusted EBITDA to be up 8.5% to 10.9% year-over-year in our guidance, with roughly 50 basis points of margin expansion. However, we do expect margins to be down slightly in the first-half of the year due to continued headwinds from recycling commodity prices.

We do expect margins to be up in the second-half of the year. We expect adjusted EBITDA growth to come in the following areas, the collection line of business up roughly $17 million to $20 million, disposal line of business up $10 million to $12 million, resource solutions down $2 million to $4 million, about $2.5 million of rollover benefit from acquisitions, and then some other kind of headwinds in the business due to cost increases of $5 million to $6 million. Overall, we expect adjusted free cash flow to be up about 10% at the midpoint of our guidance range for 2023. We expect very strong flow through from incremental EBITDA with a few cash flow headwinds, including cash interest of roughly $2.5 million year-over-year, cash taxes up roughly $3 million, closure up $7 million, as we cap at several active sites and roughly $3 million of headwinds as delays in certain capital expenditures shifted cash outflows into early 2023 from late 2022.

So in closing, our team did an incredible job in fiscal year 2022, accelerating cost efficiency programs to help moderate inflation, realigning pricing plans to offset heightened costs, and ensuring the eligible customers who are on our fuel cost recovery program and recycling risk management fees. We are well positioned to continue to execute in 2023 to grow our business through key strategic initiatives and drive long-term shareholder value. And with that, I’d like to turn it back to the operator for questions.

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Q&A Session

Operator: Thank you. And our first question comes from the line of Tyler Brown with Raymond James. Your line is now open.

Tyler Brown: Hey, good morning, guys. Can you hear me?

Ned Coletta: Good morning, Tyler.

John Casella: Good morning, Tyler. Yes, we can hear you.

Tyler Brown: Yes, okay, good, a little spotty on my cell service here. Just a quick clarification, were the special bonuses included in the guidance?

Ned Coletta: Yes, they were. So, that was something we knew about during — well, not the initial guidance to the year, but when we updated Q3, we knew about them.

Tyler Brown: Okay, just wanted to clarify that. Can we start a little bit with volume, so I think it was a little bit weak here, it sounded like there was some pull forward, you talk about 50 to 100 basis points of growth in ’23. Can you split that out between collection and disposal?

Ned Coletta: Yes, so if you look at the fourth quarter, we were — trends were weaker than we expected, and it was mainly at the landfills with tons, and in the roll-off line of business. Not much weakness anywhere else. And what’s interesting is that weakness in the fourth quarter, we had about volumes down $1.8 million through the fourth quarter in a dollarized basis. All of that decline was more than offset in the month of January. So, as you know, in the Northeast, sometimes we get some strange weather patterns, strange seasonality, and we just saw a period of weakness that we didn’t expect in the fourth quarter. But January bounced right back. So, nothing broader economic that we see, it’s just more of a slowing trend into the fourth quarter, and it’s a nice trend through late December through mid-February here. And then, Jason, you want to talk about next year?

Jason Mead: Yes, in terms of the breakup between collection and disposal, to your point, Tyler, and in 2023, our guide is for solid waste, 50 to 100 basis points for the full-year. And it’s pretty equivalent between both collection and disposal. So, as we continue advance price increases to stay ahead of inflation, we expect our volume gain — volume increases in 2023 to be quite modest across both lines of business, 50 to 100 basis points. But as Ned said, January was a strong one to start the year.

Tyler Brown: Yes. Okay, that’s helpful. And then maybe shifting over to price, I know you guys have a unique mix, very little CPI-tied revenue. Pricing has decelerated for a couple quarters, and your peers have kind of seen an acceleration. Again, I get it, you’re different. But just any comments on maybe — you kind of talked about it in the preamble, but maybe the shape of pricing, because it sounds like it’s going to accelerate up into Q1, and then maybe does it fall off as the rest of the year? Just how does that look through modeling perspective?

Ned Coletta: Yes, right now in our guidance, we have the first-half of the year at roughly 6.5% to 7% range, and the second-half of the year like 6% to 6.5%. But as I mentioned earlier, we went to straight with more price. And we haven’t seen significant rollbacks to date. I think as we look back to 2023, we pushed a lot more — I mean back to 2022, we pushed a lot more price in the February through June timeframe than we had planned to as inflation took off. And then we eased up a bit into later in the year. And we don’t have a lot of natural contracts at least set on to specific dates and have CPI-linked features, as you mentioned. So, it’s more of active pricing with our book of business. And I think where sat in the fourth quarter, we kind of sit there and look at our budget plans for the year.