Like John, for example, I'll start with him. In moving into the executive chairman role, he's not running the company day-to-day. He's going to focus on a couple of things that he's really good at and he's uniquely positioned to do. One of them is, I'll call it being our cultural ambassador. So he's spending a lot of time focusing on that. Obviously, it's a huge focus area for Ned because we all recognize that it's both a benefit for Casella, we think a differentiator, for certainly our employees, our customers, but it's also a risk, which you highlight. So it's tone at the top. It's communication. Every manager that joins the company, we bring them up to Rutland, Vermont, and go through an orientation. It's communication from the top down. It's communication across regions. It really depends on the nature of the acquisition.
As you alluded to, the company's grown by multiples over the last several years. Most of those acquisitions are in our footprint. Yeah. Either they're direct tuck-ins or you have a business that's joining a region that's established. You have infrastructure and management so that's less of a challenge. The Mid-Atlantic was a challenge. New region for us. A set of assets in terms of the GFL acquisition that didn't really have a culture, and that isn't an indictment at all of GFL. It's just the way that business had come together, it was a few acquisitions, and it just was in transition. Our game plan there was, we took our most experienced, strongest regional vice president, who had responsibility previously for our Western region, moved him to be regional vice president of the Mid-Atlantic. Regional controller, same thing.
We have four or five of our market area managers who are from other areas of the company. Then, where those managers have come from, we've backfilled with young talent and bench in those regions. We've sort of brought the Casella culture to that area.
That's a great overview of what's been going on, and it seems that your business model works, and obviously it's very competitive. Maybe let's go to labor. Growing that much, you probably had to build out your drivers, all of the assets that you guys have. Maybe beyond your CDL schools that you talk about, I'd love to hear more about that. How are you leveraging this, I assume, tight labor market? What innovations are you doing? Are there new labor pools that you can tap into? Maybe you could talk about that.
Yeah. Well, our CDL school, which we're happy about, we've now graduated, I think, 400 people from that school. We've done a few things. First of all, in the economy generally, I would say the tightness in the labor market, at least for us, for drivers and mechanics, has eased somewhat. Our turnover is in the mid-20s, which for the industry and historically is not bad. Our ongoing initiative to get as many rear load trucks off the road and replace them with automated side load trucks. A rear load truck usually has one or two helpers on the back. As we take those off the road, those helpers then become drivers. Or they'll attend our CDL driver school. That's one thing we're doing.
Another thing that we're doing, which may be at least as important, is we've changed our recruiting focus to really spend a lot more time in high schools and trade schools. Get the people that are going to be 18 years old and making them understand, you could actually make a lot of money. You could make a good living as a waste driver. Especially now, I think with uncertainty over jobs and what's happening from a technology perspective and the economy overall, it's not a bad place to be. We're making that sales pitch to 18-year-olds instead of waiting for experienced drivers to come to us.
Yeah. Right. That's the time to do it. Maybe we could jump right into. We were talking about scaling and the M&A market, the pipeline. After all the heavy lifting you've talked about, in 2026, how is that pipeline looking? Are you focusing on back to tuck-ins or building density in the market, or are you thinking about a third platform, new geography, something maybe different or larger?
Yeah. Our active pipeline right now in terms of deals that we're actively working on at some stage of maturity in the process is about $500 million. We've said that for several years, because what happens is, deals we get done, new deals come into the pipeline. That basically represents our bandwidth, I think, for pursuing and doing deals and integrating deals. That pipeline is entirely within our existing footprint. Whether it's our legacy footprint in New England, in the Northeast, or in the Mid-Atlantic. As we focus on that, so to your question about a third platform, we kind of have one eye on potential opportunities. If something arises that's logical and strategic and adjacent probably to our footprint.
We would certainly consider it, do something like we did in 2023 with the GFL divestiture. We're not going to skip states. We're not going to go to Florida or Texas. We're likely to move our way, if I had to predict, w e probably expand down the East Coast and maybe Ohio, but sort of adjacent to our existing footprint.
Yeah. That's logical. What about with that, obviously you're going to need capital. Maybe you could sort of talk about your leverage thought process and where do you guys like to be? What would you go to and how would you allocate capital with growth, with equity? Would you ever think about things like that?
Yeah. First I should say, we're committed to maintaining a strong balance sheet, moderate leverage. That hasn't changed. Over the past year, as the M&A pipeline ebbs and flows, we're not totally in control of the timing. As we've generated cash, the leverage has ticked down. We were 2.25x, I think, roughly, debt to EBITDA at the end of the year. We took that up a little bit with the acquisition primarily of Star Waste, which we just announced last week. We're now between 2.5x and 3x. We have appetite to take on a little bit more leverage. We think that where we're sitting today, that offers better shareholder value than necessarily funding the next step in our growth with equity.
I think if we do something much larger, strategic, there's nothing we're working on now, but just theoretically, we would have to reconsider that. Stepping back, the good news is we're now at a size where, given our typical level of M&A activity, we can fund that with cash flow, a little bit of incremental leverage. Yeah, so we're finally getting to that point where the flywheel is going to be sort of self-sustaining.
Yeah. That's a powerful flywheel. Maybe let's talk about operations, cost mitigation. I know the industry has been talking about this quite a bit. Collection operations, which are 60% of your revenue, what are the important cost initiatives that you're focused on and how have they helped curb inflation. I know inflation's obviously moderated, but you're always focused on pricing programs. What are you guys up to there?
Yeah. Maybe I'll start at the revenue line. The industry is such that I think ourselves and our competitors who prioritize price, there's we think durable ability to price ahead of our internal cost of inflation. There's two sides to that, of course. We're pricing to stay ahead of inflation, but not just sitting back and taking inflation as it comes. As you were asking about, we are looking to manage costs. There are certain things. It sounds really simple, but we hired a new vice president of procurement a couple of years ago. He's built a nice team, small team, but really effective, where we're now consolidating much more of our spend and managing it centrally, where we're getting the best deal, getting the best contracts, as opposed to everyone doing their own thing.
Which has been a consequence of the way Casella's been structured historically. For something like fuel, that's sort of the topic of the day, we pass that risk, as our competitors do, we pass that risk through to our customers with floating fuel fees. Things like ongoing acquisition synergies, route consolidations. I mentioned the conversions to automated trucks wherever we can to be more cost-efficient in that way. There isn't a simple answer. It's sort of across a number of fronts day to day.
Yeah. Obviously, that is a topic with fuel, but it looks like that's obviously somewhat, you guys can mitigate that, the industry can mitigate that. What about overall fleet health? How are the trucks? How are the ability to acquire trucks? And you sort of a little bit touched on technology, but maybe sort of next generation technology, maybe you could go through a little bit of that.
Yeah. The fleet's in great shape. We're under six years average age. That doesn't tell the whole story, but that's a good kind of rule of thumb. The fleet's in good shape. We have a long term, we look out three to five years, a long term fleet plan, the truck replacements are very thoughtful and planned well in advance. The fleet's in good shape. Technology, we've outfitted the vast majority of our trucks with a software called Routeware, which sets up the truck with external cameras to safety annotations, adjusting service levels, take pictures of the overflowing garbage can and send it to the customer, and the ROI on that is fantastic.
The next step for us in terms of truck technology is we're actually, and we're piloting it right now, but we're putting AI into the trucks, which is really going to improve, we think, safety performance. It might sound like sort of Big Brother, but there will be a camera facing the driver. An AI will look at, is the driver distracted? Is the driver looking where they need to look? Cameras in the truck and outside the truck, and then real-time feedback where, if the driver's not wearing their seatbelt or they've looked away from the road too long, they actually get that notification in the truck. If there are three instances of behavior improvement opportunities, then there's a teachable moment, we would say, that's triggered with their supervisor.
Yeah. I assume that's got to be pretty effective.
It's early days, but the numbers are pretty stunning, actually.
Yeah. Some AI. You talked about the route-based technology or on the truck-based technology. What about for customers using apps? Have you delved into that? If you have, what's going on there and what's the outcome of that?
Yeah. We're actually in beta testing right now. There are a few of us on the team, including myself, who have the version of the new Casella app. Taking a little bit of a step back, the way Casella has done business is very 1990s. Part of the Casella culture has been John Casella has wanted, if you ever have a problem, you can call and you're going to get a friendly, helpful customer service rep on the phone. There's two issues with that. I mean, that's great, but there's two issues with that. One is that's an expensive model, and second is no one wants to talk on the phone anymore. People want to order service, revise service, check on the status of their pickups, whatever, on an app. That's where we're going to be in six months.
All of our customers hopefully will have an app. The website, which currently is just sort of an overview of Casella, the website will be a vehicle for people to conduct commerce as well. We're moving into the 21st century.
Yeah. I'd love for everyone to see my conversations with my children on phones. It's very limited and difficult, so I understand that. Let's talk about sort of the Northeast, and we've talked about this a lot, but maybe you could just give us an update and just sort of walk us through, for those not familiar, sort of the Northeast capacity cliff, recent landfill closures, tightening permits. We've heard quite a bit about this, but maybe you could tell us what's going on, and I know you have the McKean Landfill, and just sort of what's the latest dynamics there.
Yeah. Maybe I'll start at the macro market level and then dive into Casella's position. Broadly speaking, we generate ±30,000,000tons of waste in the Northeast, so New England, New York, New Jersey. We have about 20 ,000,000 tons of landfill capacity and waste-to-energy capacity to deal with that waste. That supply-demand imbalance has, over time, resulted in very high, relative to the rest of the country, very high disposal prices, very high tip fees, which as an owner of landfills, has accrued to our benefit. Where does the rest of the waste go? The market has evolved where, like I said, about two-thirds is probably disposal capacity in the Northeast. Almost a third at this point is now exported via rail to as far away as South Carolina, Georgia, Alabama. A lot of waste goes to Ohio as well. That's the current landscape. That 20 ,000,000 tons continues to shrink.
We haven't had a lot of landfill closures in the last year or two, but we expect a number upcoming in the next couple of years. That's going to continue to shrink, which is going to continue to increase the value of the capacity that we have. The capacity that we have is, and it'll shift around a little bit as a couple of landfills close over the next five years, other landfills are expanded, but we have enough disposal capacity, which is the most important thing. We have enough disposal capacity for our customers for the next 25 years. Part of that, you mentioned, is McKean taking very little volume today. It's actually rail-served. It's a landfill in western Pennsylvania. That landfill has 50 years of life. That's there as a nice insurance policy, depending on whatever happens in the rest of our landfill portfolio.
Yeah. Sounds like you're pretty well-positioned. Maybe you could talk about something that we don't talk about too often but, or recently maybe, but national accounts, I think you've said that you sort of have an inside track there on organic growth. How are you competing there on price and your ability to provide other capabilities that maybe competitors can't match?
Yeah. The growth profile of that business has been really nice. We've grown that business close to 10% for a number of years. That's really a solutions-led business and led sales effort. We're going into customers, larger customers typically, and providing holistic sustainability solutions for not only to take care of their waste, but to meet their overall sustainability goals. We have a specialized sales force, specialized expertise to help companies do that. Oftentimes, we have someone that's embedded in a company to help manage. You know, getting recycling rates up. "Hey, we haven't recycled this. Can we recycle this?" That sort of thing. We're not competing on price.
Right. Yeah. Holistic, right. We've also talked quite a bit about recycling facilities, maybe sort of recycling facilities of the future. You've had upgrades in Boston and Connecticut. What is the ROI on these new technologies, optical sorters, robotic arms? Maybe you can sort of give a little background on that for those not familiar, and then just sort of talk through what the potential economics.
Yes. We completely replaced and outfitted our largest recycling facility in Boston, which is one of the largest in the country, with the latest technology, optical sorting. Actually, in some areas of the line, there's AI to help sort through the material. Basically, improving your sorting capabilities, significantly lowering the staff required. There's still people in the building, but a lot less. It's a lot more profitable. The ROI in Boston, which we completed in 2023, it was about a 20% IRR, probably, like conservatively. We completed a similar retrofit last year at our facility in Willimantic, Connecticut, similar economics. Our next opportunity to implement this latest technology is probably in a new facility we'll build in Pennsylvania. We actually just acquired a recycling facility in the Mid-Atlantic region that will allow us to vertically integrate some collected recyclables into our facilities.
We still have a need there for recycling capacity from a processing standpoint. We're in the process of siting, and we'll probably start later this year on developing a new recycling facility in that market, eastern Pennsylvania.
Yeah. A lot going on there. Maybe I'll open the floor up to the audience. Chris.
Hi, Brad. Thanks for being here, and John, for supporting this conference for so many years. Winter happens every year. This is a tough one, obviously, in the Northeast. Good for skiers, maybe volumes, bad for ops. How would you frame that versus prior years?
Well, yeah. As you said, given our footprint, winter's always tough. First quarter's always our toughest quarter. This winter was especially tough, both from a snowfall standpoint, also the cold. I wouldn't say that it's at a level where it would impact our results relative to past years. It's always difficult. There is that, a little bit of the offset. Doesn't fully offset it, but it's been a really great year for the ski resorts.
Sir. Mike.
Well, it's great to hear from you. Reading about your background, it's pretty impressive. With your experience at Casella, what are the challenges that you see, say, three challenges that you see going forward? Based on your tremendous experience in this industry, do you feel that you have the advantage to conquer them?
Yeah. I would say the biggest challenge probably is your first question. As we grow, how do we grow up? What I mean by that is leveraging technology, leveraging consistent process and procedure, exhibiting some of the behaviors that by necessity our larger competitors exhibit, but maintain our culture. That's our number one focus. That'll be our biggest challenge. In terms of other challenges, it's a great business. Like through the cycle, it's a great business. Our market position is very strong, obviously, in the Northeast, as you probably know. We're very well-positioned day to day in our business.
Hi. Thanks again for coming, and I had to step out briefly, so I apologize if you addressed any of this. Just thinking about capital allocation, you're at what? 2x-2.5x net debt to EBITDA. Can you walk through how you would weigh additional M&A opportunities versus, say, just internal projects and share buyback?
Yeah. We evaluate every investment, whether it's M&A, whether it's the new buying trucks for a new municipal contract, a development project like I discussed a minute ago, building a new recycling facility. We look at everything the same way, which is unlevered after-tax IRR. The nature of those investments are very different, but that allows us to compare everything on the same basis. We have a significant opportunity we think in our footprint, adjacent to our footprint, to continue to invest in acquisitions that don't come at the expense of internal investments. Actually, maybe I should say that first. Any investment that, whether it's a new municipal contract, other internal investments, if they make sense, we're doing those. It's okay, well, what are the additional capital allocation areas and acquisitions?
We have the ability to continue to make acquisitions, just given the nature of consolidation in the industry, in our footprint for the next. You know, very long, the next five, 10 years, we think.
How big would a typical acquisition be? I understand there's a range.
The biggest acquisition we've ever made is the divestiture from GFL three years ago, which was a purchase price of $525 million, roughly. Most of them are much, much smaller than that. A $100 million revenue company, $50 million-$100 million revenue company, we like those deals a lot because they're deals that we can integrate typically if they're in our footprint, typically generate a lot of synergies from them. It's the ability to invest a lot of money in one shot and get scale from that effort.
If you have, let's call it $50 million-$100 million revenue company, what's the typical margin profile of that smaller company? Obviously, you have very attractive margins. The big three have very attractive margins. I guess I'm just wondering about the economics of. I assume it's pretty favorable for you relative to your public valuation.
The rule of thumb that we usually tell people is about 20% EBITDA margins. That's what we see.
For the smaller ones?
Yeah. Maybe even smaller for the smaller ones. I'll get back to that in a second. That's the average of what we see. For the smaller ones, oftentimes, those are lower margins. Those smaller ones are often pure tuck-ins, where we're immediately taking the EBITDA margin from 10% to 50%, incrementally, to the extent that we're just consolidating a business into our existing route structure. Most of the acquisitions we're doing are in the collection business. We operate our collection business in our legacy footprint at about 30% EBITDA margins. You think about that as that's kind of the way we think about entering each of these deals, going at 20%, but then move those margins up over time.
Makes sense. Just final one, again, same topic. I know there's the big three, but it's a fragmented industry. Are there any deals that you can do specifically that you think the big three cannot do? Has that happened, or would you anticipate that happening going forward, where you're advantaged in this kind of in-between category?
Well, we typically don't see the big three at the level where we're looking at deals. Most of what we're doing flies under the radar. It isn't necessarily a regulatory impediment, though that may be the case in some cases. We're just under the radar of the companies that are much, much larger.
Great. Thank you.
Yeah.
In regards to non-hazardous construction waste, do you see any trends going on? Have you made any observations?
It's hard to answer that in the beginning of April, because that segment sort of grinds to a halt in the Northeast in the winter months. We don't really have a good view on the economy, whether it's that waste or other industrial waste streams, really until everything thaws and we see how things pick up in April, May, and June. I would say, just for everyone's benefit, Casella is relatively less exposed to C&D, both by virtue of where we operate, there just isn't a lot of housing growth in the Northeast. Also by design, where we want to have most of our business in the recurring waste streams and less exposure to what's potentially more cyclical.
Well, Brad, that's been a great overview. Thank you for being here today. Thank you again, as Chris said, Casella supporting us all these years, and hopefully have you back next year.
Great. Yeah, thanks for having me.