Q1 Earnings

Casella Waste Systems continues to report successful progress on its 2021 growth plan, with adjusted EBITDA up by 8.1% to $26.6 million and overall solid waste pricing of 5% during Q1.

Recycling Results

• Casella reported $10.77 million in recycling revenue, up nearly 6% YoY despite average commodity prices declining by 18%. Adjusted EBITDA for recycling was also up $2 million.
• With an estimated 90% of the company's recycling contracts covered either by its sustainability/recycling adjustment (SRA) fee, or revenue/risk share models, COO Ed Johnson said during Casella's earnings call that operations "have almost fully recovered" from last year's initial market decline.
• CEO John Casella said negotiations are ongoing for a new five-year processing contract with Boston and anticipates the deal will happen, but that the company is not willing to extend its current arrangement past a June expiration date. "We will continue to honor that contract through the end of the contract, but we're not going to carry that contract into the rest of the year," he said. "We can't afford to do that."

Casella's SRA model was held up as a way to adapt to shifting commodity markets even before China's scrap import restrictions were announced, and that now appears to be paying off. This model applies to material Casella brings to its MRFs — about one-third of total volume. The rest is under a revenue share model in which customers pay any processing costs not covered by commodity values. While this general approach is one that all major waste and recycling companies are now taking in their contracts, some are further along in renegotiating terms than others due to a variety of factors.

Results from the Boston contract are being closely watched in the region, as terms are expected to influence upcoming negotiations between Casella and other area municipalities. Waste Management surprised the city by choosing not to bid, citing concerns with a 25% contamination threshold at the time (as opposed to a state recommended 15%). This has left Boston with seemingly limited options, and details about how negotiations are progressing — or how this could affect the city's yet-to-be-finalized "zero waste" plan — remain scant.

"When we put our proposal together for the City of Boston, we set up a real incentive for them to educate their residents and get contamination out," said CFO Ned Coletta. "They are not doing a great job."

Casella's initial pricing for the Boston bid ranged from $117.50 per ton for processing costs (with a 50% revenue share model) to a maximum $150 per ton floor price. The company also submitted a second bid, at $10 more per ton, to potentially begin complying with the city's living wage ordinance.

Landfill Leverage

• Casella's disposal revenue was down by more than 10% YoY to $36 million — largely due to extenuating factors such as the recent Southbridge landfill closure in Massachusetts and a tough comparison from unusually high volumes in Q1 2018. Overall, landfill pricing was up 6.6% per ton and tightening regional capacity is expected to work in the company's favor.
• A setback was reported at the Ontario Landfill in New York, which Casella manages under contract, where sludge volumes have been intentionally reduced and "higher unbudgeted expenses" have come up to resolve multiple infrastructure issues. Problems at the site have become a focal point for community members in recent months — according to John Casella, "It's an all hands on deck, including myself, to resolve the issue."
• The imminent closure of a non-Casella landfill in Massachusetts is expected to raise pricing in the region further and potentially boost volumes to a regional transfer station the company acquired through a 2018 acquisition.
• These trends are also seen as positive by other companies with disposal assets in the region, particularly incinerators, although John Casella noted a parallel outcome for its collection operations. "I think it's very clear that that's a positive in terms of disposal pricing," he said, "But it's also a double-edged sword in that our cost for disposal at the facilities that we go to in Massachusetts are obviously going up as well."

Looking Ahead

• Roll-over effects from 2018 acquisitions boosted Casella's revenue by 10.8%, with more to come. The company reported a recent tuck-in acquisition of M.C. Disposal, Inc., a company in northern Maine with $7 million of annualized revenue.
• Casella claims to have potential acquisitions with another $40 million worth of annualized revenue under letters of intent, with expectations for deals to close by Q3.
• With much of the company's acquisition energy focused on the western end of its Northeast footprint, executives were asked where might be next. "The vast majority of what we're looking at is over the top of the existing investments that we've already made," said Casella, citing a larger presence in Pennsylvania as a possibility. "We have no desire to step out of the Northeast region ... You won't find us in Texas or California or the Midwest."
• Casella has reaffirmed its 2019 guidance of $710-725 million in revenue, $34-38 million in net income, $152-156 million in adjusted EBITDA and $51-55 million in free cash flow.