Casella misses recycling industry operating income by nearly $2 million in Q1 of 2018

Casella Waste Systems Inc., a regional solid waste, recycling and resource management services company headquartered in Rutland, Vermont, has reported its financial results for the three-month period ended March 31, 2018. For the quarter, revenue was $147.5 million, up $13.7 million, or 10.2 percent, from the same period in 2017, with growth mainly driven by robust collection and disposal pricing, higher solid waste volumes, higher organics and customer solutions volumes and the roll-over impact from acquisitions, the company says. This growth was partially offset by lower recycling commodity prices and volumes.

Casella Waste Systems also reports its net loss for the quarter totaled $3.9 million, an increase of $3.7 million.

“We had another strong operational quarter as we continued to execute well against our key strategies,” says John W. Casella, chairman and CEO of Casella Waste Systems. “We remain focused on creating shareholder value through increasing landfill returns, improving collection profitability, creating incremental value through resource solutions, driving general and administrative efficiencies, and strong capital discipline.”

The company notes several highlights from the quarter:

• Adjusted net income attributable to common stockholders was $0.1 million for the quarter, down $0.2 million from the same period in 2017.
• Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) was $24.6 million, up $1.5 million, or 6.4 percent, from the same period in 2017.
• Net cash provided by operating activities was $12.8 million, up $2.1 million, or 19.8%, from the same period in 2017.
• Normalized free cash flow was $7.2 million, up $6.1 million, or 529.5 percent, from the same period in 2017.
• Overall solid waste pricing was up 4.3 percent, driven by strong landfill pricing, up 4.9 percent, and robust collection pricing, up 4.8 percent.

“The progress we have made on our strategies is apparent in the positive financial results in the first quarter, despite significant recycling headwinds,” Casella says. “Our disciplined solid waste pricing programs continued to add value, with landfill pricing up 4.9 percent and collection pricing up 4.8 percent. This strong pricing was coupled with 6.6 percent solid waste volume growth, mainly driven by robust disposal volume growth. Roughly 60 percent of our disposal volume growth during the quarter was driven by a one-time $3.5 million soil remediation project for a key customer, and the remaining 40 percent was driven by higher landfill volumes across all waste types as we continued to source new landfill volumes at higher prices in the tightening northeastern disposal markets.”

Casella says prices for recycled paper and cardboard deteriorated in the first quarter of 2018 because of China’s ban on mixed paper and new lower contamination standards. “Our average commodity revenue per ton was down roughly 50 percent year over year, with mixed paper pricing down over 90 percent during this same period.”

He adds, “Our risk mitigation programs are working well to help offset this historic decline in commodity prices. However, several factors contributed to an under-recovery during the quarter, including: the rapid sequential decline in commodity prices from December to March caused our recovery fees to get behind due to their calculation based on a one-month trailing index; we are absorbing all of the commodity pricing risk on several legacy contracts, which make up roughly 15 percent of our commodity sales; and our variable costs were up as we had to slow processing lines to improve quality while we incurred higher transportation costs to deliver commodities to new markets. Given these headwinds, recycling operating income missed budget by roughly $2 million during the quarter.”

The company announced in August 2017 that it had adjusted its capital strategy to balance deleveraging with growth through acquisition or development investments. “We have set a goal to grow revenues by $20 million to $40 million per year through acquisition or development activity for the next three years as part of this new strategy,” Casella says. “We are off to a great start with this strategy, with roughly $20 million of acquired revenues over the last four months. Our acquisition pipeline remains robust, and we believe that investing a portion of our excess cash flows to grow our business will create additional shareholder returns through higher cash flows driven by new revenue streams, internalization to our disposal facilities and cost synergies.”

Costs the company incurred during the first quarter included a $2.1 million contract settlement charge related to the termination of a recycling brokerage contract. Exiting the contract has a positive return, the company says. Casella Waste Systems also paid $1.6 million to close the Southbridge Landfill in Massachusetts, which was primarily related to a reserve established for an expected settlement with the town of Charlton. Casella Waste Systems also paid $300,000 in the form of a development project charge associated with certain costs incurred at its North Country Landfill in Bethlehem, New Hampshire.

In terms of guidance for the rest of 2018, Casella says, “While we have modeled recycling commodity prices to stay flat at the current historically low levels for the remainder of 2018, we remain confident that our outperformance in the solid waste, organics and customer solutions businesses will continue to more than offset this headwind. As such, we have reaffirmed our revenue, adjusted EBITDA and normalized free cash flow guidance ranges for the fiscal year ending Dec. 31, 2018."

The company estimates revenue of between $618 million and $628 million; adjusted EBITDA of between $135 million and $139 million; and normalized free cash flow of between $42 million and $46 million for the 2018 fiscal year.