Casella Waste Systems, Inc. (CWST) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by. And welcome to the Casella Waste Systems Inc., Third Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session [Operator Instructions]. I would now like to turn the call over to Mr. Joe Fusco, Vice President of Communications. Thank you.

Thank you for joining us this morning and welcome. With us today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems; Ed Johnson, our President and Chief Operating Officer; Ned Coletta, our Senior Vice President and Chief Financial Officer; and Jason Mead, our Director of Finance. Today, we will be discussing our 2019 third quarter results. These results were released yesterday afternoon and along with a brief review of those results and an update on the company’s activities and business environment, we will be answering your questions as well. But first, as you know, I must remind everyone that various remarks that we may make about the company’s future expectations, plans and prospects constitute forward-looking statements for the purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements, as a result of various important factors, including those discussed in the Risk Factor section of our most recent Annual Report on Form 10-K, which is on file with the SEC. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to today. Also, during the call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures, to the extent they are available without unreasonable effort, are available in the appendix to our Investor slide presentation, which is available in the Investors section of our website at ir.casella.com And with that, I’ll turn it over to John Casella who’ll begin today’s discussion.

Thanks Joe, and good morning, everyone and welcome to our third quarter 2019 conference call. We continue to be pleased with our execution against key strategies of our 2021 plan and with our performance and results thus far in 2019. Our third quarter revenues and adjustment a bitter were up 14.9% and 14.1%, respectively from last year. Our core solid waste, recycling, and customer solutions business remains strong as we continue to advance key pricing and operational programs. We remain highly focused on the base business as we grow through our disciplined acquisition strategy. Where year-to-date, we have acquired eight businesses with approximately 52 million in annual revenues exceeding our target of $20 million to $40 million of acquisitions for 2019. Four of these acquisitions were completed in the third quarter. Given the timing of these acquisitions in 2019, we expect a 4% revenue growth contribution in 2020 from the rollover impact. As with the past, I would like to provide an update on the five key strategies of our 2021 plan, which were consistent with a plan as analysis in August of 2017. Our first strategy increasing landfill returns. We continue to enhance returns through price execution, operational programs, the sourcing of new volumes at higher prices and our efforts to advance key permits. The pricing environment remains strong, and we are continuing to find success in driving price at our landfills in the capacity constraint Northeast. As we recognize the scarcity value of these assets and heightened regulatory costs inflation. Landfill price was up 6.6% in the quarter as we continue to advance robust pricing. At the same time, we are also replacing lower price tonnages with higher price customers, which blends up overall pricing and enhances our returns. As such our average landfill price per ton was up 7.8% in the quarter. Notably in the third quarter, our operating costs at the Ontario landfill moderated, as we work diligently through the first half of the year to resolve order issues and made various site improvements. We are pleased that these operational challenges are behind us, and we will continue to ensure the site operating at our high standards. In the third quarter, we also received an important permit expansion at our Waste USA landfill in Vermont. The site is critical outlet for much of Vermont’s waste and our continued investment in the facility will drive significant shareholder returns. For this expansion, the line disposal area will increase by approximately 51 acres, which should provide roughly 13.7 million cubic yards of air space, extending the life of the site by about 20 years. While we have several years of capacity remaining within the current operational footprint, we recently began construction for the new large expansion area. This is a unique construction project as we plan to invest over $20 million of capital during the next several years, building out the necessary long-term infrastructure for the expansion area. The second strategy in our 2021 plan is driving further profitability within our hauling business. Our hauling teams did a great job offsetting continued disposal labor and recycling costs inflation as we advanced 5.2% price during the quarter and continue to advance key operational initiatives. Ed will get further into the details on our efforts to drive operational excellence through increased process to ensure that we have the highest levels of service, compliance, reduced safety incidents and operating efficiency. At the same time, we're working hard to integrate our acquired collection operations. The third strategy value through resource solutions. For the fourth consecutive quarter, we improved recycling adjusted EBITDA year-over-year even with commodity prices down roughly 25% in the third quarter versus last year. This speaks to the success of our off taking risk programs, and certainly the efforts from the entire team. We have built a recycling infrastructure that helps to insulate us from volatility and declines in the global recycling markets through a third-party recycling processing contract structure, which allows us to pass commodity risk back to the customer coupled with our SRA program, which is fully offsetting commodity risk on our intercompany volumes. The year-to-date declines in recycling commodity prices not materially impacted our 2019 recycling forecasts and we remain on track to improve recycling adjusted EBITDA by $5 million in 2019. With a reset of the city of Boston Recycling Processing contract on July 1, to an appropriate market level, we have now past over 90% of the recycling commodity risk back to our customers. We will continue to ensure that we generate an appropriate return on recycling assets, as we are focused on recycling -- on restructuring the remaining legacy third party contracts overtime, improving our contamination fee program further in the education of our customer base. We have also completed two recycling equipment upgrade projects that will reduce operating cost and improve the quality of our outbound materials. The customer solutions and organics team performed very well, with combined adjusted EBITDA growth of over $400,000 in the quarter. The fourth strategy in our 2021 plan is using technology to drive profitable and efficient growth. We are pleased with the progress we have made against this initiative, as we continue to drive better scale and further reduce cost out of our existing processes. While we have grown the business significantly through acquisitions, with the 2018 launch of NetSuite, we’ve been able to leverage simplified and better automated purchasing processes, which has allowed us to not add back office headcount. We’ve also experienced early success related to our new case management system and upgrades to our CRM system, which enable us to better integrate our sales and customer care teams. We will continue to target enhancing our responsiveness to our customers, and improving their overall experience. Moving on to the final strategy in the 2021 plans which is allocating capital for balanced growth. We continue to execute very well in 2019 against the strategy. We’ve completed eight acquisitions year-to-date with annualized revenue of roughly $52 million. Of the four acquisitions completed during the quarter, the most significant was the previously announced acquisition of select solid waste assets in the Albany, New York and Cheshire, Massachusetts markets from the Republic Services that are expected to produce roughly $30 million of annualized revenue. This is a great strategic fit to our assets in operation and had transitioned well through the first two months. Our teams are working hard to fully integrate this acquisition and given its size and new market entry, we expect synergies will take over a year to fully recognize. In the quarter, we also acquired three solid waste businesses with collection and transfer operations in New York. These businesses will integrate well and complement existing operations. We look forward to continuing to provide excellent service to their customers, and we welcome their hard working employees to our team. As we look across the acquisitions, we’ve completed over the last year and a half, we’re pleased to say that most are tracking well against pro forma and in all cases, we’re generating expected revenues. Now, it’s a focus on achieving our targeted operational synergies as we integrate the operation and expand margins. Looking ahead to 2020, our near-term pipeline remains strong, we are positioned well to continue to opportunistically grow the business and further drive free cash flow growth. We believe that there is over $400 million of acquisition opportunity in the mid-term across our market areas, and we will continue to selectively look at opportunities in adjacent markets. One area that was not specifically outlined in our 2021 plan, but is very important to our continued long-term success, and underlies all of our initiatives, is our focus on further building our team. We’re focused on ensuring that the Casella is the choice employer in the markets, by actively engaging with our employees, investing in development programs, and development career pass for all of our employees. Our efforts in programs targeted towards attracting and retaining drivers and maintenance technicians and a variety of other operational roles, are working well through their early innings. We have achieved stronger applicant flow, coupled with a more rigorous and timely recruitment process that has improved the quality of our job candidates. With the help of our Human Resources team, we’re also in the process of creating a robust apprentice on-boarding and training platform. Our goal is to develop programs that enable us to train our own CDL drivers and apprentice level technicians, who have committed to high levels of service and safety for many years with the company. We have established several training hubs across our operations and we are having great initial success in attracting trainees to the program. A number of the initial trainees have received their CDLs and has helped fill open driver positions within the company. The success of our Human Resources strategy should yield reduce turnover, which will lower safety related incidents and enhance productivity. Wrapping up as reflected in our updated guidance in 2019, 2019 is tracking well against our 2021 plan, and displays continued execution of our key strategies with a goal of driving additional shareholder value. We expect continued strength in solid waste, a robust acquisition pipeline and recycling tailwinds. And with that, I'll turn it over to Ned.

Thanks, John. Good morning, everyone. Revenues in the third quarter were $198.5 million, up $25.7 million or 14.9% year-over-year, with 10.6% or $18.3 million of the increase driven by acquisition activity. Solid waste revenues were up $21.9 million or 16.7% year-over-year as a percentage of solid waste revenues with price up 5.3%, volumes down 0.1%, and 14% of this growth driven from acquisitions. Revenues in the collection line of business were up $19.4 million year-over-year, with price up 5.2% across all lines of business, volume slightly down and risk recovery fees up 0.7% mainly the SRA and E&E fee. Acquisitions drove $15.6 million of this growth. Our disciplined pricing strategy has been working very well balancing customer retention and new business growth with appropriate pricing levels to offset heightened inflation across our operations. Revenues in the disposal line of business were up $1.8 million year-over-year, despite the closure of the Southbridge Landfill in November of 2018, which resulted in a $3.2 million year-over-year headwind. The Landfill pricing environment remains very strong, and we increased reported landfill pricing by 6.6% year-over-year. And as john mentioned, we increase the average price per ton at the landfills by 7.8% as we improve the mix of our customers and volumes. Excluding the Southbridge Landfill closure, Landfill tons were up 1.8% year-over-year as we ramp volumes during the higher price summer months, while still maintaining strict pricing discipline. One unexpected headwind in the quarter was the construction delays at our Chemung landfill. We originally anticipated ramping volumes in August and September, but we're not able to do so until the last week of September. Given this delay will not be able to maximize our permit in 2019, since the Chemung landfill has quarterly permit limitations. While this delay negatively impacts our forecast for 2019 it presents a great opportunity to increase volumes in 2020. Recycling revenues were down slightly year-over-year with $2.7 million of lower commodity pricing, offset by $2.3 million of higher third-party processing fees and $300,000 of higher volumes. Commodity prices were down 33% year-over-year in the quarter on lower cardboard, mix paper, plastics and metals pricing. And if they were down 5% sequentially from the second quarter to third quarter, mainly on declines in mix paper and cardboard. Our organics revenues were up $800,000 year-over-year on higher volumes and the customer solutions group’s revenues were up $3.2 million year-over-year due to several new multi-site retail customers and strong growth in the high margin industrial services group. Adjusted EBITDA was $48.4 million in the quarter, up $6 million or 14.1% year-over-year. Adjusted EBITDA margins were 24.4% in the quarter down 15 basis points year-over-year. As you'll remember, last quarter, we did layout that we expected a slight margin headwind in the third quarter, but then margins ramping into the fourth quarter. The Southbridge landfill closure negatively impacted margins in the third quarter by 80 basis points, while acquisitions completed in last 12 months pressured margins by additional 90 basis points, as we work to integrate operations and drive synergies. So excluding these two items, margins for the remainder of the business were up 155 basis points year-over-year. Solid waste adjusted EBITDA was $44.8 million in the quarter, up $4.3 million year-over-year, driven by strong pricing, higher disposal volumes and acquisition activity, partially offset by operating costs inflation. And one thing to note is we had a $3 million year-over-year headwind in adjusted EBITDA with the closure of the Southbridge Landfill. So ex. that factor our overall adjusted EBITDA was very strong in the rest of the business. Recycling adjusted EBITDA was up $700,000 year-over-year with $2.7 million lower commodity prices. As I said offset by higher shipping fees and processing fees, lower rebates to customers and higher volumes in the period. Adjusted EBITDA was $2.3 million in the other segments for the quarter, up $1 million year-over-year. Customer solutions had a great quarter with adjusted EBITDA up 12% year-over-year on strong execution of our strategy. The organics group had a very strong quarter with adjusted EBITDA up $600,000 year-over-year. And this was despite our efforts to reduce internalization of sledge volumes, the team did a great job optimizing disposal outlets and driving higher pricing. Cost of operations was up $17.2 million year-over-year with roughly $14.5 million of this increase driven by acquisition activity, and most of the remainder driven by inflation across direct labor, third-party disposal and transportation and vehicle maintenance. G&A costs were up $2 million year-over-year, but down 54 basis points as a percentage of revenues as we began to gain further leverage from our acquisition activity and our five year technology plan. Roughly $1.6 million of this increase year-over-year was driven by acquisition activity. Depreciation and amortization costs were up $2.7 million year-over-year, mainly due to higher depreciation on trucks and equipment related to our five year fleet and Yellow Iron plant and acquisition activity during the period. The third quarter included several unique income statement items. We incurred $600,000 of legal and transaction costs related to our ongoing efforts to cap and close to Southbridge Landfill. We incurred $1.1 million of expense from acquisition activities completed in the period and we recorded a $3.6 million charge from the withdrawal from our multiemployer pension plan. This is the only multiemployer defined benefit plan we have as a company. The withdrawal from this pension plan was a positive step for the company, as we limited the ongoing financial risk associated with this multiemployer plan and exited the plan for approximately at 77% discount to the stated withdrawal liability. We expect to have a $1.7 million cash payment in the fourth quarter and the remaining payments will be made over the next 16 plus years. As of September 30, 2019, our consolidated net leverage ratio was 3.24 times. This is slightly up from June 30th, mainly due to acquisition activity during the quarter. Our total debt net was $533.7 million, with liquidity of roughly $137 million. We believe that this capital structure is in a great position to allow us to continue to execute against our strategy of grow through smart acquisitions and investments. Year-to-date our normalized free cash flow was $24.1 million as compared to $37.3 million for the same period last year. Normalized free cash flow was down year-over-year due to lower net cash provided by operating activities, which I'll explain in a moment and higher capital expenditures. Net cash provided the operating activities with down $18.4 million year-over-year, with higher offering results offset by $28.5 million lower shift in working capital. This negative change in working capital is mainly driven by three factors. One, timing differences and cash received associated with AR and cash outflows and timing differences with AP. The adoption of ASC 842 as we've discussed previously on January 1, 2019, which shifted payments on landfill operating lease contracts from investing opportunity to an operating activity on the statement of cash flows. This change only impacted the financial statement positioning of this cash outflow not in amount. And three a reduction in prudent liability due to cash outflows associated with the remediation project at a former scrap yard in Potsdam and the Southbridge Landfill closure. Over the last month, we refreshed our 2019 forecast and we expect strength in our solid waste recycling and customer solutions operations to continue through the remainder of 2019 and into fiscal 2020. As previously discussed, we expect EBITDA margins -- adjusted EBITDA margins to expand by 100 basis points or more in the fourth quarter as we anniversary Southbridge Landfill closure and we begin to recognize easier comparisons for labor and disposal inflation. As such, we have raised our revenue guidance raised and also updated and tighten the ranges for adjusted EBITDA and normalized free cash flow guidance ranges for 2019. We expect normalize free cash flow to increase sequentially in the fourth quarter, mainly due to improved operating results and working capital swings to have positive $10 million in the quarter as we regain historical DSO and DPO levels. And with that, I'll turn it over to Ed. Thanks.

Thanks, Ned, and good morning, everyone. Operationally, this was a very good quarter, we continue to lead the industry in price, we're growing at a strong but manageable pace, and we're making a lot of progress with our acquisition integration work. In addition, our innovative approach of providing clear career paths for our drivers, mechanics and equipment operators are starting to bear fruit, because we're seeing a stabilization of our workforce. Consolidated cost of ops as a percentage of revenue was roughly flat as compared to Q3 last year, increasing slightly by 7 basis points, but improving considerably over Q2. Collection operations generated about 50% of our revenue, growing 24% over the prior year, primarily through acquisitions. We grew 5.2% per price, and we're slightly negative on volume as we continue to process -- the process of managing our low margin customers towards either better pricing or discontinuing the relationship. Variable margin contribution per driver hour our key productivity metric continue to improve. The landfill line of business, which generates about 13% of our third party revenue performed very well in the quarter. Ned mentioned this among delay, which provided a little headwind but Ontario is back on track. Overall our landfill volume was up 1.8%, reported price was up 6.6% and the average price per ton was up 7.8%. As you can imagine the cost of ops as a percentage of revenue for our landfill operations improved by over 300 basis points. We continue to be a price leader in this ever tightening disposal market in the Northeast and we look forward to continued strong pricing and a good finish to the year. Recycling processing was a little less than 6% of our overall revenue and cost of ops improved about 5% year-over-year. During the quarter we completed significant equipment upgrades in two of our marsh [ph]. And there are two points I would like to highlight about that. First, despite several weeks of downtime in each of these facilities, our recycling line of business increased its EBITDA contribution by $700,000. This is partially due to better pricing in muni contracts like Boston that were renewed under our new pricing structure over the past 12 months, and partially due to the continued effectiveness of our SRA fee structure. More importantly, these two ---- have not only increased capacity, they are producing cleaner products that will demand higher pricing in the commodity market. You might ask why that would matter if we have an effective fee system in place. We believe we're an integral part of the sustainable economy and it is our obligation to provide our customers with the best possible outcome and keep the recycling model sustainable. And in the long run, we will share any upside. Last quarter I talked about the initial lower margin contribution of the acquisitions and the margin compression of passing through significant disposal and labor cost increases in the collection line of business. Our focus this quarter was to start to recover those margins through both price and operational efficiency. We're not all the way there yet, but we ended the quarter in a much better position than we started it. So I'm pretty happy with our progress, and comfortable that we will have recovered the margin on disposal and labor for our legacy operations in Q4. I wanted to talk a little bit about the integration process for acquisitions and why, as I mentioned last quarter, they tend to dilute our margins in the first year. Clearly, not all acquisitions are alike, but we generally follow four integration phases and the complexity of the acquisition determines the length of time that each phase takes. The first phase is management integration of back office systems. This is where we convert customer billings to our customer information system, convert the related driver route sheets, integrate payables, all the admin stuff. The second phase is operational integration, this includes route optimization and could include service changes such as converting recycling service to a more efficient every other weak service with carts. Once we become operationally efficient, and the customers become accustomed to our billing structure and any changes in service, we can then focus on pricing. Many of our acquired companies have not cut pays with the pricing in the market and this can be a significant long-term opportunity, but takes time to execute thoughtfully. And then, what I will call phase four, we look for opportunities to improve automation. We plan for this upfront, such as providing recycling carts, but it takes more time to implement as it entails equipment replacement under our prudent asset utilization front. So, even if acquisitions dilute margins a little in the short run, we’re very happy with where we are in the process, we are on track and commend our team for the hard work they’ve done to-date. Before I move on, I want to extend a warm welcome to our new team members that have joined us through these acquisitions. Our philosophy is one of inclusion, we recognize and need your talent and hope that each of you find a long and rewarding career that allows you to grow with us as we grow the company. The last thing I want to comment on is the enhancements we’ve been making over the past year to our operational management capabilities, adding foundational elements to both run our existing business well, and to integrate newly acquired businesses. In addition to the Vice President of Operations that we added a year ago, we have now added Regional Operational Executive to each of our solid waste regional teams, and have initiated several programs to improve pricing management, monitor and improve service levels, standardize internal metrics and operational reporting and then improve our ability to replicate operating processes as we grow. We’ve also added a Vice President of Landfills to oversee operational improvements at our nine sites and in the long run improve our prospects for expansion. We will continue to tweak our structure and improve our capabilities as we move forward and the size of the company and the demands of the market dictates. With that overview, I’d like to turn it back to the operator to start the question-and-answer session.

[Operator Instructions] Your first question comes from the line of Sean Eastman with KeyBanc Capital Markets.

Dean, this is Hamza [ph] speaking for Sean. Congrats on the quarter. One main question I had was the guidance raise, congrats, that came in slightly lower than expected. Maybe walk us through the puts and takes of the additional revenue from the RSG assets and the lower volumes on the Chemung Landfill? Thank you.

Yes, good morning Hamza this is Ned. Great question, so when we look at the quarter, we had forecasted ramping up Chemung. As you know, we got a permit expansion at the site several years ago to go from $180,000 tons a year to $417,000 tons a year. We held back executing an option with the community until 2019 and we had always envisioned as is a step-up to help handle volumes from the Southbridge Landfill and other market needs. We executed that option successfully this year, and we actually began construction of our new cell in late 2018, and there were several construction delays and certification delays that really brought us getting into that new cell into late September unfortunately, and that weighed on our results by about $2 million, $2.5 million compared to where we expected to be in 2019. So, a little bit of negative this year. And you’re right we did some great acquisitions in the quarter and we drove about $30 million of new annualized revenues, which this year should add about $10 million of revenues or roughly $2 million of EBITDA. So those are direct push between both of those, so we’re able to tie in our EBITDA and our free cash flow ranges by increasing the lower end of the range. But we were not able to increase those ranges because of the Chemung delay. The positive here though is we’re now ramped up at Chemung, the site is running great, the team has done a great job, we’re into the new cell and with our current run rate this gives some great tailwind coming into next year for the company.

Okay thank you. And then on special waste, a lot of the peers are talking about more slower pace of growth. I was wondering given the Northeast footprint, if the special waste -- how the special waste pipeline looked relative to the national average? Thank you.

Right now, we haven't seen any sort of major break in projects. And I think you have to remember with our sites in the Northeast in general, things are so tight out there that many sites are bursting at the scene. And as you remember, we've been running strong pricing programs, our landfills and we're also trying to manage volumes for the summer months and later in the year. Last year in 2018, we were out of space by like November at several of our key landfills and had to spend a lot more money moving tons around. And we really weren't able to access some of the special waste contaminated soils market late in the year. And this year, we've saved some waste. We continue to run strong in special waste. And I don't know, John [inaudible].

No, I think it’s the opposite in the Northeast. I mean one of the other problems that is being experienced across the Northeast is a lot of facilities are reducing the amount of sludge that you’re taking, which is also creating an issue in terms of special waste as it relates to sludge. Most facilities are at their capacity from a sludge standpoint. So there's additional pressure being put on the facilities and marketplace. Because, again facilities were full before, but a lot of facilities are reducing the amount of sludge you're taking because of the sensitivity to odors, and other issues. So that's becoming more and more of an issue for municipalities. And one of the things that, I think everyone is doing is, pushing the responsibility from an odor control standpoint back to municipalities. Because it's an issue that’s problematic for everyone at the disposal facilities. It has been managed well by our team there, having those conversations with our municipalities from a sludge standpoint, helping them to better manage the sludge at the sites. And, it's working fairly well. But from a practical standpoint the marketplace from a special waste standpoint, the supply and demand situation is very favorable from a price standpoint.

That's good to hear. And maybe my last question was, I just wanted to congratulate the team on the execution on the SG&A front. Maybe walk through some of the efforts are being taken place and the long-term amplifications. Thank you.

Yes. A lot of it really comes back to our multiyear technology plan. And we've done a great job looking at foundational systems in the back office. We recognize several years ago that we needed to become more efficient and easier to do business with for our customers. And also internally looking around at fundamental processes, the number of touch points we had and the amount of paper in the back office. And we started with a couple key systems. As you know, we upgraded our financial ERP in one year’s time on time on budget to NetSuite in the cloud. We also updated our CRM to Microsoft Dynamics. And we recently put in a new case management system which allows our customer care, our sales force and operating teams to more effectively communicate. We continue to drive in each of those areas. Because we really -- there's a lot more opportunity here, both from a technology standpoint and from a process standpoint. While a lot of focus in 2020 on procurement and we’ll have focus in the technology side on dynamic routing and optimization and scheduling on the truck side.

Another opportunities that we have, Hamza, for 2020 and beyond is the investment that we've made in HR. Kelly Robinson came on board just under two years ago now. And, really what we did there was a recognition a couple years ago that the driver issue was going to be a significant issue. And at the time, I think Kelly started we probably had 50 to 60 openings for drivers across the company and probably 25 or 30 mechanics. And, when you have that kind of vacancy from a driver standpoint, it puts pressure on the entire organization, increases issues from a safety standpoint. I'm happy to lay out for you after a year and half and the work that the whole team has done from an HR standpoint, where we can count the number of drivers that we need on one hand and really what it's going to do is help to drive down costs related to safety, costs related to turn over, and there's significant costs associated with turnover as well. So the better job that we can do from a career development, training programs, the things that we're doing from a safety standpoint are all going to on a go forward basis really make a difference. So it's another exciting program that's going to have some significant returns for us in the future.

That’s great to hear, I'll return into the queue. Thank you.

Thank you.

You're welcome.

Your next question comes from the line of Tyler Brown with Raymond James.

Hey, good morning, guys. Can you hear me?

Yes, Tyler.

Yes, we can Tyler.

Okay. Hey, I just want to start on USA - Waste USA. So congrats on that expansion, but it looks like you're spending some $5 million in capital on cell development there I think this year, John, you talked about $20 million total. Will next year be something like $10 million or is it like $5 million, $5 million, $5 million or how do we think about that?

Yes, next year should be around $12 million to $13 million or so we're still in budgeting. So it's a bit of a moving target. And frankly, if we can do more work next year, we'll do more work, the faster we can get that done into this new cell the better off we are.

Okay. And then bigger picture, obviously, that's an unusual CapEx item, but will there be any lingering unusual CapEx on Southbridge or Potsdam?

So Potsdam, yes Potsdam is a great story. We are able to complete the project this year and one thing that's a little bit unique at Potsdam, flashing back to 1999, when this transaction was completed, there was some foresight that there may be some environmental issues there and we’ve put 59,000 shares of Casella stock that were going to be paid to the sellers into Escrow, we were able to sell those during the period and we yielded $2.6 million of cash to offset our roughly $4.8 million liability to clean that up. So that was a positive as well during the period to help to offset, we're almost done with that, we will just have some modest monitoring going forward, Southbridge continues to chug along, we've finished some of the capping there, some of it will move into next year. It won't be CapEx per se, but we'll continue to work down that liability for closure and capping at Southbridge over the next year. And we expect Jason, how much like five or so million next year, six.

Yes, I would say $5 million to $6 million or $7 million maybe between capping and closure. Maybe a little bit even north of that, like you said I think we still need to go through our full funding process.

Budgeting process. Yes.

Okay. No, that's helpful. And then so John, at this point have the issues at Ontario been largely resolved?

Yes, they have. There's still some work to do there to get us to exactly where we want to be from a quality standpoint, but the vast majority of it is behind us at this point in time Tyler, absolutely.

Okay. And then...

Yes, to Ned’s comment we would be budget in the quarter, which is a clear indication that, it's the vast majority of a cost associated with that is behind us.

Okay. And so what was the total P&L impact from rectifying that situation this year. My presumption is it won't reoccur next year?

Yes, we're sitting at about maybe a little more than three this year.

Okay. And then as of right now, you would expect the rollover benefit on revenue from M&A at 4%. So I think that's about $30 million is the right way to think about that as $6 million to $7 million of EBITDA or could it be better on synergies?

Yes, so you're in the right ballpark. We're looking at $6 million to $8 million in our model from a rollover benefit for next year from acquisitions.

Okay, perfect. And then this John or Ed, on the M&A side, so should we expect a pause as you kind of move this rap through the snake and digest. I think this year you outlaid maybe $80 million or should we expect that the M&A cadence will just continue to keep up?

I think that it's fair to say that we're in the process of really getting our arms around from an integration standpoint, what we bought this year, that's probably the activity in the fourth quarter. We're -- we still see a very robust pipeline, Tyler, but I think clearly for the fourth quarter we're going to really digest and do the job from an integration standpoint for what we bought so far this year, so a little bit of pause probably in the fourth quarter. I wouldn't really cause it a pause as much as I would. I think that after, what we've achieved already from an acquisition standpoint, we're going to focus on the integrations through the end of the year. Certainly stuff that we have in the pipeline if we need to close it we will. But I suspect that we're going to be more focused -- we are more focused on the integration for the rest of the year.

Okay, that's helpful. So, Ned, I want to come back to the disposable fleet. So correct me if I'm wrong, but there's going to be some moving pieces in the disposal fleet next year. So is it safe to assume that Chemung will be a good guy as it ramps and should be a material good guy. But you would also be pulling back at North Country and Hague.

Yes, I think it's really to be determined right now. We haven't finished budgeting yet. But as you point out both of those, those are two sites that have less than five years of permitted capacity remaining. Hague, we're very close to getting a new long term permit there. So really, depending upon the timing of Hague, and the timing of construction into that new cell will determine how we run this site next year. And you could see us ease up a little bit on volume, so we could run it to the same level as 2019 depending on when we receive that permit and what construction looks like. North Country, that's a complex permitting and community horizon over the next five to six years with our remaining capacity. And we probably will ease up a little bit there. It's a tight marketplace right now, but if we can push some additional price and run slightly lower volumes their five year strategy into 2020.

Okay. And then, just big picture though, you would expect EBITDA contribution from the disposal fleet excluding Ontario next year. And maybe even meaningful contribution.

Yes, we do expect a positive across our assets. Ontario will have good comp year-over-year as we've resolved some of these issues. Chemung, as we talked about earlier, will ramp up volumes there year-over-year. And then the rest of the franchise, I mean, pricing continues to get into a better and better spot. We don't see any headwinds across the franchise except for as you pointed out, maybe we run Hague a little bit lower in North Country a little lower. So $2 million dollars potentially at those two sites, but generally we feel good year-over-year.

Okay. And my last one, just on the multiemployer plan, so did I hear it right. As of now you have no off balance sheet multiemployer liabilities at this point?

Yes, this is the only one so we're partying to a few other collective bargaining agreements with several teamsters units. And -- but each of those are defined contribution plans where we don't have multiemployer exposure. And this was the only one. So we're pretty excited about this. It was roughly $18.5 million off balance sheet liability associated with this. And it's actually a business unit where we've been growing. So we've been picking up other people's liability. So we're able to flash back in time to 2011 is the way this worked and negotiate and exit as it happened in 2011. So it was really favorable. We're excited. Our team did a great job negotiating this.

Okay, perfect, guys. I appreciate the time.

Thank you.

Thank you.

Your next question comes from the line of Michael Hoffman with Stifel.

So you're working on the railroad today, John I can hear a rail horn.

Usually at 10 o'clock.

Train, you've got to be kidding. I can't believe. So, Ned, you have had the benefit of positive moving your credit rating in this year. How do I think that through with the landfill accounting going into 2020?

Complex accounting questions here. So, one of the elements of landfill accounting is how you discount future liabilities and then how those get reflected onto a balance sheet retirement assets, retirement liabilities. And to your point, for the last15 years we've used a credit adjusted risk free rate based upon the single B high yield index that was then adjusted for the tenure of our landfill liabilities future closure liability. So to your point we've moved to a double B credit, which is great. It will bring down that discount rate. And also, right now high yield rates are or interest rates are lower as well. So we haven't finished all of the math for our budget next year. But what you'll actually see happen is, you'll see a few balance sheet moves where asset retirement obligations and liabilities will click up a little bit. And you'll see slightly higher amortization and slightly lower accretion. And, it's hard to say right now what that will result in, but the net result is a little -- no difference at the operating income line, but slightly higher EBITDA potentially. I haven't done all the math yet Michael, but it is a positive move in that regard because you'll see a shift between accretion expense and landfill amortization. Once again, no difference to the offering income line, a few balance sheet moves but it will change the complexion slightly. And I'll -- once we get that math done I'll let you know.

Okay, thanks for that. And then you mentioned earlier in the commentary about sledges, is this a PFAS issue or is it an odor issue? We're picking up out in the West Coast. Northwest there's a couple of the public companies have stopped taking PFAS sledges, are you focused they are just it's odor?

I think that it's more of the odor but the PFAS issue is an issue as well particularly as it relates to land application and other -- and I think that that's certainly something that is in the marketplace. But the major component really is odor.

Okay. And then…

Where we have to control the odors at the facilities Michael because even traveling from the wastewater treatment plant to the landfill has been problematic in some cases. And I think -- so I think that the majority of the issues that we've seen has been -- have been odor.

Okay. All right, that helps. And then, Ned, if you pro forma at all your acquisitions this year into an EBITDA what would the leverage ratio be?

If we took them out of our…

No, no, put them pro forma -- you own them since January 1. So you had full credit form and EBITDA, and you did your leverage ratio. What's the EBITDA -- what the leverage rate?

I don't have that calculator now Mike I am going to follow up with you. I'm sorry.

But clearly, it's less, it's back down.

Yeah.

Okay.

The way our credit agreement works, to be clear is when you bring on an acquisition, you actually get full credit at that point in time, so I'm not sure it changed anything. So if we take on an acquisition on September 1st for instance, you have some additional debt. But our credit agreement, I think most of you, they allow you to take 12 months of EBITDA at that point in time based upon an approve pro forma. So I don't -- I guess I got to look at that. I don't think it would change anything with our leverage ratio.

Okay. Well, if it does, let me know.

Yes.

And then John, I always have to ask this as we come looming into a year where you're going to beat your goal by a year. So it looks like you are likely to be close to $70 million in free cash in 2020, which is a year ahead of plan. So what's the 2024 plan look like?

You sound like a board member.

I know your board members.

Oh you do, obviously it's too -- it's premature for us to really comment on that. I mean, I think that, we'll have to make a determination, Michael as to when it's appropriate for us to start talking about that. Obviously, we've got to get our budget done for 2020, get a look at where that lands. And maybe at that point in time, we may have a comment, we may not, it may -- it's a little premature right now to really start thinking about 2024 or 2025.

Fair enough. But if I were sitting out there and having conversations and thought $100 million, would that make you blench?

If you what?

I was having conversations with people and I said $100 million, would that make you blench?

We haven't done that math. And, it's, I think that it's fair to say that we're going to drive as much free cash flow as we can. I think we obviously have demonstrated the capability to do that over the last five years. I really wouldn't comment on the $100 million, but I think that obviously we're going to drive as much as we can.

Yeah, and we've been driving consistently, as you know, Michael, roughly 15% to 20% a year of free cash flow growth and if you start to roll forward that maybe how you got to that that position, but we expect that the same 10% to 15% next year and don't see that gets us off track.

Yes, that was a little bit behind that. And then lastly, are we getting close to a market rate where close top rail comes into play out of your region for disposal?

Close top rail, so we continue to see some C&D in contaminate sales mode that there are several moves that are happening in the marketplace with containerize municipal solid waste, they are costly and they are capital intensive, as you know. And we're not -- we've done a few tests of those we’re not moving any considerable amount of MSW or even C&D, or contaminated soil down in the marketplace we're trying to really maximize our capacity. But as you point out, that is going to be the relief valve for the Northeast because there will be additional sites that close over the next five years and whether there is any new capacity that comes online, that's a long shot. So I think from our view, you'll continue to see more and to your point those prices are higher than where the market is today. So I think gives us room from a landfill pricing standpoint.

And you have Holyoke which does have a rail. So maybe McKean comes into play in some future…

I think that we do McKean obviously is that option from a capacity standpoint to the extent that there's an opportunity to have long-term contract from a municipal standpoint to take care of long-term need. Obviously, that's an option for us in the future. And certainly, we could connect it to Holyoke, there's no question about that. Michael, I think that's an option for us in the future and we’ll continue to drive it right now. McKean is operating at a level that's not that painful. So, from a practical standpoint, it’s a real significant option for us in the future if we need it.

And I think I would agree with, Ned. We're ways away from I think, really effective pricing from a rail standpoint.

Okay, thank you very much.

Thank you, Michael.

You’re welcome. Thank you.

Your next question comes from a line of Tony Bancroft with Gabelli Funds.

Good morning, gentlemen, and nice work.

Hey, Tony.

Certainly, piggybacking on Michael’s questions, sort of more big picture, but with your strong performance outsized M&A, strong balance sheet, the landfill dynamics in Massachusetts, and maybe further going along maybe some more areas, along with margin and growth differentials in outside markets. Any change maybe sort of some puts and takes on how you view the Northeast versus other markets, adjacent markets that you maybe expanding, potentially could expand into could you sort of talk big picture on that?

I think that we're still very much focused on our 2021 plan. Michael, I think that it's fair to say that we've got significantly -- I'm sorry, Tony. Apologize.

I take that as a very high compliment.

Fair enough. I think that we're still focused, Tony, on the 2021 plan, we've got significant opportunity over the top of the existing assets that we own in the Northeast and certainly we will take a look at adjacent opportunities as they come to the market. But we're focused on executing the strategy that we've put in place for 2021. I think that there's, again, more opportunity than even what we had anticipated a year and a half, two years ago. When you look at the pressure that's out there from a disposable inflation standpoint, labor inflation, and recycling inflation. The opportunities are even more robust than what we had originally thought. So we're going to continue to stay focused on the 2021 plan, stay focused on the Northeast, but certainly we’ll look at opportunities that come to the market, if something were to divest in Pennsylvania, from the waste and advanced transaction, that would certainly be something that we would be interested in, as an example. But we're already in Pennsylvania now currently. So, we'll look at opportunities as they come, but we’re really staying focused on our 2021 plan.

Sounds good. Thanks, John.

Thanks, Tony.

Thanks, Tony.

And there are no further questions at this time.

Great, thanks, operator. Thank you, everyone, for joining us this morning. We look forward to discussing our fourth quarter 2019 earnings and our 2020 guidance with you in February of next year. Thanks, everyone. Have a great weekend.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.