Casella Waste Systems, Inc. ($CWST)

Good afternoon, everyone. This is Tami Zakaria, Head of Machinery, Engineering, Construction and Waste Equity Research at JPMorgan. 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. Thank you for having us.

I think this is your first JPMorgan 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. So 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. So if you submit a question, I'll pose it for you. And we'll open up to the audience in the last 10 minutes of this session if you have any questions for the team.

So with that out of the way, first question to you, Ned. As the new CEO, what are your top 3 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 3. So 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 for me as CEO, and it's much of the same. But there are some focus points for me. And they're mainly people-oriented things that I wanted to do a little bit differently or I had ideas about. And the first is ensuring we have a safe and supported 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, 30 years. And we're doing some modernization to it. As an example, our first core value is 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 4 years ago, we were 2,000 employees. Today, we're 5,500 employees. So as we've grown more rapidly, making sure our value system, our culture, our communication really works up and down the business and 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 resources and capital resources. So 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.

So while we're at it, I think in the last week or so, there has been some personnel changes with the CFO -- COO departing. And I think you just hired a new CRO. Any comments on how you're thinking about these changes?

Yes. So 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 had 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 an 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 the 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 reenvisioning 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 is Sean Steves, I'm really sorry to see him go. We've had a great partnership for years. He's been with the company for 8 years. And due to family reasons, he really wanted to get a lot closer to his parents and decided to leave and move on. And 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 of great internal candidates. We already have a handful of external candidates. And we really think we're going to end up on the other side of this with an amazingly talented individual who can help us get more cost out of our business, be safer and drive value.

Great. So let's talk about Casella, the revenue mix. Could you remind us what your mix of revenues is from open markets versus restrictive contract markets? Is there an ideal mix or target that you have in mind?

Yes. So we're about 70% open market, which, as you know, Tami, allows us to really price flexibly as the environment, inflation, other factors evolve. The other 30-or-so percent would be large industrial customers, municipal customers, customers where we have a long-term contract. So we don't have a specific target. We actually like this mix because it affords us a lot of flexibility. But we also like the stability of having large municipal contracts. So I would say it's -- that mix that we have is pretty ideal from my perspective.

While we are on this topic, I think one theme that came up quite often this -- throughout the meetings today has been the spike in fuel prices. So could you remind us if you have fuel surcharges, how that flows through to the P&L, if there is a lag?

Yes. So the vast majority of our revenue is covered by a floating fuel surcharge. There's a slight lag, a lag of a month. So we take the high price point of the trailing 5 weeks and so there could be a lag as prices are moving quickly, but 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, rolling that forward. So we're completely insulated at moments like this.

Understood. That's great to know. So 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 want to make sure that we have a reasonable spread over our internal rate of inflation so that we can preserve and grow margins over time. 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 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 adjust that spread the way we want to see it. So I think from that perspective, it really is going to follow the rate of inflation.

And remind us, what is the target price cost spread? Is it like 100, 150 basis points or...?

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, but we'd 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?

Yes. I mean being in the Northeast, of course, we're dealing with steadier growth, population, economic activity. We just don't see the booms and busts that exist in some other areas of the country. 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. We prioritized quality of revenue, margin and making sure that we're pricing the work appropriately. And that has come on the margin at the expense of volume. Long term, as you said, we're 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 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. So just for the audience, can you help us catch up what we should be looking for over the next 3 years?

Sure. So 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 to 40 years, politicians and regulators have really looked towards recycling, circularity of reducing waste that's disposed of. And those programs have made a difference. But let's face it, we're a disposable society, both at the residential side, the business side, there's still a lot of waste. And we've only seen one new greenfield landfill in the last 35 years. At the same time, we've seen about 25% of all of the annual capacity come offline as sites have permanently closed. And 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. And 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. So at the same time, sites are closing, especially in the last 5 to 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 New York. About 25% of that now is going on railcars and moving to states like Ohio or Alabama, very, very far away. So that's an expensive proposition, as you can imagine, both from a capital standpoint and from an 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 disposal, we say in the industry, you have T&D cost, transport and disposal. And that's the market clearing rate, the T&D. So if you're bringing it to a nearby site, you're going to spend less on transportation, you're going to yield more on disposal. If you're bringing it halfway across the country on a railcar, you're going to spend the vast majority on transportation and yield far less on disposal. So from Casella's vantage point today, as you said, we have one site that's closing at the end of 2028, Ontario Landfill, New York. We've been working on a site that's nearby called Highland. 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 4 quarters. So we'll have a really nice offset. Ontario will close, Highland will come online, and it will give us a great backdrop to shift tons. Ontario is our highest cost site today to build and operate. Highland is our lowest cost site to build and operate. So 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 '27. We've been working a 3-pronged strategy: one, developing a new landfill in the next town over, a greenfield site; two, working on expanding on to land that Casella owns at North Country; and 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. So 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 3 and we only expect to do $2 million of EBITDA at the site. So less than half of 1%. But if we can get the expansion opportunity in the state, we could have a really nice tailwind and step up on the alternative of having to rail the low amount of volume today out to McKean is not a negative for us. So a lot going on with landfills in the Northeast. I'd like to say 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, yes. 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. But then as more capacity comes out of the market, we would expect that trend to resume. 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. So long term, that would certainly help to drive prices higher, we think.

So 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. And so 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 demo debris. And 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. So 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. And frankly, like in the Northeast or United States and Mid-Atlantic, they're a little slower growing markets anyways from a new household formation and much more of our revenues 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?

Yes. We've done an amazing job over the last number of years. I think I've acquired 80 businesses thereabouts over the last 6 or 7 years. In 2023, we acquired $330 million of revenues. 2024, $215 million of revenues and last year, $115 million. So 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 '26. 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. But we're really tracking to a year where right now, things are far along our pipeline. We'll acquire $150 million to $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 is in 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?

Yes. I mean the multiple for us is an output, not an input. So 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 a municipal contract, whatever it is. So 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, we look to get that return well into the teens and higher.

And one of the areas we've actually yielded a lot of value is just on tax structure. So the vast majority of acquisitions we make are either asset deals or sole owner LLCs or complicated restructuring like F reorgs, 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 into our cash flows.

Perfect. Let's 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, I wanted to -- 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 into Mid-Atlantic? What kind of savings you expected and sort of a scorecard like what you expected then versus where you are today?

Yes. So we've done a great job developing markets the Northeastern United States. But as we start 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. So when this platform of assets came up for sale, GFL was divesting 11 operations, it was a perfect fit for us because if we go [indiscernible]. 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 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. So I think the strategy is playing very, very well. From a system 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 to 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. And 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. So 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. So it will 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. I wanted to ask you about your SG&A. I think you've mentioned in the past that this year is going to be pivotal in a way that would lead to multiyear cost improvements. Elaborate on that for us. Is there a way to quantify what is your ideal SG&A rate maybe 3 years down the road?

Yes. So 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 that 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 is really, really easy. So 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 want to use a credit card. Relatively low-hanging fruit, but a significant drag on G&A right now, just paying those merchant fees. So 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 3 years, but we should do better than that. So that's kind of one step. But 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. And 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. Related to -- 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 the savings? And more importantly, why $5 million? What could be sources of upside to this target?

So this was $5 million of realization in this year. And as I talked about a minute ago, we have about $15 million of operating cost savings that we've in the Mid-Atlantic over the next couple of years. So if we have $5 million this year, it's a larger number on a run rate basis. And we think this will probably come out a little faster than 3 years, as Brad said earlier, but 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. 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. Then we've got those 2 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 and then you start to add on the acquisition growth. And that's -- for the last 10-plus years, we've done 15% to 20% free cash flow growth a year. Last 5 years, we've done over 20%. And it's a balance between the organic formula and then the acquisitions and shaping up into the year, $5 million of synergies coming out of Mid-Atlantic, 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. But over time, we assume we'll keep adding adjacencies in a logical way and build our business up to multiple regions.

So a 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. So for those new to the story, could you unpack that? What drives -- what's the business model behind this Resource Solutions business that keeps it less volatile than maybe some of your peers?

Yes. Our Resource Solutions business is made up of a few components. One is our national accounts, big large multisite retail or industrial customers where we're bringing circularity solutions and really driving some significant growth. But the other side of the business is the processing business and we've really differentiated ourselves over the last decade plus where both for -- there's 2 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. So 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. So we've passed 100% of the commodity risk back to third parties who come into our processing facilities. We've done the same thing through our hauling business, which is really, really unique. So 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. And 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 going to have the same high level of returns in our recycling business. So 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 want to touch on 2 topics very quickly. One is capital allocation. We saw modest buybacks. So no buybacks?

No buybacks now.

And that's not in the cards?

Not for the foreseeable future. Yes. 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. So we think that's a much more compelling opportunity for our shareholders than returning the capital at this point.

And we have close to $800 million of liquidity. So we've got a great balance sheet. We're levered at 2.3x, 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.

And lastly, we have seen some inclement weather in the Northeast. Any comments?

Yes. So 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. So 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. A lot of economic activity there, a lot less snow out West. So you always have puts and takes. And when we come down to it, having the toughest couple of 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. So yes, it's tough. I feel for our team members on those very, 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, Ned and Brad, thanks for joining. We hope to host you next year.

Thank you.

Thank you for having us.