gentlemen, and welcome to the Casella Waste Systems Inc. Q1 2019 Earnings Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, today's conference will be recorded.
I would now like to turn the call over to Joe Fusco, Vice President of Communications. Sir, you may begin.
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 Q1 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.com. And with that, I'll turn it over to John Casella, who will begin today's discussion.
Thanks, Joe, and good morning, everyone. We are pleased with the strong start to the year and our most challenging seasonal quarter. We continue to execute well against our key strategies as part of our 2021 plan and remain focused on driving further normalized free cash flow growth. As reported yesterday's press release, our Q1 revenues and adjusted EBITDA were up 11% and 8 point 1% respectively from last year. We also reaffirmed our 2019 guidance for revenue, net income, adjusted EBITDA and normalized free cash flow.
Notably in the quarter, we completed an equity offering with net proceeds of just over $100,000,000 We are well positioned to continue to grow the business in a disciplined manner. And yesterday, we announced our first acquisition in 2019 of MPC Disposal located in Maine. This is a tuck in great addition to the 10 acquisitions we completed in 2018 and we continue to see a robust pipeline in the Northeast. Overall, we remain focused on executing against our 2021 plan. The five key strategies are consistent with the plan as announced in August of 2017, which includes increasing landfill returns, improving collection profitability, creating incremental value through resource solutions and using technology to drive profitable growth and efficiencies along with efficiently allocating capital for strategic growth.
Our first strategy in our 2021 plan is increasing landfill returns. We continue to enhance returns through price execution, operational programs, the sourcing of new volumes at higher prices and our efforts to advance key permits. Our average landfill price per ton was up 6.6% in the quarter as we advanced a strong pricing program in early 2019. The pricing landscape continues to be favorable and we expect it to remain so into the foreseeable future due to the continued disposal capacity constraints across the Northeast. We're not only increasing price on existing volumes, but also replacing lower priced waste streams with higher priced volumes, which blends up our overall pricing and improves return.
The Q1 was a tough quarter for our disposal line of business with adjusted EBITDA down due to the expected closure of the Southbridge landfill in 2018 November 2018, a tough comparison given the large soil remediation job that we had in the Q1 of last year and most notably operational challenges at our Ontario landfill that caused us to cut high priced sludges accepted at the site and to incur hires and budgeted expenses to resolve several operational issues. It's an all hands on deck including myself to resolve the issues and we are well on our way to getting back to our high operating standards and expected financial performance at the site. Our second strategy in our 2021 plan is driving further profitability within our hauling business. We continue to outperform and execute well against our pricing and operational strategies. Our pricing discipline and agility once again apparent in the quarter as we advanced collection price by 6% year over year.
We are continuously monitoring inflation across the business and adjusting our pricing programs accordingly as we aim to outpace heightened disposal, recycling and labor costs. As we continue to advance price, our risk mitigation SRE and E and E fee programs are working well to offset recycling commodity pressures, fuel, environment and regulatory costs. We improved collection margins in the quarter while at the same time experiencing slightly negative volumes as we deselected or shed less profitable customers. We launched a new program in 2019 called Service Excellence focused on establishing clear and measurable service standards. We initially focused on the collection line of business where it is paramount to provide top notch service to our customers each and every day.
3rd strategy in our 2021 plan is creating incremental value through resource solutions. Our recycling business performed well in the quarter with a year over year improvement in adjusted EBITDA as we continue to make progress restructuring 3rd party recycling processing contracts to pass commodity risk back to our customers introducing contamination fees to help drive behavior changes with recycling and starting 2 large recycling facility equipment upgrade projects. Our SRA fee continues to work well as it is fully offsetting the commodity risk on our intercompany volumes. Given our early success in 2019 and the strength of our risk mitigation programs, we do not expect the year to date declines in the recycling commodity prices including the recent declines in cardboard to significantly impact our forecast for the remainder of the year. We will maintain focus on producing high quality and materials reducing our exposure to commodity prices and improving our operational The customer solutions team also performed exceptionally well in the quarter with adjusted EBITDA growth of approximately 33% and margin improvement of over 70 basis points as they continue to capture share of wallet for major industrial customers across our franchise area.
The 4th strategy in our 2021 plan is using technology to drive profitable and efficient growth. We're happy with the progress we have made against this initiative over the last year. Our NetSuite implementation went very well and we are now starting to drive meaningful change to our business processes. Working to simplify, automate our purchasing processes to drive out costs enable us to continue to scale our business without adding significant back office headcount. One of our main focus areas in 2019 is on better integrating our sales force and our customer care teams through a newly launched case management system, which is tied to our CRM, which is Microsoft CRM, with an aim on improving our ability to quickly and efficiently respond to customer needs.
Moving on to our final strategy in our 2021 plan, which is allocating capital to balance delevering with smart growth. We executed very well in 2018 against this strategy with the completion of 10 acquisitions during the year. We exceeded our goal to acquire or develop $20,000,000 to $40,000,000 per year of annualized revenues and we are well positioned to again outperform our goal in 2019. Over the last 6 months, we have made great progress integrating the acquisitions we completed in 20 18. To date, we've completed all of the finance back office systems integration work for all of the acquisitions completed in 2018.
We are busy working on executing against our post acquisition operating plans for each acquisition to drive synergies and internalization. We're tracking generally well to the performance or above pro form a for almost every acquisition completed last year with a few areas that need to improve over the next several years. And as we said last year, when we talked about those acquisitions, the value will come out of those acquisitions over the next year or so as existing disposal contracts terminate and we were able to internalize additional tons from those acquisitions that we did in 2018. Yesterday, we closed on the acquisition of MC Disposal in Maine. This is a great tuck in acquisition for us, roughly $7,000,000 of annualized revenues that will integrate well with our existing operations in Maine.
This acquisition represents a nice start to our acquisition growth strategy in 2019. And as we look out over the next few months, we have approximately $40,000,000 of annual revenues across opportunistically grow the business given the recent equity offering and our ability to continue to grow free cash flow organically. The overall strength of our balance sheet coupled with a robust pipeline of that overlay our existing operational footprint or that is in adjacent strategic markets. One area that is not specifically outlined in our 2021 plan, but is very important to our continued long term success and underlies all of our initiatives is to focus on further building our team. As we have highlighted in the past, in 2018, we introduced our career path program to our maintenance and landfill technicians, our recycling employees and our drivers.
While the program is in the early innings, we are starting to see some early positive benefits. The goal of Career Pass program is to provide a measurable and transparent path to advancement through career training programs, safety and productivity goals. Over time, we expect this program to improve employee satisfaction, strengthen our recruitment, reduce turnover and enhance productivity while lowering safety incidents. In 2019, with the help of our human resource team, we are also in the process of creating a robust apprentice onboarding and training platform. Our goal is to develop a training program to help us to train CDL drivers and apprentice level technicians that are highly committed to the company and dedicated to superior safety and service.
We have established several training hubs across our operations we are having great initial success in attracting trainees to the program. Wrapping up, as reflected in our guidance, 2019 is attracting well against our 2021 plan and displays continued execution of our key strategies with a goal of driving additional shareholder value. We expect continued strength in solid waste, a robust acquisition pipeline, recycling tailwinds to offset the 2018 production of the Southbridge landfill. And with that,
I'll turn it over to Ned. Thanks, John. Revenues in the Q1 were $163,700,000 up 16,200,000 dollars or 11% year over year with $11,900,000 or 8.1 percent of that growth driven by acquisition activity, the rollover impact year over year. Solid waste revenues were up $11,200,000 or 10.2 percent year over year as a percentage of solid waste revenues with price up 5% and then 10.8% from the rollover impact to acquisitions and volumes down 4% year over year. Revenues in the collection line of business were up $16,600,000 with price up 6% across all lines of business, volumes down very slightly, risk recovery fees up 2.4% and acquisitions up 11,300,000 dollars Our disciplined pricing strategy has been working very well, balancing customer retention and new business growth with appropriate pricing levels to offset the building inflation across our operations.
Revenues in the disposal line of business were down $4,200,000 year over year with very strong offset by volume declines and the closure of the Southbridge landfill in November 2018. The closure of Southbridge resulted in a 2 point $2,000,000 year over year decline in revenues. Disposal volumes had a tough year over year comparison as we had a one time $3,500,000 soils remediation project in the Q1 last year that did not repeat this year. And volumes were also negatively impacted by a $600,000 business interruption at a transfer station that we're rebuilding after a fire. This transfer station is now open.
Excluding these two factors, disposal volumes were actually up slightly. Economic activity remains strong across the region and landfills and waste to energy facilities were generally at capacity throughout 2018. The tightness of the market has given us a great pricing backdrop for 2019. And in the Q1, we increased reported landfill pricing by 4 point 2% year over year. And as John mentioned, we drove average price per tonne up 6.6%.
Excluding the Southbridge landfill closure, landfill tons were slightly down. They're down 1.5% year over year. However, we do expect to ramp tons up during the higher price summer months. Recycling revenues were up $600,000 year over year with $1,900,000 lower commodity pricing, but this was offset by our $2,000,000 of higher third party tipping fees or processing fees and $500,000 of higher volumes. Average commodity revenue per ton was down 15% year over year in the quarter on lower fiber pricing and down 16% from December of 2018 to April of 2019 on further declines in cardboard pricing with cardboard down 35% from December to April.
Organics were up $1,400,000 year over year in higher volumes, mainly associated with the new 2 year sludge T and D contract. And customer solutions revenues were up $3,000,000 year over year due to several new multi site retail customers and continued growth in our industrial services business. Adjusted EBITDA was $26,600,000 in the quarter, up $2,000,000 or 8.1 percent year over year with margins down 44 basis points. Solid waste adjusted EBITDA was $24,800,000 in the quarter. This is actually down $100,000 year over year with very strong pricing and acquisition activity offset by some inflation in our operating costs and as I just mentioned lower disposal volumes and $1,800,000 of lower adjusted EBITDA at the Southbridge Landfill.
Solid waste adjusted EBITDA margins were 20.4% in the quarter. This is down 2 20 basis points year over year and one of the largest reasons we saw margin pressure overall as a business. The Southbridge landfill closure negatively impacted margins by 115 basis points, while our heightened operating costs and reduced volumes at the Ontario landfill pressured margins by 80 basis points fuel negatively pressured margins by roughly 40 basis points. So excluding these three items, margins were actually slightly up year over year. Recycling adjusted EBITDA was up $2,000,000 year over year with lower commodity prices and higher variable Adjusted EBITDA was $1,800,000 in other segment, which is up $100,000 year over year with a great quarter for customer solutions with adjusted EBITDA up $300,000 or up 33% year over year on strong execution of the industrial strategy.
Cost of operations was up $12,100,000 year over year with roughly $9,000,000 of that increase driven by acquisition activity and most of the remainder driven by higher third party transportation disposal costs. G and A costs were up $1,700,000 year over year, but down 36 basis points as a percentage of revenues as we began to gain leverage from acquisition activities in the 5 year technology plan. Roughly $1,000,000 of this year over year increase was driven by acquisition activity. Depreciation and amortization costs were up $1,500,000 year over year, mainly due to higher depreciation on trucks and equipment related to our 5 year fleet in Yellow Iron Plans and heightened acquisition activity. You will notice there are 2 unique items in the quarter.
1, we incurred roughly $600,000 of legal and transaction costs related to our ongoing efforts to cap and close the Southbridge landfill. This is moving along well as John mentioned, but we do continue to work with the state to get a capping plan in place and we incurred expense from acquisition activities during the period as well. Our normalized free cash flow was negative $6,000,000 in the quarter as compared to positive $7,200,000 for the same period in 2018. This reduction was mainly due to 2 items. The biggest is timing differences in cash outflows associated with accounts payable.
We expect this to normalize through the remainder of the fiscal year and we're on track to meet our guidance. And we also had higher capital expenditures year over year due to business growth and timing differences. This is actually a positive storyline where we're able to take delivery on trucks and equipment earlier in the fiscal year as we placed orders in mid-twenty 18. As of March 31, 2019, our consolidated net leverage ratio as defined in our credit facility was 3.10 times, which is down 2.3 times since December 31, 2014. Our total debt was $469,900,000 with liquidity of approximately $197,000,000 In addition, we have fixed our interest rates on roughly 67% of our debt.
As John mentioned, we believe our capital structure is in a great position and will allow us to execute well against our strategy to grow through smart acquisitions in 2019. We just refreshed our 2019 forecast and we are confident that the 35% decline in carport prices year to date through April will not impact our guidance ranges for the year. We currently have over 90% of our recycling revenues covered by either our SRA fee or our revenue share risk contracts. This has allowed us to offtake commodity pricing risk to our customers. As stated in the press release yesterday afternoon, we reaffirmed our guidance for fiscal year 2019 by estimating results in the following ranges: revenues between $710,000,000 $725,000,000 adjusted EBITDA between $152,000,000 $156,000,000 dollars and normalized free cash flow between $51,000,000 $55,000,000 We have updated our net cash provided by operating activities guidance range to between $111,000,000 $115,000,000 from the previous range of $119,000,000 to 123,000,000 dollars This change was made because of our adoption on January 1, 2019 of ASC 842 not because we expect weaker cash flow generation during the year.
As part of the adoption of ASC 842, we changed the classification of payments on operating landfill operating leases from an investing activity on the statement of cash flows to an operating activity. To reinforce, this change in classification will not change cash flows or change our normalized free cash flow guidance for the year. And with that, I'll hand it over to Ed.
Thanks, Ned, and good morning, everyone. Well, we had a very good start to the year. Our collection operations, which generated about 50% of our revenue, continue to grow and expand margins. And our recycling operations have almost fully recovered from last year's commodity market disruption, moving to a pay for service model that minimizes commodity exposure. Additionally, our landfills and related transfer assets are well prepared to take advantage of great market conditions as we enter the busy springsummer season.
Let me go through some of our key operational numbers. On a consolidated basis, our cost of ops as a percentage of revenue increased by 33 basis points in the quarter versus the prior year. This was driven by the landfills as we ran lower tonnage to save permit capacity for later in the year and to get caught up on what I will call pre construction work to allow for early spring cell construction. As most of you know, landfills have high operating leverage with minimal variable cost and a loss of volume flows through to margins. So we expect this to reverse through the year as we crank volumes back up.
Landfill demand remains strong and price was up 4.2% in the quarter and the more important average price per ton was up 6.6% indicating that we are being very selective on the tons we take in. Cost of ops as a percentage of revenue on our collection operations improved by 108 basis points and this was driven both by price and operational We want to note here that this was not aided by acquisitions as their new operations had only a minor effect on the percentage more on that in a minute. Cost of ops in our recycling operations improved by 1600 basis points as last year we had negative margins. But this is a relatively small part of our revenue less than 7%. A year ago on this call, I stated that the imbalance caused by the change in commodity markets would right itself in 6 to 12 months as we rolled off long term recycling contracts and implemented our new pay for service language.
That is exactly what has happened. We saw the term start to gain momentum in Q4 and now we're happy to see the strong Q1 results. Most states in the Northeast where we operate mandate recycling and even though it now costs more to recycle than to put it in the landfill, our customers want to do the right thing and are willing to pay for the service we provide. In the long run, markets will recover and the cost to our customers will go down. Well, these are very busy times for us at Casella.
We are seeing tremendous opportunities for growth in our market and have a considerable pipeline of acquisitions. As exciting as this is, I wanted to assure you that we remain disciplined in the acquisition process and understand the importance of successfully integrating their acquired companies and more importantly the management teams and other human resources that come with them. We are very happy with all of the acquisitions we have completed to date and particularly our new Rochester operation, which is now our largest division. These acquisitions remain on track to their pro formas and we are methodically integrating them into our systems and processes and look forward to attaining additional synergies over the rest of the year. I want to thank all of our team members that have been doing the integration work.
You're doing a great job and we appreciate the extra effort that that requires. With that, I'd like to turn it back to the operator and to start the question and answer session.
Thank you. You. And our first question comes from Sean Eastman with KeyBanc Capital Markets. Your line is now open.
Hi. Thanks, team. And Ned, thanks for parsing out all of the margin impacts in the quarter. That was helpful. I'd just like to start on the operational challenges at the Ontario landfill.
If you guys wouldn't mind just providing a little more color on what those challenges are and whether they're fully contained in the quarter. I'm just trying to get an idea of sort of margin progression here towards the 50 basis points of expansion that's embedded in the guide considering we sort of started the year at a kind of down year over year level?
Yes. I think that it's clearly, we had some challenges at Ontario and it really related to sludge going into the facility. I mean there's very little tolerance from an order standpoint. And quite frankly, some of the issues that are associated with that were gas getting out in front. And from an operational standpoint, as I said, Sean, it was all hands on deck.
We've put the additional wells in. We've experienced that cost in the Q1 of a significant number of additional wells and we're well on our way to having as I said back to the standards that we need to be at. It happened. We're not pleased with it. I think we've made the changes necessary, make sure that it doesn't happen again.
And we've spent the dollars, obviously, from an operating standpoint, both in terms of putting you to you always have a lot of work in the springtime at sites as well from the winter in terms of erosion. That also contributes to those issues. And you just you have those issues to clean up when you come out of the winter. But we did have the additional issues related to the sludge, which we slowed down going into the facility as well. But the cost associated with that is in the Q1.
Got it. All right. Thanks. So I'm just wondering how the kind of margin trajectory should look from here. I assume it will follow assuming the operational issues are contained, I assume the margins will ramp alongside 2nd quarter Or maybe this will be a more back end loaded year than usual?
Yes. When we look at the forecast for the year, we're still tracking to be up the 50 basis points as we refreshed our forecast for the year. And we look at the progression throughout the year, we'll be kind of flattish in Q2 and then gaining on the year in Q3 and Q4. And as John said, last year, if you remember, we, bit out of the gates really fast at the landfills in Q1, probably took in too many tons. And then in November December, we really struggled to find homes for those tons.
So slowing tons earlier in the year and really pushing our pricing strategies is a good strategy for the year. Some of it was due to these operational challenges, but we expect to comp higher margins later in the year.
Well, and also, I mean, I think that we did have that really large project in the Q1 that didn't repeat. I mean, it's kind of serendipity in that we'll be able to realize higher pricing towards the end of the year as opposed to in the beginning of the year. We just had a very large project that didn't repeat.
Okay.
That's helpful. And just a last quick one for me. I believe there are 2 landfill expansion permits in the works that could be received within 2019. So I'm wondering if we could get a quick update on those. And I know those particular landfills still do have some runway of permitted capacity.
But would those permits coming in this year kind of change those disposal volume dynamics we're looking at this year?
I don't think that it's likely that those 2 permits, I think you're talking about Higgs and Waste USA, are likely to change the total volume this year. I think it's more a function of long term capacity. The Waste USA facility, as you know, is a 20 year permit of 50 acre expansion of that facility. So that's a very long term expansion for the Waste USA facility. I do think that we will see that.
It's hard to say exactly when, but we've got 14 out of 15 permits there. We've got one permit left, which is our 250 permit. The hearings are over and closed at this point in time. We're just waiting for the 250 commission to write that permit. And then same thing with Hakes.
Hakes is not as much capacity there. It's capacity for a few years, but it's not going to change the dynamics in 2019.
Super, super helpful. Thanks so much guys.
You're welcome. Thank you.
Thank you. And our following question comes from Tyler Brown with Raymond James. Your line is now open.
Hey, good morning guys.
Hey, good morning Tyler.
All right, Ned. So there might be a lot to unpack here, but I want to come back to the EBITDA bridge for this year. So I'm trying to parse out what's changed versus the bridge that you laid out last quarter.
So it feels like there
is four things here. So number 1, recycling is maybe a smidge lower if recycling prices hold, maybe $1,000,000 or so something like that. But 2, collection pricing was up $6,000,000 which I believe was ahead of your guidance of $3,500,000 to $4,000,000 So maybe some tailwind. 3%, you closed on some M and A, which might give you a slight tailwind. And then 4, Ontario is having some odor issues and added costs.
Would those be the things that change? And can you give any color on those pieces?
Yes. I think you've really hit the nail on the head. Recycling is not going to be significantly off. It's really about $5,000,000 We had guided up $5,000,000 to $6,000,000 We're probably tracking about $5,000,000 We were up 2% in the quarter. Southbridge is tracking to about the same level, negative 8%.
You look at our probably tracking up more like 7% to 9% right now, that range. And on the landfills, we're tracking more like 7% ish maybe right now or slightly lower. And in acquisitions, we've guided 8 to 10 up. This first acquisition is a smaller one. And as you know, the 1st couple of quarters, we're doing a lot of work to integrate the acquisition and drive long term value.
So yes, it's not a big needle mover. It's maybe $500,000 or something in the year or less. And but the big swing we're seeing right now is the reallocation between the other landfills and collection price. There is a good opportunity to recover on the other landfill side because some of it's just volumes we intake in the Q1 that we will take this summer or this fall, a little bit of it as well though it's higher operating costs in the Q1 that we have to outperform to make up for.
Okay, very helpful. Now one clarification. So you noted 6% actual pricing into the landfill, but I think it's 4% on a same store landfill pricing. Which number should we use when we compare that to the 3.5% to 4.5% pricing expectation you laid out last quarter?
It's a 4.2. So the 6.6 rolls through a couple of different areas. 1, it's our intercompany price plays into that and 2, it's blending in with the new volumes if we've kicked out a price increases, getting that back to the street through the collection line of price increases, getting that back to the street through the collection line of business. And as Ed said, still expanding margins in the collection line of business. So our transfer of pricing is working very well in the business.
Okay. And then clearly disposal prices are on the move given tightness. But it sounds like Chicopee has started its capping work. It's slated to close in June. Taunton, by all indications, could close maybe even as early as the end of this year.
I mean, I think you're talking another 500,000 tons of disposal capacity in Massachusetts that is imminently slated to disappear. Do you think that Northeastern disposal pricing could actually accelerate into 2020?
I think there's a real possibility of that. I mean, I think just look at the what transpired in the Boston bids, I think that clearly we could see it accelerate. I think that it's also we've received our additional permitted capacity at our transfer station in Holyoke. But with the activity of Chicopee until that's closed, we're not seeing any additional tons there at all. We're successful in getting the permit, but we're thinking that we should once that closes, Tyler, we should see additional tons going through Holyoke as well.
Okay. Okay. That's helpful. And then just real quickly back on recycling for a moment. So I think we can all appreciate the SRA fees and the repricing of that handful of contracts.
Ned, I think you mentioned 90% of recycling is covered. But if those larger contracts are renegotiated, will that number actually go up? Or when you renegotiate those contracts, are you simply recalibrating them so you don't lose money in them, but they don't have an SRA fee? Or how will that work?
No. We've established a pretty strict standard that, we call the SRA fee what we put on our collection customers. It's floating like a fuel surcharge. But I think as you know about a third of the tons that come into our processing facilities come from our own trucks, our own collection customers and 2 thirds of the tons come from others, whether they be municipalities or private haulers. And in those instances, we call our contract structure revenue share structure, where if commodities fall below our fully loaded processing costs as an appropriate return, our customers pay dollar for dollar a processing fee and the risk of commodities is transferred back to the customer.
And we're using that structure with all new contracts. And as you know last year, we didn't have a few contracts under that structure. It was painful for us. And it was a big headwind during the year. And as we laid out back when we gave guidance for the year, the step up year over year from 2018 to 2019 in recycling, a lot of it was driven by the reset of a couple of legacy contracts that didn't have that risk being pushed back to our customers.
So as we step through those resets, that's how we start to get up to about 90% or more of our customers where the commodity risk is passed back to them. So with this recent decline, it's going to hit us a little bit, let's say like $500,000 or so, but it's not a huge headwind to us because we've put in very effective risk programs.
Right, right, right, right.
Okay. Maybe my last one here. I want to come back to M and A. So John, you've been successful in the New England market. But if assets, both collection and disposal, were to come up in market, say, that were contiguous to your proverbial sandbox, would you entertain expanding the footprint geographically?
I think that we have said that we would look at contiguous. We have a presence in Pennsylvania as an example right now with McKean. And so I mean we have facilities in Pennsylvania. So I think there are contiguous markets Tyler that we would look at and are looking at quite frankly. The vast majority of what we're looking at is over the top of the existing investment that we've already made as we've said.
But there are some things that are interesting from a Pennsylvania standpoint. We do have assets in McKean already in that market area. But certainly, we're not we wouldn't be interested in we have no desire to step out of the Northeast region. That's you won't find us in Texas or California or the Midwest. That's not we're not looking to do anything like that.
Right. Okay. No, that's very, very helpful. Thank you very much.
Yes. Thank you, Tyler.
Thank you. Our next question is from William Griffin. Your line is now open.
Hi, thank you. Just one question. The $40,000,000 of revenue for deals under letter of intent, just wondering if that is contemplated in the guidance reiteration? And if so, are there some offsets to that benefit that you're seeing over the rest of the year? Or should we think about these deals, should they close as potential upside?
Yes. So Will, we have not contemplated that in the guidance for the remainder of the year, the reaffirmation. Until we close a deal, we really don't have visibility. Sean and I and Ed had a few back and forth conversations about this because we don't typically talk a lot about acquisitions before they close, but we did raise equity and we raised it for a reason to fund acquisitions. And we've been working hard on bringing in a few acquisitions that are a little bit more complicated and will be great fits to our business.
And we just wanted to make sure people had an update of where we're headed and how we plan to use equity proceeds. But it's not in the revenue or EBITDA, free cash flow guidance at this point.
Got it. Thank you very much.
Thank you.
Thank you. And our next question comes from Michael Hoffman with Stifel. Your line
It sounds like you have a cold.
Hope you
get better.
I do.
So I know you don't put it in the guidance, but how should I think about what that $40,000,000 could be on an annualized basis? And think of it as 20%, 25% margin,
so $8,000,000 to $10,000,000 is the incremental contribution? Yes. So last year we acquired a few transfer stations and that kind of blended things down. This is more hauling than transfers. And the 1st year, we haven't closed these deals yet.
We're close, but you probably want to be more like the 20% level and then drive up from there.
All right. That helps. And then Boston is in the process correct, there were 2 companies didn't bid at all, you all did a no bid. So what's the status of that process? I'm assuming Boston got cut off guard and what do you mean nobody wants to recycle for us?
Where are we in that process? And then I have a follow on about the Boston disposal contract.
Go ahead. Yes. So there are 3 people who went to the pre bid and one of the most important bidders decided not to bid and they made a few public comments about it. It really had to do with contamination in the City of Boston in the recycling stream. And we might have been very fearful as well if we weren't currently handling the streams.
We're auditing them weekly, daily in many cases and we know where the issues are. And when we put our proposal together for the City of Boston, we've set up a real incentive for them to educate their residents and get contamination out. But I could see why some of the smarter players in the marketplace decide maybe not to bid with the levels of contamination in the city today. They're not doing a great job.
Okay. So you expect to be awarded something, are you planning on taking on all of it or because I would have thought this was going to get divided up by 2 or 3 players.
No. We were handling all of it. We've handled all of it historically over the last 5 years, Michael. And I think that it's likely that we'll handle all of it to the extent that we're successful in negotiating the bid, which we're in the process of doing that right now. We'll in all likelihood handle all of it.
Okay. We have done historically.
Okay.
But I think that we have we're very comfortable with where we are. As Ned said, redid the bid. We also gave them significant incentive to clean up the stream, the way that we bid it. So, there's obviously one cost if it's not cleaned up and there's another cost if they clean it up. So there's real incentives for the city to do a better job from an education standpoint.
And certainly, we'll work with them to achieve a much higher level of quality coming to the facility so that we can continue to put real quality material into the markets. So but it's likely that we'll handle the entire stream.
Okay. And then the Boston disposal bids look like it's coming out with a 9 handle on it. Can you talk about what that knock on consequences to ongoing efforts to keep improving your disposal pricing?
I think it's very clear that that's a positive in terms of disposal pricing, but it's also a double edged sword in that our costs for disposal at the facilities that we go to in Massachusetts are obviously going up as well. So it's a positive, but it's a double edged sword. As you know in the quarter, we had higher transportation costs, higher disposal costs internally as well.
Okay. And then with regards to Ontario, so you've put in more landfill gas wells to be able to capture gas and orders and things of that nature, but you've reduced the sludge volume in the quarter. Will you be able to ramp back the sludge volume or you have committed to just a lower rate of sludge?
We're going to be utilizing a lower rate of sludge. But that lower rate of sludge, Michael, is going to be at a higher price. So we'll get back some of it, probably not all of it. But as you know, the pricing from a sludge standpoint is very significant, it's a high price. Some of it we'll get back in a higher price, but we won't get back all of it.
We're going to be running lower amount of sludge at our facilities.
But this isn't a trend that's unique to Casella. I think we've seen some of Across the board. Across the board, some of our peers across the marketplace significantly reduce levels of sludge going into those sites. And it's an area that we have a lot of pricing power into that.
Yes. I get that. I agree. Just to be clear, the 4.2% landfill price also had to absorb the fact that you reduced the sludge rate?
Yes, that's correct.
Right. So if I if you hadn't, the actual price you're going with is even greater than the higher. Yes, right. Okay.
That's exactly right.
Okay. That's all I got.
Okay. Thanks, Michael. See you next week.
Thank you. And our last question comes from Schwartz with First Analysis. Your line is open.
Good morning, gentlemen.
Hey, Steve. How are you doing?
To ask the 10th question on M and A, these deals that are under LOI, what's the probability typically that a deal comes to close while it's in the LOI stage? I know it's not 100% obviously, but if you could flavor that for me.
I think it's really difficult to flavor it. I think they're all somewhat unique. I think that we get to that stage, obviously, it's non binding letter of intent, so it's really hard to give a factor. I mean, obviously, we've had good success. We haven't gotten all of the deals done that we approached in 2018.
But I think we've had a fairly high rate of success. But certainly until they're closed, they're not closed.
In each of these transactions, we've been working through diligence on and progressing. So it's they're not immediately going to close, but there are things we've been working on for a period of time and we're in a constructive space and that's why we decided to give some additional commentary.
Yes. And they are to be clear, they're companies you've worked alongside with for a long time, right, since they're in your geographic area?
Yes. That's correct.
Yes. Okay. And then and Ned, I think when you answered William's question, you did throw in a comment that these deals this year might be a bit more complicated than the deals we saw come through last year. Is did I hear that correctly?
Yes. They just there are a few transactions that have multiple sites and we're just part of it is we've been working really, really hard on integration of every deal we completed in 2018. And we're not a huge company. We don't have a huge team. So many of the same people who are working on integration also work on diligence and integration planning for new deals.
So maybe I wasn't Pacing it. I mean, there's an
appropriate pacing of those transactions as well to make sure that we get done what we need to get done from an integration standpoint as we continue to grow.
Yes. By choice of words maybe wasn't perfect. It's more of a metered approach is probably better.
Okay. Okay. And then certainly back on Boston, is this a situation where they could handle it like many municipalities do with police and fire contracts? If July 1 comes, is there a possibility you continue working under your old contract and the negotiation continues? I think in that case, that would obviously push out your SRA recovery element and maybe some other things would push it out to later in the year or even into 2020?
No, that's not possible at this point in time. We have we had a long term contract with Boston. We honored that contract. 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. We would continue to work with the City of Boston if they weren't able if we weren't able to get to an agreement, if they would be providing if they were willing to meet the bid that we put in place and we'd continue to provide the service at the new price.
If they wanted us to do that while we continue to negotiate that would be fine. But we're not going to extend the existing contract. We can't afford to do that. We Got it. Yes.
We had the contract. We honored the contract to the end of the contract. It was the right thing to do. And now the contract is over. If they want us to continue to provide service, they'll have to do it at the new price.
Got it. Good to hear that. Thank you.
Yes. Okay. Thanks, Steve.
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to John Casello for closing remarks.
Thank you very much. Thanks everybody for joining us this morning. We look forward to discussing our Q2 2019 earnings with you in early August. Have a great day, everyone. Thank you.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.