CWST - NASDAQ

All right. Good morning, and thank you for joining us on the call today. Today, we will be discussing our second quarter 2024 results, which were released yesterday afternoon. Here with me today are John Casella, Chairman and Chief Executive Officer of Casella Waste Systems.

Hello, operator? Were you going to say something? No? Okay. Sorry, Charlie, go ahead, please.

We've John here. Ned Coletta, our President; Brad Helgeson, our Chief Financial Officer; and Sean Steves, our Senior Vice President and Chief Operating Officer of Solid Waste Operations. After a review of these results and an update on company's activities and business environment, we will be happy to take your questions. But first, please be aware that various remarks 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 these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recently filed Form 10-K and Form 10-Q, which are 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 in 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, August 2, 2024. 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 included in our press release filed on Form 8-K with SEC. And with that, I will now turn the call over to John Casella to begin today's discussion.

Thanks, Charlie. Good morning, everyone, and welcome to our second quarter 2024 conference call. I will begin today's remarks highlighting our strategic execution and continued growth with brief comments on our results. Brad and Ned will then go into more details on our financials and strategies. First, I'd like to welcome our new team members to Casella, who joined us from several recent acquisitions. Yesterday afternoon, we announced another major step in our company's growth strategy with the acquisition of LMR Disposal and Whitetail Disposal, two collection companies in the Mid-Atlantic that strongly align with our core operating strategies. These valuable operations immediately offer us additional growth in new markets and more density in existing. We're very excited to begin serving our new customers and continue executing against our growth strategy in these attractive markets. We have also closed on three other tuck-in acquisitions this year; two in July and one in May. I'd like to provide another welcome to all of our team members who have come on board. These five acquisitions reflect our ability to continue to grow the business through a disciplined approach. Our team remains focused and balanced across integration efforts, our core business and on future opportunities. Moving to our results, both revenue and adjusted EBITDA reached all-time highs on a quarterly basis. This milestone reflects the hard work and dedication of our team -- that our team has put into building the business. While there are a couple of unexpected items that weighed on the second quarter results noted in our press release, our year-to-date performance is consistent with our plans for the first half of the year. Looking ahead, we are well positioned to carry the growth momentum forward over the second half of the year. Shifting to a few of our key strategies and performance of our operations, starting with our landfills. Volumes were down year-over-year. MSW volumes were, again, stable in the quarter, but lower C&D and special waste tons continued to present a bit of a headwind. However, this is largely a result of the upcoming closure of a large third-party C&D landfill in New York at the end of the year. More importantly, we had expected this EBITDA and margin pressure to begin the year. It has been factored into our guidance, and we believe the market will return to a more steady state next year. And I want to stress that this has not shifted our strategy in any way. We are steadfast in prioritizing long-term returns and not allowing any short-term impacts to sway the focus. Our average price per ton at the landfills demonstrates this approach as we continue to improve the quality of our inbound waste stream. On the collection side, results continue to show positive returns from our strategic investments in this line of business. Our frontline development route enhancements and fleet investment programs are highly successful. In our base business, we expanded adjusted EBITDA 130 basis points year-over-year. Sean Steves and his team have developed a proven model that is delivering strong operating performance. But it's a collaborative approach, starting with our human resource team and their efforts around recruitment, our CDL and diesel mechanic programs to help set our frontline team up with the necessary job skills and safety training for success. As a result, employee turnover and safety levels are trending positively. From an operational standpoint, our fleet automation, route conversion and onboard computer plans are driving higher productivity levels and improving operating cost metrics. We are deploying this model across our footprint and believe there's a long runway of opportunity ahead, especially with the acquisitions we've completed over the last year or more. While a lot of coordination and planning is involved, repeatable execution is part of our success. In resource solutions, we, once again, posted very strong results in this segment, led by the performance of our recycling operations. While our average commodity revenue per ton was up 50% year-over-year, much of this value is shared with our customers, given our balanced model that focuses on steady returns while reducing commodity price volatility. Contributions from the Boston MRF drove most of the success in the quarter. On the national accounts side, this business also posted a bit of growth in the quarter and remains a key part of our overall strategy of providing superior differentiated services, which is something I'd like to highlight for a minute. As you know, we've talked about a sales strategy targeting larger commercial and industrial customers. This strategy is not fully apparent when looking at our Solid Waste business alone, as positive volume growth in national accounts offset some of our Solid Waste volume decline. This dynamic is more reflective of our strategy where we are focused on growing our larger, profitable National Account customers and revenue as compared to some of the less profitable Solid Waste revenues we are shedding. Wrapping up, we are executing against our growth strategy and are well positioned for the remainder of this year. Our core operating programs are intact. Our project development pipeline offers a long runway for profitable growth, combined with our acquisition strategy that has expanded our operating footprint to 10 states, we are poised to continue delivering value. And with that, I'll turn it over to Brad to go through some details on the financials.

Thanks, John. Good morning, everyone. Revenues in the second quarter were $377.2 million, up $87.5 million or 30.2% year-over-year with $70 million from acquisition rollover and $17.5 million from organic growth or 6%. Solid Waste revenues were up 35.1% year-over-year with acquisition growth of 30.7%, price up 5.7% and volumes down 1.8%. Within Solid Waste, price in the collection line of business was up 6.2% and volume down 1.2%. In the front load commercial business, price was up 7.3% and volume up 1.1%, while volume declines in the quarter were concentrated in residential and roll-off as we worked to improve the quality of revenue and margins in those businesses. Revenues in the Disposal line of business were up 2.3% year-over-year with transfer revenue up 9% and landfill revenue down 5.2%. Landfill price growth of 5.2% was offset by lower volume of 10.4%. MSW volumes into the landfills were down slightly in the quarter and essentially flat over the first half of the year, but we saw continued weakness in C&D and special waste volumes. As we've discussed, the C&D market is currently under pressure as certain competitors in the Metro New York market have aggressively pursued volumes. We expect this dynamic to continue through the end of the year, but it should abate in 2025. In the case of special waste volumes, we have a deep sales pipeline, but these waste streams are often project-based, and thus, timing is inherently difficult to predict. The average price per ton at the landfills was up 10.8% year-over-year, reflecting a mix shift away from lower priced streams as we help align on price in the face of volume pressure and prioritize preserving our valuable airspace. Resource solutions revenues were up 15.4% year-over-year, with recycling and other processing revenue up 31.1% and national accounts up 6.9%. Within processing operations, price was up 5.5%, driven by an increase of over 50% in average commodity revenue over Q2 last year. Of course, most of the benefit of these higher commodity prices is shared with our customers under our contract structures designed to mitigate risk. So the net benefit to our revenue in the quarter was only $1.1 million. We expect favorable year-over-year comps to continue through 2024 as recycled commodity markets remain firm and current prices are well above second half of last year. Processing volume was up 12.7% with higher recycling volumes benefited by production enhancements at the Boston MRF. Within national accounts revenue, price was up 3.7% and volume was up 3.4%. Acquisitions contributed 4.5% across the resource solutions segment. Adjusted EBITDA was $91.6 million in the quarter, up $19.4 million or 26.9% year-over-year, with $18 million from acquisition rollover. Adjusted EBITDA margins were 24.3% in the quarter, down 60 basis points year-over-year. Bridging the year-over-year change in the EBITDA margin, a few specific headwinds drove the decline in the quarter. Lower volume at the landfills, particularly C&D; higher landfill operating costs, including leachate with the wet weather in New England; and employee separation costs together represented over 200 basis points of margin headwind. The rest of our business performed well and in line with plan. Our pricing programs continued to outpace inflation. The Boston MRF contributed approximately $2.5 million of adjusted EBITDA growth in the quarter, and we benefited again from higher recycled commodity prices and ongoing cost efficiencies in the collection business. Acquisitions were also a modest tailwind to consolidated margins in the quarter. Stepping back from the quarter, adjusted EBITDA margins are up 40 basis points year-to-date, and our outlook for margin expansion for the full year, as reflected in our guidance, is unchanged. Cost of operations in the quarter was up $57.5 million year-over-year, with $48 million of the increase from acquisitions and $9.5 million from the base business. So, on a same-store basis, cost of operations was down 60 basis points as a percentage of revenue year-over-year. Our effective tax rate was 35.1% in the quarter as certain non-deductible expenses and discrete items pushed the rate above our statutory rate of approximately 27%. The effective rate is projected at approximately 35% for the year, but we expect to pay less than $5 million in cash taxes. Adjusted net income was $12.5 million in the quarter, down $6.3 million compared to prior year, with the accelerated amortization of identifiable intangibles associated with acquisitions weighing on earnings. Intangible amortization was up $8 million year-over-year, while D&A associated with acquisitions was over 26% of acquired revenue as compared to approximately 12% for our base business. GAAP net income was $7 million in the quarter, up $1.5 million compared to prior year, impacted by higher D&A and acquisition-related expenditures, but comparing favorably to the charges for the termination of bridge financing and a legal settlement in Q2 last year. Net cash provided by operating activities was $79.8 million for the first six months of 2024, down $3.4 million year-over-year. This was driven by higher cash outflows from net changes in assets and liabilities, including AP timing in the first quarter and slower AR collections at our businesses acquired from GFL in the Mid-Atlantic. Overall, DSO at June 30 was 38 days, which comprises 55 days at the former GFL operations and 32 days for the rest of Casella's AR. As a reminder, the acquired businesses were a carve-out from GFL, so the collections were largely not in our control until we transitioned AR and customer data onto our systems, which was completed in Q2. We'll focus on working this AR balance down in the coming months, which represents a cash flow opportunity going forward, but this has certainly been a drag on reported cash flow year-to-date. Adjusted free cash flow was $39.5 million in the first six months compared to $47.9 million in the first half of 2023, driven by the working capital dynamics that I just discussed and higher capital expenditures year-over-year. I'll note that adjusted free cash flow year-to-date represents less than 30% of our full year guidance as compared to nearly 40% generated in the first half last year. However, considering the working capital movements reflected in the first half number this year, we believe that we are very well positioned heading into second half from a cash flow standpoint. As of June 30, we had $1.05 billion of debt, $208.5 million of cash and available liquidity of $481 million. Our consolidated net leverage ratio for purposes of our bank covenants was 2.63x. Our liquidity and leverage profile have enabled us to be opportunistic in executing on our M&A pipeline as we funded our recent acquisitions, including LMR and Whitetail Disposal, primarily with cash on hand. We currently have $75 million now drawn on our revolver with approximately $225 million of remaining liquidity and pro forma leverage is less than 3x. As we announced in our press release yesterday, we've updated our guidance to reflect developments in the business to-date, including acquisitions closed. We're raising our ranges for revenue and adjusted EBITDA by $40 million and $10 million, respectively, at the midpoints, primarily reflecting the anticipated contribution from acquisitions. We reaffirmed guidance for adjusted free cash flow with the expected contribution from acquisitions, offset by the cost of financing and a conservative outlook on AR collections with newly acquired businesses. We lowered our ranges for the GAAP metrics, net income and net cash provided by operating activities due largely to higher acquisition-related expenditures. Reconciliations of our guidance on these GAAP metrics to their related non-GAAP metrics are included in the press release. Regarding key assumptions underlying guidance, we now expect Solid Waste volume to be down 1% to 2%, reflecting continued softness in landfill volumes as well as lower residential collection and roll-off volumes as we prioritize customer profitability over volume growth. However, our overall organic revenue growth assumptions remain unchanged, reflecting an expectation that Solid Waste price growth will be in the upper end of our anticipated range of 5% to 6% for the year. And with that, I'll turn it over to Ned.

Thanks, Brad, and good morning, everyone. As mentioned in our earnings release yesterday afternoon, we've completed five acquisitions year-to-date that are expected to contribute over $100 million of annualized revenues. Nearly all of this acquired revenue is in our Mid-Atlantic region, where we see tremendous opportunity to build scale, further grow our business through our differentiated service offerings. We are excited about further building our business in the Mid-Atlantic and these bolt-on acquisitions fit our long-term strategy well. Whitetail and LMR are in adjacent secondary markets with high-quality operations and a balanced mix of commercial, subscription, residential, municipal and industrial customers. Further, we're building operational density, which will help to drive additional efficiencies in our collection operations. These acquired businesses have well-established customer and community relationships that present great opportunities for organic growth, including through our resource solutions offerings. There is potential for us to internalize more recycling volumes into our Mid-Atlantic recycling facility, while at the same time, using our targeted sales approach at larger industrial, institutional and multi-site commercial customers who demand heightened sustainability services. As always, our near-term focus is welcoming our new employees and customers to Casella while integrating the operations and systems to ensure a smooth transition. Looking broadly at our M&A strategy, our acquisition pipeline remains very active with lots of opportunity in strategic areas across our 10 state footprint. Ongoing dialogues and diligence efforts sets us up well for potential additional acquisitions in late 2024 into early 2025. Turning to our development projects. Investment in our rail-served McKean, Pennsylvania landfill is nearly complete. We received our first test loads at the site in the second quarter that allowed us to test equipment, processes and conduct training. We have not included any incremental contribution from the site in our forecast or guidance. And as previously discussed, this site provides a solid long-term risk management strategy to preserve our flexibility in the Northeast. As such, this won't be a meaningful driver of near-term volume growth, and the site will be operated under the same return-driven focus that we apply across all opportunities. An example of this return-driven focus is the continued strong performance of our Boston recycling facility. Results from the upgraded equipment at this facility are accretive to consolidated adjusted EBITDA and margins and clearly demonstrate our approach to sustainability investments being both environmentally and economically balanced. We're excited about the technology and equipment upgrade at our Willimantic Connecticut recycling facility planned for the second half of 2024. We kicked off that project a few weeks ago, and we are evaluating other opportunities to advance our circularity infrastructure. Our RNG projects are also progressing. The facility at Juniper Ridge landfill faced some initial start-up delays from our third-party partner that has moved the opening date back to this fall. As a reminder, we have invested $0 into these projects, and we're receiving a royalty payment from the sale of gas and RINs, which we believe is the most appropriate risk-mitigating path for us. Looking ahead, the three Waga led projects continue to advance with commercial operations expected in late 2025. Like John and the rest of our team, I would like to again welcome our new employees to Casella. We pride ourselves on our strong culture and our value system. We're very excited about the opportunities ahead to drive continued profitable growth and shareholder value. And with that, I'd like to turn it back to the operator for questions.

[Operator Instructions] The first question comes from Tyler Brown with Raymond James. Your line is now open.

Hi, good morning, guys.

Good morning.

Good morning, folks. Can we just start maybe talk a little bit about the $3 million in leachate. So I've been reading some articles about all the flooding in Vermont. So I'm assuming that that is the issue. But I just want to be clear, this wasn't systemically higher leachate costs because of PFAS?

No, not at all. Clearly, additional volume because of all of the wet weather affected on four of our facilities, Tyler. So very significant flooding in Vermont, a bit into New Hampshire and a bit in Maine. Less so in New Hampshire and Maine; very significant in Vermont and -- probably at Vermont and New Hampshire, more so in...

A little in New York too.

Yes. And a little upstate New York, where Clinton County facility as well. So, additional volumes because of the wet weather, and also a little bit further in transportation in some cases because of the amount that we had. We had to go to new facilities, different facilities.

Okay. Yes, that's very helpful. And then, Brad, so just -- if I look at the EBITDA, the guide moved up, I think, by $10 million or so. But you are obviously active on the M&A front, which I'm assuming will contribute in the back half. You did have the higher leachate cost. Seems like commodity prices are improving, though I know that's not a huge impact. But just, can you talk about or maybe bridge the $10 million increase? Was that effectively all from acquisitions or was there some core increase in there?

Yes, it's effectively all from acquisitions. We're more or less on track with our guidance prior to the acquisition. So I think for all intents and purposes, you can assume the $10 million is attributable entirely to the acquisitions, and that's a little less than six months' contribution, with one of the deals closing on July 1 and one closing on August 1.

Okay. And then, just from a modeling perspective, just how much revenue should we expect from M&A in '24? And then basically, how much is already slated for '25.

So, for these acquisitions that we've just announced, it's about $115 million of annual revenue. The $40 million of the increase in the guidance for this year is essentially the impact of those acquisitions. And so the rollover would be -- again, plus or minus would be the difference. Yeah.

Yes. Okay. Right. So, already have some rolling into '25. Okay, just maybe a little more -- yes, maybe a little more color on Whitetail and LMR. Can you talk a little bit -- Ned, I think you touched on it, but can you talk about the revenue mix? What are they exposed to in collection? Do they have strong transfer assets? Do you plan to internalize both the recycling and the landfill waste?

Thanks, Tyler. Neither of them have transfer assets today. LMR is a business that's in Northwestern New Jersey, just across the border from our Pennsylvania operations. Some overlap, some adjacencies, well-mixed business. The real internalization opportunity will be getting recyclables into the recycling facility we acquired from GFL last year that we're in the process of upgrading as well. Whitetail is a little bit more of a significant business. It's headed down towards Allentown, down towards Philadelphia area in the secondary market to operate across three operations and very well-run business across subscription, residential, municipal, commercial, industrial segments. It's been a fast-growing business that has a very good reputation in those markets, high-quality service. As we look to that business, once again, great opportunity to vertically integrate to our recycling operation in Pennsylvania. Short-term, we're not looking to internalize either of them from a waste standpoint, although mid-term, we could look to do so to McKean if we chose to. Both of them are more of extensions of the platform, some level of overlap and a continuation of the strategy we started last year.

Okay, prefect. And my last one, there was a large transaction that was announced on Long Island by one of your peers. I'm just curious if that -- if there's any competitive dynamic that we should think about there? Does that hurt or help the C&D situation or just any thoughts there? Thanks guys.

From a practical standpoint, we really weren't receiving any of the MSW from the principals in that transaction. So it's not a -- not any significance from a disposal standpoint?

Yes. Almost all the MSW in Long Island goes to the burn plants, Covanta, facilities. And that transaction, they were bringing their C&D under very long-term agreement out to Ohio. So that was -- that doesn't really change the complexion of construction demo flows in the Northeast.

Okay, perfect. Thanks, guys.

Thank you.

You're welcome, Tyler.

And our next question comes from Brian Butler with Stifel. Your line is open.

Good morning. Thank you for taking the question.

Good morning.

On the deals, could you give a year-to-date spend on that? or do I need to wait till you report third quarter?

It's not something we're laying out this time. So, you'll see in our third quarter Q, the amalgamation of all acquisitions.

Okay. I guess maybe another way to ask is, when you look at the guidance kind of going up the $40 million and $10 million, so kind of an implied EBITDA margin of 25%. When you think of that rolling into 2025, how should we think about those margins improving as you integrate those assets?

Yes. Brian, it's Brad. So, the increase in guidance of $10 million and $40 million, that's predominantly the acquisitions, but not entirely. I would say the margins for the business is pre synergy are probably closer to 20%. And we'll, of course, look to work those up over time as we put in place our operating strategies and, where possible, get some synergies out of the overlap.

Okay. And then, maybe on the commercial side of the business on collection. Have you been seeing service intervals still outpacing service decreases?

Yes, we're absolutely continuing to see strength in the commercial side of the business. We have volume increases and our price remains quite strong across the entire business. It's probably the brightest spot in our entire collection business today. We really do differentiate ourselves with our offerings and continue to gain new business, especially with higher end, higher profile customers.

Okay. And then, maybe one last one on modeling. When you think about the -- you talked about the tax rate being 35% for '24, but only $5 million in cash tax. What's the right way to think about '25 when it comes to NOLs that might be kind of rolling over and impacting the tax rate next year?

Yes. We're going to use up our pre-2017 NOLs this year, and then we're going to roll into our post 2017 tax law change NOLs starting next year. So, from a cash perspective, those are worked a little bit differently than the pre-2017 in that they only shield 80% of federal cash tax. So, all else being equal, we'll begin to pay federal cash tax probably next year, but at a relatively low level. Again, primarily shielded by the NOLs for several years after that.

But on the income statement, we'll revert more to the normalized.

Yes. So, on the income statement, 35% this year. I think as our pretax income continues to grow, that number will naturally kind of come down towards our statutory rate of 27%. Exactly where? It's too early to say for 2025. But 35% should be the high watermark from a book perspective.

Okay, great. I'll get back into the queue. Thank you.

Thanks Brian.

And the next question comes from Jerry Revich with Goldman Sachs. Your line is open.

Hi, this is Adam Bubes with Goldman Sachs. Good morning, everyone.

Good morning.

Really strong growth in the quarter and looks like the M&A pipeline continues to be robust. Is it possible to sort of isolate the margin trajectory on the core legacy operations versus acquired businesses? I'm wondering if the price/cost spread looks different this quarter for your core operations versus acquired assets.

Hey Adam, it's Brad. The price/cost spread for the existing business has been pretty consistent, over 100 basis points in the base business. In the acquired businesses, we intentionally take a more cautious and gradual approach with price increases. So the effect of our pricing programs is really felt in the base business. One number that John mentioned in his prepared remarks that I think gives a good idea of the underlying margin trend that's happening in the business, kind of setting aside the one-time issues, I'll call it, we've had in the second quarter is the collection business was up, excluding acquisitions, 130 basis points on EBITDA margin year-over-year in the quarter. So that's very much the underlying trend as kind of the puts and takes come in over the top of it.

Got it. And then, how much of the lost C&D volumes this year do you expect to get back in 2025? Just conceptually, should we expect outsized volumes in 2025 as the competitor landfill comes offline?

I think from our vantage point, nothing ever shifts on a dime, but that capacity will be out of the market at Brookhaven and Long Island, and there will be less outlets to go to. So, some of our long-term customers who shifted to that site as they were looking to fill it up, we hope to get back into our system. As with everything, transportation is always the complexity to establish transportation lanes and get that waste back. So, right now, it's a little early to say if it ramps Q1 or through the spring, but we're hopeful that those volumes do return to us in a headwind of May.

And then, one last one on margins. It looks like normal seasonality is for margins to be up 160 basis points 3Q versus 2Q, given the unexpected expense items in 2Q, should we be expecting margins to be 80 basis points ahead of normal seasonality in 3Q as those rolls off? I know there could be some other moving pieces with McKean, Willimantic. So, any puts on the sequential margin trajectory?

Yes. I would say there's two things going on that I would highlight. One is the point you made. We had a couple of "onetime items" in the second quarter that Q2 to Q3, that should help the sequential margin trend. But then, overall, kind of taking a step back, the mix of the business is shifting geographically, where as we move down the Eastern Seaboard, the business is going to have less seasonality to it. It's going to have relatively more collection relative to landfill. And then those factors will lead to a smoother quarter-to-quarter margin trend than we've seen historically. So, exactly how that plays out, it's probably hard to predict for this third quarter. It's hard for you to predict for this third quarter. But those are really the two kinds of factors as you think about it.

Thanks so much.

And the next question comes from Stephanie Moore with Jefferies. Your line is open.

Hi. Good morning. Thank you. I was hoping you could touch a bit on maybe some of the inflationary pressures that you're seeing and how that's trended as the year has progressed, you know labor trends, repair, maintenance and the likes of that as well as maybe some of the other self-help initiatives that you have in place that are helping to offset some of the cost pressures? Thanks.

Great. So, I think inflation has been a little stickier than we had predicted at the beginning of the year. And we're seeing trends, generally, flattish through the spring, not decreasing. What we're seeing inflation hang north of 5% roughly in our business. We have seen labor tail off a bit over the last year plus, and we've seen a lot of stability in our labor force and our training programs, our recruiting programs, everything we're doing to try to attract great people to our organization are helping there. And the fight for talent does seem to be a little bit lower today. But there are some areas that are really quite sticky. On the maintenance side, parts, tires, outside repairs. On the landfill side, almost everything to do with landfills, especially on the capital side we've seen heightened inflation remain into the business. As we've talked about a lot of times in the past, so, we can be nimble from a pricing standpoint as an organization. And as we look at these inflation trends through this spring, they are a little bit higher than we expected, and we're starting to course correct on certain segments of the business with our pricing programs and advancing a bit more price to the second half of the year, which we hope gets that spread a little bit stronger through the last five months of the year.

Great. Appreciate the color. And then, maybe switching to your recycling business. You have a pretty robust recycling operations. I was curious if you're contemplating any investments or potential expansions, just given the potential of maybe EPR being implemented in certain states within the Northeast? Or if you've kind of walked -- if you've kind of contemplated any changes to your recycling business, f EPR does go in effect -- does, in fact, go into effect?

So, a couple of things there. I think that from a practical standpoint, we continue to invest in the infrastructure, similar to what we did in Boston. Higher quality, more significant throughput. We're doing the same thing with our Willimantic facility, and then we'll be doing the same retrofit of our facility in Pennsylvania as well. So, we'll continue to invest in the infrastructure. As the government relations side of the business really understands what the drivers are going to be from an EPR standpoint, each state is somewhat different. There's a little bit of activity in a couple of states now and government relations will continue to stay abreast of what's going on there. And certainly, we'll be involved in trying to help shape that.

Yes. And I think from a public policy standpoint, we would like to see more recycled content. Legislation versus EPR, that there has been 30-plus years of substantial investment in recycling infrastructure across the country and Casella has invested significantly. So, setting up parallel recycling systems really don't yield a lot of benefit. We've seen that over the years in bottle bill states. You're really just creating a new tax on society versus driving additional sustainability or circularity. So, from our vantage point, I think the recycled content movement is much more exciting. It could have a very positive impact on the industry, additional investment in, really the environment, which is what we're all trying to do.

Really helpful. Makes sense. Thanks, guys.

Thank you. You're welcome.

And the next question comes from Faiza Alwy with Deutsche Bank. Your line is open.

Hi. Good morning. Thank you so much.

Good morning.

So, I wanted to ask about C&D volumes, right? You've mentioned the impact from the landfill closures. I'm curious if there is also a macro overlay, because a bunch of the other companies have been talking about soar volumes generally. So, just curious if you're seeing a macro impact there as well and if volumes were essentially in line with your expectations?

So, the Northeast is predominantly a lot -- we rely a lot less upon construction activity as a business. We don't see the big ebbs and flows when boom busts from construction. We're usually a bit more slow and steady. With all that being said, we have seen less spending on large construction projects, infrastructure projects in the Northeast. And it's probably showing up a little bit more in the special waste streams, where we see large contaminated soil projects, cleanup projects just down for the last 12 to 18 months. They can be a little bit -- timing sometimes is hard to predict, and our pipeline remains really robust where there's a number of projects out there that are funded and just waiting to start and we haven't seen initiate over the last six plus months. So there is some built-up demand there. It feels like with some of the slowing of the economy and just uncertainty in the economy, some of those projects have not started. But as I said earlier, we've consciously, over the last decade, tried to remix our business to have less construction and demolition exposure. So, we have less in our hauling business today. We have less at our landfills, our transfers. So, yes, it's been a bit of a headwind, but it's definitely not something that we're trying -- that we see as much volatility as you can in other parts of the country.

Great. Thank you. And then just on the -- you mentioned sort of efficiency initiatives, and you mentioned how you're sort of more excited about that given the M&A. So give us a sense of how quickly can you roll through those initiatives within M&A? Maybe we can imagine what the margins might be on the -- just given your guide on the sales and EBITDA on the new acquisitions, but how quickly can you implement some of those initiatives and get move on.

Normally, those synergies really come over a couple of year period of time. In a lot of cases, there are contracts in place from a disposal standpoint that have to run their course. There are other organizational agreements in place from a vendor perspective, et cetera, et cetera. So it takes -- you begin to see a bit -- obviously in the first 12 months, but it'll be a 2-year period of time for the majority of the synergies to come in.

And delays in truck deliveries are definitely weighing on our ability to get synergies at the pace we want. But we're trying to do as much as we can through some of our vendor relationships. But, say in the mid-Atlantic, we're on track with our model, with the assets we purchased, businesses from GFL last year. But we could be even a little further along if we've gotten some of our automated side load trucks, and we can start to deploy more efficiency into that market. It will come over time, and we've got great opportunities. But it'd be nice to be able to get truck deliveries a little faster.

Great. Thank you. Appreciate it.

You're welcome.

And our next question comes from Michael Feniger with Bank of America. Your line is open.

Hi, guys. Thank you for taking my questions. I know you touched on it. Do you mind just giving us a sense of where you think the leverage ends this year? And just with such an active pipeline, Ned, can you kind of talk to us about, is it more on the smaller tuck-in side, larger? Just any context there would be helpful.

Yes. So, the pipeline kind of spans many different opportunities from excellent tuck-ins, several million dollars to tens of million dollars of revenue in existing markets to additional adjacencies that will either drive the expansion of the platform or maybe even some level of vertical integration. So there's a wide mix of opportunities that we're working on. As always, we never guide to acquisitions we haven't completed yet. As we said earlier, there's a few things we're working on right now that could potentially cross later this year into next year, but it's a little early to claim success on any of them. It's always a lot of work to get to the point.

No, we just did.

Yes, we just did have too. Yes, it's good point, John. I mean that was a lot of months of work and really excellent. I think, Brad, you said pro forma, where we at leverage-wise?

Yes, we're about 2.9x pro forma. So, it's difficult to predict, obviously, where we'll be by year-end because it's going to be a function of the M&A activity. But the company has been very clear over a long period of time on how we intend to manage the balance sheet. We intend to keep leverage. It may go over a short period of time, but over time, we're going to look to keep leverage in the area of 3x or below. That remains the plan. We used some of the dry powder, certainly to close LMR and Whitetail. But, as I mentioned, we still have some dry powder available for the next deal that come up in the pipeline. So, we're in a good position to keep executing on what's in front of us.

That's helpful. And just with you guys doing these acquisitions in growth mode, I'm curious, I'm not asking for a guide on 2025, but do you feel like your CapEx intensity, is it going up as you guys kind of are building out this footprint and have projects? Just directionally, kind of wondering on that CapEx.

I think it's actually -- so setting aside -- it's Brad, setting aside the upfront CapEx that we isolate in the non-GAAP metric, setting that aside, over time, the CapEx intensity of the business actually should come down. And I alluded to this earlier, some of the changes with the shifting mix of the business. And as we're growing geographically, we're predominantly acquiring collection businesses. And so, those have much less capital intensity than the landfills. So, over time, as a -- whatever your chosen metric percentage of revenue, you'll see the CapEx trend lower.

And one of the things we try to do when we buy businesses within our business plan is execute pretty quickly as we can to get fleet upgrades, facility upgrades, other areas like that. So, it is always a little heightened. All those upgrades are always considered in our pro formas, and we try to give visibility on them as well on our financials.

Perfect. And just lastly, like the price versus cost spread, I think you talked about that 100 bps. I mean, just a kind of bigger picture, as we're going to maybe next year, is it -- do you think to maintain that? Is it -- have to push a little bit more on price because we're not seeing that cost deflation yet? Or do you see some buckets where you maintain that spread because you're looking at your cost profile and you see actually either comp-wise or the trend is that you are starting to see maybe some deflation as we start going into 2025?

Yes. So, the cost has been stable. They came down materially over the last 18 months and in the last six months, it's been stable but a little bit higher than we had budgeted. And I've said this earlier but I'll repeat it, we have a lot of flexibility from pricing fees in our book of business, and we really took a good hard look this spring, did our pricing programs match where inflation was in the business and did we need any course corrections? And we're really lucky in that regard. We're not just dependent upon CPI linked metrics and contracts. We can be very flexible and nimble. And late in the second quarter, early into the third quarter, we did course correct a little bit with some of our pricing programs for later in the year because we thought we are -- our inflation metric was slightly higher than we had expected. So, we expect that spread to actually increase a little bit into the second half of the year right now.

Perfect. Thank you.

Thank you.

[Operator Instructions] And the next question comes from Tyler Brown with Raymond James. Your line is open.

Hi. Thanks for the follow-up here. This is actually, kind of goes back to Michael's question a little bit around CapEx. And it's a little bit on the cash flow add-backs. So I totally get why you add them back, but they are cash out the door. And I mean, next year, shouldn't most of those add-backs kind of fall off, like the FLSA payment, Southbridge, McKean, the veneer failure. Maybe some of the acquisition spend stays in there, but shouldn't the quantum of those add backs start to go down?

Yes. I mean, you listed some of the add-backs. Those will not recur, certainly. I think as the company is acquisitive and continues to grow, we'll be making upfront capital expenditures that we'll continue to categorize the way we have as post-acquisition CapEx. So, where that comes out for 2025 will be a function of the acquisition activity. Where we sit today, certainly, though on that line in particular, I would expect that number to be materially lower in 2025 than it was this year. Just with GFL and the Willimantic MRF retrofit is in that number. So, it is a chunkier number certainly this year than we might expect going forward.

Yes. I'm not the brightest guy. So, what is the difference between the $46.5 million of acquisition CapEx and the $17 million of cash outlays from acquisition activities?

Oh, yes. So, a little definitional topic here. So, the CapEx for acquisitions is, just like it sounds. It's new trucks. It's the Willimantic MRF as I said. It's facilities and things like that. The cash outlays for acquisitions are the acquisition expenses, so legal, due diligence, rebranding, things like that. That's just the cash outlay associated with that P&L expense.

Okay. And then, John, on Southbridge, is there any update there? Is there any chance of a reopening of that site?

I would say no, Tyler. I think that we're in the process and have closed that site out. And I would not anticipate anything coming back at Southbridge.

Okay. Okay. Thought that was maybe an outside chance at one point. And then last thing, Ned. So, I just get asked this question quite a bit. But are you guys seeing any impact from increased, let's call it, takeaway capacity in the market via rail? I mean it sounds like rail volumes really are ramping up at some of your competitors. But then again, it sounds like a lot of those are internal tons. But I'm just curious if you're seeing any impact on the fight for tons. And it sounds like you're holding the line on price, but just any broader thoughts about that dynamic?

Yes. So, as capacity comes out of the market, it will never be linear, right? So -- I mean, everyone is looking for it in their crystal ball, trying to predict what will happen in the future. And as you're well aware, there are several sites that will absolutely close in the next several years across Northeast. And there are several sites and there is some great risk they may close. So there are a couple of competitors in the marketplace who have been ramping up rail capacity coming out of the Northeast, whether it be to Ohio or to the Southern U.S. And I would say in the recent past, that has weighed on volumes in the Northeast. Now, when you look to the next couple of years, it probably doesn't because there's a lot of risk of additional capacity coming out of the market, much of the reason why we built up McKean. But it's not affecting our pricing. It's really not greatly affecting us losing tons. MSW has been very stable at our sites. So, we haven't been growing on it either.

It's something more of a C&D. C&D impact more than MSW.

Yes. But it's definitely, as some additional capacity has come online, looking to the future, some of that waste has been moving out of the Northeast. It's taken a tiny bit of pressure off the system in the near term. But you look out over the next couple of years and there could be a lot of pressure still, depending upon which sites stay open and close.

Yes, perfect. Okay, thank you so much, guys.

Thank you.

You're welcome.

Our next question comes from Timna Tanners with Wolfe Research. Your line is now open.

Hi, good morning, and happy Friday.

Good morning, Timna.

So, wanted just a little bit more detail. You expanded on a little bit in the script, some commercial strategies regarding -- maybe it's just the normal mix improvements from shedding, but I didn't know if there was anything a little bit new there about continuing to look for better mix and holding on pricing, if that was new and incremental or just the same. And similar questions on going after the larger industrial customers, if that's new and a little bit more detail on that?

I think that, clearly, our perspective about the Mid-Atlantic is there's a significant opportunity there, Timna, to take our resource solutions group into the industrial accounts. There is nice opportunity there from a growth standpoint in terms of providing services -- waste and recycling services for some of those larger organizations that are trying to drive sustainability within their organizations. Our team is really well positioned for that, and there is significant opportunity in the Mid-Atlantic. I think, as Ned said before, some of the mix change, and Brad, is natural because of the Mid-Atlantic being more driven from a collection recycling standpoint as opposed to disposals. So, on an overall basis, we're very comfortable in the Mid-Atlantic. There's substantial amount of disposal capacity in that market. I think there's 12 facilities that are in that market currently. So, the natural mix is going to change a little bit because of that.

And you see it again this quarter, we traded price for volume in the subscription residential segment. We continue to see quality, density in our market. So the profitability margins continue to improve there. So, it's the right decision-making in that segment. But we are winning, to John's point, like in segments like institutional colleges and universities, large industrial...

Medical centers.

Medical centers, these really complex accounts that require differentiated services and really are seeking to even have kind of like a consulting approach where they have sustainability plans, circularity goals, and they're really partnering with our team to try to change some of their process and make the right investments. That's one area we win really well. We're not winning on low cost, we're winning on service.

Okay. That's helpful color. And then just a quick one to follow up on the M&A question. Are you seeing any changes in what potential targets want to -- with the price that they want and the multiple that they're looking for? Thanks again.

I don't think that there's any changes. I think that multiples have been full multiples for, I would say, the last two years. But I wouldn't characterize it as a change from where things have been. Multiples have been full for at least two years now, 1.5 years to two years. No real change there. I think that the one thing that is very interesting for us is the number of opportunities that we have is very significant. There's an awful lot of activity still, even with the growth that we've had over the last year, 1.5 years. there's still a significant amount of opportunity out there. And each time we go and look at our pipeline, it seems like the numbers don't change much in terms of the total opportunity that we're looking at.

Interesting. Okay. Thanks again.

You're welcome.

I show no further questions in the queue at this time. I would now like to turn the call back over to John Casella for closing remarks.

Thank you for joining us this morning. Hope you have a great weekend and look forward to discussing our third quarter 2024 earnings this fall. Thanks, everybody, and have a great weekend. Thank you.