Q3 Earnings

The Casella Waste Systems resurgence continued through Q3, per the company's latest earnings report, with more than two-thirds of its revenue increase driven by a recent string of acquisitions throughout the Northeast. Overall pricing was up by 5.3% (6.6% for landfills and 5.2% for collection) and recycling financials were more stable than elsewhere in the industry.

Landfill leverage

• Casella reported a 1.6% increase in disposal volumes and an $1.8 million boost in revenue – both YoY – despite the Southbridge Landfill's early closure in Massachusetts last year. During the earnings call, CEO John Casella also reported the "vast majority" of operational issues related to odors at the Ontario County Landfill in New York have been resolved.
• Construction of a new cell at another landfill in New York's Chemung County was delayed by several months – resulting in a $2-2.5 million headwind based on projections – but CFO Ned Coletta said it is now operational for a "great tailwind coming into next year." Casella also plans to spend more than $20 million on a major expansion of its Waste USA landfill (the last in Vermont), with much of the work happening in 2020.
• Asked about utilizing Massachusetts rail infrastructure to move tonnage out of New England, Coletta said pricing would be the near-term focus to manage capacity. Still, he recognized rail will likely "be the relief valve for the Northeast" as more sites close in the next five years and the prospect of new capacity is considered "a long shot."

While collection accounted for nearly 50% of Casella's revenue in Q3, given the profile of its recent acquisitions, the company also derived strength from having well-placed transfer station and landfill assets in a capacity-constrained region. Casella recently added a vice president of landfills to "oversee operational improvements at our nine sites and in the long run improve our prospects for expansion." This is one of several new positions created by the company in recent months.

The prospects for two sites with less than five years of permitted capacity – Hakes in New York and North Country Environmental in New Hampshire – are among those to be determined. Executives described the Hakes C&D site as "very close to getting a new long-term permit." By contrast, Coletta said that the New Hampshire site has "a complex permitting and community horizon." The company is currently involved in litigation over the landfill and simultaneously considering a potential new location in the state.

While Casella still has plenty of remaining capacity to work with at sites in Maine, Vermont and New York, experiences in Massachusetts and New Hampshire may be emblematic of the region's long-term future. As sites close due to community and regulatory pressures, more material will be exported farther away. The McKean Landfill in Pennsylvania, which Coletta called "a real significant option for us in the future," is one potential destination. Casella is also not opposed to adjacent expansion in the landfill-heavy state.

"If something were to divest in Pennsylvania, from the Waste and Advanced transaction, that would certainly be something that we would be interested in," said John Casella.

Bucking trends 

• While some of the industry's larger companies reported softening or uncertain special waste activity heading into Q4, that isn't the case for Casella's footprint. The disposal capacity constraints, and growing sensitivity around accepting sludge, have made the business "very favorable from a price standpoint."
• Q3 recycling revenue was $10.7 million, down slightly YoY, but adjusted EBITDA for recycling was up by $700,000. This came despite a $2.7 million commodity price headwind, along with multi-week downtime due to two MRF upgrades. This was attributed to the company's SRA fee structure and new terms in its Boston contract.
• Casella also negotiated an exit from the multi-employer New England Teamsters and Trucking Industry Pension Fund at an estimated cost of $4.2 million, described as a 77% discount on the stated withdrawal liability. This covers employees in Massachusetts, where Republic Services has been experiencing public discord over contract negotiations – including participation in the fund – during recent months.

Looking ahead

• Casella has spent nearly $80.1 million on eight acquisitions through Q3, including a sizable deal with Republic in two states, worth a collective $52 million in annual revenue. While there could be additional deals in Q4, executives said they are more focused on integration in the near-term.
• This 2019 activity already puts Casella ahead of its full-year acquisition targets and the company sees at least $400 million in mid-term opportunities across current market areas. Moreover, according to John Casella, "we will continue to selectively look at opportunities in adjacent markets."
• Given the company's busy year, Casella is updating annual guidance yet again. It is now projecting revenues between $735-745 million, net income between $31-34 million and normalized free cash flow between $52-55 million.