Good afternoon, everyone. This is Tami Zakaria, Head of Machinery, Engineering, Construction, and Waste Equity Research at J.P. Morgan. It is our pleasure to host Team Casella Waste with us today. We have Ned Coletta, CEO, and we have Brad Helgeson, CFO. Ned and Brad, welcome.
Thank you.
I think.
Thanks for having us.
I think this is your first J.P. Morgan conference, right?
It is. For a number of years, we used to attend, I don't know, more than 10 years ago, so we're happy to be back.
Well, we are honored to have you here today. Let's dive into the Q&A. Before I start, I wanted to remind investors that this is being webcast and investors listening in online are able to submit questions. If you submit a question, I'll pose it for you. We'll open up to the audience in the last 10 minutes of this session, if you have any questions for the team. With that out of the way, first question to you, Ned. As the new CEO, what are your top three priorities near term or over the next 12- months?
It's a great question, and one I've gotten a few times over the last several months. I've been with Casella for 21 years, and I was the CFO for 12, the president for three. A lot of our strategy and a lot of our focus as a team, I helped to shape over that period of time, so there's not a right turn or a big deviation that's coming from me as CEO, and it's much of the same. There are some focus points for me, and, you know, they're mainly people-oriented things that I wanted to do a little bit differently or I had ideas about.
The first is ensuring we have a safe and supportive workforce and really doubling down on our safety programs, focusing on our engagement surveys and ensuring that, our people had a voice up and down the organization. The second is also a cultural one, where we've had the same core value system for 25 years-30 years, and we're doing some modernization to it. As an example, our first core value was service. I changed on my first day of work to safely service and just ensuring that our people know that they have Stop Work Authority across the board, working on improving communication up and down the organization. We've grown from four years ago, we were 2,000 employees, today we're 5,500 employees. As we've grown more rapidly, making sure our value system, our culture, our communication really works up and down the business.
The last is just ensuring we're more purposeful with our work every day. We've had great strategic plans for years, but each of our major department heads, business leads, we're really rolling up strategic plans at all levels of the organization, ensuring this alignment of what we're doing, focus on the right investments, both in people resource and capital resource. Not a big shift, but a little bit of a shift in focus of like, let's just get back to some building blocks and making sure we're talking up and down the organization and hearing all of the voices we can.
While we're at it, I think in the last week or so, there's been some personnel changes with the COO departing, and I think you just hired a new CRO. Any comments on how you're thinking about these changes?
Yeah. Our head of sales departed in the fall. He went on to another opportunity, but we looked at that as a real positive for us. We'd really outgrown a number of his skills and experiences. We launched a solid search and we were able to recruit an amazing new team member, Chris Rains, who started yesterday. Chris has spent 20 years at one of the major industry players and went on to work in a few different industries, both in operating roles and in sales and revenue roles. So we love that balance of someone who's run businesses but also has a lot of customer focus. So it's something we've been lacking, I think. There are a few segments where we've been very effective from organic growth standpoint. One of the most notable is our large institutional industrial accounts.
We grew them last year 17% organically and bringing some of this same discipline up and down the sales organization, especially as we're pivoting to more and more digital customer engagement, digital sales channels, both through our app, our website, really re-envisioning how we offer customer care and inside sales support. We're on a transformative journey. Our second turnover in leadership was our Chief Operating Officer and his name's Sean M. Steves. I'm really sorry to see him go. We've had a great partnership for years. He's been with the company for eight years. Due to family reasons, he really wanted to get a lot closer to his parents and decided to leave and move on. This is one that we're sad to see him go, but we're happy for him as well.
He's got a great opportunity outside of the waste industry. We've launched the search. We've got a couple great internal candidates. We already have a handful of external candidates, and we really think we're gonna end up on the other side of this with a amazingly talented individual who can help us, you know, get more cost out of our business, be safer, and drive value.
Great. Let's talk about Casella, the revenue mix. Could you remind us what your mix of revenues is from open markets versus restricted contract markets? Is there an ideal mix or target that you have in mind?
Yeah. We're about 70% open market, you know, which as you know, Tami, allows us to really price flexibly as the environment, inflation, other factors, evolve. The other 30% or so would be, you know, large industrial customers, municipal customers, you know, customers where we have a long-term contract. You know, we don't have a specific target. We actually like this mix because it affords us a lot of flexibility. You know, but we also like the stability of having large municipal contracts. You know, I would say it's, you know, that mix that we have is pretty ideal from my perspective.
While we're on this topic.
Mm
I think one theme that came up quite often throughout the meetings today has been the spike in fuel prices.
Yeah.
Could you remind us if you have fuel surcharges, how that flows through to the P&L, if there's a lag?
Yeah. The vast majority of our revenue is covered by a floating fuel surcharge. There's a slight lag. There's a lag of a month. You know, we take the high price point of the trailing five weeks. You know, there could be a lag as prices are moving quickly, but then, of course, we catch up when they move in the other direction. That covers the vast majority of our business. For the portion that's not covered by the floating fee, we go ahead and fix the price. We purchase forward on an annual basis, you know, rolling that forward. We're completely insulated at moments like this.
Understood. That's great to know. Let's talk about pricing. I think you guided to about 5% pricing in solid waste this year. Not too long ago, we've seen pricing in the high single-digit% range when inflation was high. How do you expect pricing to trend in the medium term? Do you see it moderating further as inflation maybe moderates further? Or is mid-single-digit% sort of the run rate for now?
I mean, we don't target a specific pricing level, we target the spread. So we wanna make sure that we have a reasonable spread over our internal rate of inflation so that we can preserve and grow margins over time. You know, last year actually, we rolled out our price increases in the beginning part of the year, as we usually do, and we realized halfway through the year that, you know, it wasn't quite catching up or wasn't quite staying ahead of inflation the way we typically like to see, so we rolled out another small price increase in order to, you know, adjust that spread the way we wanna see it. You know, I think it and from that perspective, it really is gonna follow, you know, the rate of inflation.
Remind us, what is the target price-cost spread? Is it like 150 basis points or
You know, we like to target a minimum of 50 basis points. There have been points in time where that spread has been wider, particularly in more rapid inflation environments. You know, we like to hit that at least 50 basis points.
Understood. Let's talk about volume. Your expectation is flat to down this year. Volume has been pretty elusive for the waste industry for at least a couple of years now, if you take out the natural disaster tailwinds. What is the steady state or long-term volume growth algo for you? Because you're more Northeast-focused, how should we think about the run rate volume growth that you could target for the business?
Yeah. I mean, being in the Northeast, of course, you know, we're dealing with steadier growth, population, economic activity. We just don't see the booms and busts that, you know, exist in some other areas of the country. You know, we have not, stepping back, we haven't prioritized volume and frankly, I think that goes for all of our certainly large publicly traded peers. You know, we've prioritized quality of revenue margin and making sure that we're pricing the work appropriately. You know, and that has come on the margin at the expense of volume. Long term, you know, as you said, we, you know, we're just flat to down 1%. We were closer to down 1% last year. This year, we're targeting plus or minus flat.
We think an appropriate place to be for us long term is marginally positive. We think that in our markets with our business, it's certainly, we're certainly capable of growing the business, again, with that low priority of making sure that we're pricing the work appropriately. We're not chasing volume.
Understood. Let's talk about your landfill ownership. You have some expiring ownership landfill assets, and then you're expecting some extension in some other assets. Just for the audience, can you help us catch up what we should be looking for over the next three years?
Sure. We, all of our landfills are in New England and New York, and this is a marketplace where from a public policy standpoint over the last, let's say, 30 years-40 years, politicians and regulators have really looked towards recycling, circularity, of reducing waste that's disposed of. Those programs have made a difference. Let's face it, we're a disposable society, both at the residential side, the business side, there's still a lot of waste. We've only seen one new greenfield landfill in the last 35 years. At the same time, what we've seen about 25% of all of the annual capacity come off of line as sites have permanently closed. They may have closed just because you've got a river that borders up against their neighborhood or whatever it might be. They just reached the end of life.
The solution in the Northeast has not been to create new capacity from a public policy standpoint; it's been to export the waste to other states. At the same time sites are closing, especially in the last 5 years-10 years, we've seen about 25% of all the waste produced in the Northeast. It's about 30 million tons a year produced in New England and in New York. About 25% of that now is going on rail cars and moving to states like Ohio or Alabama very, very far away. That's an expensive proposition as you can imagine, both from a capital standpoint and from operating expense standpoint. Casella today has the leading landfill position in the Northeast. We have over 20 years on average of capacity across our portfolio.
Keeping that waste in the market gives us a higher yield at the sites versus spending more of the dollars. Like, if you generate waste, say, in Eastern Massachusetts, to bring it to a disposal, we say in the industry you have T&D costs, transport and disposal, and that's the market clearing rate, the T&D. If you're bringing it to a nearby site, you're gonna spend less on transportation, you're gonna yield more on disposal. If you're bringing it halfway across the country on a rail car, you're gonna spend the vast majority on transportation and yield far less on disposal. From Casella's vantage point today, as you said, we have one site that's closing at the end of 2028, Ontario Landfill in New York. We've been working on a site that's nearby called Hyland.
It's been an operating site we've had in our portfolio for 30 years. We're very close to more than doubling the annual capacity and more than tripling the size of the site. We expect to receive that permit in the next four quarters. We'll have a really nice offset. Ontario will close, Hyland will come online, and it'll give us a great backdrop to shift tons. Ontario's our highest cost site today to build and operate. Hyland's our lowest cost site to build and operate. We actually expect a situation where EBITDA is roughly flat, but we have higher cash flows and higher operating income after that transition. We have one other site in New Hampshire that we've been working really hard to maintain our North Country landfill. It ultimately runs out of space at the end of 2027.
We've been working a three-pronged strategy. One, developing a new landfill in the next town over, a greenfield site. Two, working on expanding onto land that Casella owns at North Country. Three, we've bought a large property on the CSX mainline in central New Hampshire, and we're permitting a transfer station to move waste out of New Hampshire to our rail-served landfill in Pennsylvania. One way or another, this will shake out, but there's not a large negative financial outcome there where we've ramped that New Hampshire landfill down over the last three years, and we only expect to do $2 million of EBITDA at the site, so less than half of 1%. If we can get the expansion opportunity in the state, we could have a really nice tailwind and step up.
The alternative of having to rail the low amount of volume today out to McKean is not a negative for us. A lot going on with landfills in the Northeast, and I like to say, you know, that public policy backdrop that's allowed us to have this leading position, really great returns at our sites, a lot of pricing power over the last decade plus, we're not immune to the regulatory backdrop as well. It's complex for us, and we see that at a site like North Country.
With all this scarcity or expiring landfill capacity, at least in some locations, could this be a positive for disposal tipping fees or disposal fees, and you could see a lift in pricing?
We think so, yeah. I mean, certainly over the long term. I mean, what we've seen over the past couple of decades really is as significant capacity has come out of the market in the Northeast, that has pressured disposal prices to move higher. What has happened over that period of time is disposal prices move higher. All of a sudden now it makes sense to rail to Ohio or Alabama, whereas historically it didn't. When that capacity then is introduced into the market, it taps the brakes on pricing. You know, as more capacity comes out of the market, we would expect that trend to resume.
You know, I should also note that as the market becomes more reliant on rail export, rail is not an inexpensive solution, nor do we expect it to become inexpensive. You know, long term, that would certainly help to drive prices higher, we think.
I received a follow-up question probably for you, Brad. Going back to that volume comment, investors sometimes ask whether the weakness in housing construction is in part responsible for the lack of volume we've seen in the waste industry in general. If residential construction picks up, that could be a volume tailwind down the line. What is your response to that?
It could be, but I lived through kind of the big decline in 2008 through 2012, and entering that, Casella had close to 20% exposure to construction and demolition debris. When that decline happened, it was a painful headwind that was hard to offset. We purposely have remixed our business over the last decade plus to limit ourselves to only 10% exposure to construction and demo. A lot of our business model, if you get to know us and know about our team, is managing risk. We do a lot of things where we're not trying to get the absolute upside, but we're trying to get steady returns in all market cycles. We do have some limited exposure, but from a business plan standpoint, we're not trying to play that top side of the market at all.
Frankly, like in the Northeastern United States and Mid-Atlantic, they're a little slower growing markets anyways from a new household formation, and much more of our revenue is derived from small, medium, large businesses and steadier sources.
That's super helpful. Let's talk about M&A. We've known Casella as a successful integrator that acquired small waste companies to unlock value and complement your organic growth over the years. In the most recent years, we saw somewhat of a slowdown in terms of M&A revenue accretion. Can you remind us how to think about the TAM for M&A as it relates to your Northeast-based footprint?
Yeah. We've done an amazing job over the last number of years. I think I've acquired 80 businesses, thereabouts, over the last six or seven years. In 2023, we acquired $330 million of revenues, 2024, $215 million of revenues, and last year, $115 million. You're right, 2025 was a year where we had a little bit less acquired revenues, but it's mainly because a few deals are slipping into 2026. We're shaping up really well. We had a deal that closed on the first day of the year, sets us up well as $30 million of acquired revenues. We're really tracking to a year where, you know, right now things are far along our pipeline. We'll acquire $150 million-$180 million of revenues. Opportunity to do even more than that. None of that's in our current guidance right now.
We only include acquisitions after we successfully complete them into our guidance. If we look at the addressable market, we typically talk about $500 million being in our pipeline of revenues, but those are direct conversations we're having with sellers. The addressable market's in, you know, billions of dollars of acquisition opportunity. We're generally focused right now on overlays to our current market, so where we have tuck-in opportunities, adjacencies to our current markets. We're not looking to hop far away into new geographies. There's a lot of opportunity for us to drive value on top of businesses we already own.
Is there a way to think about the framework for M&A in terms of payback period or ROI or a multiple, specific multiple range you are willing to pay?
Yeah. I mean, the multiple for us is an output, not an input. We look at really every investment we make exactly the same way. It's unlevered after-tax IRR, and that's acquisitions, that's new CapEx, that's municipal contract, whatever it is. You know, at a minimum, we look to get before synergies, a low teens IRR calculated on that basis, and we calculate every deal exactly the same way. As we realize synergies and depending on the acquisition, you know, we look to get that return, you know, well into the teens and higher.
One of the areas we've actually yielded a lot of value is just on tax structuring. The vast majority of acquisitions we make are either asset deals or sole owner LLCs or complicated restructuring like F reorganization, where we yield all of the tax assets, and it really helps us to shield a significant amount of taxes. And into the future as well, we've got some great tax assets that really help to create more leverage on acquired businesses and to enhance our cash flows.
Perfect. Let's
Yeah
Open it up to the audience. If anyone has a question, please raise your hand, and we'll get a mic to you. While we wait for a question from the audience, related to that M&A topic, I think a couple of years ago you bought some assets in the Mid-Atlantic region. Can you recap what was the motivation to go in, into Mid-Atlantic, what kind of savings you expected, and sort of a scorecard, like what you expected then versus where you are today?
Yeah. We've done a great job developing markets in the Northeast United States, but as we started to look around, and into the next 20 years, starting to step into some new geographies and new nodes of growth, we thought was important from a business planning standpoint. When this platform of assets came up for sale, GFL was divesting 11 operations, it was a perfect fit for us because the gray dots on this map are the businesses we bought from GFL. We've actually done 10 acquisitions since then, all of the blue dots, and you can see, you know, the new market formation starting to gain density. Some of these are transfer stations or recycling facilities starting to build the set of assets to bring a set of, a full set of solutions to customers.
I think the strategy is playing very, very well. From a systems standpoint, we are a little bit delayed in getting everything moved to our legacy systems. We decided to do a full upgrade of our legacy systems and then implement on, onto them with both the initial acquisition and the next acquisitions. We're 95% through that. No technical risk. We just have to move one more business unit and flip to our new PCI compliant payment portal. Once that's done, we actually have been waiting to put a lot of these businesses together. We've got about $15 million of cost savings that have been parked waiting for us to get through the systems integration. This spring, we're starting to unlock a lot of operating value that's collapsing operations, that's collapsing routes, getting more automation on the street.
It'll be a real tailwind for us over the next couple of years, but we're really pleased with the move we made.
That's great to know. Wanted to ask you about your SG&A. I think, you know, you've mentioned in the past that this year is gonna be pivotal in a way that would lead to multi-year cost improvements. Elaborate on that for us. Is there a way to quantify what is your ideal SG&A rate maybe three years down the road?
Yeah. Today, as a percentage of revenue, we're a little over 12% on the G&A line. Our much larger publicly traded peers are around 10%, so there's a lot of room for us to improve. Essentially, we can become a lot more efficient in the back office, a lot more scalable by implementing technology. Some of that is somewhat complicated, some of it's really easy. For example, with the upgrade of our payment portal, in conjunction with our system consolidation, all of a sudden we'll be able to charge convenience fees to customers who wanna use a credit card. Relatively low-hanging fruit, but a significant drag on G&A right now, just paying those merchant fees. That's just one example.
We have about $15 million of cash costs teed up to come out of the business over the next, we say three years, but, you know, we should do better than that. That's kinda one step. Then really the more powerful step, I think, is once we become more automated, we're leveraging technology in a way that we're not today, then we become much more scalable. As we're growing revenue, particularly through acquisitions, we should see that G&A as a percentage of revenue move down, whereas last few years, really, it's been flat because new acquisitions have required a lot of additional manual effort in the back office.
Great. Somewhat related to this topic, I think you've quantified about $5 million of savings in the Mid-Atlantic region this year. Tell us about that. What are the buckets of these savings? More importantly, why $5 million? What could be sources of upside to this target?
This was $5 million of realization in this year. As I talked about a minute ago, we have about $15 million of operating cost savings that we've targeted in the Mid-Atlantic over the next couple of years. You know, if we have $5 million this year, you know, it's a larger number on a run rate basis. We think this will probably come out a little faster than three years, as Brad said earlier. Trying to be a bit conservative here. If we look at just our growth algorithm for the next several years, on the organic side, it's more of the same. You know, it's a price-cost spread of 50 basis points or more. We do this through our open markets, our great pricing programs, fee programs, along with a lot of good cost operating programs.
We've got those two self-help buckets, the synergies coming out of the Mid-Atlantic, some of the G&A cost benefits of the automation and investments we've made in the back office. You start to add on the acquisition growth. That's, you know, for the last 10+ years, we've done, you know, 15%-20% free cash flow growth a year. Last five years, we've done over 20%. It's a balance between that organic formula and then the acquisitions and, you know, shaping up into the year, you know, $5 million of synergies coming out of Mid-Atlantic, you know, part of us having a successful 2026.
That is awesome to hear. One question, probably, somewhat of a long-term question. Could you go beyond the Northeast and Mid-Atlantic through M&A? Could you not be a regional and become more national? Why or why not?
We could, but it's one step at a time. I mean, if we look at our strategic plan today, a lot of the focus where we're doing new market development or we're working on developing relationships are with providers and other waste industry participants who are inside our existing markets or into adjacent markets. You can drive a lot more value and leverage by doing that. If we were to jump 1,000 miles away and have a satellite, it'd be hard to create value for a number of years, and it would be a big distraction. So as a management team, we just don't see the value in that in the near term. Over time, we assume we'll keep adding adjacencies in a logical way and build our business up to, you know, multiple regions.
Question on your Resource Solutions business. I think it's quite unique in the sense it keeps you relatively insulated from the volatility in commodity prices, much more so than some of your peers. For those new to the story, could you unpack that? What's the business model behind this Resource Solutions business that keeps it less volatile than maybe some of your peers?
Yeah. Our Resource Solutions business is made up of a few components. One is our national accounts, big, large, multi-site retail or industrial customers where we're bringing circularity solutions and really driving some significant growth. The other side of the business is a processing business, and we've really differentiated ourselves over the last decade plus where both for there's two types of customers that come into our recycling processing centers, third-party trucks and our own trucks. For third-party trucks, we have floating fees, so in high commodity markets, we might share some revenues with them. In low commodity markets, they're always paying us a flat fee. As an example, if we have a threshold of $120, if commodity prices fall to $80 a ton, we charge $40, so we make the $120 in all scenarios.
We've passed 100% of the commodity risk back to third parties who come into our processing facilities. Well, we've done the same thing through our hauling business, which is really, really unique. We have a floating fee on almost all of our residential and commercial customers' bills, so it's almost like a fuel surcharge. If commodity prices are dropping, that fee goes up. We took a tiny bit of commodity risk and split it up among millions of customers, so they might have pennies or dollars of risk on their bills, but for us, we can always guarantee that we're gonna have the same high level of returns in our recycling business. In a down commodity market like this, Casella has very little downside risk, and we're still generating high returns at our recycling facilities.
Great. Any questions from the audience? I think we have about a couple of more minutes. I wanna touch on two topics very quickly. One is capital allocation. We saw modest buybacks, so no buybacks.
No buybacks, no.
That's not in the cards?
Not for the foreseeable future. Yeah. I mean, we think we have a very long runway to continue to acquire right down the middle of the fairway, if you will, in terms of geography, strategic fit, opportunities for us to extract synergies as we build market density and grow adjacent to our geographic footprint. You know, we think that's a much more compelling opportunity for our shareholders than returning the capital at this point.
We have close to $800 million of liquidity, so, we've got a great balance sheet. We're levered at 2.3 x, great availability, and this positions us to be really opportunistic for the right acquisition opportunities, which we believe drives a lot higher returns in the midterm for shareholders.
Lastly, we've seen some inclement weather in the Northeast. Any comments?
Yeah. We mentioned this on our earnings call in February. We operate a business outdoors every day, so we hate to talk about the weather, but it was one of the coldest winters in the last 25 years. I think we ran the stats. It was 20% colder than the average winter in the last 10 years. That leads to a little bit less economic activity. It leads to a little bit lower productivity. On the flip side, we service almost every major ski area across the Northeast, and it was a really great winter. Lot of economic activity there, a lot less snow out West.
You always have puts and takes, and when we come down to it, you know, having the toughest couple months at the beginning of the year, January, February, gives us a lot of time to execute our business strategy, and we put a really solid guidance range out for the year, had a lot of confidence in it to be able to outperform for the year. Yeah, it's tough. I feel for our team members on those very cold days, and we just have to take it a bit slower and safer.
I think that's all the time we had today. Thank you.
Thank you.
Ned and Brad, thanks for joining. We hope to host you next year.
Thank you.
Thank you for having us.