Casella Waste Systems completed what it called "arguably the best year in the company’s history," with adjusted free cash flow growing by nearly 38% and results exceeding all aspects of a multiyear plan established in 2017.
Driving this, in part, was ongoing M&A activity for the Vermont-based company, which purchased 10 companies worth $88 million in annualized revenue last year at a cost of $170.65 million (net of cash acquired). So far this year it has acquired an additional five companies worth $4 million in revenue, for a collective revenue contribution of $55 million expected from the acquisitions in 2021 and to date.
During a Friday earnings call, CEO John Casella said elements of a new 2024 strategy include growing revenue by at least $30 million per year through acquisition or development opportunities (while keeping leverage low) and growing adjusted free cash flow by 10% to 15% per year. Other aspects of the new plan include increasing landfill returns, improving collection profitability, creating more value from resource solutions and strengthening "foundational pillars" such as the company's workforce, technology and facilities.
- While landfill tons were up 4.2% year over year, Chief Financial Officer Ned Coletta said these volumes were still down by about 300,000 tons from pre-pandemic levels, due in part to New York City's prolonged economic recovery. Solid waste pricing grew during the fourth quarter by 4.3%, with collection pricing up 4.8% and landfill pricing up 4% year over year.
- Casella calculated its own internal rate of inflation at roughly 4.1% and has already implemented the bulk of its price increases. Chief Operating Officer Ed Johnson said “customer pushback has been relatively muted." Coletta said the company is uniquely positioned for price flexibility, as about 70% of its collection business is in areas such as residential subscription, small commercial containers and temporary construction roll-off, rather than longer-term contracts.
- On the landfill side, Casella is working to have new capacity online at the rail-served McKean Landfill in Pennsylvania by late 2023 or early 2024. Casella is also awaiting state approval to more than double capacity at its Hyland Landfill in New York to 1 million tons per year.
Casella's annual earnings call served as an opportunity to outline its medium-term growth plans after coming out of a multiyear turnaround strategy. Executives said they expect further profitability in the years to come, citing efforts to build out the lower-margin transfer station business. They said this positions them to capture more high-margin landfill tons in the future.
"Everybody knows that disposal capacity is very limited and things are shifting. States like Massachusetts are looking to export all their waste. We're now down in Connecticut, they're struggling with their disposal plan," said Johnson, in reference to entering the latter market via last year's Willimantic Waste Paper acquisition. He added that these transfer station investments help to "strategically place ourselves in the market where the disposal crisis is."
The company's McKean site is seen as a key destination to take Northeast waste. Coletta said expanding the company's Hyland site was also especially strategic because another large landfill in the Buffalo market is set to close in the coming years. In anticipation of that, two of Casella's recent transfer station acquisitions have been in that market.
Amid multiple analyst questions about why landfill pricing couldn't be higher, given the scarcity of disposal assets, executives said average landfill pricing was up more than 6% in the fourth quarter and continues to rise this year, with further contract resets coming up.
“This is a long-term opportunity, and it’s not just a one-year opportunity, so this pricing is going to come for years into the future," said Coletta.
- Revenues for Casella's resource solutions segment, which includes recycling, grew to $235.1 million in 2021 due to higher commodity prices and other factors. Johnson said the company had seen notable growth in college and university customers over the past year that previously were less interested in paying for these services, with John Casella noting the same trend has been occurring among industrial customers.
- Casella is in the process of spending $18 million to upgrade its Boston MRF, one of the largest in the country, with robotics and other new equipment that will boost capacity by 35% while reducing labor costs. Like other large MRFs, this facility is predominantly staffed by a fluctuating, temporary workforce. The company is also deploying another $1 million worth of robotics projects elsewhere, it said.
- In addition, the company is pursuing renewable natural gas projects at two of its landfills, with third parties making the capital investments and Casella receiving royalty payments.
- Casella estimates 2022 results could be as high as $995 million for revenue, $52 million for net income, $232 million for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and $108 million for adjusted free cash flow.
- Capital expenditures are expected to be around $120 million, including $15 million in nonrecurring costs from acquisition integrations. This is slightly below the company's 2021 capital spending, after the completion of a multiyear expansion project at a major Vermont landfill.
- Like others, the company is investing in collection automation and sees a continued need to find more drivers and mechanics. “It’s a much higher priority," said John Casella. "We’ve got to do everything that we can as an industry to attract as many people coming out of high school as we can that are not going on to college."
- While executives didn't discuss M&A in great detail during the earnings call, John Casella said that "our pipeline remains strong" and "we're actively working on several opportunities in various states."