|Adjusted Net Income||$27.2M|
|Adjusted Net Income||$4.1M|
Casella Waste Systems closed out 2018 with a busier than expected pace of acquisitions, double digit revenue growth and lots of optimism.
Despite a $8 million recycling headwind, the company still reported a $9 million net increase in adjusted EBITDA — among multiple other positive indicators — and announced plans to raise its 2021 free cash flow target to $65-70 million.
"2018 was a significant transitional year for the company. After years of focus on operational improvements, strengthening our daily process and discipline and driving performance to acceptable levels, 2018 became a year to refocus on growth. We exceeded our expectations," said COO Ed Johnson during the company's fourth quarter earnings call.
- Casella closed out the year with 10 acquisitions worth $77 million in annualized revenues — well above its $20-40 million target. One of the most recent was Al's Maintenance in Dec. 2018, part of an ongoing expansion in the Rochester, New York market. These deals are projected to drive revenue growth of 5.5% into 2019.
- CEO John Casella said the company has been experiencing "pent up demand" on this front, and expects more tuck-ins to come, with total spending likely on the higher end of that same $20-40 million range.
- Casella has also budgeted for additional capital expenditures to integrate these new companies. CFO Ned Coletta said the company typically expects it will take 6-12 months to make the new assets efficient, and up to a year-and-a-half until they're fully integrated. Due to the nature of existing contracts, the company doesn't expect to fully internalize all of the acquired waste until closer to two years.
While Casella did make some purchases in New England states, its 2018 growth story is largely about the upstate New York market. The process of integrating four businesses in the Rochester area was described as closer to a merger than an outright acquisition.
Moving forward, executives outlined multiple reasons why they believe the regional market is ready for more deals after years of difficult financial headwinds.
"As we overcame these challenges, we found our smaller competitors have continued to struggle," said Johnson "Since it became apparent in our market that we were back in the game, our pipeline of potential deals has expanded exponentially. The resulting opportunity for growth through acquisitions is coming at the perfect time for us. Our ship is in order."
Driving Disposal Pricing
Casella reported a 6.5% increase in the average price per ton at its landfills along with volume growth, and doesn't foresee this slowing down due to the Northeast's uniquely tight disposal landscape. According to the company, many of its landfills have more than 15 years of disposal capacity.
- As a reminder of one reason why disposal capacity is tightening, Casella reported a $15.8 million closure charge at its Southbridge landfill in Massachusetts. The site accepted its final tons last year after community opposition effectively shut it down. Casella expects annual closure costs to be high again this year, before coming down to $5-6 million in the future.
- "Given how dynamic the Northeast market is we have been moving disposal contracts to shorter terms to allow us to adjust pricing more appropriately as the market changes. Aside from pricing, we are positioned well to further leverage our excess annual landfill capacity as more waste moves from east to west coupled with internalization value of our recent and targeted acquisitions," said CEO Casella. "Our efforts will continue in regard to expanding permitted landfill capacity to meet the disposal demands of the Northeast."
- In late 2018, the company's Clinton County Landfill in New York got an annual permit increase from 75,000 tons to 250,000. A previous increase at the Chemung County Landfill, also in New York, will also start to come into play for displaced Massachusetts tonnage. As efforts continue to expand a contentious site in New Hampshire there could also be new capacity to the east.
- Casella's 2018 recycling revenue came in at $11.56 million, down $1.5 million YoY. This drop was driven by lower commodity pricing and volumes, but offset by higher third-party tip fees. The company saw an uptick in operating income during Q4 and is confident its pricing strategy is paying off. "Our expectation for 2019 is that recycling will provide the tailwind even if commodity prices stay at these low levels as several of the largest third-party contracts reset," said CEO Casella.
- While the company is about six months into using a new cloud-based technology platform, Coletta still characterized operations as "quite inefficient." Casella is now looking for new ways to digitize its billing system, before focusing on routing and customer experience.
- For 2019 guidance, Casella is expecting revenues of $710-725 million and net income of $34-38 million. Normalized free cash flow is expected to be $51-55 million (compared to $47.1 million in 2018) in a step toward the company's 2021 target.