All right. Good morning, everybody. I'm Michael Hoffman, Group Head of Diversified Industrial Research. I do the environmental services space. It's my pleasure to have with us on stage this morning from Casella Waste Systems. I have Ned Coletta, who is the president, was formerly the chief financial officer, and next to him is Charlie Wohlhuter, who came over two years ago now, Charlie?
Yep, just over two.
To be in investor relations. Welcome on the stage with us.
Thank you, Michael.
Thank you so much. So I wanna tackle a subject that's near and dear to my heart, which is about sort of underlying free cash flow. I, you know, I look at garbage stocks, and what I think investors are buying are repeatable, recurrent, sustainable compounding of cash.
Yeah.
What is it that Casella needs to do to produce that consistent compounding in the mid-teens? 'Cause the way—if you backed into where the stock's trading right now, and I'm not here to argue multiples, but just where it's trading, it is presuming a level of double-digit compounding. So what is it you all have to do to assure the repeatability of that double-digit compounding?
Yeah, Michael, great, great question, and good morning, everyone. Thanks for attending. We've done this consistently for 10+ years, looking at free cash flow growth, and, you know, there's really a simple recipe to it: run a great business, focus on operations, focus on controllable investments in the fleet, areas where we can generate, you know, 20+% returns, focus on pricing programs, and then look at risk management, things like our floating fee programs that take the peaks and the valleys out and allow us to be more consistent, with our, with our returns. And then really just a huge focus on capital investment. Where are we investing as a business, whether it's organic growth, development projects, and allocating capital to, you know, the right risk profile, the right growth profile?
You know, we've gone through a period of explosive growth, so, in our free cash flow, we add back a number of items that are associated with acquisitions or large development projects. But when you get under the hood, we really think that's an important metric to show that the base business has been growing, you know, 15%-20% now for many, many years. And it just comes down to a simple formula every year, Michael, of the right pricing, the right risk management programs, the right simple investments to drive operating efficiencies in the business. And now we're entering a phase where I think there are a couple other things to help that compound more. We've been focused a lot in the back office on some great, simple investments to streamline G&A, take cost out, gain more leverage.
We've taken about 120 basis points out of G&A the last several years, and we have a goal to take another 100+ out over the next few years, and that will help, once again, to compound that growth.
Underlying any of that, does that model work regardless of what GDP and CPI are doing, or would we need to describe some level of that on a consistent basis?
Absolutely, it works in any environment. We've got a pretty unique book of business, especially in the collection, waste, and recycling collection side of our business, where we're only exposed to about 10%-12% to municipal contracts that have set CPI increases each year. And we also have a number of industrial contracts that might be 5-year in nature, have set pricing. But about 75% of our book of business and collection, we can price at will. I can change price tomorrow, next week. I can put in new fees. So it gives us a lot of flexibility to stay out ahead of inflation, and, and we've done an excellent job, even in this very dynamic environment the last couple of years, pricing, you know, 50 to 60 to 70 basis points ahead of inflation. We're really looking at the pull-through, right?
So it's not just getting the price ahead of inflation, it's by the time it hits the margin line, are we getting 50 basis points of margin accretion? If we are, we feel like that's a successful model, and-
That's the way to think about managing-
Yeah
... the spread. It's not so much what is it, it's, it's what's the leverage through to the model?
Yeah.
Right.
If, if we're getting... You know, and you always have puts and takes, but if we're generally getting 50+ basis points of pull-through to the margin line, we feel pretty successful about what we're doing, managing inflation and pricing. And we've done that amazingly well the last couple of years. And I think markets where you have inflation or change or volatility allow opportunity as well, and, you know, we're nimble enough, we're small enough. As I described, our contract structures are flexible enough that we've been able to gain margins during this environment.
Okay, so part of your pricing dynamic is you sit in a, in what I'm gonna call the legacy portfolio for a minute. To sort of frame that for everybody, Casella, a year ago, bought assets from GFL that they were divesting, that put them in Pennsylvania, Maryland, Delaware. That's, so I'm gonna call that new market relative-
Mm
... to legacy. Legacy, New England, you have a unique disposal position. You're 20% of share-
Yeah
... waste is about 20, the burners are 40-ish, and then there's a bunch of little pieces. So you have, and you're in a market with continuing ongoing shrinkage of-
Yeah
... airspace. You have been able to price at or greater than collection in your disposal business, where your peers are at collection price, rate of change is higher than the disposal price rate of change. Will you be able to sustain that point of differentiation, or has that run its course? And specifically, the market rates have gotten to a place where rail is becoming far more attractive, so there's out-of-the-market optionality on volume where volume can go. Does that cap your ability to maintain that pricing relationship in disposal that you've enjoyed for so long now?
Yeah, I can only control what I can control.
Right.
A lot of pricing in our business is very opaque to the market. So, you know, landfill pricing is just it's game theory, and it has been for years, and we do a really great job of, you know, advancing pricing programs that generate the appropriate returns on our assets. We'll, we'll always shed volumes, even at our landfills, to drive higher returns and higher price. And we look at these assets as almost irreplaceable in the Northeast. So if I don't sell a ton this year, and I can sell it next year or the year after for a much higher price point, we'll, we'll do that. So you know, we're very, very logical, very consistent in how we run our sites, how we run pricing. And, you know, a lot of people...
There's all sorts of different pricing stats, right? So the, the most common is third-party customer, what you're taking in, how do you increase that price year-over-year? And that, that's our reported price. But, but we also, over the last, you know, number of years, have started to look at an average pricing stat of I only have so much space at this landfill, and if I take in a new customer, that gets booked to volumes. If I take in tons from my own trucks, that gets booked intercompany, isn't part of a pricing stat. So we've started to look at let's really understand how we're consuming that scarce-
Total airspace consumption.
Total airspace consumption, and we'll take all of the revenue taken in, whether it came in through a price increase, a volume increase, intercompany, and we'll divide that by all the tons that go in and just come up with an average price. We've been increasing the average price by high single digits to low double digits for the last 5 years.
Right.
I mean, that's a really important statement on where the market's headed because we're increasing, improving the mix consistently of taking less valuable materials, mixing to higher value materials. We might be mixing more intercompany, which doesn't show up in the pricing stat. All of those things-
But it shows up in the collection pricing because-
And-
You passed it through there.
It does.
Right.
It shows up in Free Cash Flow.
Right. Okay, so what I'm hearing as a message is that you believe you can still maximize the competitive advantage of your share position-
Yes
... in that market.
Yep. There's only been one new greenfield landfill in the Northeast United States in 35 years. And as you well know, public policy is not changing anytime soon, and expansions are very, very challenging. And we've been modeling a number of different scenarios over time. You know, a scenario where there's a bit more stability and several sites get permits, including Casella sites or even third-party sites, in a scenario where several important sites do not get expansion permits, hence the reason why we brought McKean online this last year. So we have a very large landfill in Pennsylvania, in McKean County, and it has an interesting-
Scranton, Pennsylvania.
Yeah.
Sort of that corner.
And this landfill, it's been a kind of a sleepy landfill for the last 15 years since we acquired it, but it has a permit to take in 1.6 million tons per year via rail. So over the last year, we've built out over a mile and a half of rail spur, we've built a gantry crane, and we've built an operation that can offload, containerize municipal solid waste, containerize sludges, containerize soils, and can do it very, very efficiently, and it's one of the closer sites-
Right
... to, you know, key population centers, Boston, New York City, New Jersey. And we didn't do this to just you know, bring in a bunch of third-party customers and make money this year. We did this for the long game, where we look out 10-20 years, and I might be signing a contract with a customer. Do I always have visibility where their waste is going to go in 5-10 years? No. And when we look at that scenario analysis of the Northeast, of what may close, if you start to get into a case where there's a few additional closures, there's not enough places to put all of this garbage.
Right.
Sites like McKean will have to become part of the solution.
Well, I viewed McKean both offensive and defensive, because you're going through a permit expansion in New Hampshire-
Yeah
... and you may or may not get it, and if you don't, you know, that was as defensive as an offensive move of-
Yeah
... there's an overall market displacement happening. I think that's a fair way to think about it.
Yeah, exactly. If you look at any major players in the Northeast today, Waste Management, Republic Services, Waste Connections, they're all moving waste out of that market-
Right
... via rail. IWS is. Now, Casella has been moving waste out of the market, and you really have seen a shift over the last decade where there was a couple% of the annual volumes that left via rail. You flash forward to today, as all these sites have permanently closed, and there's no new capacity coming online, where, like, 25%-30% of all the waste generated in New York, New England, gets put on a rail car and moved-
Right
... somewhere else.
That number's only going up as the overall urban tipping fee gets higher and higher.
Yeah, and to your point earlier, you know, everything in our business is transportation and disposal. So if I'm in here, in Boston, where can my waste make it, both from a transportation and the market clears? So if the market clears in Boston at $100 a ton, you know, if I have closer-in sites, by the time it gets to my site, I can yield a higher tipping fee-
Right
... and I have more pricing power as well.
Right.
You know, as you said earlier, having that unique portfolio in the Northeast, you know, positions us really well for the long term.
When does McKean open?
... McKean is open now. We've accepted our first rail cars.
Okay.
I'll show you some pictures. We're just kind of shaking things out-
Sure
... slowly ramping. It's not gonna be a contributor in 2024.
Right. You know, I think you'll phase into it, but-
Yeah
... you know, when you say 1.6 million tons a year, that's five thousand tons a day-
Yeah
... is the potential. So what, I mean, what do you think is a logical number if I looked out 24 months? Are you at 1,000?
Yeah, we're definitely looking at this to ramp up to, you know, about 1,000 tons a day, stabilize, and then go from there.
Right.
We want a couple cornerstone customers. We want to get that muscle memory of moving waste via rail, get a little bit of scale, and then assess New Hampshire.
So is the current movement in the Connecticut legislature to tax... I don't know why they're doing this, but they're taxing waste leaving the state. Is that, is that actually gonna happen?
Probably not.
Okay.
Connecticut really doesn't have a lot of capacity.
Well, they have none.
A good bit of their waste has to leave the state.
Yeah.
From a public policy standpoint, they made decisions to not have capacity-
Right
... much like Massachusetts. I mean, the public policy in Massachusetts, a 20-year solid waste plan, explicitly says, "We're gonna export our waste to other states.
Right.
You know, environmental justice, all of these topics will start to play a key role as you look at the exporting of people's waste and externalities to other communities.
Okay. Switching gears, one of the metrics the market looks at is cash conversion of EBITDA, or you can look at cash conversion of adjusted net income. You know, the median is sort of 45% of an unadjusted number, if you would. What does Casella have to do to be able to get into a place where it's not an adjustment to get to the 45, it's an unadjusted number, good old-fashioned cash flow from ops less capital spending, all capital spending, divided by the EBITDA is 45%? What do you have to do to do that?
Yeah, so, it's certainly a metric that we focus on, and our goal is certainly to improve that each and every year. But, you know, as we've spent the last, you know, 10, 15 minutes here, as everyone can, you know, probably understand, you know, we're in a very high growth phase period for the company. We just crested over $1 billion, 2022 or 2023?
Thank you.
And, you know, here guidance is calling for about $1.5 billion revenue. So with that requires a lot of investment. It's really setting us up for future growth over the next 5, 10+ years, and as investments really flow through a number of areas, working capital, and then probably, like, the biggest part is CapEx. Again, making a lot of investments, whether it's McKean, things we got going on, across our, you know, legacy fleet, as well as acquired fleet, converting rear load to automated side loaders. We've spent $20 million last year upgrading our Boston MRF, another $20 million at the end of this year for Willimantic MRF, and some other investments in our recycling fleet. So I think to kind of answer your question directly, Michael, we're certainly in a growth phase.
I think, you know, medium, longer term, as we continue to grow, become more mature, we start leveraging these investments, I think that kind of incremental growth CapEx beyond the maintenance or recurring, CapEx will... You know, there's perhaps some levers that we can pull there.
Yeah, we've been probably spending, you know, 400 basis points as a percentage of revenue more on growth capital.
Right.
You know, that's definitely. You know, you can look at it through both lenses. It's excellent we have those opportunities, right? And when we buy a business, we're definitely also pro forma-ing and looking at what we're gonna invest in the first year, year and a half, to drive synergies, upgrade fleets. So it's not like this isn't driving a positive return. This is contemplated, you know, when we make these decisions, but they're good, positive investments, and they're driving returns. And right now, you know, I don't think I have an exact date to give you on when we can get there because we continue to grow, so it's-
Do you think it's inside five years?
You know, it's tough because of the working capital issue, right?
Right.
So, like, you know, I'm hopeful we can continue to grow the exact same way-
Right
... for the next five years, repeatedly and at a slightly higher rate than we have historically. So I don't wanna put a stake in the ground on that one.
Okay. Have to try. But I do have a five-year question. So you're approximately 70/30. It's a little more-
Yeah
... 72, 28, solid waste versus Resource Solutions, and Resource Solutions is a mixture of asset light and asset intensive because that's where your-
Mm
... recycling business is. If you look out five years, is it the same mix, or does the Resource Solutions piece shrink?
We have no plans to consciously remix. I mean, our Resource Solutions business, which is recycling, processing services, organics collection processing, and, and our industrial services, national accounts, is a very high-returning free cash flow business, and we're making some very key investments as well. It's... You know, we look at every investment that comes along very strategically, and we probably re-blended a little bit away from it this last year with our investment in the buying the businesses from GFL in Pennsylvania, Maryland, Delaware. We also bought a larger collection and transfer and recycling business in New York. But as we look at those businesses, we definitely can bring a bit more of our model to those markets, and what I mean is, you know, look at Pennsylvania, for instance, a lot of great industrial-...
Customers, a lot of great institutional customers, and they're starved a bit on the sustainability side. They're starved a bit from a company like Casella, who really digs in, gets under the hood, and helps the customer to drive more to the recycling organic side. So we think it is a really good organic growth opportunity to bring our sales, our operating approach to those markets, and I can't chart out exactly how that moves, but I know they're significantly underweighted today, those markets.
So as we look at it over the next couple years, if we just do what we do, you know, with the business we bought from GFL, only had about 20-25% small can commercial work and less than 5% industrial waste work, and when we look at our business, we typically do 35%-40% in a market for small can commercial and 15%+ industrial. So that reblending isn't just gonna come from us knocking on doors of small commercial businesses or industrial. It's gonna come by us coming in with recycling solutions and sustainability solutions, and, and we'll start to move that needle.
Okay. So what I hear is, is that you can replicate into the Mid-Atlantic what you've been doing in the legacy, and therefore, the portfolio mix stays relatively similar.
That's our game plan.
Okay. To that end, do you need to be more asset-intensive in that industrial services business, or can you continue to produce a model that's asset light?
It's becoming a little bit more asset-intensive on the recycling side. I think we used to do a retrofit of a facility and invest $5 or $6 million. Our most recent investment in Boston was close to $20 million, but you know, the facility's producing $1 million of EBITDA a month. So you know, these are really high-returning investments.
Right.
We're about to go into Connecticut to do a full upgrade of our recycling processing facility there, and we're bringing a lot of technology in, very high-speed optical sorters, robotics. As an example, in Boston, we reduced our labor force by close to 40%. We increased our throughput by over 40%, drove new revenue streams by capturing more materials and improved quality. So you know, that part of the resource business does have some capital intensity, but they're great investments. The other side, which is, you know, working with you know, a great... Like, we just won BU in Boston.
We just won Northeastern, like, really great universities, and we won all of those contracts less on asset intensity and more on helping them to recognize higher sustainability, so a lot of real-time data coming from our trucks, real-time data coming from processing. We embed sustainability personnel into their campus to help, you know, understand what they can do to, you know, change education or asset placement.
So we in the US, we talk about this topic and always say sustainability, but how much of what you're actually positing is more about circular economy?
Yeah, I, I guess that might be a better way to say. Like, there's so much circularity in what we do, and, and many of our major customers, Becton Dickinson's a great example, is, is one of our premier customers in the med device space. I was meeting with their president a few months back, and he was saying, "I want to put our plastics back into our syringes," and he- it's such a huge initiative for companies like that to say, "I'm not just being wasteful in the world. I can bring my materials back circular into a product." And when you dig a little deeper, you don't have to bring the exact materials back in-
He's not, he's not gonna get a syringe into a syringe, but he could get-
But-
Polypropylene in a box.
You can get recycled polypropylene into it-
Right
... and, you know, really show that you're committed to buying materials that support sustainability, support circularity, and it's interesting because if you flash back, you know, 10-15 years ago, I spent a lot of time in my career trying to work with consumer products companies, manufacturing companies to buy more and more recycled materials for their products. And they never would enter into long-term fixed contracts that would provide stability to our industry and really drive that circularity. So we headed in a totally different direction. We started to manage risk through a floating fee at our recycling business. We created what we call the Sustainability Recycling Adjustment fee, and we put this small fee, like a fuel surcharge, on our collection customers' bills. So if recycling prices drop, this fee goes up and vice versa.
We took a tiny little bit of risk and spread it among millions of customers, which drove our recycling returns up significantly and drove a lot of consistency. What's interesting, the circularity concept has come around, like, big.
Right.
And our customers today are like, "We want our materials back in our products." So it's kind of funny, what we're working so hard at 10, 15, 20 years ago now is coming true.
Right.
And I think it's super exciting for our industry because that consistency of outlets and demand for our products is really important to drive additional investment, and it... You know, I think this is one thing that's really misunderstood. We drive way higher returns from recycling than landfills, and-
Yeah, most people don't understand that. But you're not taking a huge amount of commodity risk at this point.
No
... because of the way you've run the business model. I mean, I think that's-
Yeah
... an industry change, is we're treating it like manufacturing.
Yeah.
You know, understand what your capital deployed is. You, you can build a rate of return around it, and then you can manage it accordingly.
Yep.
Yeah, right.
Take the peaks and the valleys out-
Yeah
... if we can get consistent with that revenue source, and we do it by charging upfront at processing facilities, passing risk back to customers, and never trying to take the peaks or the valleys.
So have you successfully begun to sign longer-term contracts with a more stable pricing structure in within the consumer packaging world?
No.
Not yet?
Not yet.
Not yet. All right, but they want to have the-
Yes
... conversation about circular?
Yes.
What do they need to sign the long-term contract?
I don't know. I don't know if it's extended producer responsibility that wakes up that part of society or... To date, you know, if it's just a penny-
It just transfers the cost of doing recycling.
I know. If it's a $0.01 difference per pound on recycled versus virgin materials, a consumer products company will typically just take the cheaper material. And-
Would content commitments be better, going to the legislature and convince them to do that?
Probably.
Yeah.
It's, you know, from our vantage point today, we've got a handful of amazing companies that have taken a lot of our recycled goods for years. Anheuser-Busch has taken 100% of our aluminum for 20+ years. Mohawk Carpets has taken a large amount of our PET. So, you know, we do have a handful of companies that, like, have huge commitments over long periods of time. But to really spill that out to the mainstream, you know, I think the next couple of years are gonna be telling, and as that happens, there's not enough supply of these recycled goods, so we're just gonna see a big step-up.
Right.
We're gonna see more stability, and we're gonna see more infrastructure. It'll be great for the world.
So on that, so you're gonna put money into Willimantic. Do you need to build another facility? Do you need one in Pennsylvania?
So we acquired a recycling facility-
Okay
... from GFL in Pennsylvania. It came with the transaction. But, you know-
Okay
... we knew this when we bought it. It had 20-year-old equipment in it.
It's older.
Yeah, so we have a plan in 2025 to upgrade that facility, and we think that's, as I said earlier, that's a market that's ripe for, you know, driving a lot more recycling and circularity.
Right. So-
You know, something, to tack on to that point-
Go ahead
... quickly, Michael, that certainly you know, which, I've just kind of learned in the last 1 year or 2, is that, you know, the recycling stream has certainly changed and evolved a lot. I think today, the Boston Globe, there's, I believe, 1 print edition a week, versus 5, 10 years ago, there was, you know, 6 or 7. And so the equipment also has to certainly be able to handle that stream. So Boston, that we just upgraded last year, you know, that was 10+-year-old equipment that was really geared and aimed towards a different recycling stream. Now that the recycling stream has changed, and going back to-
Yeah, the composition has gone from-
Exactly
... newsprint to corrugated to now there's this intense-
You need-
... different pressure on, you know-
Equipment for that.
... ones, twos, and fives, you know.
классиfies.
Four, sixes, and sevens are still worthless, you know, but, but, but even that'll evolve at some point. So as we get to near the end, two last questions. One is on your capital allocation plan, you've already sort of laid the frameworks for this, but the focus I'm hearing is growth, therefore not likely to see a dividend. And you know, where... You know, so where does a dividend and a buyback play into your story, given that your peers that you get compared to ultimately do both?
Yeah, so first and foremost, M&A and development projects are the highest and best use of capital for us, highest returning. You know, when you kind of start to go down the other options, dividend, buybacks, how do I articulate this?
Not yet, but on that point-
Not yet.
But on-
Yeah, certainly not in the near or even medium term for us, just given so much growth potential of deploying our capital through M&A and development projects. But, you know, some of our larger peers, you know, they don't have those abilities or that runway like we do, so dividends, buybacks come more into play.
Okay. PFAS, risk or reward?
I think less of a risk today than it was 6-8 weeks ago, when CERCLA was passed, and we were talking about this before. It's not perfect, but it's the first time the federal government has come out and clearly said the manufacturers who produce these chemicals and the manufacturers who use these chemicals are responsible for them. And, you know, passive receivers, such as landfills, wastewater treatment plants, farmers,
Composting
... composting, all of which touch our business, are not ultimately responsible. Now, you know, the legislation and, and what the EPA did is not totally clear, right, by any stretch of the imagination.
Mm-hmm.
And Michael, in your new role, like, you're gonna do a lot to shape this. But from where we're sitting, you know, the finger's not pointed at us anymore, which is helpful. But we're also not sitting still. We've got two technology pilots going, one of foam fractionation. So, actually, I should back up a little bit. People use items, discard them, rugs, carpets, packaging, ends up in landfills, and so PFAS ends up in landfills, and most of it just gets sequestered and stuck in the waste mass, and we've studied this. Part of it, as water goes through the landfill and items break down, part of it gets taken out. We pump all the water out. We call it leachate. And that leachate historically has either been treated on site or brought to wastewater treatment plants.
But no one's doing a lot to take chemicals out. It's really for the biologics as you get to wastewater treatment plants.
Mm.
So there's a lot of technology development right now to take those chemicals out, the forever chemicals, and then either, you know, put them into cement and lock them back into a landfill or whatnot. So foam fractionation, reverse osmosis, both those technologies-
Separates
... separate out the chemicals.
Separates and concentrates.
Yeah.
Yeah.
Concentrates, and then what we're doing, it's actually kind of low tech, but it works. We take that concentrate, we take a big container, we mix up cement, we make a big block, and we throw it in a landfill.
Right.
That's it.
Yeah.
So there's a circular, you know, getting that PFAS, keeping it in that landfill forever. You've got double composite liners. It's not ever gonna leak from the site. So, you know, besides the legislation, we've gotta have solutions that are real practical, real world, to help solve this problem.
Okay. Well, we're at the end of our time. I wanna thank you for making time for us-
Thank you
... and coming to Boston.