Good morning, ladies and gentlemen, and welcome to the Casella Waste Systems Inc. Q4 2019 Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Mr. Joe Busco, Vice President of Communications. Please go ahead, sir.
Thank you for joining us this morning and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems Ed Johnson, our President and Chief Operating Officer Ned Coletta, our Senior Vice President and Chief Financial Officer and Jason Mead, our Director of Finance. Today, we will be discussing our 2019 Q4 and year end results. These results were released yesterday afternoon. Along with a brief review of those results and an update on the company's activities and business environment, we will be answering your questions as well.
But first, as you know, I must remind everyone that various remarks that we may make about the company's future expectations, plans and prospects constitute forward looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent Annual Report on Form 10 ks, which is on file with the SEC. In addition, any forward looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. These forward looking statements should not be relied upon as representing our views as of any date subsequent to today.
Also during this call, we will be referring to non GAAP financial measures. These non GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliations of the non GAAP financial measures to the most directly comparable GAAP measures to the extent they are available without unreasonable effort are available in the appendix to our investor slide presentation, which is available in the Investors section of our website at ir.casella dot com. And with that, I'll turn it over to John Casella, who will begin today's discussion. John?
Thanks, Joe, and good morning, everyone, and welcome to our Q4 2019 conference call. We're pleased with our Q4 results and our results for 2019. This was another strong and exciting year as we continue to execute well against the key strategies of our 2021 plan. We meaningfully grew the business with 9 acquisitions in the year with approximately $53,000,000 of annualized revenues. And as we announced yesterday, we've closed on 2 acquisitions thus far in 2020 with an estimated $6,000,000 of annualized revenues, making a strong start to the year in terms of our continued execution against our acquisition strategy.
Our success in 2019 is reflected within our numbers for the year as we grew revenues by over 12%, increased adjusted EBITDA by over 13% and improved normalized free cash flow by nearly 18%. Notably, our 2019 revenue, adjusted EBITDA, normalized free cash flow results met or exceeded our guidance ranges that were raised in October. These accomplishments for our team are perhaps even more impressive given that during fiscal year 2019, we experienced an $8,000,000 adjusted EBITDA headwind related to the November 2018 closure of our Southbridge Landfill. So the rest of the business improved by over $26,000,000 in the year, which emphasizes the strength within our solid waste, recycling, organics and our customer solutions businesses coupled with the success of our acquisition strategy. In 2020, we will remain focused on executing against our 2021 plan.
The 5 key strategies are consistent with that plan as announced in August of 2017, which includes increasing landfill returns, driving additional profitability in the collection operations, creating incremental value through resource solutions, using technology to drive profitable growth and efficient and allocating capital to balance delevering with smart growth. Our first strategy in our 2021 plan is increasing landfill returns. As a vertically integrated resource management company, we are highly focused on providing services to our customers that meet their needs and future environmental service needs. We continuously strive to help our customers meet their sustainability goals through increased resource recovery and diversion programs. We have developed leading recycling programs and we are one of the most prominent organics companies in the Northeast.
That said, landfills also play a critical role within today's sustainability infrastructure. These necessary highly regulated sites not only provide safe environmentally sound destinations for products and materials at the end of the consumption lifecycle, but they also serve as outlets for various special waste and other time sensitive materials such as debris and cleanup from natural disasters. We are proud of our long track record of developing and operating safe landfills that meet the needs of our customers, while creating tremendous value for our host communities and other community stakeholders. While we continue to work to find higher and better uses for all of the materials in the waste stream, there's not a silver bullet solution that magically transforms waste into new products or resources. Landfills remain the safest, lowest greenhouse gas footprint and the most reliable means to dispose the waste today.
In 2019, our teams achieved 2 important landfill expansions that will allow us to continue to meet the needs of our customers. In 2019, we received a 2,700,000 cubic yard expansion at our Hakes facility, which will provide roughly 5 years of additional capacity as we look to bridge to the next site next phase. And in September 2019, we received a $13,700,000 cubic yard expansion at our Waste USA facility in Vermont. We started to work through the initial excavation phase and will continue to do so in 2020. This expansion extends the life of the site by an estimated 20 years.
Despite these great successes, we faced an unexpected setback at our North Country Landfill located in New Hampshire 2 weeks ago. When we learned from the New Hampshire Department of Environmental Services that it decided to interpret the state public benefit statute in a manner that we believe was different than how it is consistently interpreted in the past. Given this, we have withdrawn our airspace expansion permit and we are working diligently to resubmit it to meet the requirements 2020 as we have incorporated and we have incorporated this impact into our guidance. Our second strategy in 2020 one plan is driving further profitability within our hauling business. Ed will provide further details on our performance, key metrics and various initiatives, but we continue to execute well our pricing and operational strategies.
We again advanced strong pricing 4.8% in the quarter as we are focused on offsetting continued labor disposal and recycling cost inflation. Operational excellence is an important initiative as we aim to ensure that we have the highest levels of service compliance, reduce safety incidents and operating efficiency. Our teams are also continue to work diligently in integrating acquisitions. We continue to recognize such follow through is an important element in driving high free cash flow and additional shareholder value. The 3rd strategy in our 2021 plan is creating incremental value through Resource Solutions.
We improved recycling adjusted EBITDA by $4,600,000 year over year in 2019, even with commodity prices down roughly 20 percent over the same period. This exemplifies the strength and success of our risk off taking programs, which greatly mitigate our exposure to volatility and declines in the global recycling markets. 2019 was an exceptional year for the team as we reset 2 major recycling processing contracts, including the City of Boston on July 1, as well as 2 completed equipment upgrade projects that target reducing operating costs through increased automation as well as and probably most importantly, improving the quality of our outbound materials. As we look to 2020 beyond, we plan to continue to focus on partnering to build modernized, economically sustainable recycling programs. We plan to continue to make investments in recycling equipment, operating initiatives and customer education programs.
We also plan to target further refinements to our contamination fee program along with resetting our remaining legacy third party contracts over time. Underlying all of this, we remain focused on generating an appropriate return on our recycling assets. The customer solutions and organics team also performed very well during the year with combined adjusted EBITDA growth of over $700,000 in 2019. The 4th strategy in the 2021 plan is using technology to drive profitable and efficient growth. We continue to make great progress in leveraging our 2018 implementation of NetSuite.
While we have grown the business considerably through acquisitions, we are realizing better scale through more streamlined purchasing processes. We plan to focus our efforts in 2020 to further digitizing and modernizing our procurement process. As we drive better scale and work towards further reducing costs of existing processes, we also aim to continuously enhance our customer experience and our proactiveness and responsiveness to their needs. The recent upgrades to our CRM and early success related to our new case management system are meaningful in our ability to achieve these goals through better integration of our sales and customer care teams. Moving to our final strategy in our 2021 plan, which is allocating capital to balance delevering with smart growth.
We executed very well against this strategy in 2019. As part of our 2021 plan, we outlined the goal to acquire $20,000,000 to $40,000,000 per year of annualized revenue. In 2019, we again outpaced this target acquiring $53,000,000 of annualized revenue through our disciplined approach. Overall, we remain pleased with the performance of the acquisitions thus far. Our focus remains high on operational integration and achieving pro form a returns.
As I have mentioned, we have completed 2 acquisitions so far in 2020 with approximately $6,000,000 of annualized revenues. This is a strong start to the year as part of our growth strategy, and we are excited to welcome these new employees to our team and to provide a high level of service to our new customers. In January, we acquired an industrial recycling processing facility in Albany, New York, which is a great complement to our September 2019 market entry with the acquisition of select solid waste assets from Republic Services. In February, we acquired DAILIES and SUN, which is a great strategic fit to our Massachusetts collection operations. Our near term pipeline remains robust and we are positioned well to continue to opportunistically grow the business and further drive free cash flow.
We believe that there is over $400,000,000 of acquisition opportunity in the mid term across our market areas and we'll continue to selectively look at opportunities in adjacent markets. One area that is not specifically outlined in our 2021 plan, but is very important to our continued long term success, underlies all of our initiatives is the focus on further building our team. Over the past year, we've made significant progress and enhancements to our human resource programs. Our ongoing goals include being the preferred employer within the markets that we operate. 1 of our key programs, career path, career development, we found early success by way of providing greater transparency of advancement opportunities within key roles such as drivers, technicians and operators.
Such line of sight bolsters our ability to attract and retain quality employees, which should result in lower turnover, lower safety incidents, while simultaneously improving operational efficiencies and employee morale. Further strengthening our efforts is a continued investment and dedication to improving the recruiting, more rigorous and timely onboarding, employee engagement, along with training and development. As an example, we've developed and trained hubs across our operations that enable us to recruit and train our own CDL drivers and apprentice level technicians. Ultimately, although our programs are early on, they are yielding benefits, including improved applicant flow, higher job candidates across key operational roles, a positive indicator that our programs are really beginning to work well. Wrapping up, as reflected in our 2019 results and our 2020 guidance, we're tracking well against our 2021 plan, which displays continued execution of our key strategies with a goal of driving additional shareholder value.
And with that, I'll turn it over to Ned.
Thanks, John. Revenues in the Q4 were $193,600,000 up 18.9 percent year over year with 7.4 percent of the increase driven by acquisition activity. Solid waste revenues were up 18,400,000 dollars year over year with price up 5%, volumes down 0.9% and 9.9% growth from acquisitions. Revenues in the collection line of business were up $15,200,000 year over year with price up 4.8% across all lines of business, volumes slightly down, risk recovery fees up 2.2% and acquisitions up 10,900,000 dollars Revenues in the disposal line of business were up $2,300,000 year over year despite the closure of the Southbridge Landfill in November of 2018, which resulted in a $1,200,000 negative year over year variance. The landfill pricing environment remains strong and we increased reported landfill pricing by 7.6% year over year.
And in addition, we increased average price per tonne at the landfills by 7.8% as we improved our mix of customers and volumes. Excluding the Southbridge landfill closure, landfill tons were up 3.1% year over year. Recycling revenues were down $700,000 year over year with $2,700,000 lower commodity pricing and $300,000 lower volumes, partially offset by $2,200,000 higher third party tipping fees. In addition, we also had higher intercompany processing fees. Commodity prices were down 38% year over year.
This is mainly on lower OCC, lower mixed paper, plastics and metals pricing. Pricing was also down 28% from the Q1 through the Q4 of 2019. Organics revenues were down $300,000 year over year on lower volumes as we continue to shed sludges that do not meet our lower tolerance for odors and management at our landfill sites and processing sites. Customer Solutions revenues were up 2,200,000 dollars year over year due to several new multi site retail customers and strong growth in our industrial services business. Adjusted EBITDA was $41,100,000 in the quarter, up $7,300,000 or up 21% year over year.
Adjusted EBITDA margins were 21.2% for the quarter, up 185 basis points year over year. We saw margin improvement across almost all lines of business. During the Q4, we anniversaried the margin headwind from the closure of the Southbridge Landfill and began to recognize easier comps on disposal and labor inflation that we faced over the last few years. Solid waste adjusted EBITDA was 39 point $3,000,000 in the quarter, up $7,400,000 year over year, mainly driven by strong pricing, higher landfill volumes and acquisition activity. Recycling adjusted EBITDA was flat year over year with $2,700,000 lower commodity prices, mainly offset by higher third party tipping fees and also intercompany tipping fees.
Adjusted EBITDA was $500,000 in the other segment. This is down slightly year over year. This is mainly driven by lower project work through customer solutions. The organics group was up slightly year over year. They did a great job during the period optimizing disposal outlets and driving pricing in this tough sludge environment as we work to reduce these volumes into our landfills and other sites.
Cost of operations was up $9,200,000 year over year and down 195 basis points as a percentage of revenues. Roughly $8,700,000 of the increase was driven by acquisition activity and most of the remainder was driven by inflation across direct labor, 3rd party disposal and vehicle maintenance. General and administrative costs were up $2,900,000 year over year and up 30 basis points as a percentage of revenue. Roughly $1,700,000 of the increase was driven by acquisition activity. However, for fiscal 2019, G and A costs were 12.5 percent of revenues and this is down roughly 80 basis points from fiscal 2017 as a direct result of our efforts drive back office efficiencies through our technology plan combined with the scale we continue to gain as we grow our revenues.
Depreciation and amortization costs were up $2,700,000 year over year, mainly due to higher depreciation on trucks and equipment related to our fleet in yellow iron plans and acquisition activity. The 4th quarter includes several unique items on income statement. We had $600,000 of legal and transaction costs related to our ongoing efforts to cap and close the Southbridge Landfill and we incurred $450,000 of expense from acquisition activities. As of December 31, 2019, our consolidated net leverage ratio was 3.07x. This is down from September 30 as we generated significant cash during the quarter and continue to grow EBITDA.
Our consolidated funded debt net was $521,300,000 with liquidity of $152,100,000 In addition, we have fixed our interest rate on roughly 68% of our debt. During the Q4, we completed the remarketing of 2 of our existing solid waste industrial revenue bonds. On October 1, we remarket our 11 dollars New Hampshire BFA senior unsecured bonds at a 2.950 fixed rate through the 20 29 maturity date. And then on December 3, we remarketed $25,000,000 of New York EFC senior unsecured bonds at 2.7 8 percent fixed rate for 10 years, both excellent rates for us going forward. Net cash provided by operating activities was down $4,000,000 year over year for the full year with higher operating results offset mainly by the reduction in short term liabilities.
This negative change in working capital was mainly driven by $5,300,000 negative through the adoption of ASC 842 on January 1, 2019. We've talked about this the last several quarters. This shifted payments on landfill operating lease contracts from investing activity to an operating activity on the statement of cash flows. This change only impacted the financial statement positioning of the outflow. We also had an $8,500,000 negative impact associated with the reduction of accrued liabilities due to cash outflows from the Southbridge landfill closure and the remediation project at a former scrapyard owned by one of our subsidiaries in Potsdam, New York.
There was also a $9,500,000 negative impact due to timing differences in cash outflows and inflows from accounts receivable, accounts payable and prepaids and other liabilities. Overall normalized free cash flow is $55,500,000 for fiscal 2019. This was up 8,400,000 or 17.4 percent year over year. As stated in our press release yesterday afternoon, we announced guidance for fiscal 2020 by estimating results in the following ranges: revenues between $800,000,000 $815,000,000 or up 8.6% at the midpoint adjusted EBITDA between $170,000,000 $174,000,000 or up 9.9 percent at the midpoint and normalized free cash flow between $60,000,000 $64,000,000 or up $11,800,000 at the midpoint. The 2020 guidance includes 4.7 percent revenue growth from the rollover impact of acquisitions completed in 2019 and those already completed in early 2020.
However, our 2020 guidance does not include the impact from any acquisitions that have not yet been completed. We expect adjusted EBITDA growth to be driven by the following factors in 2020. We expect our collection line of business to be up $5,000,000 to $7,000,000 of EBITDA driven by robust pricing and partially offset by wage and disposal cost inflation. We expect all of our disposal sites excluding North Country to be up $7,000,000 to $8,000,000 driven by robust pricing and some very limited volume growth. As John discussed, we expect our North Country landfill to be down 4 $500,000 as we're slowing tonnages into the site.
Our Resource Solutions Group, recycling organics and customer solutions, we expect to be up $2,000,000 to $3,000,000 as we continue to improve our revenue model, off take risk and improve operational efficiencies. We expect roughly $6,000,000 to $8,000,000 of rollover benefit from acquisitions completed in 2019 and early 2020. And we expect a slight headwind of $2,000,000 to $4,000,000 mainly from G and A growth and a few other factors in the business. Overall, we expect about 30 basis points of EBITDA margin expansion during the year. Working capital and net cash provided by operating activities will be negatively impacted in 2020 as we plan to spend roughly $14,000,000 on the final Caffeine closure at the Southbridge landfill.
We expect to substantially complete this work during 2020. One other quick note, we have changed our segment reporting for 2020 with the recycling organics and customer solutions groups now rolling up into the Resource Solutions segment. So we will have the Eastern Region, Western Region, Resource Solutions and Corporate Entities. And with that, I'll turn it over to Ed. Thank you.
Thanks, Ned, and good morning, everyone. We finished the year strong. We continue to be a price leader in our markets. Our legacy businesses are performing well, and we made considerable progress integrating our acquisitions during the quarter. Consolidated cost of ops as a percentage of revenue improved by almost 200 basis points over Q4 last year, driven both by price and by improved operating cost at the landfills and better performance at our recycling organics and resource solutions businesses.
Our collection operations, which generate about 50% of our revenue, grew 18% over the same quarter last year primarily through acquisitions. I have mentioned in the past that acquisitions tend to dilute our margins in the 1st year as it takes time to get pricing where it should be and to increase the level of automation appropriate to the operation. Given that margin headwind, we're really happy with the overall performance in the quarter. On a same store basis, excluding the acquisitions, we grew collection pricing by 4.8 percent, were slightly negative on volume and improved our overall variable margin contribution per driver hour, which is our key productivity metric by 1.5%. Recycling is a hot subject and I know that many industry participants are struggling in this low commodity price market.
So I think it's worth repeating some of our comments from before. We, along with our customers in the Northeast, believe recycling is an integral part of sustainable economy and it's our obligation to provide our customers with the best possible outcome and keep the recycling model economically and environmentally sustainable. We continue to make investments to increase throughput and operating efficiency as well as to produce cleaner products that will demand a higher relative price in the commodity markets. But we provide a service. We do not take on the commodity risk and we look for an acceptable return on our investment.
We have spent several years educating the market and transitioning our business model accordingly. And although there remain a few minor legacy contracts yet to roll off, we have effectively insulated ourselves from commodity risk and our recycling operations are a positive contributor to our financial performance. A quick update on our progress with integrating our acquisitions. In the Rochester market, where we acquired 4 collection operations and a transfer station in late 2018, we have completed the first three phases of our integration process. Management integration and back office system conversions were completed 1st, initial operational integration followed including route optimization and service changes where appropriate, and more recently the careful elevation of pricing to market rates.
We are now entering Phase 4 increasing the level of automation and we see some significant opportunities. Our team in Rochester has worked very hard to get these things done and I thank them for their exceptional effort. We're also making progress with our more recent Albany, Western Mass, Southern Vermont acquisitions and integrating them with our Fort Edward and existing Southern Vermont operations. Phase 1 is complete and we are well into Phase 2 with a good management structure and a solid market area plan in place. Last quarter, I mentioned the enhancements we've been making to our operational management capabilities, adding foundational elements to both run our existing businesses well and to integrate newly acquired businesses smoothly.
We're making significant progress on furthering develop further developing our operational processes and systems and are continuing to add resources where needed to expedite the integration of future acquisitions. We've learned over the past year and a half where the pinch points are and as we improve our processes we will be able to realize synergies faster and increase our capacity to take on more in the future. We finished the year strong and we're excited about the opportunities in front of us and look forward to your questions. With that, I'd like to turn it back to the operator now to start the Q and A.
Your first question comes from the line of Tyler Brown with Raymond James.
Good morning, guys. Good morning, Tyler. Good morning, Tyler.
Hey. So I'm a little unclear on the North Country update. So to be clear, the decision to pull the permit expansion was based on a governmental interpretation issue. It wasn't related to
a vote. Is that right?
No, that's exactly right, Tyler. The agency interpreted the statute differently than they had in the past, And we will take that into account and reapply based on the information that we've given us. It's a deviation from how they've viewed that statute for, in my view, probably over 20 years. So we will reapply with in fairly short order.
Okay. So you do plan to resubmit. And then in conjunction with, I guess, governmental approval, North Country does require a local vote?
No, it does not. We have approval for this permit. We have approval. This is a permit that will give us probably 4 or 5 years of capacity. We have local approval for that.
If we go on beyond that, we would need a local vote, but not the permit that's in front of that will go back in front of DEC shortly.
Okay. Okay. And so maybe at the 2020 tonnage levels, how many years does that site have? Does it have a handful, maybe 4 or 5?
Yes. I would say it's still 4 or 5 years.
Okay. And then obviously it's a pretty big drag, but where are those tons going? Are you going to try to internalize them elsewhere in the fleet?
Some of them certainly will be internalized to other facilities. Some of them will go to 3rd some of the tons will go to 3rd party facilities. But we will internalize as much as we can within our system.
Yes. We service roughly 150 towns and cities in the state of New Hampshire and having to move tonnages out of state from New Hampshire is not easy because you can't take out of state waste into Maine, you can't take it into Vermont. Massachusetts doesn't have capacity. So you're left with trying to move it out to New York, which could be as much as a 50% increase.
Okay. That's helpful. And then, Ned, so you mentioned that it's a $4,500,000 EBITDA drag from North Country specifically, but then you also mentioned that there's a plus 7 to 8 from everything else. But I was wondering if you could parse that 7 to 8 between maybe Hake's, Chemung and pricing or just any flavor would be helpful?
It's overall, most of it's just price and there's some extra tons in New York. As you know, last year Chabang ran a little bit light. So we'll ramp some tonnages to get that up to level. The rest of the sites are looking to have a pretty good year, normal pricing, operating efficiencies.
And there's no fundamental change in the Northeastern pricing dynamic. I mean, it still feels very scarce capacity.
Yes. I mean, I think the supply and demand equation really hasn't changed, Tyler, for sure. Yes. It's exactly right.
Okay. And then maybe Ned on the CapEx side. So I appreciate that you've got a number of one I'm going to call it one timey CapEx items this year, Waste USA build out Southbridge capping and you have some other non recurring items. But to be maybe a little bit more clear, will the WasteUSA and the Southbridge spend basically be done in 2020 or does that also linger into 2021 or 2022?
So Southbridge is a combination of capping closure. The majority of it's short term liabilities that will be worked down about $14,000,000 and we expect the majority of that to be done in the year. We need a good construction season to get all of the work done. There's quite a few acres that will be capped. And Waste USA, the major part of the excavation will be done in 2020 and then we'll construct the cell 2021 and then we'll be into the new expansion area.
Okay. Okay. And then so if I was to sum up those 3, call it, non recurring items, I mean, that is $40 some 1,000,000 out the door in cash. Does that restrict your ability to do M and A? Or do you still feel like you have plenty of financial flexibility for good deals out there?
I think that we would characterize it with significant availability from an acquisition standpoint in terms of the existing credit facility.
Okay. Okay. So not a limiting factor. And then maybe my last one, this is kind of in the same vein, but and maybe this is a question for all three of you, but how do you feel from a bandwidth perspective, be it IT, be it human capital, financial capital, I mean all of the different limiting factors, how do you guys feel from a bandwidth perspective for future M and A?
I think that you saw us take a
little bit of a pause in the Q4, Tyler, in terms of acquisition. We did a lot of work in terms of really taking a look at the success that we've had from an acquisition standpoint. We've added people to HR. We've added people to IT. A few, not a lot of overhead, but certainly reflective on the work that we've done to integrate the businesses that we've bought over the last 18 months or so.
So I think that we're feeling good about where we are. We've got a few more resources that we're going to put in place from a development standpoint. But we think that back office, customer care, payables, the work that we did, that Ned did with the finance team to implement NetSuite is really paying dividends to us in terms of the back office. And we've added a few people, both from an IT as well as from an HR standpoint, because we've added about 600 employees in the last year, year and
a half or so. And maybe, Ed, from an operational bandwidth perspective, do you feel you have enough integration, call it manpower, if you will?
Yes. If you remember on the last quarter, I talked about our expansion of our structure. So we now have a regional VP of Ops in the East and in the West, plus we've added resources at the home office to support the transitions. And we as John mentioned, we have 1 or 2 additions coming on in the near future.
Okay. Okay, good. Ned, I really appreciate the bridge. I feel like maybe you've been asked that question before.
Thanks, Tyler. Thanks, Tyler. Thanks, Tyler.
Your next question comes from the line of Hamzah Mazari with Jefferies.
This is John filling in for Hamzah. Hey, Hamzah. Could you just comment on whether you think landfill pricing is at peak right now in your system? And how much runway do you think is
a reflection of the supply and demand equation. So I think we're likely to continue to see fairly robust pricing because of the supply and demand equation. So I think it's fair to say that it will I don't know that we would anticipate it being exactly as strong as it was in 'nineteen on a go forward, maybe a little bit more modest, but still relatively in the same zip code.
Great. So I have
one more question and then I'll turn it over. Can you also comment on your margin target of 29% in the solid waste and how quickly you think you can get there? Also any execution risks we should be thinking about as well?
Yes. So that's the one target in the 2021 plan that we're probably tracking a little light against. We ended the year in solid ways at sorry, I just got to get the number at 20 around 26%. And as you know, we've had a couple of headwinds there over the last year, whether it be wage inflation or the Southbridge closures, some of the long haul transportation. We got back to improving margins in the Q4.
We had a great overall quarter of improving margins. But in solid waste, our margins were up over 200 basis points, 210 basis points in the 4th quarter. And we're looking at a year next year where we believe we've anniversaried a lot of the fundamental changes we made from a wage reset, transportation, 3rd party disposals. So we'll get back to the cadence of 30 to 50 basis points of margin enhancement in solid waste. North Country will weigh on that a little bit in the year.
So we're probably there's no reason we shouldn't get to that destination, but we are tracking a little behind. I think we end 2021 closer to 27 ish percent, 27 point 5%. Got
it. Thank you. That's very helpful.
Yes.
Your next question comes from the line of Sean Eastman with KeyBanc Capital Markets.
Gentlemen, thanks for taking my questions. I just wanted to go back to the North Country Landfill setback. I just want to understand better the timeline of the resubmission process. And just based on that, is it likely that this becomes a tailwind as we look into 2021?
I wouldn't anticipate it would be a tailwind for 2021 at this point. But we obviously, we've got to go through the process. We're in the process of doing that now. We'll get the resubmission in as soon as we can, but I would not anticipate at this point it being an issue in 2021.
Okay. Got it. And on the volume shedding, I just wanted to get some color on whether this was this had been contemplated for some time based on the strategic initiatives or whether there's been any shifts of late in terms of competitive dynamics in any particular piece of the business?
We started a process early in 2019 of reevaluating our customers on a profitability basis, particularly in the roll off line of business, but also the rest of the business, and simply readdressing customers that over time had eroding margins. And so we started pushing price selectively to those customers or talking to them about how to change their operations so that they could keep their costs the same, but not hurt our margins. And in that process, there are customers that simply go to a competitor and that's okay as long as we're keeping our price discipline and we're keeping our profitability in place.
Got it. So no fully sort of expected kind of
Yes, exactly. No surprises, not at all.
Got it. And then just I'm trying to understand, in the Q4, again, price growth ahead of internal budgeted expectations. Just understanding the dynamic there, is it that the underlying inflationary environment was also higher than budgeted or Yes.
I think it's fair to say that the entire industry is feeling pressure from a wage standpoint, which in one sense is a positive for drivers mechanics. But the entire industry and the transportation industry is feeling a lot of wage inflation currently. Seeing inflation from a recycling standpoint, inflation from a disposal perspective. So there's a lot of inflation inherent in the business model at this point in
time. Yes. And if you look at the year, we ended up solid waste at 5.1% overall price and we had budgeted around 4%, but we also ended up with about 75 basis points more inflation and it was on 3rd party transportation, 3rd party disposal and direct labor lines.
Got it. Okay. That makes sense. Perfect.
As we talked about in the Q4, we started to really comp a lot of that and start to drop more to the bottom line again.
Yes. Okay. That makes sense. And then lastly from me, just given the bolstering of the HR and back office staffing, the leadership role additions, it's a pretty material sort of EBITDA drag, I guess, from a year over year perspective in 2020. So I'm just wondering, considering those elements and then some of the efficiencies around the CRM and the ERP have yet to be harvested.
How we're tracking over the next couple of years relative to that 12% SG and A margin target?
Yes. So we've made quite a bit of headway already, as I talked about, about 80 basis points. And it's a combination of a lot of different things. We're gaining some scale on key roles, but we're also gaining efficiency in the back office. In 2020, we're focused on a couple of key technology initiatives.
1 is on the procurement side. As you know, we put a new ERP in place a year and a half ago and we are focused on digitizing, taking paper out, automating processes in 2020 and we hope to start to drive even more efficiency there and modernization of our systems. We haven't announced the target to The Street, but this will be a self funding initiative and will generate margin benefit over the next 2 years. Our other major initiative is really looking at enhancing what we call order to cash cycle from how customers interact with us to how we dispatch route trucks, onboard computing and we're in a pilot phase, looking at some new technology there. And this could have a really meaningful service our customers safely and efficiently.
So it's exciting a little early in that one to lay out a lot of dynamics. But from our standpoint, we will continue to gain scale. As John was talking about, there's some interesting growing pains when you grow as much as we have. We've grown 35% of our employees in the last 2 plus years. And here's a funny example, our payroll and benefits team, very small reports through my team and we added 35% new employees, but we hadn't added a single head in that group.
So it's almost like a step function. We need to add someone there to help support our employees and then you kind of grow into that role. So there's a little bit of that coming into 20 20 where we're adding key people to help us continue to grow effectively.
Really helpful. Thanks for the time, everyone.
Thank you. Thank you.
Your next question comes from the line of Michael Hoffman with Stifel.
Thank you, John. Ned, how are you doing? Are you okay?
I'm good.
Are you what's that?
I'm on crutches, but I'm
Ending injury. Season ending.
So we understand. And I think there's congratulations for you, John. Don't you want another grandchild?
I do. I do. Absolutely.
Good question. Congratulations. So to the business of trash, if we follow-up on the underlying inflation, could you actually quantify it as a percentage? Just so I'm understanding this because you are getting terrific pricing. So what it sounds like is you're doing 5% in land solid waste pricing, but you're sitting here at 5.5% inflation.
Is that what I heard?
No, no, no. No, opposite way. Okay. Yes. Well, earlier in the year, there were a few margin headwinds that are a little unfortunate.
So at Ontario, the Southbridge comp, there are a few things like that that weighed on margins also as we brought in acquired businesses, they weighed on margins. So our direct programs, our pricing programs are outpacing inflation. If you just look at year to date, acquisitions alone, 1st year, a little bit margin dilutive. They weighed on margin 60 basis points. Ontario weighed on 20 basis points and Southbridge, 80 basis points.
So you've got 160 basis points there and our margins were slightly backwards year over year. So all of our other pricing programs are outpacing inflation in markets, but we had a few of those unfortunate headwinds through the year. But I think we're setting up nicely for 2020 to outpace inflation.
Okay. So to that end, thinking about cadence, the first half of the year gets pretty good margin comparison, second half it's a little tougher to net out for up 30 to 50 is what you're trying to get to?
Yes. And That's the way Yes, we were going to guide a little bit stronger than that, but with the North Country slowdown in the volumes, that's high margin business that weighs on margins a little bit through the year.
Okay. And then John, just so I'm clear understanding your answer to the North Country question, are you expecting it to be permitted and therefore online in 2021 or we should assume I'm carrying this headwind in fact getting any worse just I still have $5,000,000 of headwind in the 2020, it stays in 2021 and then it comes off?
Yes. I think that we're hopeful to get through the process and have the facility operational by 2021.
Okay.
All right. So this is $5,000,000 maybe a little The
reason why we pushed back on tonnage is we want to make sure it's obviously, there's we've got to get through the process, Michael. So but we think that we will get through the process and be able to minimize any impact to 2021.
Perfect. Okay, that helps. And then you have done a terrific job in price on the collection side. It feels like it's kind of settled into you can sustain middle threes. Landfill, you're in this still exploring sort of the market corrections given the disposal reduction.
Where do you think it settles? Obviously, 7, 8 is not sustainable, but where do you think settle on if you were taking out and trying to model out 5, 6 years? Do we think about landfill being able to do a 4 consistently once you kind of work through all of the market corrections?
Yes. That's what we have in our internal models moving out the next several years. As you know, we've been working through if you look at our landfill book of business, about a third little more than a third of the tons going in are from our own trucks, about a third are from long term contracts and about a third are from independent third parties. And everything on our own trucks, we push through intercompany pricing each year and we're pushing it through that 6% to 8% range. 3rd parties, we've moved more to shorter term contracts, so we can more perfectly reflect the constraints in the market.
And as we've been working through some of the longer term municipal contracts, you see some larger step ups. So some of those larger step ups are also probably shading it above 5% a little bit right now. And I think we believe as we look forward to the next couple of years that that 4% to 5% range is sustainable.
Okay. That's very helpful. And then when do you think the market rate gets to a level where far distant assets become attractive and volume can move away from the market through trains and what have you, Is there a risk to that, that it causes a shifting in this pricing environment because railing gets is accessible?
It's still I think we still have a ways to go, Michael. I don't think that we're at the levels where the capital intensity of rail. And you know what those numbers look like in terms of the intensity amount of capital that has to be deployed to move that same 1,000 ton a day that you can move by truck. So I think that we've got a ways to go before that's going to be effective. At some point in time, it may very well be, but I think we're years away from it really being effective in terms of moving it, moving waste from a rail perspective.
It also depends
on what state you're in. So if you're in New Jersey or Pennsylvania where you can't get overweight permits for trailer trucks, it's a little different story. So you've seen more rail transfer waste via truck. And our sites are well positioned for major population centers, and we believe many of the moves are sustainable long term.
Okay, great. And then on the deal side, so the pipeline is full and you're still active and theoretically you could absorb similar levels like you did a year ago. Is there any sense that the current election environment spooking people to get things done in 2020 to have certainty on their tax position? Or are we just seeing I don't
know. I think it depends on the level of sophistication and the size of the company, Michael. But for the most part, I think that the drivers there are the inflation that all of the independents are feeling from a labor standpoint, from a disposal perspective as well as from recycling standpoint. The value disruption from a recycling standpoint is a big, big driver for a lot of the smaller companies as is the labor. If they can find the other thing that we've done is we've changed our system.
We've put training programs in place. We're now we're trying to hire people, trying to attract as many people coming out of high school that are not going on to college and give them a career. We're doing an awful lot of work there. And as we said before, we've beefed up HR to really and we've been successful. We're filling we've filled the slots from a driver standpoint.
And at one point in time, we had 40 openings for drivers across the system. And so there's a tremendous amount of pressure on the independents because of wage inflation, recycling inflation and disposal inflation.
And so would you say that your retention has gone up or your current drivers has gone down, whichever way you want to refer to it?
Yes. Retention is going up. I mean, one of the things that we did was Kelly Robinson came in as our new VP of HR about 2 years ago now, but the 1st year, he spent just doing career development. So if you come to work for Casella as a rear load driver, we'll train you as a rear load driver. If you do a good job and you're safe, we'll train you as a roll off driver.
We'll train you as a front load driver. We'll train you as a swing driver, and then you can become a trainer. And there you can see how you can go from 18 dollars to $35 an hour in a 5 year period of time and really have a clear understanding of what your career could be at Casella. It's really paying dividends because what we found was the majority of our turnover was in the 1st year and a lot of our accidents and safety issues are in the 1st year. So we're doing additional training, and we're doing a lot of work to really impact the turnover.
So it's the programs are really beginning to work and take hold. And first thing that we were able to do with those programs was to fill the seats. And now it's about retention and bringing people's skill sets up and allowing them to progress along that career path so they can do a better job of taking care of their family.
Okay. Thank you very much. Appreciate it. Thank you.
Thank you.
Thanks, Michael.
Your next question comes from the line of Tyler Brown with Raymond James.
Hey, guys. Just a couple
of quick follow ups if I could. First off, there was no CNG tax credit benefit in Q4?
There is a very small one. So we use about 400,000 I'm sorry, about 200,000 gallons per year. And so we had about $200,000 of benefit in Q4.
Okay. That's helpful. I just want
to make sure there wasn't something there. Secondly, the so Ned, when you talk about Resource Solutions being a positive 2% to 3%, I'm assuming that's now including the recycling piece because I would assume that there's some recycling benefits rolling into 2020?
Yes. And I kind of quickly made that comment. We've reorganized our internal teams to be more effective where our recycling, our customer solutions and our organics groups are now under one leader and they have very common business plans and goals. And so next year, when you see our segment reporting, you'll see the East and the West, the solid waste groups, the resource solutions group and then other corporate entities. And that $2,000,000 to $3,000,000 is mainly driven by recycling with a little bit of growth in organics and customer solutions.
Okay. That's what I thought. And then just lastly, I do want to come back to the 7 to 8 again on the disposal, the positive 7 to 8 which excludes North Country. But isn't there a couple million benefit from Ontario presumably not reoccurring? Again, we talked about Chemung, but it doesn't feel that there's a huge assumption in there from a price perspective.
I could be wrong, but are you kind of thinking about landfill pricing moderating in 2020?
Yes. In our model, we have it moderating. We have it around 4% to 4.5%. And you're right, Ontario, we have a little easier year over year comp. We ran some higher costs, operating costs in the first half of the year as we're addressing some gas issues at the site.
And that's around $2,000,000 of tailwind per se coming into 2020. Shemeng, as we mentioned earlier, we got a permit increase several years ago, but we hadn't exercised our option to get into that additional annual capacity and we started to ramp it late in 2019. We'll fully ramp that this next year. So that will be about $2,000,000 to $3,000,000 of benefit and then the rest is just at various sites through good pricing, good operating discipline.
Okay. I appreciate it.
Okay. Thanks, Tyler. We
do have a follow-up question from the line of Michael Hoffman with Stifel.
Sorry, I forgot to ask this interest rate question. Rates, basically, the banks are practically giving money away to the garbage industry. Do you have an opportunity to meaningfully lower your rates?
I'm not sure if we have an opportunity to meaningfully lower rates. We did a great job in 2018. We refinanced our senior secured credit facility and term loan B into a new revolver in a term loan A. And we put a pricing grid in place. As we get leverage out of the business, our rates drop.
And we're currently paying on that LIBOR plus 175. And we can step down in that grid all the way to L plus 125. We'll look at that. We're also looking at whether there's an opportunity to do a blend and extend there and improve our position. We've been active with tax exempt bonds and we expect to have some more in 2020 They'll help fund growth and we've been getting very low fixed rates there and they're extremely effective.
I don't think there's a big step down there, Michael, because we've done such a nice job taking interest costs down, but we'll look at it.
Well, I mean, you're over 5% at this point and why did I get their multibillion dollar revenue companies and they're getting money at 2.5%. Can't you get this below 5%?
Yes. So our revolver is so LIBOR plus 175%, so that puts that like 3.5%. We've got some fixed swaps that puts it more like 4.25% for part of that money. Our tax exempt debt, everything we're doing today is sub-three percent fixed. Some of the historic stuff is more like 4 point percent to 5%.
So as those rollover, but they have non call provisions in them. So generally, we'll look to work it down, but there is not a big step down expected.
Okay. And then lastly, what tax rate am I supposed to be using?
20 6% is our effective tax rate. In 2020 though, we'll essentially, Jason, we'll have very little income statement taxes. How much do we have
in the model?
Correct. We're anticipating close
to nothing. Close to nothing. Close to nothing. Yes.
We've got a $1,000,000 tax provision.
$1,000,000 tax provision in 2020 and then cash taxes should be around the same.
Okay. Thanks. Appreciate it.
Thank you, Michael.
Yes. Thanks for your time.
See you.
I'm showing no further questions at this time. I would now like to turn the conference back over to Mr. John I'm sorry, we did just have a question to come into queue.
No. Okay. We're done, operator.
I'll turn the call over back to Mr. John Cassello.
Thank you, operator, and thank you all for attending this morning. We look forward to discussing our Q1 2020 earnings with all of you in early May. Thanks, everyone. Have a great day.
Thank you for participating, ladies and gentlemen. This concludes today's conference call. You may now disconnect.