Casella Waste Systems, Inc. (CWST) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Casella Waste Systems Second Quarter 2021 Earnings Conference. 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 hand the conference over to Joe Fusco, Vice President of Communications. Please go ahead.

Thank you everyone 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 Vice President of Finance. Today we will be discussing our 2021 second quarter results. These results were released yesterday afternoon. 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 Factors 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 this 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 in our investor slide presentation, which is available in the Investors section of our website at ir.casella.com well. And with that, I’ll turn it over to John Casella who’ll begin today’s discussion. John?

Thanks, Joe. Good morning everyone and welcome to our second quarter 2021 conference call. As evidenced by our results, our team continues to perform at a high level. We are executing very well against our key strategies. Through this period of economic recovery and growth, we maintained focus on our customers, services the sustainability needs, quickly reacting to increased service levels. At the same time, we prudently managed variable costs coming back into the business with the uptick in activity. As expected, solid waste volumes were up over 7% in the quarter compared to the second quarter of 2020 which was our hardest-hit period of the pandemic. In the second quarter, we grew revenues by over 14% and adjusted EBITDA improved over 18% with margin expansion as compared to the same period in 2020. We also continue to drive adjusted free cash flow growth with year-to-date improvement of 45%. As announced earlier this week we acquired Connecticut-based Willimantic Waste Paper. Before I dive into the details of the operation, I would like to mention that I’ve had the pleasure this week to meet with some of the hardworking men and women of Willimantic that are joining our team. I welcome you all aboard as we look forward to working with you to provide great service to cover the 30,000 customers in Connecticut. This is truly an exciting acquisition for the company as we expand our operations into eastern Connecticut. The business has well run and has established market presence with decades of experience providing integrated solid waste and recycling services to its customers. As I said, Tim and Tom DeVivo has built a terrific company and have a terrific number of hard-working men and women that have really done a terrific job of taking care of their customers and it’s a great platform for Casella in Connecticut. Collection operations include residential, municipal, commercial roll-off-services, other operations consist of several recycling operations. Solid waste transfer, and a rail-served transfer was C&D processing. Given the supply and demand dynamics in the Northeast, we are working to bring our McKean landfill rail online. And we will look to internalize volumes Willimantic and other Casella operations as long-term stable sources of tonnage into the site. I will now provide a brief review related to further execution against our key strategies and recent performance highlights. First, as it relates to disposal as expected, volumes were up in the second quarter, while many of our customers are fully back online. The volumes from the New York City area have been the slowest to recover. We do not have collection operations in and around the city but several of our landfills accept waste from third-party transfer stations. We are seeing modest improved trends across these volumes, however, slightly lower activity levels, combined with labor shortages impacting third-party truckers has resulted in some of these volumes not coming back into our sites as yet. From a pricing perspective, we advanced positive landfill price of 4.3% in the quarter, which was a sequential improvement from the first quarter. We also continue to focus on various operational initiatives and permitting efforts to help drive further value and higher returns across our disposal assets. Moving to the collection business. Ed and Ned will provide details on the recent performance of our operations along with what we’re seeing with price and volume trends. I wanted to take this opportunity to talk about labor and how we’ve positioned the company to mitigate the challenges many employees are facing in today’s environment. Throughout the history of the company, we’ve created a culture of being of service not only to our customers, but to one another. In 2020 through the pandemic this was evident. Not only did we take exceptional care of our customers, but we also prioritize keeping our people safe, especially those working on our frontlines. We supplied protective gears, that is COVID-related guidelines and overall we helped each other get through an unprecedented time emphasizing first and foremost the health and safety of our employees and their families. While it’s meant a lot to our workforce, we also recognize their frontline operators and hourly employees with a special hero’s bonus around Labor Day. This is much well deserved and well received. These actions are playing dividends in 2021 through increased loyalty across the organization. Over the last several years, we’ve also focused significantly on improving the quality of our fleet. We recognize that our drivers, mechanics and operational team take great pride in our trucks. For equipment leads to lower levels of employee satisfaction execution against our multi-year fleet plan initiatives has driven organization in this area by prioritizing when each truck is to be replaced, creating standardization of body and chassis based on application, and provide enhanced visibility in alignment to the budgeting in the capital allocation process. Ultimately this has resulted in lower average fleet age, lower maintenance, less downtime, and a highly reliable fleet, which all very much positively impacts employee morale and retention. Further, we’ve invested more in automation across our fleet, automated trucks and routes ultimately reduce safety instance, improved productivity, require a higher skill set, and broaden labor pool in that, the more innovation in technology inside the trucks, the easier the trucks are to operate, the broader the labor pool for those applications which is absolutely terrific. These factors have all helped to mitigate turnover within the markets where we have enhanced automation. Our success in these areas coupled with other operational HR initiatives have greatly helped to limit labor challenges. We have not had to drastically change labor rates and we are not experiencing significant labor – significant levels of labor shortages. Next, our resource solutions business, business continues to perform very well. Our recycling processing operations have benefited from improved operational performance coupled with higher recycling commodity prices. As commodity prices increase, we have shared a portion of the upside with our customers lowering tipping fees, higher rebates and lower SRA fees. Our risk mitigation fee programs, protect us very well from the downside recycling commodity risk with exposure on only about 10% of our recycling volumes. So our risk-balanced structure is working well as intended and has allowed us to create a model that is both economically and environmentally sustainable. Our non-processing operations are also performing well as we continue to focus on providing resource management services to large customers who often have a high level of sustainability-related needs. As we envision combining our recycling organics and customer solutions under resource solutions is bringing enhanced alignment across our sales operating and back-office teams, which is driving higher value to the organization. Finally, I would like to further highlight our capital allocation and growth strategy. Through the last several months, the acquisition activity continues to heat up. We’ve had many productive conversations with potential sellers and we’re working on several opportunities that go – that could goes over the balance of 2021 or into next year. We believe that certain factors such as labor challenges and tax reform are driving the further acceleration of the pipeline. Our pipeline remains robust and our balance sheet is well-positioned to continue to grow the business. Wrapping up, we are executing well against our key strategies. We expect continued strength across the business and we have again raised 2021 guidance. Further, we are enthusiastic about our acquisition pipeline and our ability to continue to drive adjusted free cash flow growth. And with that, I’ll turn it over to Ned. Amongst the torrential downpour here at Vermont which is what we’ve had for the entire month of July. So it’s very green in Vermont.

Hopefully, everyone can hear me over the rain and the train horns. Revenues in the second quarter were $215.9 million, up $27.1 million or 14.4% year-over-year with 1.9% a year-over-year change driven by acquisition activity. Solid waste revenues were up 13.7% year-over-year with price up 4%, volumes up 7.1%, and acquisition growth of 2.6%. This is a sequential improvement from the first quarter 2021 when solid waste volumes were down 3.3% year-over-year. Revenues in the collection line of business were up 14.2% year-over-year with price up 4.2% and volumes up 6.7% with volumes up 12%, over 12% in the commercial line of business, and over 8% in the roll-off line of business. The residential line of business was slightly up year-over-year as we didn’t have a significant impact with COVID last year. As we have discussed over the last year, we’ve kept close track of the commercial and industrial collection customers who reduced service levels or even shut off services during the COVID-19 pandemic. Through late April, we have recorded – recovered roughly 70% of these volumes on a revenue basis. Since April we have recovered, another 15% and we’re now sitting at roughly 85% recovery of any commercial or industrial services on a revenue basis that were reduced or suspended due to COVID. Revenues in the disposal line of business were up 12.4% year-over-year with landfill pricing up 4.3%. Landfill tons were up 11.2% year-over-year. However, on a trailing 12 months basis, we’re still down roughly 225,000 tons or 5% versus pre-COVID landfill tonnage levels. Almost all of this negative impact is in New York State and is mainly the result of lower commercial activity in the greater New York City area. And as John mentioned driver shortages at third-party trucking companies that typically move this waste from the city to our landfills. Resource solutions revenues were up 16.2% year-over-year with higher recycling commodity prices and higher processing and non-processing volumes. Average commodity revenues per ton were up $62 per ton year-over-year on higher cardboard and mixed paper pricing, higher metals pricing and higher plastics pricing. Adjusted EBITDA was $52.1 million in the quarter, up $8.1 million or 18.5% year-over-year, and adjusted EBITDA margins were 24.1% for the quarter, up 85 basis points year-over-year. Solid waste performance drove a positive 70 basis points of our consolidated year-over-year margin expansion and recycling contributed a positive 15 basis points to the expansion. Our core business performed very well in the period with pricing and operating efficiency programs, outpacing a few notable year-over-year margin headwinds including fuel, overtime, acquisition integration, healthcare, and incentive compensation. However, it’s important to note that these costs were up year-over-year due to the very unique nature of Q2 2020. However, most of these categories were stable from Q1 to Q2, 2021. Solid waste adjusted EBITDA was $46.6 million in the quarter, up $6 million year-over-year with both collection and disposal up. Resource solutions adjusted EBITDA was $5.6 million in the quarter, up $2.3 million year-over-year. As intended as John discussed earlier, much of the increased commodity pricing during the quarter was passed back to our customers through our recycling risk management programs through lower SRA fees and higher rebates or lower processing fees, our recycling processing centers. However, higher commodity prices did improve operating results by roughly $1 million during the quarter. Cost of operations was up $15.1 million year-over-year, but down 120 basis points as a percentage of revenues. Many cost categories improved as a percentage of revenue and as our team has worked hard to control costs as volumes have returned to the business and we continue to execute very well against key operating initiatives such as a collection route, automation, and optimization. General and administrative costs in the quarter were up $4.3 million year-over-year with $2.8 million of the increase driven by higher bonus and equity accruals due to timing differences and higher performance. Given the reversal of the tax valuation allowance in fiscal year 2020, we expect an income statement tax provision of approximately 32% in fiscal year 2021, however, our cash taxes will remain at approximately $1.5 million in fiscal 2021. Our income tax provision was $5.4 million in the quarter, up $5.1 million from the same period in 2020. This increase resulted in a $0.10 per share year-over-year headwind to EPS. As of June 30, we had approximately $549 million of debt and $167 million of cash. Our consolidated net leverage ratio was 2.54 times as of June 30. Pro forma for the Willimantic acquisition closed on July 26. Our pro forma leverage was approximately 2.46 times with liquidity of roughly $217 million. As John mentioned, we believe our capital structure is in a great position and gives us flexibility to continue to execute our strategy to grow through smart growth investments and acquisitions. Net cash provided by operating activities was $79 million year-to-date up $16.5 million year-over-year, driven by higher operating results and positive changes in our assets and liabilities year-over-year. Adjusted free cash flow was $39.8 million year-to-date, up $12.3 million or 45% year-over-year. Year-to-date capital expenditures were up $5 million as we continue to invest in planned capital expenditures at newly acquired operations to drive operating synergies and integration efforts. We also continue to invest in development of the Phase 6 landfill expansion at the Waste USA Landfill. We expect – we expect to complete this expansion in 2021. Much of the capital expenditures that we’ve been buying this year, we actually ordered back in 2020 and we’ve locked in pricing at that time. However, we have experienced recent inflationary pressures and dumpster purchases as steel prices have skyrocketed and for certain construction materials at our landfills. We are closely watching these trends and adjusting our pricing models accordingly. Given our solid execution year-to-date and our increased visibility of economic trends combined with the expected contribution of acquisitions already completed this year, including the Willimantic acquisition. We raised our fiscal 2021 guidance ranges for the second time this year. These are laid out in our press release yesterday. The updated 2021 guidance ranges assume a stable economic environment continuing through the remainder of the year with a modest rebound in solid waste volumes. We expect solid waste volumes to be up roughly 1.5% year-over-year in the third quarter and up 1.5% in the fourth quarter as the post-COVID comparisons become more challenging. The guidance includes 4.7% of revenue growth from acquisitions already completed in 2020 and 2021. However, as always, it does not include any acquisitions yet to be completed. And with that, I’ll hand it over to Ed. Thank you.

Thanks, Ned. Good morning, everyone. Well, another great quarter. We continue to perform well operationally and even though we knew we were going to have a very tough comp on the collection side, we exceeded plan in all major lines of business. We reduced consolidated cost of ops as a percentage of revenue by over 120 basis points. Q2 of last year was a very unusual quarter because of COVID. So I thought it would be beneficial to talk to two-year of trends as I go through the segments. The collection line of business is on a long-term track of margin improvement as we continue to increase our level of automation, upgrade routing systems, implement onboard computers, and improved real-time internal operating stat reports that we use to manage the business. However, the comp was difficult as last year. Q2 was significantly affected by the COVID pandemic as businesses were forced to cease operating and people were asked to sequester in their homes. We moved quickly to flex cost and protect our people and our team did a great job, but there were a couple of unanticipated benefits low disposal weights in the commercial line, and the overall efficiency of having no traffic. Our cost dropped faster than our lost revenue and gave us a temporary boost in margins. This year, cost of ops as a percentage of revenue went back up as compared to last year, but it is still a 270 basis point decrease from Q2 of 2019, which reflects a more normalized picture of our long-term improvement. Over the past two years, our landfill operations have made some substantial progress reducing costs and improving operating efficiency. Landfill operations, which have high fixed operating costs with little flex capability are financially very volume sensitive. In Q2 of last year, the COVID effect on economic activity reduced tonnages, revenue was down 10% as compared to the prior year, but we still managed to reduce cost of ops as a percentage of revenue by 50 basis points. This year, with volume starting to return, we see the full benefit of what we have been doing and cost of ops as a percentage of revenue were down an additional 525 basis points. Our biggest landfill, Ontario County in New York has led the charge and I want to give a special shout out the Mark Johnson and Brian Sanders for the great work they’ve done there. Our resource solutions group has also performed well. This group includes our recycling and biosolids operations and volumes in these areas remain fairly steady through last year’s disruption. Operational improvements resulted in a reduction of cost of operations as a percentage of revenue of 200 basis points in Q2 of 2021 versus Q2 of last year and a cumulative 500 basis points from Q2 of 2019. We continue to work on initiatives that will further improve our operational efficiency. We are investing in our recycling facilities, including technological innovations that will both increase capacity, improve product quality and reduce per ton processing costs. We are expanding our use of onboard computers and integrated camera systems on our collection vehicles. We are steadily increasing our level of automation in our residential collection line. We are implementing real-time business intelligence reports to quicken our response to operational issues as they arise. And we have developed the long-term heavy equipment plan that will right-size equipment in all post collection activities, replace equipment on a timely and pre-planned basis and reduce overall capital and operational costs. Similarly, we have also just completed a long-term facility plant to upgrade efficiency and improved workplace environment to attract and retain good people. These initiatives give us confidence that we can continue to improve the efficiency of our existing operations. As a closing comment, I would like to welcome the Willimantic employees that joined Casella team this week. We look forward to you having long and fruitful careers with us and hope you’re find Casella to be the same great place to work as we have. With that, I’d like to turn it back to the operator to start the Q&A.

And thank you. [Operator Instructions] Our first question is from Hamzah Mazari with Jefferies. Your question, please.

Great, thank you so much. Good morning. I guess the first question would just be on, you mentioned exposure to New York and why you’re not sort of above pre-COVID levels on volume. Do you have a sense of when you get back to pre-COVID levels? How quickly you can get there? And as part of that, what’s your guidance imply on pricing for this year in the second half?

Yes, I’ll start first and then you could. Yes, so on the collection line of business, Hamzah, on the roll-off side, construction side; we’re actually higher than pre-COVID levels right now. And then on the commercial and industrial side, we’re about $3 million, $3.5 million of revenues on an annualized basis lower, so pretty de minimis. And John, do you want to...

I was just going to say, Hamzah, the City didn’t open until July 1, so we expected that it should continue to improve through the rest of 2021. But if you remember, and I’m sure you’re well aware of it, the City opened and I think it was around July 1.

Yes.

Right.

And we’re seeing something interesting to where, as John described, we’re doing a great job retaining drivers and hiring people and it really building our workforce. But the volumes from New York moves very far distances to our landfills and some of the third-party haulers has seen some labor challenges. And I think when some of the federal programs roll back, we expect that to help, but that – with some of the driver shortage is there. So not directly our people but it is impacting our business a bit today.

Got it. And just on pricing, what’s your expectations on pricing in your guidance going forward?

Yes. So, we expect pricing to – as we said, Q1 was a little bit lighter than we expected, Q2 was where we want it to be. And for the rest of the year, we expect to be kind of three and three quarters to kind of 4-ish or mail – we’re around that 4 level for the rest of the year.

Got it. And just on the M&A pipeline, I know you talked about the current transaction. What does the pipeline look like? I know Pennsylvania changed hands. You guys didn’t get that asset, but just sort of any view as to the pipeline longer-term going forward? I know you’ve sized it up, but maybe just talk about the level of transactions you think you can do in the near-term and whether you think that’s going to be higher than normal. Or I guess higher than – is the run rate of deals you’re doing right now going to be consistent going forward?

I think that we have always taken the approach to be a bit conservative in terms of what we do and it seems as though, we’re obviously above what we had laid out from a guidance – we’ve done five transactions and $67 million of acquired revenue this year. And we have a lot of activity right now, and so there is a lot of activity because of labor issues, and there’s a lot of activity. If you – and if you talk to us in the first quarter, we weren’t seeing activity from the tax contemplation but we are now. Some people are really thinking about it in terms of tax changes. So there is an awful lot of activity. We still – we had indicated that we had 8,200 million that we are working on, still consistent even though we’ve completed Willimantic, we still have a number of things that will happen throughout the second half of the year. And I think that, clearly we’re going to be on the conservative side, but it seems as though we have been over-performing from a – from an M&A standpoint. And there are clearly transactions and opportunities that if you would talk to us a year ago, that were not in the mix in terms of opportunities, because we just didn’t think that there would be a target from an M&A standpoint, which has changed pretty dramatically.

Great. Thank you so much. I’ll turn it over. Thank you.

Thanks, Hamzah.

Thanks, Hamzah.

Our next question comes from Michael Hoffman with Stifel. Your question, please.

Hi, guys.

Hey, Michael.

So, I am pretty sure that every quarter, it must be a pretty reliable service.

It is. Even through a big rainstorm those rely on.

Yes, certainly.

Yes. And so, in the community theater, you’ve been practicing your presentation for the opening remarks there, are you doing community theater these days.

He’s definitely doing community theater.

Since my whole life.

So on the more serious questions like interest expense and things like that, what are we looking at for the next couple guidance things through the second half, interest expense, your D&A, SG&A? Can you help us with those now that you’ve layered in a bigger longtime family owned business that probably has no basis, so got a fair amount of goodwill maybe intangibles, things like that?

Yes. So, interest expense, we expect around $22 million for the rest of the year. And right now with the Willimantic transaction, it was structured where we are able to take a tax basis step up. So there will be a little bit higher D&A, both from a goodwill standpoint and amortizable intangible standpoint and from the tax basis step up which is good from a tax planning standpoint, with airplane, Michael in the near-term actually weighs on G&A and I need to quote that number. So, G&A...

We’ve got the $103 million of the D&A in the other half of the year.

Yes. I think our case on that number in front of me.

There were several voices there. Say that again.

$103 million of D&A on the year, Michael, that we’ve got to into.

Oh, DNA is $103 million. Okay. All right. I mean I like that…

Yes.

I am going to write that. And then the SG&A, is that kind of probably land somewhere between $115 million and $117 million?

So we are at – let me detail – and then does that include Willimantic? Yes. So it’ll will be around one – so half a year. It will be around one $114 million to $115 million range, Michael.

Okay, all right. That’s very helpful. And then, the tax rate is high this year because of that tax valuation issue last year, but what’s it get back to going forward, so we get the forward right?

Yes. So much of our focus for many years has been on managing cash taxes, which we’ve done very effectively and – but our effective income statement tax rate sitting at 32% and that’s actually a little higher than we’d like it to be and a lot of it has to do with non-deductibility of compensation and other charitable contributions in the like, and we haven’t done a lot with tax credits. We’ve done some with landfill gas to energy and we’ll look to do more there, but it hasn’t been a focus because we’ve had a net operating loss position in some of the work we’ve done with tax depreciation. So it is something we’re looking at from a strategy standpoint, Michael, because from this point going forward, you’ll see a normal provision on the income statement. And it is the area, we will focus on.

So should I use 32% or 30% for next year?

I’m sorry, use 32%.

Use 32%, okay.

Yes.

All right, that’s helpful. And then...

And just one more point on that, our actual cash tax rate is like 27.8%. Its lower, of course, due to NOLs and whatnot but the income statement is up because of non-deductible items.

Got it. Okay, that’s very helpful. And you still think the NOL kind of based on doing your M&A, you’d stretch it a little bit, it doesn’t really turnover on you until 2025, 2026?

Yes. We’ve been able to structure transactions very effectively to help us with that and we’re looking out, 2025 or later.

Okay, that’s helpful as well. This is a hypothetical, but if New York City had been fully operational on July – on May – July 1, if you will, on July 1, so you knew that volume is there. The presumption is your guidance would clearly have been stronger and I’m not being critical that it’s a little muted if I look back to starting February of this year and then when you raised it. But it’s a little more muted relative to some of the peers, and that’s about New York City. That’s what the issue is, if you had visibility on New York City, would there be a higher number?

That’s where our two different...

And I think recycling as well, we mentioned, we built a very fair system to share risk and we maybe don’t have as much of a tailwind right now, but that’s fine with us. We’re doing exactly what we set out to achieve and we’re making a nice return in recycling.

Perfect. That helps, too. So lots of the company have been talking about landfill gas operations and the grand windfall that might come from it. Can you talk a little bit about, is there incremental opportunities for either development or repositioning, what you’re doing to uncouple some value, including maybe grabbing some credits.

Well, as you know we partner with third parties to build our gas plants. We’re moving toward R&D now at most of our sites. We have a lot of great opportunity, but our model is basically to sell them the gas and minimize our capital and our risk and then, we share on the upside. So when we partner with somebody, we work a model on where that upside starts and we take very conservative long-term estimates. So things like RINs because we know the RIN market is spiking right now, so we want to make sure we stay conservative on that and we share as much upside as we can.

But I do think that there is an opportunity, Michael, from a pipeline-ready gas that is going to change the dynamics a little bit from a landfill gas energy standpoint. There is an opportunity there that technology innovation is moving forward. And I think it is going to change the dynamics a bit and create a bit more opportunity, especially for those facilities that don’t – that aren’t able to get to the grid.

Right. Any sense on what that might mean to a bump in cash or EBITDA?

I don’t, at this point in time. I mean, I wouldn’t – I think that it’s – I think there is a possibility that it could be a positive, but it wouldn’t be something that we will be putting into the model at this point.

Okay, fair enough. Willimantic has rail, does this help accelerate McKean development or how does it play into the McKean storyline?

Yes, it surely does. The Willimantic facility certainly fits into our strategy to bring McKean up and operational. We’re in a process of doing that now. We put the team together, we’re going through the engineering and expect to have McKean up, operational toward the end of 2022, maybe early 2023. But absolutely, it’s very helpful because it puts more tons in our control to make sure that we’ve got the tonnage necessary to get a nice return at McKean, when we bring it up and make it operational.

So you have to put a spur in as the state is going to help fund some of that as they...

Yes. There is a possibility. We had received the grant once for $10 million for that rail infrastructure, I’m not sure whether we will pursue that or not. We’re going to build out the facility and we’re going to do it in – at a very high level in terms of having the fastest turn times, the least amount of damage to the cars. So we’ve got an opportunity to build out very high quality facility as is – it’s a clean sheet of paper at this point in time. That’s exactly what we’re going to do. So there is a nice opportunity for us to really build that facility right.

Okay, and last one for me, just because I think you need – it helps you manage the news flow. So there is some stuff in the New Hampshire papers about the landfill having leachate spill, can you put that in perspective, so everybody understands? You’ve got on top of it, it’s managed and it shouldn’t interfere with the development of the second...

I’d say, it’s unfortunate and it’s very disappointing we – from an operating standpoint, it’s unacceptable. We are – we’ve made some changes to make sure that the issue doesn’t happen. The leachate went into a retention basin. That’s been cleaned up and straightened out. We’ll continue to work through with DES on the issue. And as I said, it’s unacceptable and certainly something that we have looked at from a personnel standpoint and have made some changes in addition to some policy changes in terms of duplication as well and work over a weekend in particular. So it’s an unacceptable. It has been taken care of, it has been cleaned up and it did go into a retention basin, so...

So it did not go into the river, which the journal – the one journalist was trying to suggest it may have?

That did not happen. Absolutely not.

All right.

No.

But I think that’s a good point of clarification in case you...

Went into retention basin. Correct.

Got it. All right, thank you very much. Nice quarter.

Thank you, Michael.

Thanks, Michael.

Our next question comes from Tyler Brown with Raymond James.

Hi, Tyler.

Hey, good morning guys.

Hey, good morning.

Hey, Ned, just real quick on the guide. But of the incremental $30 million to $35 million in revenue, just how much of that is M&A and how much of that is an increase in maybe core price and volume? It just feels like it’s mostly M&A.

Yes. $25 million is associated with M&A on the revenue side.

Okay, so...

Roughly, a 20% margin attached to it.

Okay. I was going to ask on the EBITDA, Okay. So again there, the $10 million increases, a good chunk of that is M&A?

Yes. $5 million is M&A, $5 million is core...

Okay. So I can’t tell – I mean, do you feel like you’re being conservative on the – it sounds like maybe you do, I’m not being presumptuous here, but it feels like maybe you’re being conservative on the core price and volume, there could be upside there still on restarts.

Yes, right now, we’re tracking pretty close to our budget, as we mentioned, a little while ago, both on price and volume and even we’re slightly lighter in Q2 on volumes. We’re tracking ahead on operating efficiency programs and we’re probably being a little bit conservative on – hopefully, we can track well during this quarter and come back and adjust guidance again. I think, we’re just trying not to get too far ahead of ourselves in this environment...

Sure.

And there have been a lot of moving pieces, both from a margin standpoint – and it’s actually been kind of a complicated period, as because usually our businesses are so stable and we’ve had some real changes in volumes and we’ve changed our cost profile dramatically, and we’re doing a great job ramping back in with volumes in controlling costs and gaining more confidence there.

So kind of going back and touching on that, on the 85 basis points of margin improvement, there are a lot of numbers in there. Can you parse that out again, I thought that commodities was maybe 15 but what was – what were the puts and takes there?

Yes. It’s a good question. So it’s interesting. Our 85 basis points up, 70 basis points came from solid waste and 15 basis points from recycling. So our – we did give almost all of that commodity price increase back to our customers, which is great, but there’s some system headwinds there too. I don’t know how much detail you want to get in but fuel was – despite these headwinds, we still had really nice margin improvement. And Q2 last year was such a strange period for everyone because we had much lower fuel, lower over time, lower labor, things like that. But year-over-year, our fuel was up 30 basis points, over time up 60 basis points, healthcare up 90 basis points, and incentive comp up 100 basis points. So you kind of take that into contexts and you think about our core business operate very, very well in the second quarter.

Interesting. Yes. Very interesting. But then, if you look at the guidance and again, I’m not great at math but it looks like you may be going to see a flattening out in margin during the back half.

I don’t know about that. I’m not sure about that. I think you’re pretty good in that.

Well, anyway. But, anyway – yes...

We have a moving pieces with the new acquisition and I think, to your point, maybe we’re being a little conservative but we have moved up guidance ranges significantly throughout the year, second raise on the year and we hope to beat them.

Okay. And then just lastly on Willimantic. Can you disclose what you paid and is there an earnout?

There’s not in our earnout, but we are not disclosing what we paid for it.

Okay. And then just lastly. So on McKean, did I hear you right, John, you’re talking late 2022 or 2023 to get that – the rail in?

That’s correct. That is our plan. That’s our plan at this point in time. The team’s in place. We’re moving it forward now. It will be the end of 2022 or early 2023.

And so would it initially start accepting C&D with a longer-term hope to bring in MSW both out of I assume Willimantic and Holyoke?

Yes. Exactly. Our game plan would be to move C&D early on but to build capability to move MSW to the site since we do have permits for MSW there. And we’re working on finalizing the design and like many things in this environment, capital assets in the rail side, as you know, are out pretty far. So we’re working through his work on finalizing the design and then we’ll get it there a sense of the timeline.

Okay. All right, guys. Thanks so much for the time.

Thanks, Tyler.

Yes.

And our next question comes from Sean Eastman with KeyBanc.

Hi, guys. Nice quarter.

Thanks.

Congrats on the Willimantic deal.

Thank you.

So on one hand, you guys are seeing that labor tightness is driving momentum in the acquisition pipeline but on the other hand, I think you said Casella hasn’t seen labor shortages, not having to change wage rates. So how do I...

No. No, that’s – I think that we said that now. We’re – we had substantial changes a couple of years ago in 2018, 2019...

Yes.

2019 and 2020, we had substantial labor changes. We went through all our labor rates almost but we had a substantial amount of that activity with the economic activity before the pandemic, Sean. So we’re...

But with that, I think I’m serious that we’re not immune to this.

No.

We have been increasing labor rates, we have some places where we have open slots but I think John was trying to intimate. It’s not a crisis for us, I think we talked to some companies and they’re really, really struggling with this factor. And the way we treated our employees, both from a pay standpoint and from a culture and safety and you name it has helped us to have better intention than many.

Well, the other thing that we’ve done is we’ve really built our HR team from not only from the standpoint of recruitment, but we’ve also built CDL schools, we’re attracting people out of high school. I think the whole industry has to attract people out of high school. We’ve changed our internal policy from 21 to 18 for people to begin to drive truck in. Obviously, it means more from a training standpoint, from a safety perspective but we’ve put a lot of programs in place over the last couple of years. Kelley Robinson and the HR team have done a great job of reaching out and really doing the hard work and making sure that as we look at our rates in each of the markets that we operate, that we in fact are very competitive from a rate standpoint. So that’s ongoing but the bulk of that for us was a couple of years ago, two years ago.

Yes. Okay. That’s what I was trying to flush out. I think that’s...

Fair enough.

Very helpful.

Yes.

Very helpful.

Fair enough.

Okay. And then Tyler’s math skills flushed out potential conservatism in the margins in the second half. Maybe you could just refresh us on exactly what you think you need to be conservative around there, is it just kind of continued cost normalization, you mentioned the acquisition but maybe what in particular might warrant a little bit of conservatism still as we exit a really strong first half clearly?

Yes. So the comparisons get much harder, right, in the second half?

Yes.

So that’s the first point because we exited COVID 2Q into Q3 and Q4 last year, but very strongly with margin enhancement. And then from our vantage point, I think it’s just a cost normalization and it’s something add-in, the operating team are keeping an eye on every day and we’re just trying not to get ahead of ourselves. We’ve got great programs in place, we’re reacting really quickly. But I think when we look at, that’s probably the biggest factor of why we’re being a bit conservative. On another hand, it’s something we can manage and we’re going to try to manage to where we can beat those numbers.

Okay. Fair enough. And last one for me on Willimantic. I mean the rail in the McKean landfill, synergy element’s interesting. Yes, maybe the other item we haven’t hit on is just what this does to the pipeline. Since it’s a new platform, it establishes a new geographic presence. Does this kind of open up another...

Yes. Really...

Bucket of...

It is indeed another platform, Sean, there’s no question about it. Eastern Connecticut, there are a number of opportunities that are associated with Willimantic and it’s a terrific platform for us into Eastern Connecticut and we look forward to that. I do think too that the activity also is reflective of what’s happening in the marketplace and should help with some momentum for the second half of the year and into 2022.

Okay. Terrific. Another helpful color, guys. Thanks very much.

Thank you. Appreciate it.

Thank you. And our next question comes from Alexander Leach with Berenberg Capital Markets.

Hey, Alex.

Good morning, guys.

Good morning.

Good morning.

And so with the 85% of the commercial industrial business that you guys managed to get back online, what’s going on with the remaining 15%? Why are some of these customers so late coming back to the full-service levels?

Yes. So we did a really good scrub of everyone who still has lower service levels. And some of them I think never will come back and it’s just going to be replaced with new businesses where unfortunately some companies didn’t survive at this time period. But the rest of it is still I think a bit tourism-related. We see some of that and restaurant-related is still in the Northeast is a little slower than everywhere out in the country, as you well know it being in the city. So – and it’s a little bit associated with some schools and whatnot that we assume when they come back in the fall, they were at lower run rates this spring and we’ll see that come back to normalized level. So it probably will never actually come back. You’ll replace it with some other work or other customers and at some point here, we’re probably done tracking this because it’s not that productive. We’ve gotten most of it back and ramp back on volumes.

Okay. Great. And then could you give us an update on the customer solutions business? How is customer penetration fairing on that side, is it still growing faster than the group average.

It is. Jason will probably give you the numbers or net in terms of the actual growth for the quarter but the overall business platform is really doing very well. Paul, Liza, the entire team are doing a terrific job with colleges and universities. Industrial customers will continue to grow that book of business pretty dramatically and had a really good second quarter. A lot of activity as you might know with regard to those sustainability goals that those institutions have whether it’s colleges and universities or industrial customers, no question that we’re having some great growth there. Jason, maybe you want to add to that?

So in the second quarter, we had over 9% revenue growth in our non-processing resource solutions operations, which is primarily related to our customer solutions, professional services business. Little bit of a easier comp in the second quarter, but year-to-date, I think, we’re closer to about 5% revenue growth. So really, really strong performance there.

And the way we reorganize this business last year is important because we have the asset part of it and the asset-light part of it. And the asset part is recycling processing, organics processing and the physical assets in the marketplace that we’re vertically integrating to our servicing customers through. And the asset-light part is really exciting as well. Because as John mentioned, everyone is really trying to work to reduce their environmental footprint and focus on ESG goals, and our team can make a really meaningful difference partnering with our customers there and we’ve gotten some great new wins on that side, some great renewals. One of our newest customers is Boston University and we’re super excited about. It’s ramping online this summer and there is a lot of promise in that business line.

Okay, Great. Thanks, guys.

Thank you.

Thank you.

Thank you. And I’m not showing any further questions in the queue, I would like to turn the call back to John Casella for his final remarks.

Thank you, operator, and thanks, everyone, for joining us this morning. We look forward to discussing our third quarter 2021 earnings with you in late October. The sun has finally come out in Vermont, you will all be glad to know. I think we had three sunny days in July in total. So everything is very green. Thanks, again, everybody. Have a great day, and enjoy the weekend. Thanks.

And with that, we conclude our conference for today. Thank you for your participation. You may now disconnect.