Good morning, ladies and gentlemen, and welcome to the Casala Waste Systems in Q3 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 turn the conference over to your host, Mr.
Jan Pascoe. You may begin your conference.
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 3rd quarter 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 provision 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. And 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'll begin today's discussion.
Thanks, Joe. Good morning, everyone, and welcome to our Q3 2018 conference call. We are pleased with our Q3 results and our continued execution against key strategies. Strong operating performance and free cash flow growth continues to be driven by our execution of our 2021 plan with outperformance of our pricing strategies and outperformance of our acquisition strategy. From an acquisition perspective, including the 2 acquisitions we announced yesterday, we have acquired approximately $70,000,000 of annualized revenues year to date and have exceeded our goal of $20,000,000 to $40,000,000 We're excited about the early success we have had along with the robust pipeline and growth opportunity that still exists.
We are actively working on acquiring several more businesses that are in various stages of progress and look forward to updating you on these as we move forward. So the acquisition phase growth phase through the acquisition growth phase, we've retained our focus and discipline on core business, including our pricing programs. In the quarter, we increased solid waste pricing 4.8% year over year. Our strong financial performance in the solid waste, organics and customer solution groups was again muted by recycling commodity pricing pressures. However, we remain confident in our ability to more than offset this headwind through continued outperformance and strength through the remainder of the business.
Therefore, we've raised our revenue, adjusted EBITDA and normal free cash flow guidance ranges for 2018. We announced our 2021 plan last summer, and I'm pleased to say that we are tracking well against this long term plan. At the time we announced our 2021 plan, we put forth a goal to grow normalized free cash flow by 10% to 15% per year. This annual growth rate equated to approximately $50,000,000 to $60,000,000 per year of normalized free cash flow by the end of 2021. Given our early operational success and acquisition growth, we are confident we will generate $50,000,000 of normalized free cash flow in 2019 or early 2020.
We expect to continue to grow normalized free cash flow 10% to 15% per year, and we're on track to exceed this goal in 2018 with 15% to 20% growth. The focus of the five key strategies of our 2021 plan will remain intact, and I'd like now to provide some highlights on each. The first strategy of the 2021 plan was increasing landfill returns. We continue to enhance returns through price execution, operational programs, sourcing of new volumes at higher prices and our efforts to adjust permits. During the Q3, we increased our average landfill price per ton by 8% and at the same time increased landfill tons year over year.
As I mentioned, we remain very much focused on the execution of our pricing programs given the backdrop of tightening disposal dynamics across the Northeast. We're not only advancing price on existing volumes, but when we're able to, we also continue to replace lower priced waste streams with higher priced volumes, thus blending up our average price and helping to improve our returns. Aside from pricing, we're positioned well to further leverage our excess annual landfill capacity as more waste moves east to west coupled with internalization value of our recent and targeted acquisitions. Expanding permitted landfill capacity is an ongoing challenge for all solid waste operators in the Northeast. The Northeast has one of the toughest regulatory and political environments in the country.
The good news is most of our landfills have over 15 years of permitting capacity, and we continue to make progress advancing key permitting activities. During the quarter, we announced the permit expansion at the Clinton County Landfill from 175,000 tons per year to 250,000 tons per year. This site will serve as a key disposal outlet over time. We also made progress during the Q3 moving towards closure and resolution of the ongoing matters of the Southbridge Landfill. We settled our lawsuit against our environmental insurance carrier, and they paid us $10,000,000 as part of that settlement.
This is a big accomplishment by our legal and engineering teams, and we'll reimburse cash we have already spent and help to fund planned cash outflows with the closure of the site. We had another important victory at Southbridge during the quarter. As you remember, we were sued by several environmental activists under the Clean Water Act and RCRA for alleged contamination of the groundwater at Southbridge. While the data has always clearly illustrated that these claims were false, matters like these are always quite complicated and the facts don't always seem to matter to regulators or the courts. Well, we won a big one as the United States District Court in Massachusetts dismissed the lawsuit.
We're now working on the remaining matters to cap and we expect to place the final tons at Southbridge in the Q4. Our second strategy in the 2021 plan is driving further profitability within our business, our hauling business. Ed will run through the details, but we continue to outperform and execute well against our pricing and operational strategies. Our risk mitigating SRA and E and E fee programs again worked well to offset recycling commodity pressures and high fuel costs during the quarter. Even as these fees have escalated given market conditions, we've only experienced limited customer loss and price rollbacks.
Our teams continue to do an excellent job integrating acquisitions, which is an important part of driving free cash flow growth and additional shareholder value. 3rd strategy in the 'twenty one plan is creating incremental value through Resource Solutions. We continue to advance profitable growth in our customer solutions and organic business, while the recycling business remains a significant headwind. The customer solutions team had a big quarter with adjusted EBITDA growth of 90% year over year as they continue to capture share of wallet for major industrial customers across our franchise. We continue to see this as an important growth area through our 2021 plan.
In the recycling business, average commodity revenue per ton was down year over year. And while we have also seen our variable costs and we have also seen our variable costs increase. On a positive note, we've seen recycling commodity prices stabilize and slightly improve over the past few months. With this, our trailing SRA fee fully recovered higher recycling costs in our hauling operation in the quarter. Moreover, this program offsets the risk for roughly 1 third of our volumes.
Many of the remaining volumes have an appropriate risk mitigating contract structures in place. However, we're still absorbing all of the commodity risk on several legacy third party contracts, which is driving much of our year over year decline in adjusted EBITDA for recycling. We should note that we first experienced a sharp decline in recycling commodities about a year ago, so we started to comp easier periods going forward and we'll continue to make progress renegotiating underwater contracts and pushing contamination fees back to our customers. Our expectation for 2019 is that recycling will provide a tailwind even if commodity prices stay at these low levels as some of the largest third party contracts reset over the next year. The 4th strategy in the 'twenty one plan is using technology to drive profitable and efficient growth.
Over the last year, we've developed a long term technology plan that seeks to enhance our profitable revenue growth and drive efficiencies across our operations and back office administration. We believe that there's a lot of room for improvement in how we interact with our customers, sell services, route our trucks, run our integrated operations and manage our back office administrative functions. As we further develop our technology plan and strategy, we'll likely enhance our goal to reduce G and A costs and with sales and operating targets. We continue to be pleased with the early progress we made against this strategy, which includes successfully closing our books over the last three quarters on our new NetSuite ERP system. Again, a tremendous effort by the entire team to bring that project in on time and on budget.
Moving to our final strategy in the 2021 plan, which is allocating capital to balance delevering with smart growth. As I mentioned, we're very pleased with the execution against our strategy thus far as we've outperformed our goals and believe that we have an opportunity to outperform these goals in 2019 as well given the strength of our near term deal pipeline. Most notably, the acquisitions that we've done in the Rochester market is a real clear indication strategically of what we're trying to do. We have in that market additional disposal capacity at some of our disposal facilities And the activity that we've had from an acquisition standpoint in that Rochester market is a clear indication of being able to create value with that additional capacity that we have from a disposal standpoint. Overall, our midterm acquisition pipeline remains robust, and we believe there could be over $400,000,000 of acquisition opportunity across our footprint that could be great strategic fits and direct tuck ins or new market opportunities.
One area that is not specifically outlined in our 2021 plan, but is very important to our continued long term success and underlies some of our initiatives is our focus on further building our team. With the help of human resources team, we've initiated the implementation of career paths program for maintenance technicians and drivers. We're also working on introducing the program to recycling facility, landfill technicians in the near term and ultimately a career path for all positions within the company. Career path program incentivizes key roles to enhance both their skills and their earnings potential by giving our employee a measurable and transparent path to advancement. We believe that the program will improve our employee satisfaction, help recruitment, reduce turnover and ultimately lead to higher productivity and lower safety incidents.
I'm very excited about this program for our team. Wrapping up, our raised 2018 guidance is tracking well against our 20 21 plan and displays continued execution of our key strategies with the goal of driving additional shareholder value. We expect the continued strength in solid waste in our acquisition growth platform to offset recycling headwinds. And while anticipating a tailwind from recycling next year as several key contracts reset over the next year. And with that, I'll turn it over to Ned to walk you through the financials.
Thanks, John. Before discussing the quarter, I wanted to give some context about how well we are truly doing in 2018 excluding the recycling headwinds. For the 12 months ended September 30, adjusted EBITDA for the recycling business was down $10,700,000 year over year, while at the same time adjusted EBITDA for the remainder of the business was up $16,900,000 year over year. This has resulted in $6,200,000 of growth over this very challenging period for recycling, but it truly underscores how well we're doing in solid waste, customer solutions and organics and other parts of the business. Now on to the quarter.
Revenues in the 3rd quarter were 172,800,000 dollars up $12,600,000 or 7.8 percent year over year, with 4% of this coming from acquisitions, 1.5% from our cost recovery fees to SRA and E and E fee, 5.7% from organic growth across the business, and this was all partially offset by a 3.4% headwind from recycling price and volumes. Solid waste revenues were up $12,700,000 or 10.7 percent year over year as a percentage of solid waste revenues. Revenues in the collection line of business were up $9,600,000 year with price up 5.7 percent across all lines of business, volumes slightly down, down 0.4%, risk recovery fees up 3.5% and acquisitions adding $3,400,000 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 up $3,900,000 year over year with the growth driven by strong pricing, higher landfill volumes, $3,000,000 of acquisition activity, all partially offset by a business interruption at a transfer station that we're rebuilding after a fire that forced us to close the facility in late June. The temporary closure of this transfer station resulted in a $800,000 headwind to revenues.
This accounts for all of the decline in the disposal volume metric. We increased reported landfill pricing by 4 0.1% year over year. And more importantly, we increased our average price per ton at the landfills by 8% as we improved the mix of our customers and volumes. We expect these same positive pricing trends to continue into 2019 as we recognize the rollover impact of price increases already completed and we advanced further pricing in key markets. Landfill tons were up 2.8% year over year with strength across all markets in all waste categories.
We expect landfill tons to be down year over year in the Q4 as we need to slower run rate at several sites that fall within our annual permit limits. The tightness in the market gives a great pricing backdrop coming into 2019. Recycling revenues were down $5,500,000 year over year with $6,600,000 lower commodity pricing, $2,300,000 of lower volumes, partially offset by $3,500,000 of party tipping fees. Our average commodity revenue per tonne or ACR as we call it was down $59 a tonne or 48% year over year, mainly on lower fiber pricing. Mixed paper prices were down 72% year over year and OCC prices down 38% year over year.
We did see commodity prices hit bottom and start to improve sequentially through the Q3. Organics revenues were up $3,800,000 year over year on higher volumes. This is mainly associated with the new 2 year sludge contract that we talked about through the 1st and second quarter. This contract has negatively impacted adjusted EBITDA margins by roughly 10 basis points in the quarter as we pass through 3rd party transportation disposal costs. But on the positive side, the contract requires no CapEx, has great free cash flow and very high returns.
Onto customer solutions, the revenues were up $1,600,000 year over year due to several new multi site retail customers and continued growth in our Industrial Services business. Adoption of ASC 606 revenue recognition reduced our reported revenues and cost of ops by roughly $1,600,000 each during the Q3. This change benefited our margins by about 20 basis points during the quarter. Adjusted EBITDA was $42,400,000 in the quarter, up $2,900,000 or up 7.3% year over year with margins slightly down to 24.6%. As commodity prices improved sequentially from the 2nd and third quarter, our trailing cost recovery fee, the SRA fee and trailing revenue share contracts were applied fully recovered lower Khmer prices, albeit these programs are designed to recover costs and have a result have resulted in impacting margins.
Solid waste adjusted EBITDA was $40,500,000 in the quarter, up $4,200,000 year over year with strong pricing and higher landfill volumes, partially offset by lower collection and transfer volumes. Increased intercompany recycling tipping fees were fully recovered during the period by higher SRA fees and our fuel costs were fully recovered by our floating E and E fee. Solid waste adjusted EBITDA margins were 30.8%, up 20 basis points year over year. Our higher cost recovery fees negatively impacted margins by about 40 basis points during the period. Recycling adjusted EBITDA was down 1 $100,000 year over year with the decline driven by lower Kymaya prices and lower volumes.
Our variable processing costs were also up during the period, dollars 1,200,000 as we had to slow processing speeds and our MRFs to meet higher quality standards. Our residue costs were also up as we pulled more waste out of the stream and our 3rd party disposal rates were up. We talked about this the last few quarters. Our transportation costs have more than doubled as we've had to reach new markets such as India or Vietnam. Adjusted EBITDA was $1,300,000 in the other segment, down slightly year over year, which is mainly a function of our year over year differences in corporate management fees.
The customer solutions group had a great quarter, as John said, with adjusted EBITDA up $600,000 or 90 percent year over year and very strong execution of the industrial strategy. Cost of operations was up $10,300,000 year over year with increasing costs mainly driven by higher volumes, acquisition activity, inflation in select cost categories and higher recycling, processing and transportation costs. Our general and administrative costs were down $300,000 year over year. The decrease was mainly on lower incentive compensation accruals, partially offset by higher legal expenses during the period and a slightly higher bad debt expense in several customer bankruptcies. Depreciation and amortization costs were up $1,600,000 year over year, mainly due to higher landfill amortization expense and higher volumes and higher depreciation as we continue to execute against the fleet in Yellow Iron plants.
The Q3 did include several unique items that you may have noticed. As John mentioned earlier, we received a $10,000,000 cash insurance settlement from our environmental insurance provider during the quarter. This gain was partially offset by a $500,000 of ongoing legal and engineering expenses we incurred as we closed the Southbridge landfill. We also incurred $580,000 of expense from acquisition activities as we completed 2 larger acquisitions during the quarter and worked through a documentation and diligence on several other transactions that closed early in Q4. Our normalized free cash flow was $37,300,000 year to date, up $2,900,000 or 8.5 percent from the same period last year.
The increase was driven by improved operating performance, partially offset by a reduction in cash flows from a change in our assets and liabilities and by higher capital expenditures due to landfill construction timing differences and higher expenditures on revenue growth. As of September 30, our consolidated net leverage ratio was 3.54 times, which is down almost 1.9 times since December of 2014. Our total debt net was $528,200,000 which is up $30,500,000 from December 31, 2017. Our debt though is up mainly on acquisition activity and some fees incurred from the refinancing of our senior secured debt earlier in the year. As we laid out in our 2021 plan, we remain focused on further reducing business with a goal of getting leverage down to 3 to 3.25 times through continued capital discipline balanced with smart growth investments.
During the quarter, we continued our efforts to reduce floating interest rate risk exposure by entering into another $45,000,000 of floating to fixed LIBOR swaps. We have now fixed our interest rates on roughly 61 percent of our debt or almost $325,000,000 of debt. This is up from 34% at March 31, 2018. As we laid out last quarter, given the historically low recycling prices and the ongoing cost pressures in the recycling business, we expect recycling adjusted EBITDA for 2018 to be down roughly 10,000,000 dollars year over year. Despite this significant headwind and given the continued strength in our solid waste, organics and customer solutions operations, combined with our success in advancing acquisition activities, we have increased our revenue, adjusted EBITDA and normalized free cash flow ranges for the year.
These ranges can be found in our press release. One thing to point out though is our cost recovery fees are doing a great job recovering offsetting commodity and fuel risk, but they do gross up revenues and compress margins. And to give you a sense of where we are through the year, these fees were estimating to be up roughly $12,500,000 year over year for the full 2018 period. And this will compress our margins by about 60 basis points. In addition, our recycling business is estimated to impact margins by about 160 basis points for 2018.
These two factors are masking a lot of margin expansion in other areas through our great work in advancing pricing and cutting costs. And with that, I'll pass it to Ed.
Thanks, Ned, and good morning, everyone. We're very happy with our progress year to date and certainly look forward to a strong close to the year. For the quarter, hauling and disposal operations continue to be well ahead of plan overcoming the headwind from commodity prices in the recycling segment. We are successfully managing through what I'll call a dynamic environment. So I thought it would be helpful if I walk through our pricing programs and our margins and how we are staying ahead of the game while positioning ourselves well for the future.
Our consolidated cost of ops as a percentage of revenue was up 120 basis points in the quarter versus the prior year. As reiterated from past calls, this is primarily due to the China led drop in commodity prices and the effect on margins in that segment of our business. There are other changes in the Northeast that are causing some additional minor margin compression, but strongly benefiting the bottom line. There are also some long term strategic moves we are making that change our solid waste business mix, improving our ability to capture and control tons from markets with increasing demand and shrinking supplies. Breaking down our solid waste business into its components, our collection operations generated about 46% of our revenue in the quarter and we achieved 5.7% price on those revenues.
Now 5.7% is a great number, but it does not include year over year additions to our pass through fees like our fuel surcharge, which is embedded in our E and E fee and SRA fees. In addition, we were in markets with rapidly increasing disposal prices and a very competitive labor environment. The good news here is that we have not only covered these cost increases, but have been able to retain our margins. Cost of ops as a percentage of revenue is flat year over year. Adjusting for the pass through fees and related costs, we improved our core cost of op percentage by 35 basis points.
Our landfill operations had an outstanding quarter. We reported 4.1% price improvement, but the most important average price per ton was up 8%. Tons were up 2.8% as well as we see strong demand in the marketplace. As you know, the landfill operating costs are highly fixed, so the additional volumes and price drove a 50% or 50 basis point improvement in our cost of ops percentage over the prior year in that line of business. With landfill closures coming in the East, our transfer operations are becoming more and more strategically important as distinct gates to our landfills.
Our transfer operations charge local market rates and operate to make a purchase, but also to support the higher margins of our local collection operations and landfills. During the quarter, transfer operations that we acquired and began operating since the Q3 last year diluted our total solid waste margins by about 60 basis points. But that was about 60 basis points better than planned. So we're pretty happy with it. This leads me to a few strategic comments.
As we execute our acquisition strategy, we are acquiring collection that either come with their own transfer station or will feed into 1 of our existing transfer stations and eventually that waste will be internalized into 1 of our landfills. Although expanding the transfer station model will compress margins in the short run, it will improve our cash flows and make us more profitable by filling unused capacity in our landfill network. And in the long run, it will make us more price improvement at the landfills is strong, we believe the supply and demand balance supports an aggressive approach. The state of Massachusetts in particular, which is knowingly forced the out of state export of waste, will certainly see continued upward price pressure as they have added to their disposal system the cost of handling and transporting the waste long distances. The Northeast is certainly becoming one big regional landfill market.
Capacity is tight and the opportunity to reset pricing at the appropriate levels all the way to the curb is now. Okay. As I step down from my soapbox, I want to close by welcoming the employees of Youngblood Disposal, Ciboral, We Care, Valley Sanitation, Oceanside Rubbish and Boone and Sons. We've been very impressed through our due diligence with your operations and strive to provide you and all of our team members with a great culture in which to work and with exceptional opportunities for each of you to succeed in your career goals with us. With that, I'd like to now turn it back to the operator to start the question and answer session.
Your first question comes from the line of William Griffin. Your line is open.
Hi, good morning everyone. Good morning, William.
So
my first question was just, I was wondering if you could walk us through the puts and takes on the 2019 revenue growth of 5.5 percent that was noted in the press release. It seems to me like the rollover impact of acquisitions will get you most of the way there on its own in 2019. So any color you have there would be helpful.
Yes. Will, I'm sorry to say confusion about that. So we expect revenue growth in 2019 of over 10%. The 5.5% is just from the rollover impact of acquisitions already completed in 2018. Our solid waste pricing should be north of 3.5%.
I should note first, we haven't finished budgeting yet. So this is just on a run rate basis as we look at things. We don't expect solid waste volumes to be materially different than where they have been. We're trying to run-in about that 1% plus range looking at pricing elasticity across the business. We're going to have positive growth in recycling unless something radically changes even if pricing stays where it is.
We expect to roll over several contracts as we talked about. And then please remember, we'll have about a 2% revenue impact, negative impact from the closure of Southbridge. We'll be closing the site in the coming weeks.
Okay. That's helpful. And so, yes, you mentioned recycling. I was just wondering if you could talk about it. I think there's you said there's 3 sort of legacy contracts that are not currently subject to the SRA.
Have you been involved in preliminary discussions with those customers?
And
if they sort of pushed back on the fee, I mean, is it business you'd walk away from or
Yes. I mean, we've had preliminary conversations with all of those legacy contracts and we'll walk away from the business. Either way, we're going to be better off next year from a recycling standpoint because those legacy contracts come off in the next 12 months. So we're going to be we'll be much better off. Yes.
And it's not business that we would need to keep. I don't think that it's our view that it's more likely that the contracts will be renewed than that we'll be walking away from anything. The location of our recycling facilities for those larger contracts is a critical component in terms of the overall ability to provide that service. So I think it's our view that it's more likely that those contracts will be renewed at a profitable rate. And John said in his prepared comments, but
I think it's important to note is that in September, in the month of September, our EBITDA was up year over year in the recycling business. This is the first time in over 15 months that we've had improvement. And it's really due to a couple of factors. One is, we've seen a very slight sequential improvement in commodity prices, so that's good. We're starting to comp a lot easier periods.
The real substantial decline started to happen in August September of 2017. And then the last point is, we've been improving contracts and really even shifting our business structure. One of the areas we're very, very focused on right now is contamination. So we need to make sure we're getting quality materials into our recycling facility and we're not signed up to take garbage from people. So if we're getting 25%, 30% inbound contamination, we're holding people to their contracts and we're starting to impose new contamination fees, which are also helping us to generate revenues in some of the areas we maybe don't have the risk mitigation programs in place like the SRA fee.
Thank you. And then my last question was just on how are you thinking about SG and A spend trending in absolute dollars as you begin integrating these larger deals that you've been doing. Should we expect to see that tick up? Or do you think you can kind of manage and keep it flat?
Yes. So our intention with some of our technology investments is to gain G and A leverage and it's also our intention to gain some leverage with acquisitions. The absolute dollars are going to come up because we're adding some new locations, we're adding some new management, but we are conservative in our approach. We're looking I don't have as a percentage of revenue base. For the year, we're looking to come out around 12.7% roughly, 12 point 6% to 12.8% kind of in that range.
And as I said earlier, we have not finished budgeting for next year, but it is truly our intention to not scale G and A at the same rate as we're bringing on revenues from the acquisitions.
Perfect. Thank you.
Thank you.
Your next question comes from the line of Corey Greendale. Your line is open.
Hey, good morning and congratulations on all of the great results. So I just had a few questions. First of all, maybe this is nitpicking. Everything is really good. You talked you spent you gave great detail on the year over year margin impacts.
If I look at just the EBITDA dollars in the solid waste business, I think it's up like 4,500,000 year over year. And just the absolute dollar amount is up a little less than I might have expected given the strong price. Can you talk about kind of maybe just reposition some of the things you talked about, but talk about more of the cost offsets that might be affecting the absolute dollar increase?
Yes. I think it's a good point. It's hard to look at it all because we've got some really successful fee programs working like the SRA fee, the fuel fee. So our revenues are grossing up, but our costs are also grossing up. The good thing is we fully recovered both intercompany recycling increases year over year and fuel increases.
So we're very happy about that. So part of our cost and part of our revenue, you almost have to put this aside where they're just offsetting risk. And then you go across the rest of the business, I don't know, Ed, if you want to talk about some of the inflation we're seeing in other categories.
Yes. So I think it's pretty well known through the industry is that CDL drivers and mechanics, there's a definite shortage nationally. We've been very good with our career paths to attract new talent and to battle that shortfall, but we're also adjusting wages. So there's a wage recover and keep our margins with our pricing program and the collection operation.
And if I think about just the underlying level of labor cost inflation, if you could put a number on that?
Yes, 4%. Probably about 4%. Normally, we're thinking in the 2% range, but we're clearly around 4% inflation. And I think that probably some of the increases, as Ed said, what we did before we started the career path from a driver perspective, we went out market by market and really did a market evaluation and adjusted wages to make sure that we're at market.
Okay. And then on the collection business, the pricing quite strong and it sounds like there was at least a bit of volume loss as a result of pushing strong price. Just if you could give us some insight into how you're thinking about that and the trade off we saw in Q3, is that about what we should expect or would you even potentially get more aggressive on price and risk losing more volume for that trade off?
Yes. It's both some volume trade off, but when you get under the hood a bit in our front load commercial line of business, our volumes were up about 2 over 2%. In our rear load resi line of business, our volumes were up a little bit over 1%. And in our roll off line of business, we're down a little bit. And we're really trying to flex price in the roll off line of business.
We have a very tight landfill market. We're trying to reset prices higher. So we are trading more there on the residential and commercial side of business. The inflation is the inflation and we need to push back the true cost of doing business both from a labor standpoint and from a disposal recycling standpoint. So we're not seeing the same losses.
Our sales force, our GMs have done a really nice job working with customers and helping them to understand the changes in the market.
And you think the roll off, trade off the volumes you're losing there, how much of that winds up in your landfill anyway?
Probably a good fit of it and we're filled up as much as we want to be in 20 18. As we talked about, we're having to ease up volumes as we glide through the Q4 to meet permit limits, which is a good problem to have coming into 2019 because it sets a nice pricing tone coming into our resets on many customers.
Okay. And then my last question is just you've obviously picked up the M and A activity at least in terms of number of acquisitions pretty meaningfully. Just interested in, given that muscle hadn't been flexed in a while, how the and I know these are predominantly tuck ins, but how the integration is going? And if there is complexity around that given that you hadn't been doing a lot of acquisitions and given that you just changed your back end ERP system if that complicates or makes it easier?
I think that moving to the new NetSuite system in the cloud is really going to pay some dividends on a go forward basis because we're going to have everything on one database. It's pretty exciting, and I think it's really going to help with back office costs. From an integration standpoint, the integration is really at the field level. It's at the regional VP level, and they are very much involved with the acquisitions, sponsor them. It's their teams that put the performance together, their team that's going to be held accountable to the performance.
So I think from a practical standpoint, there are resources that a few small amount of resources that we have put in place. And we'll continue to evaluate the execution of the integration to make sure that we have the resources necessary to get that done. But again, the vast majority of that will be done at the field level, at the regional team level. They're doing a great job, doing a terrific job.
Your next question comes from the line of Michael Hoffman. Your line is open.
Thank you for taking the questions. So can you just clarify your calculation of price when you reported? What is that a measure of the average rate that you've achieved? Or is it the price you've gone to the street with and then the retention and losses are captured in volume? I just want to make sure we're comparing apples to apples across
the peer group.
So we don't play any games with our pricing stats. It's same customer, same type of service, how much we changed their actual price year over year. We don't even do a shorter period like that like some of our peers do. So if there are any rollbacks or any changes, it's captured in the actual price statistic and everything else gets pushed to loss unless it's a fee. And our fees are carved out separately, they're tracked separately, such as the SRA fee or the E and E fee.
So then obviously everybody is pressing this issue on margins given the depth of the price. What's the actual full in all internal cost of inflation? Is it really running at 3% or 4% but
On labor for sure, yes, on an overall basis. So
we run market based pricing. So what we give externally for landfills or recycling facilities, we give to our own hauling companies that can pass it back to curb. So during the year, we gave anywhere from 6% to 10% price increases from our disposal sites to our hauling companies. And as you know, we've given very large increases in the quarter alone a $2,000,000 year over year increase in tipping fees between our recycling facilities and our hauling companies. So as Ed pointed out, we've taken a lot of inflation from disposal from recycling and we've effectively gotten it back to the curb and we've expanded margins a little tiny bit in collection even with this inflation.
So you kind of have like true inflation labor, parts, tires, things like that. But you also have us running a market based system where we're passing back through. So some of those costs show up in the landfill, some of it shows up in the recycling business as well.
Okay. So the playoff on that would be we ought to be seeing an improving cash on cash return aspect of the business then. And I guess that's where we really ought to be looking is that while margins maybe shouldn't be the focus, we ought to be looking at the quality of the cash returns. Can we talk about that and what's happening in the model and whether the business is converting more cash out of it faster?
Yes. We look at return on net app. This as a statistic we look at and we're running right around 10% returns right now. So that's very positive. Our free cash flow conversion as you know continues to improve, but it is slightly masked by these fees that have been grossed up.
So you almost have to X those to the side to see what's happening in the core business and we are improving our cash on cash returns in that manner.
It's about $12,000,000 $12,000,000 for the year.
Yes. So year to date
we should pull $12,000,000 out of the year to date revs and then look on the cash flow
and we'd see I'm sorry. So that will be for the full year, we expect our fees to be $12,500,000 for the year to date and the $9,000,000 ish? 9, yes, dollars 9.
$9,000,000 year to date. Dollars 12,500,000 for the year.
So maybe that's probably possibly a better way to think about this in this inflationary environment is that you're holding margins stable ish, but you're producing better cash and that really ultimately is the real measure of the quality of the garbage companies, the ability to accelerate the cash conversion of the model?
Yes, absolutely.
Okay. All right. Thanks.
Thanks. You're welcome. Thanks, Michael.
We have a question from Michael Hoffman. Your line is open.
Since I got this chance to ask one follow-up, which I should have asked in the place, why not reset the 2021 goal given that you're well ahead of the pace of acquisitions and just give us a pro form a adjustment for it?
Yes. We you put these plans together and we've tried to do this for a few years now to give people some visibility into our long range plans and it's hard to get everything right. So it's funny I flash back in my mind to the summer of 2017 and we were right about one thing. Organically, we're growing free cash flow 10% to 15% a year given where we are in our programs. You tack on some inorganic growth acquisitions were more like 15% to 20% a year or maybe higher if we do more acquisition activity.
The $50,000,000 I threw out there was just kind of like a base minimum. And if you kind of roll the numbers forward from the summer of 2017 to 2021, you could get anywhere from $50,000,000 to I think $60,000,000 or $65,000,000 if you used our growth rates. So we just threw that out there as a base. Well, I think you can see now Michael that that base is going to be surpassed. As John said a little earlier, we'll probably hit $50,000,000 in 2019 or early 2020.
We haven't finished our budgeting yet. So I don't want to get ahead of myself. But you look at that, I think the more important measure is how fast we'll grow it. We'll probably just abandon the $50,000,000 It's not an important metric. It's more of we're growing 10% to 15% organically.
And then in 2018, we're actually going to end growing free cash flow of 15% to 20%.
Okay.
Yes. And one thing that I think is important to note is as we're ramping up acquisitions, it's going to take a year, 2 years for some of these to fully pull in synergies, whether it be internalization they have existing third party disposal contracts or if we have to put businesses together. You know how this goes. It takes a little while. And just looking at where things ramp through this year and into next year is I think an important thing.
So we expect through this year to about $6,000,000 of EBITDA contributed from acquisitions, which is helping to offset quite a bit of that recycling headwind. Coming into next year, we expect in 2019 to have $8,000,000 to $10,000,000 of rollover impact from the acquisitions we've completed to date. But that's not the full run rate. It will be into 2020 till we reach the full run rate, which will be more like 25 plus percent margin on the acquisitions we've completed to date. So I think it's important to note where it's going to take a little while.
We had a great pipeline coming into this year of acquisitions and things have happened a bit faster than we had originally planned and we've got some integration work to do. Okay.
And I
think the other thing that is very clear too is all of the pressure from a labor standpoint, from a disposal standpoint, from a recycling standpoint has just made the acquisition strategy even more powerful because there's a tremendous amount of activity out there and difficulty for most of the independents.
Okay.
Yes. Thanks, Michael. Thank you.
I am showing no further questions at this time. I would now like to turn the conference back to Mr. John Casella.
Thanks, everyone, for your attention this morning. We look forward to discussing our Q4 2018 earnings and our 2019 guidance with you in late February of next year. Thanks, everyone. Have a great day.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.