Good day, ladies and gentlemen, and welcome to the Casella Waste Systems, Inc. Q4 2018 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 introduce your host for today's conference, Mr. Joe Fusco. Mr. Fusco, 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 2018 Q4 and full year results. These results were released yesterday. And 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. And 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 under the heading Events and Presentations. With that, I'll turn it over to John Casella.
Thanks, Joe. Good morning, everyone. We are pleased with our Q4 results and our results for fiscal year 2018. 2018 was an exciting year in which we continue to execute well against our key strategies in our 2021 plan. We meaningfully grew the business through 10 acquisitions with $77,000,000 in annualized revenues, opportunistically refinanced our credit facility, successfully implemented our new ERP system.
And in January of 2019, we completed an equity offering with $100,000,000 in proceeds. Pulling all this off as we did was a true team effort. And all in all, we positioned ourselves very well for 2019 and beyond. Our 2018 execution is apparent as reported yesterday. For the year, we grew revenues over 10%, We grew normalized free cash flow by over 21%.
We drove down our consolidated net leverage ratio down to 3.62x, and we increased adjusted EBITDA by $9,000,000 This is particularly impressive given that during the same period, we experienced an $8,000,000 adjusted EBITDA headwind from recycling. So the rest of the business improved by $17,000,000 which highlights the strength and performance within our solid waste, customer solutions and organic businesses. Fiscal year 2018 results beat our guidance ranges that we increased in the Q3 for revenues and normalized free cash flow, while we were within our revised guidance range for adjusted EBITDA. It's a great accomplishment for the entire team. Looking out over the next several years, we are well positioned to drive additional shareholder value into the business given the strength of our cash flow growth, our robust acquisition activity to date, we are on track to outpace our normalized free cash flow growth targets set as part of our 2021 plan.
We are increasing our normalized free cash flow target range for fiscal year 2021 to between $65,000,000 to $70,000,000 or roughly 10% to 15% per year of growth. In 2019, we remain focused on executing against our 2021 plan. The 5 key strategies 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 growth and efficiencies, in addition to allocating capital for strategic growth. Our first strategy in the 2021 plan is increasing landfill returns. We continue to enhance returns through price execution, operational programs, sourcing new volumes at higher prices and our efforts to advance key permits.
In 2018, we increased the average landfill price per ton by 6.5%, at the same time increased landfill funds year over year. The pricing landscape in the Northeast is favorable and should continue to be for some time given the continued disposal capacity constraints. As we advance pricing on existing volumes and replace lower priced waste streams with higher priced volumes, we continue to blend up our overall pricing as we improve returns. Given how dynamic the Northeast market is, we have been moving disposal contracts to shorter terms to allow us to adjust pricing more appropriately as the market changes. Aside from pricing, we are positioned well to further leverage our excess annual landfill capacity as more waste moves from east to west, coupled with internalization value of our recent and targeted acquisitions.
Our efforts will continue in regard to expanding permitted landfill capacity to meet the disposal demands of the Northeast. We look forward to ongoing success here as we work through one of the most challenging regulatory and political environments in the country. Most of our sites have over 15 years of permitted capacity, and we've made good progress advancing key permitting activities, such as the expansion received in the Q3 related to Clinton County Landfill, increasing the annual capacity from 175,000 tons a year to 250,000 tons per year. Our second strategy in the 2021 plan is driving further profitability within our hauling business. Ed will run through some additional details, but we continue to outperform and execute well against our pricing strategies and operational strategies.
In the quarter, collection price was up 5.6% year over year, which reflects our focus on disciplined and nimble programs that enable us to outpace heightened disposal, recycling and labor cost inflation. We expect to continue advanced strong pricing in 2019. Our risk mitigated SRA fee and E and E fee programs again worked well to offset the recycling commodity pressures and higher fuel costs during the Q4. Even as these fees have escalated given the market conditions, we have experienced limited customer churn or price rollbacks. Our team also continued to do an excellent job in integrating acquisitions, which is an important part of driving high free cash flow growth and additional shareholder value.
The third strategy in the 2021 plan is creating incremental value through Resource Solutions. We continue to advance profitable growth in our customer solutions and organic businesses, while the recycling business was a headwind for 2018. As I mentioned, recycling was an $8,000,000 adjusted EBITDA drag on the year and negatively impacted margins. Recycling commodity prices were down through year and we also incurred higher processing and transportation costs as we had to slow down the lines to improve quality along with sell materials into new end markets. On a positive note, the 4th quarter recycling adjusted EBITDA was up nearly $800,000 year over year, even with our ACR per ton down approximately 18%.
This is reflective on our risk mitigation programs such as our SRA fee, where we fully recovered higher recycling costs across the solid waste operations in the quarter. We continue to refine contracts that allow us to offtake the commodity risk and pass through higher processing costs through higher tip fees to our 3rd party volumes. Our expectation for 2019 is that recycling will provide a tailwind even if commodity prices stay at these low levels as several of the largest third party contracts reset. Our customer solutions team performed exceptionally well this year with adjusted EBITDA growth of approximately 78% and margin improvement of over 2 50 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 efficient growth.
In 2018, we further advanced and refined our long term technology plan. We are pleased with the early progress we have made against this strategy, which notably includes successful implementation of our new NetSuite ERP program. Our technology plan is focused on driving profitable revenue growth, improving how we interact with and sell to our customers and improving operating and back office efficiencies. We are currently focused on improving sales and customer service through process additional function of our CRM. Moving to the final strategy of 2021, which is allocating capital to balance delevering with smart growth.
We executed very well against this strategy in 2018. As part of our 2021 plan, we outlined a goal to acquire or develop $20,000,000 to $40,000,000 per year of annualized revenue. In 2018, we outpaced this target, acquiring $77,000,000 of annualized revenue through a disciplined approach. With the recent equity offering and our ability to continue to grow free cash flow organically, our balance sheet is well positioned to continue to opportunistically grow the business. We believe that we have the potential to outperform again in 20 19 based on the strength of our near term deal pipeline.
We believe there's an opportunity to acquire $100,000,000 to acquire over $400,000,000 of revenues that overlays our existing operations or that is adjacent strategic markets. It's exciting to continue to have significant opportunity over the top of the existing operations in the Northeast. In 2019, we also continue to further integrate our acquisitions completed in 2018 to advance operational and back office synergies. We are particularly excited about our new market entry into Rochester where we acquired 4 businesses during 2018 with most recent purchase of valves maintenance in December. Rochester is a major population center located near 3 of our New York landfills and we look forward to leveraging our ability to vertically integrate volumes and to better consolidate our Rochester operations.
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 our focus on further building our team and creating the kind of culture that has made us successful. With the help of the human resources team, we initiated implementation of a career path program for maintenance technicians and drivers. Putting Career Pass in place is critically important as we go out into the future so that those individuals when they come into the company have a clear understanding of how they can advance within Casella and increase their value to the company and their ability to provide for their families. Career Pass program incentivized key roles to enhance both their skills by giving our employees a measurable and transparent path to advancement. While we're still in the early innings of this initiative, we are starting to see the benefits and over time believe that the program will improve employee satisfaction, help recruitment, reduce turnover and ultimately to higher productivity, lower safety and very excited about the program and the addition of Kelly Robinson to our team from an HR standpoint.
Wrapping up, as reflected in our guidance, our 2019 plan is tracking well against our 2021 plan and displays continued execution of our key strategies within with the goal of driving additional shareholder value. We expect continued strength in solid waste, robust acquisition pipeline and recycling tailwinds with the reset of several contracts at the end of 2018 early 2019. And with that, I'll turn it over to Ned.
Thanks, John. Revenues in the Q4 were $174,700,000 up $23,500,000 or 15.5 percent year over year with roughly $13,400,000 of the increase driven by acquisition activity. Solid waste revenues were up $17,900,000 or 16% year over year as a percentage of solid waste revenues with price up 4.5%, volumes flat or volumes up 0.5% excluding the business interruption during the period. Revenues in the collection line of business were up $15,300,000 year over year with price up 5.6% across all lines of business, volumes flat, risk recovery fees up $1,600,000 and acquisitions up $9,900,000 Our disciplined pricing strategy has been working very well, balancing customer retention with new business growth with appropriate levels of pricing to offset the building inflation across many aspects of our operations. Revenues in the disposal line of business were up 3 point $2,000,000 year over year with the growth driven by strong pricing, dollars 3,500,000 of acquisition activity and higher landfill volumes.
This was partially offset by lower transfer station volumes and the closure of the Southbridge landfill in early November. Disposal volumes were negatively impacted by $600,000 during the quarter due to a business interruption at a transfer station that we're rebuilding after a fire forced us to close the facility in late June. The Southbridge landfill closure resulted in a $1,800,000 decline in disposal revenues during the period. As we discussed last quarter, we had to slow tons at our landfills in the 4th quarter to ensure that we did not exceed our annual permit limits at several sites. Economic activity remains very strong across the region and landfills and waste to energy facilities were mainly at capacity in 2018.
This tightness in the market gives a great pricing backdrop coming into 2019. We increased our reported landfill pricing by 3.7% year over year and importantly we increased our average price per ton at the landfills by 5.6 percent as we improved the mix of our customers and volumes during the period. Recycling revenues were down $1,500,000 year over year with $2,300,000 lower commodity pricing, dollars 700,000 lower volumes, partially offset by $1,400,000 of higher third party tipping fees. This doesn't include the higher intercompany processing fees that we charged ourselves. Average commodity revenue per ton or as we say ACR was down $15 per ton or 18% year over year in the quarter on lower fiber pricing.
Our average commodity revenue per ton though was up 5% from the Q3 to the Q4 and we've conservatively modeled commodity prices to stay relatively flat at current levels throughout fiscal year 2019. Organics revenues were up $4,000,000 year over year and higher volumes, mainly associated with a new 2 year sludge T and D contract. And customer solutions revenues were up $3,200,000 year over year due to several new multi site retail customers and continued strong growth in our industrial services business. Adoption of ASC 606 revenue recognition guidance reduced our reported revenues and reduced our cost of ops by roughly $1,500,000 during the 4th quarter as compared to how we would have historically booked these transactions.
This is
the last quarter we'll have this comparison. This change did benefit our margins by roughly 15 basis points in the quarter. Adjusted EBITDA was 33 $800,000 in the quarter, up $3,600,000 or 12% year over year with margins slightly down during the period. Solid waste adjusted EBITDA was $31,900,000 in the quarter, up $2,500,000 year over year with strong pricing and acquisition activity driving the year over year growth, partially offset by higher direct costs, transportation and third party disposal and $1,900,000 of lower adjusted EBITDA at our Southbridge landfill due to the closure in early November. Increased intercompany recycling tipping fees were fully recovered during the period by the higher SRA fees and increased fuel costs year over year were fully recovered by our floating energy and environmental fee.
Solid waste adjusted EBITDA margins were 24.5 percent down year over year. Our margins were negatively impacted during the quarter, mainly due to higher third party transportation and higher third party disposal costs as we are forced to spend more money moving waste out of our landfills to 3rd party sites as Southbridge closed and many of our landfills are very close to annual permits and we have to shift tons around in November December. This trend will mitigate as we move into Recycling adjusted EBITDA was up $700,000 year over year with lower commodity prices and lower volumes offset by $3,200,000 of higher tipping fees and lower rebates during the period. As commodity prices improved sequentially from the 3rd to 4th quarter, our trailing cost recovery fees and our trailing revenue share contracts were applied fully recovered lower Kamayo prices. Adjusted EBITDA was $700,000 in the other segment, up $400,000 year over year with very strong performance in the customer solutions business with adjusted EBITDA up $700,000 year over year.
Cost of ops was up $17,500,000 year over year with roughly $10,000,000 of the increase driven by acquisition activity and most of the remainder driven by higher third party transportation and disposal costs. G and A costs were up $1,700,000 year over year, but down 90 basis points as a percentage of revenues as we began to gain leverage from the acquisition activity in our 5 year technology plan. Depreciation and amortization costs were up $3,100,000 year over year, mainly due to higher depreciation on trucks and equipment related to our 5 year fleet in Yellow Iron plant and acquisition activity during the period. The 4th quarter included several unique items. We took a $15,800,000 Southbridge Landfill closure charge, which included a $8,700,000 contract settlement charge for the settlement of litigation with the town of Southbridge.
We also trued up our closure accrual with a $6,000,000 charge to reflect changes in engineering estimates for the capping closure of the site and we incurred $1,100,000 of legal and transaction costs associated with Southbridge during the period. We took a $1,100,000 impairment charge for the unconsolidated investment in recycle rewards. This investment dates back over 10 plus years ago and the impairment was not contemplated when we pre announced results on January 22. We incurred $900,000 of expense from acquisition activities and other items during the quarter. On a very positive note, we reevaluated our tax strategy in 2018 due to U.
S. Tax reform and we're able to take advantage of bonus depreciation to offset nearly all of our federal tax liabilities during the year, while still preserving our federal net operating losses for future use. We began the year with approximately $110,000,000 of federal NOLs and we ended the year with $113,000,000 of NOLs. We expect to utilize the same strategy in 2019. Our normalized free cash flow was $47,100,000 in 20.18, up 21.3 percent from the same period last year.
The increase was driven by improved operating performance, partially offset by a reduction of cash flows from changes in our assets and liabilities and offset by higher capital expenditures due to higher spend on revenue growth. As of December 31, 2018, our consolidated net leverage ratio was 3.62x, which is down 1.8x since December 31, 2014. Our total debt, net was $555,200,000 which is up close to $58,000,000 year over year. Our debt was up mainly on acquisition activity and the refinancing of our senior secured debt and tax exempt debt during 2018. On January 25, we completed an offering of 3,565,000 shares of Class A common stock and generated net proceeds of $100,900,000 Pro form a for the equity offering, our consolidated net leverage ratio would have been 2.96x on December 31, 2018 and pro form a our availability in the revolver and cash position gave us availability of roughly $212,300,000 Pro form a for the deal, we have roughly 67% of our debt at fixed positions today.
As John mentioned, we believe our capital structure is in a great position and will allow us to execute our strategy to grow through smart investments and acquisitions in 2019. As stated in our press release yesterday afternoon, we announced our guidance for 2019 by estimating results in the following ranges: revenues between $710,000,000 7 $25,000,000 or up 8.6 percent at the midpoint adjusted EBITDA between $152,000,000 and $156,000,000 or up 11.6 percent at the midpoint and normalized free cash flow between $51,000,000 $55,000,000 or up 12.6 percent at the midpoint. Please note that we did file a corrective press release last night to fix an error in the normalized free cash flow reconciliation for our 2019 guidance. The correct guidance range is $51,000,000 to $55,000,000 as stated in the press release text. We had included an incorrect estimate related to planned expenditures for the Southbridge landfill closure and pot sand remediation expected to be completed in 2019.
The 2019 budget includes roughly 5.5% revenue growth from the rollover impact of acquisitions completed during fiscal year 2018. However, our 2019 budget does not include the impact from any acquisitions that have yet to be completed. We expect our adjusted EBITDA growth to be driven by the following factors in 2019. We expect our collection business to be up $6,000,000 to $7,000,000 driven by 3.5 percent to 4% price, partially offset by wage and disposal inflation. We expect $8,000,000 headwind from the Southbridge landfill closure during 2019.
All other disposal sites, landfills and transfer stations, we expect to be up $7,000,000 to $9,000,000 driven by 3.5% to 4 point 5 percent price and some volume growth as well. We expect a tailwind from recycling, which is really exciting with recycling up $5,000,000 to 6,000,000 We expect roughly $8,000,000 to $10,000,000 of rollover benefit from acquisitions already completed in 2018 and we expect about $4,000,000 to $6,000,000 of other headwinds in the business including some headwinds from landfill gas to energy and some increases in G and A. Overall, we expect EBITDA to be up 10% to 13% year over year with roughly 50 basis points of margin expansion. In conclusion, we're tracking really well against our 2021 strategic plan and we're excited about what's in front of us in 2019. And with that, I'll hand it over to Ed.
Thanks, Ned. Good morning, everyone. 2018 was a significant transitional year for the company. After years of focus on operational improvements, strengthening our daily process and discipline and driving performance to acceptable levels, 2018 became a year to refocus on growth. We exceeded our expectations.
But before I get into the details of our transformation, let me walk through the cost of ops results for the quarter. Our consolidated cost of ops as a percentage of revenue was up 70 basis points in the quarter versus the same quarter last year. Recycling and our other non solid waste businesses had only a minor effect on this percentage in Q4. So we are starting to anniversary the commodity price drops of a year ago. Recycling has become a processing for a fee type of business now, so we expect financial performance going forward to be more stable.
Focusing on our solid waste business components, our collection operations generated a little over 47% of our revenue in the quarter. Cost of ops as a percentage of revenue increased from the same quarter last year by about 41 basis points. On last quarter's call, I mentioned that acquisitions can affect your metrics during the transition period, and certainly, that's the case here. Factoring out the acquisitions to get to a same store basis, our cost of ops improved by 40 basis points. As we assimilate the acquisitions, they will come in line with our existing operations.
Our disposal segment includes landfill operations and transfer station operations. The landfills generated 13.3% of our revenue and the transfer stations, which are effectively distant gates for the landfills, produced another 10%. The landfills by themselves had another great quarter, driven by strong pricing, 3.7% and on an even stronger average price per ton improvement of 5.6 percent and our costs were about flat. However, our cost on the transfer piece has increased, particularly the transportation cost. Combining the 2, we still improved cost of ops as a percentage of revenue by about 40 basis points.
So pricing is strong enough to cover, and we expect that to continue. Now I'd like to get back to the growth opportunity and comment on some of the things we're doing to assure success and some of the ancillary benefits of growth. First, the opportunity. Our industry, particularly in the Northeast, faced many challenges over the past 10 years. There were equipment issues resulting from new emission standards, recycling commodity risk, which were residing with the collection companies, increasing disposal shortage, driver and mechanic shortages and a tough regulatory environment, just to name a few.
As we overcame these challenges, we found our smaller competitors have continued to struggle. We offer opportunities for the owners, the owners' families in the business and their employees to join a company with a great reputation and a strong culture with positive values and the ability to solve their business challenges while taking their investment off the table, more like mergers than acquisitions. Since it became apparent in our market that we were back in the game, our pipeline of potential deals has expanded exponentially. The resulting opportunity for growth through acquisitions is coming at the perfect time for us. Our shift is in order.
Yes, we have everyday challenges just like everyone else, but we have processes in place to handle them and more importantly, people in place with the decision making skills needed to meet those challenges. We've not talked much in the past about our management development activities, but the leadership programs at Casella, which were in place long before I arrived here, are up and running strong, and we continue to develop the kind of decision makers that will lead the company in the future and that are now providing bench strength for our growth. Over the past year, we've added a few key resources, primarily through promotion and backfilling to ensure that we not only grow through acquisitions, but we are successful in integrating these operations and realizing the synergies that make this strategy successful. We also continue to improve our systems and processes, and over time, the integration process will become easier and easier. The growth strategy also enhances our ability to attract and retain talent.
Our culture of continuous improvement not only applies to our processes but to our people as well, and growth provides opportunities to learn and to advance in the company. I'm not only talking about management. Our driver and mechanic career path programs provide direct training and advancement opportunities at the very core of our business. So with those few comments, I'd like to turn it back to the operator now to start the question and answer session.
Thank you. You. Our first question comes from Tyler Brown of Raymond James. You may proceed with your question.
Hey, good morning guys.
Good morning, Tyler.
Good morning. Hey, Ned, super helpful on the EBITDA bridge. Soften that number either this year or over time?
Yes. There is a possibility over time. If you look at, I said, all other disposal sites being up $7,000,000 to $9,000,000 year over year with about 3.5% to 4.5% of price and then some disposal volume growth. Some of that growth is going to come from our own tons. In 2020 about 2 years ago, we got a permit increase at our Chemung landfill from 200,000 tons a year to 437,000 tons a year.
And then in late 2018, we got a permit increase at our Clinton Landfill from 175,000 tons a year to 250,000 tons a year. We've actually held back some of this capacity for this day to come where we would be able to redirect some of our volumes from Southbridge out to New York State to take care of our customers. Not all of it's going to go there. Some of it's going to stay in Massachusetts going to 3rd party sites. So there is a little bit of Massachusetts going to 3rd party sites.
So there is a little bit of benefit in our other landfills from Southbridge. We are spending more money though transporting that waste out to New York State. We are driving some additional higher third party volumes to Chemung and Clinton in the year as we access that additional capacity coming online. Longer term, as we work through permitting at North Country, there's probably even more of an opportunity to drive value integrating a few more Massachusetts times into that site as well.
Okay. That's very helpful. A quick clarification on the free cash side. So I know in the normalized free cash flow, you exclude the $12,500,000 on the landfill closure of the remediation expenditures. You add that back.
But will that expenditure flow through cash from ops? And will that largely go away in 2020?
Yes. So, I was running long on my script. So I decided just to hold back and not say it. The net cash provided by operating activities, you'll notice in our guidance, is pretty flat year over year. Right.
And the reason is because we're taking down current accruals for landfill capping closure, the remediation at Potsdam, all of those reside as liabilities. And in our forecast or our budget for 2019, that cash goes out the door as we complete those activities. So net cash provided by operating activities is really skewed in the year by close to $12,500,000 to $13,000,000 through these activities. And this is going to be a big year at Southbridge. After we get through this initial capping and a big year of closure, we'll come to a point where we spend $5,000,000 or $6,000,000 a year the year after and then they'll drop to a couple of $1,000,000 for the year or 2 after that.
Pottsdam is a site that was acquired in the late 90s. We've been working with the EPA from probably 15 years where this is unfortunately part of the site we acquired had an old metals business and there were some remediation efforts that needed to happen. And it's taken this long along with our partners, Niagara Mohawk and Alcoa to come to a conclusion with the EPA to have a remediation plan and we believe the work will finally take place in 2019 to clean up that site appropriately. So that's appropriately accrued, but it's been a short term accrual over the last year that will reverse out and hit our free cash flow. That's a pretty large swing and that's why we're calling that out and it's all non routine.
Right. Okay. And then same type of question on the $8,500,000 of added CapEx. Will that abate also going forward? Or should we expect that if you can make continued M and A?
So a good bit of that's associated with M and A. We really, as we buy businesses, we of course have pro formas for a multiyear period of time looking at the entire fleet and other capital needs of where replacements need to come. But in the first 6 months to a year of an acquisition, we're really focused on integrating it with our business and there might be some facility changes, equipment upgrades, you name it and there's a heightened level of CapEx. And we really view that in many ways as part of the purchase price to get the assets term. Okay.
Okay. That's helpful. And then interesting term.
Okay. Okay. That's helpful. And then interesting commentary on the NOLs, but at this point when would you expect to become a meaningful cash taxpayer?
So bonus depreciation stays at 100% through 2022. And what's interesting is we're getting a double benefit because as we acquire businesses, especially through asset acquisitions, we're taking 100% bonus depreciation on their assets as well and everything we're buying except for landfill assets. So we shielded over 100% of our pre tax income in 2018 through bonus depreciation. Bonus depreciation stays at 100% through 2022 then drops to 80% and kind of comes down over the next 5 years after Q2. So if tax law stays the same, our NOLs should take us out through 20, 24 or even later with our current planning where we're not going to be a meaningful cash tax payer.
Okay. That's very interesting. And then my last question here for John on the M and A side. You guys obviously have a lot of powder on the balance sheet. You talked about exceeding the $20,000,000 to $40,000,000 target.
But curious, should we still expect to see small onesie twosies? Or could there be something more meaty, I guess, in the acquisition pipeline?
I think you'll continue to see the smaller activity. I think that there's there are a few opportunities similar to what we did in Rochester, other markets that are within our footprint that we're not in, Tyler, that could be a little bit more meaningful than $8,000,000 or $10,000,000 acquisition. But you're really going to see more of the same as opposed to anything really different from an acquisition standpoint.
Okay. All right. Thanks, guys. Appreciate it.
Thank you. Thank you.
And our next question comes from Michael Hoffman of Stifel. You may proceed with your question.
Thank you, team for taking the questions.
Hey, Michael. Hey,
John, Ed, Jason, Joe, Fusco. City of Boston, if I have my data right, is in a rebidding mode of all 3 major contracts, those collection, the disposal, the recycling. So this has sort of multi parts to it. 1, can you share your current direct exposure? 2, what do you think happens to the disposal price versus the last round?
If my memory serves, the last round was in the low 70s plus cost escalators. And the third part of that is if this comes out at a number with a 90 handle on it, how's that sort of trickle through for you? Is it as obvious if we ended at 80% and they go to 90% and that's a 12% increase, do you get to raise all your prices 12%?
Yes. So the only direct exposure we have right now to the City of Boston contract is on the recycling side. And we've been talking for the last year about a few contracts where we're upside down. 1 was with independent where we're upside down $1,000,000 on that one contract. We reset that on January 1 to current market rates and it will be a pickup of almost $2,000,000 a year on that one contract.
And then the second contract we're underwater on was the City of Boston. We did bid on that contract. It's in process right now. We've bid to make money and to reduce our risk profile. So we feel pretty positive about that.
Some of the competitors in the market
Was the swing on the
$3,000,000 a year swing, positive swing for us and that will be awarded for July 1st. So we could pick up about half a year
on that.
So some of that really is in our numbers for the year of our recycling, why it's improving year over year even though we're modeling commodities to be flat. City of Austin several people did bid on the trash including Republic small parts of it Covanta on all of it and Wheeler Raider on small parts of it. And there was some visibility yesterday on the bids coming from the market. It really won't impact us. Our waste doesn't flow through the City of Boston.
We're not hauling for the residential customers in the City of Boston either. But it will be a market signal that's pretty important.
Do you think the right $90
So are anywhere from mid-80s to mid-90s, the best we can tell.
And is it fair to say that we're ending it somewhere at the high 70s, low 80s. So whichever one wins, let's say the midpoint $90 does that percent change, can you do that type of percent change just ratably across your network because that sort of sets the direct haul number and then the rolling number going out to you. So if you have a $50 number somewhere, can you raise it 10%, could you raise it by bucks?
So if you look at kind of like our price increases, both on the hauling side and on the disposal side, they're really very blended numbers. If you get under the hood, they might range from anywhere of 0% or 1% or 2% increases all the way up to 15%, 20% increases because there are a number of contracts that reside in that book of business. So if you look at any one of our landfills, as customers are rolling off contracts, depending upon how long ago they enter those contracts, they could be seeing a 10% increase, a 20% increase or more depending on where they sit and where the other advantages are in the market. John, you said in your script, we're entering in very short term agreements right now, if anything. Yes.
I think that there's no question they're going to see double digit inflation in the Massachusetts market, Michael. Okay. That's what I was trying
to get to.
Yes. I don't think there's any question about it. It's also a lot of pressure from a transportation standpoint as well. Okay.
Second question for me. We've watched you meaningfully improve the cash conversion of the model. And I think because of your mix of other revenues, which are lower margin, probably the right way to think about this is the percent of EBITDA. So what's the probability you could get to a 40% or better cash conversion? You're in the 30s now.
And 1, what's it take to do it and how long would it take it?
Yes. Good point. So our free cash flow as a percentage of revenue is slightly diluted because our organics business in many ways has a lot of brokerage components and our customer solutions business has a large degree of brokerage revenue. So our revenues are grossed up and our direct costs are grossed up. So there's a little bit less margin flowing through those businesses, but nice cash conversion as you laid out.
So looking at free cash flow as a percentage of EBITDA is important. And as we've said, we've got a game plan over the next several years to add over 200 basis points to that conversion rate. We're working hard at that. The pathway to get it into the 40s is a little further out. We haven't laid that out for investors.
But if you look at the numbers we laid out yesterday evening $65,000,000 to $70,000,000 of free cash flow by 2021 that gets us I'm not sure if I've got a percentage in front of me, Jason, but that gets us more into the high 30s. High 30s. Yes. High 30s. Yes.
It gets us pretty close to 40 percent. So we are in a trajectory. It is something we're very focused on, Michael.
Okay. That's great. And then last one for me. What's the probability that you can drive SG and A to 12% and will not work you and your finance team to death, but what's the probability you can get to 12%?
Yes. So we do have a multiyear plan on the technology side. We are quite inefficient today in the back office and no fault of anyone. It's just the solid waste business is complex. Every customer has different pricing structures, different billing structures.
There's a lot going on and we have a lot of paper that moves in all elements of our business. So we made the first step with the ERP implementation in 2018 with NetSuite. I'd like to say where we are today a year later is we're just about as efficient as we were beforehand. We've got a lot of work especially on the digitization side of taking paper, taking approval steps, taking manual intervention out of the work. We'll be very focused on that over the next year plus.
The side of the business where we really start to gain more leverage is when we upgrade our billing work order management routing systems both on the G and A side and on the operating side. We are 6 months into a product selection process on that side. And remarkably, there's not a lot of amazing solutions out there for the solid waste business. There are a lot of people who have built solutions for small, kind of like HVAC type businesses where you have maybe 10 service calls in a day. But service management solutions with 400, 500, 800 stops in a day are not out there as much.
So we're still evaluating next steps forward there. And it is part of our management plan to take 75 to 100 basis points out by 2021. And there's no reason to stop if we can get more and more efficient and we'll gain some scale as well. You saw it in 2018 with the acquisition work. We expect in 2019 where we're not adding people at the same pace as revenues.
I think Ned and the finance team, Michael did a great job of getting us to a new platform, which is NetSuite in the cloud. We've been on it now for 6 months. The transition is full. But we're starting now, we'll be we're starting to ring out and bring in the efficiencies of moving to that platform from the platform that we've been on for 35 years. I think the execution on time, on budget in terms of getting to NetSuite in the cloud and getting to the next generation of software was really well done.
But we haven't gotten the efficiencies. It will take probably this next year to really get additional efficiencies from the ERP program to say nothing of stepping into a new program from a routing and billing perspective. I think we're moving to the future very rapidly. And I think most importantly, we're going to be a lot easier for our customers to do business with when we get that implementation, the 5 year technology plan implemented. I think it's going to bring a lot of productivity and efficiency to the organization.
And we're at the beginning stages of that. First thing we had to do is get on a new platform. And that's really exciting because we're going to have one database for the entire company. And that's a real step in the right direction.
Terrific. That's it for me. I appreciate it.
Thanks, Michael. Thanks, Michael.
Thank you. And our next question comes from Sean Eastman from KeyBanc Capital. You may proceed with your question.
Hi, guys. Congratulations on closing out a really strong year. I just wanted to start on the acquisition pipeline. I'm just trying to get a sense for the potential this year. I know you guys said you'll do above the original target, but just wondering how we should be thinking about that $77,000,000 you guys added in 2018.
Was that a really outsized number? Or does this pipeline sort of support?
Well, no, I think it's fair to say that there was a bit of pent up demand. It was the 1st year we got started and we got a little bit of activity out in front. But I mean, I think that we've said that we've got we're tracking with LOIs for the upper end of the range around $40,000,000 right now that we're working on. We've got good visibility. So we think that we're going to be certainly at our target from acquisition standpoint.
Wouldn't necessarily say that we're going to repeat 2018, but certainly, we're going to be at the upper end and that's where we are in terms of the visibility with LOIs that we're working on right now.
But it's also we're metering a bit. I think it'd be fair to say integration is more important than getting the deal done even in many ways. So Ed talked about people earlier and adding a few key resources and making sure we get the work done on integration. So we're running on a few deals right now, jogging on a few others to making sure we get integration work done from 2018 acquisitions.
Okay, great. That was sort of my next question. You guys did speak to it in the prepared remarks. But just wondering how to think about the challenge ahead on integration considering 2018 came in so much above the initial expectations. Maybe just a bit more color on the teams that are in place and some of the measures there to get the synergies?
It's really exciting. I mean one of the things that we've done is we've added some talent from an accounting standpoint, particularly in the Western region with Dennis Pantano and Michael Stehman. We've added an additional regional controller there. It gives Michael a little bit more opportunity to help on the integration side. He was the regional controller and now we brought in another controller to free up Michael from an integration standpoint and as well as Dennis.
And we brought in some new talent from a controller standpoint for that market. We've done some things from an operating standpoint, additional support there with Ed from an operating standpoint with Sean. So I mean as we identify those areas that we need additional resources, we're executing on that and putting additional talent in place to make sure that we integrate those businesses appropriately, quickly and get the integration behind us as quickly as we can.
And typically in integration, if we're talking something into existing business, within months you're running pretty close to efficiency. In 6 to 12 months you're all the way there. Rochester, we're putting 4 standalone businesses together. There's a lot of logistics there. And as we laid out, as we did these acquisitions, it's going to be a year and a half to where fully integrated and up and going in that market.
It's a lot of work, tons of opportunity as well for us. So we're
Yes, it's actually going to be over a couple of year period of time in that some of the existing disposal contracts don't roll off for another year, year and a half. So we won't be able to internalize some of that waste until probably 2 years out. So but that's all incorporated into our plan, incorporated into the performance. That's how we performed it. So no surprises there at all, but it will take a little bit more time, as Ned said, with regard to the integration full integration of the Rochester market.
So a little more complex than a normal tuck in into an existing facility there. We're taking 4 businesses and putting them together.
Super helpful. Really appreciate your time and congrats again. Thanks. Thank you.
Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Fusco for any further remarks.
I'd like to turn it back over to John Casado for closing
remarks. Thanks everybody for your