CEO John Casella talks GDP growth and getting fair returns on invested capital in recycling
While some companies have pushed for a nationwide presence only to find themselves overextended, Casella Waste Systems has seen success by keeping it local.
Since the Vermont-based company started in 1975, it has remained a family-run business with a set focus on commercial customers, key processing and disposal infrastructure, and select municipal contracts. Their footprint includes more than 100 locations across six states, from New York to Maine. Within that space they have implemented ways to share the risks of commodity pricing before some of their larger competitors and shown how to operate within a region that often has strict recycling laws and a limited appetite for expanding landfills — let alone building new ones.
Their most recent quarterly earnings showed a good start to the year with plans to "reinvigorate" the search for tuck-in acquisitions and other opportunities. Yet during that same call, chairman and CEO John Casella recognized ongoing community opposition and regulatory challenges involving contaminated water near their landfill in Southbridge, MA could make it financially impractical to continue operating the site. Boston's recently announced "zero waste" ambitions could bring new competition to their existing business in that market as well.
On May 8, Waste Dive spoke with John Casella to get his take on current events within both his company and the industry.
The following transcript has been edited for brevity and clarity.
WASTE DIVE: The Southbridge landfill expansion hasn't been going as planned. Yet you've had success with expansions at the Ontario County Landfill and Chemung Landfill in New York, and Juniper Ridge Landfill in Maine. Are there any new lessons in terms of community engagement?
JOHN CASELLA: On June 13th we've got a vote in Southbridge. I think that we've got support from the community. What we haven't enjoyed is real support from the [town] council. So it'll be interesting to see how the vote goes. We've been pretty engaged over the last year-and-a-half to two years so we'll see how the vote comes out.
It sounds like you've used a similar strategy of highlighting the financial benefits from host fees, right? I know with the Ontario landfill, a lot of that money goes to community programs.
CASELLA: Absolutely. Same thing in Southbridge as well. We're a big contributor to the budget and we're a big economic driver in the community and I think that clearly from our perspective we've done a god job there. I think [Massachusetts] coming up with half the money to put the water line in place has been a real positive as well and we'll see how things go.
Speaking of state policy, your home state of Vermont has an ambitious universal recycling law. What has that meant for your business?
CASELLA: From a recycling standpoint with mandatory recycling — which was the first leg of that — I think the infrastructure is in place. All of the haulers in the state have done a good job of helping to implement the universal law as it relates to recycling. I think the next step to organics is a bit more problematic. I believe we're moving too quickly. We've asked for people to slow down, not necessarily to change the direction but to slow down, because there's not a lot of infrastructure in place currently to handle organics.
The other thing that's really important to realize is that [we're] getting values out of those organics in our landfills. Washington Electric Co-op invested the capital to build a landfill-gas-to-energy project at our Waste USA facility and we're generating power for two-thirds of [their] load. We've got a very low emission model where we're trying to capture as close to 100% of the gas as we can. So it's not as if organics aren't being handled properly or that we're not getting value out of them.
So I think the universal law is a good law. Laws always need to be tweaked. You don't think of everything [on] the first go around. We just need to get stakeholders together and figure out what the tweaks should be to move it forward...What may be good for Burlington, Vermont and Chittenden County isn't necessarily good for Benson and the Northeast Kingdom where you just don't have the population density.
"I think the next step to organics is a bit more problematic. I believe we're moving too quickly. We've asked for people to slow down, not necessarily to change the direction but to slow down, because there's not a lot of infrastructure in place currently to handle organics."
Chairman & CEO, Casella Waste Systems
Boston just put out a "zero waste" planning RFP and is very interested in organics. Do you see an opportunity there for organics collection?
CASELLA: The real question is who's going to pay for it. Not only do you have to have the capital to put the infrastructure in place, you also have to have the capital to collect it...Those are the questions that really need to be answered before we move forward. A little common sense, slow down a little bit and really think it through so we have a good outcome.
If more of those questions can be answered do you see a case to be made for potentially bidding on an organics collection in the city some day?
CASELLA: You know, municipalities set public policy. So if a municipality sets a public policy that they want organics collection and they're willing to pay for it, then certainly we — and I'm sure other folks — would step up and bid that. Similar to what's being done in San Francisco. If you go to San Francisco organics are being collected, but what's happening there is that it's a city contract so the city is paying for it. So if a municipality stepped up and did an RFP and wanted to collect organics along with recycling and trash certainly there would be many companies I think that would step up and bid on that.
Are there any other markets within the Northeast where you could become more involved?
CASELLA: We've kind of curtailed the footprint over the last few years. We've gotten out of ancillary businesses, we've kind of narrowed our focus, gotten back to our core competency. [We] got out of the water business, got out of the waste-to-energy business, got out of the cellulose insulation and manufacturing business and several others. And now that capital is going back into our core business and you can see the results over the last year or two.
It sounds like the structure of your recycling contracts, trying to share more of the risk, is something that you've been doing for a while, correct? Whereas it's a newer approach among some of the other companies.
CASELLA: Yeah we really have, it's not new. You know recycling is mandatory in most of the states that we operate in in the Northeast. So why would it be that we could only get a return on the invested capital in recycling when commodity markets are high? It makes no sense. It's a regulation. It's public sector policy that was set so we should be able to get a fair return on the invested capital irrespective of what happens with commodity prices. And so you know we put the SRA (sustainability/recycling adjustment) fee in place.
"...Why would it be that we could only get a return on the invested capital in recycling when commodity markets are high? It makes no sense. It's a regulation."
Chairman & CEO, Casella Waste Systems
The SRA fee is on the basis of what we actually sell into the marketplace. It's not off a yellow sheet or something. It's what we actually sell, which is really critically important. [We] put the algorithms together to determine if commodity prices go up or down, what we have to move the fee in order to cover that. So when we first put the SRA fee in place it was 4.4% and we tried to put it across as large a portion of our customer base as we could. Not just our recycling customers, but all of our customers because it's mandatory to recycle...and we got hardly any pushback at all.
Because when you think about it, [customers get] a $35 bill for residential service. A 4.4% fee on that is really nothing. People pay $200 for a cable bill for crying out loud. For the first 12 months that fee went up and it went all the way up to 5.8%. For the last 12 months it went down and it's back down to [around] 4.6%. Last month commodity prices were off $25-30 so it's likely to start going back up again.
Now we're getting a respectable return on our invested capital in recycling, which allows us to go invest more capital to do more from a recycling standpoint. Without getting a return on the invested capital you don't invest.
What trends are you watching in the industry and the economy for the rest of the year?
CASELLA: The real question is do we get the healthcare law done? Do we get tax relief? Are we going to see something there? Because I think in general GDP growth is going to be good for the country, it's going to be good for all businesses in the solid waste business. More economic activity means more waste generated, more material to process from a recycling standpoint. So in general that's a real positive. And I think that the change in direction in terms of doing more in America is going to be good for the solid waste industry.
Stay tuned for more from Casella in an upcoming episode of Waste Dive's Talkin' Trash podcast and additional interviews with other industry executives from WasteExpo this week.
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