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Casella Waste Systems Has a “Challenging but Strong” Q1 2019

The company faced operational obstacles at its Ontario County, N.Y., Landfill and challenges in its disposal line of business due to the expected closure of the Southbridge Landfill in Massachusetts in November 2018.

Rutland, Vt.-based Casella Waste Systems Inc. reported its Q1 2019 earnings, providing information on landfill operation challenges, acquisitions, areas of growth, areas of focus for 2019 and beyond and more.

“We are pleased with the strong start to the year, as we continued to execute well against our key strategies as part of our 2021 plan,” said John W. Casella, chairman and CEO of Casella Waste Systems, in a statement. “We remain focused on driving normalized free cash flow growth by increasing landfill returns, improving collection profitability, creating incremental value through resource solutions, using technology to drive profitable growth and efficiencies and prudently allocating capital for strategic growth.”

The company reported revenues of $163.7 million for Q1 2019, an increase of 11 percent, or $16.2 million, from the same period in 2018. It also announced that it closed on its acquisition of Maine-based M.C. Disposal Inc., a waste collection company with roughly $7 million of annual revenues.

Despite these positives, Casella referred to Q1 2019 as a “challenging seasonal quarter” during a call with investors on May 1.

“The first quarter was a tough quarter for our disposal line of business with adjusted EBITDA down due to the expected closure of the Southbridge Landfill in November 2018, which is a tough comparison given the large soil remediation job that we had in the first quarter of last year,” stated Casella. “And most notably, operational challenges at our Ontario Landfill caused us to cut hike price sludges accepted at the site and to incur higher unbudgeted expenses to resolve several operational issues. It's all hands on deck, including myself, to resolve the issues. And we are well on our way to getting back to our high operating standards and expected financial performance at the same.”

Providing more color about the challenges at its Ontario County, N.Y., Landfill, Casella said that some of the challenges were related to sludge going into the facility and gas getting out the front. To resolve some of those issues, the company put in additional landfill gas wells and made other necessary changes to ensure the issues don’t happen again.

Here are some other highlights from the firm’s results:

• Revenues were $163.7 million for the first quarter of 2019, an increase of 11 percent, or $16.2 million, from the same period in 2018. This growth was mainly driven by robust collection and disposal pricing; the rollover impact from acquisitions; higher recycling, organics and customer solutions volumes; and higher recycling processing fees that were partially offset by lower solid waste volumes, the closure of the Southbridge Landfill in Massachusetts and lower recycling commodity prices.

• Adjusted EBITDA was $26.6 million for the quarter, up $2 million, or 8.1 percent, from the same period in 2018. This growth was mainly driven by improved performance in the company's collection, recycling and customer solutions lines of business, partially offset by a decline in performance in the disposal line of business.

• Net loss was $1.7 million for the quarter, an improvement of $2.2 million, or 56.2 percent, from the same period in 2018.

• Net cash provided by operating activities was $4.8 million for the quarter, compared to $12.8 million for the same period in 2018.

• Normalized free cash flow was $6 million for the quarter, down $7.2 million from the same period in 2018.

• Overall solid waste pricing was up 5 percent, driven by strong landfill pricing, up 4.2 percent, and robust collection pricing, up 6 percent. “Our disciplined pricing programs are aimed at balancing volume growth while covering inflation and expanding margins,” said Casella in a statement. “We accomplished both goals in our collection operations, with margins and cash flows up as we shed unprofitable work, improved operating efficiencies and offset historically high inflation.”

• Revenues in the disposal line of business were down $4.2 million year-over-year, with strong pricing offset by volume declines and the closure of the Southbridge Landfill in November 2018.

• Disposal volumes had a tough year-over-year comparison, as the company had a one-time $3.5 million soils remediation project in the first quarter last year that did not repeat this year. Volumes also were negatively impacted by a $600,000 business interruption at a transfer station that is being rebuilt following a fire. “Given the continued tightening of the northeast disposal market, we worked to drive strong pricing discipline, coupled with our goals to maintain sufficient landfill capacity through the higher-priced summer months and to eliminate more challenging waste streams. We expect positive disposal volume growth through the remainder of the year,” said Casella in a statement.

• Excluding the Southbridge Landfill closure, landfill tons were down 1.5 percent year-over-year.

• Recycling revenues were up $600,000 year-over-year, with $1.9 million lower commodity pricing, but this was offset by $2 million of higher third-party tipping fees or processing fees and $0.5 million of higher volumes. “Due to our efforts to restructure third-party recycling processing contracts and off-take commodity pricing risk, we improved operating income year-over-year in our recycling business despite commodity prices being down roughly 18 percent during the same period,” said Casella in a statement. “Our SRA fee, revenue share contracts and contamination fees combined with our efforts to produce higher-quality materials and manage processing costs have allowed us to improve recycling financial performance in a challenging commodity pricing environment.”

• Average commodity revenue per ton was down 15 percent year-over-year, with declines in fiber pricing and cardboard pricing.

• Operating income was $4.4 million for the first quarter, as compared to $0.8 million for the same period in 2018. Adjusted operating income was $5.7 million for the quarter, up $0.8 million from the same period in 2018.

• Casella announced its acquisition of M.C. Disposal Inc.: “Earlier today [May 1, 2019], we purchased substantially all of the assets of M.C. Disposal Inc. (MCD), a waste collection company with roughly $7 million of annual revenues located in Maine,” said Casella in a statement. “MCD has built a solid business through excellent customer service, and we expect this acquisition will tuck in well with our existing operations and allow us to build further route density and drive operational efficiencies. We are pleased to welcome the hardworking MCD employees and owners to our team.

“While there is still work ahead of us, we have made great progress over the last several months successfully integrating and recognizing synergies from the 10 acquisitions that we completed in 2018,” added Casella. “Our acquisition pipeline remains robust with over $40 million of annual revenues under letter of intent that we expect to close by the end of the third quarter. We believe that there is additional opportunity to drive cash flow growth across our footprint through strategic growth.”

• Commenting on labor and building up the company’s team, Casella said: “As we have highlighted in the past in 2018, we introduced our career path program to our maintenance and landfill technicians, our recycling employees and our drivers. While the program is in its early innings, we are starting to see some early positive benefits. … Over time, we expect this program to improve employee satisfaction, strengthen our recruitment, reduce turnover and enhance productivity while lowering safety incidents.”

“In 2019, with the help of our human resource team, we are also in the process of creating a robust on-premise onboarding and training platform,” added Casella. “Our goal is to develop a training program to help us train CDL drivers and apprentice level technicians that are highly committed to the company and dedicated to superior safety and service. We have established several training hubs across our operations, and we are having great initial success in attracting trainees to the program.”

• Replying to questions asked by investors about the company’s contract with Boston, Ned Coletta, senior vice president and chief financial officer at Casella, said: “There are three people who went to the pre-bid, and one of the most important bidders decided not to bid. They made a few public comments about it, and it really had to do with contamination in the city of Boston in the recycling stream. … When we put our proposal together for the city of Boston, we set up a real incentive for them to educate their residents and get contamination out. But I could see why some of the smarter players in the marketplace decided maybe not to bid with the levels of contamination in the city today. They are not doing a great job.”

Adding to Coletta’s comment, Casella said: “I think it's likely that we'll handle all of it [full contract opposed to having the contract divided up between two to three players] to the extent that we're successful in negotiating the bid, which we're in the process of doing that right now. But I think we're very comfortable with where we are. As Ned said, we did the bid. We also gave them significant incentive to clean up the stream—there's one cost if it's not cleaned up, then there’s another cost if they clean it up. So, there are real incentives for the city to do a better job from an education standpoint. And certainly, we'll work with them to achieve a much higher level of quality coming to the facility so that we can continue to put real quality material into the markets.”

“We have a long-term contract with Boston, and we honored that contract. We will continue to honor that contract through the end of the contract, but we're not going to carry that contract into the rest of the year,” added Casella. “We would continue to work with the city of Boston if they weren't able to get to an agreement and if they were willing to meet the bid that we've put in place. … We're not going to extend the existing contract. We can't afford to do that. We've had the contract, and we honored the contract to the end of the contract. It was the right thing to do, and now the contract is over. If they want us to continue to provide service, they'll have to do it at the new price.”

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