Casella Waste Systems, Inc.

Thank you for standing by, and welcome to the Casella Waste System Think Q1 2021 earnings. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star then 1 on your telephone. Please be advised that today's call is being recorded. If you require additional assistance, you may press star then 0 to reach an operator. I would now like to hand the call over to Joe Fusso, Vice President of Communications. Please go ahead.

Thank you this morning for joining us 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 first 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 the call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures, to the extent they are available without unreasonable effort, are available in the appendix to our investor slide presentation, which is available in the investor section of our website at ir.cosella.com. And with that, I'll turn it over to John Casella, who will begin today's discussion.

Thanks, Joe. Good morning, everyone, and welcome to our first quarter 2021 conference call. Obviously, we're very pleased with our results and continued execution against our key strategies. We're real proud of the work that the entire team has done throughout the entire period of time with regard to the pandemic. Our management team continues to do a great job of taking care of our people. Obviously, our people are doing a great job taking care of our customers and the communities that we serve. Our performance really reflects a maintained focus and commitment by our teams on service excellence through this dynamic period. Over the past year, I've witnessed our culture strengthening even further across the organization, driving success related to both meeting the needs of our customers as well as executing against key operating metrics and goals. As expected in the quarter, we experienced lower economic activity levels compared to the first quarter of 2020, and as such, solid waste volumes declined 3.3 percent. Despite this headwind, consolidated revenues were up 3.6 percent and adjusted EBITDA improved 15.9 percent with margin expansion of 215 basis points year-over-year. At the same time, we grew adjusted free cash flow by $6.9 million year-over-year in the quarter through our strong operating performance, continued discipline, capital allocation, and working capital improvement. Although solid waste volumes were negative in the quarter, the progression from Q4 through April has been positive. The sequential trends and outlook indicate a continued recovery as part of the economic reopening across the Northeast. Some brief review of our key strategies. First, on disposal, while tonnage trends are improving, volumes were down in the first quarter. This was largely driven by lower landfill tons year over year as we experienced lower volumes from the greater New York City area into several of our sites. While we do not have collection operations in or around New York City, we do accept waste from third-party customers within its geography. As we know, the city has been one of the hardest hit areas in the country related to the pandemic and one of the slowest to reopen. That said, we have seen positive volume trends over the past several weeks related to business and construction activity levels beginning to come back online in a more robust manner. Also, as you probably know, the mayor announcement that we had yesterday, the mayor, de Blasio, announced yesterday that the city is going to reopen entirely on July 1, which is obviously going to be a positive. With the vaccine rollout and restrictions loosening, we expect to see continued improvement in volume levels throughout the year. Despite lower volumes, we have remained disciplined from a pricing perspective. We advanced 3.5 reported landfill price in the quarter. We also continue to focus on operating programs. Disposal adjusted EBITDA margin expansion improved as we flex certain variable costs in line with volumes without sacrificing safety or compliance. Overall, our disposal assets are well positioned within the capacity-constrained Northeast. Our pricing, operating, and permitting outlook remains positive. In the collection business, recent volume trends are also improving in the collection business, as we're experiencing increased commercial and roll-off service levels, closer to normal seasonal levels. Similar to disposal, sequential volume trends are on a positive trajectory. Over the last year, we have leveraged improved real-time business intelligence to better flex our variable costs, and we have continued to invest in further automation, route optimization, and technology in an effort to drive improved operating performance. We have improved collection, adjusted EBITDA margins for five consecutive quarters, and we are up 330 basis points since 2019. We've advanced collection price by 3.5% in the quarter, and as the economy continues to reopen across the Northeast, volumes improve, we will consider inflation across various categories, we will analyze further pricing opportunities over the balance of the year while continuing to enhance our operating programs. On resource solutions, if you recall, in January of last year, we combined our recycling, organics, and customer solutions businesses under resource solutions in an effort to better align cross-functional sales, operating, back office teams while strengthening our ability to attract, win, and retain profitable customers within this segment. This January, we took another step in further integrating these teams to drive increased synergies by creating processing and non-processing business unit groups within Resource Solutions. With this, we aim to drive better teamwork, improved organization across the sales team, and position our business to best meet the needs of our customers. Within processing are recycling and biosolids facilities where we receive inbound materials, process it, and produce an end product. Non-processing consists of brokerage and resource management services provided to large customers with broad sustainability needs. Resource Solutions' performance was strong in the quarter with adjusted EBITDA up $1.4 million year-over-year while expanding margins. Aside from strong financial performance, I'm proud of the work of Resource Solutions Team in regard to the recognition we received this March from Beckton Dickinson as its top global supplier and sustainability category for resource management services delivered to their manufacturing and distribution operations across North America. Finally, I would like to highlight our capital allocation and growth strategy. Our acquisition pipeline remains robust with over $400 million of addressable opportunities and annualized revenue over the top of our existing footprint in the Northeast. We are well positioned to continue to execute against our growth strategy in a disciplined manner given the strength of our balance sheet. We are focused on opportunistically putting this capital to work on deals that meet our criteria from a strategic fit and a financial return perspective. where we can drive higher levels of free cash flow and continue to grow the business. Wrapping up, we are executing well against our strategies as reflected by our continued performance in the first quarter against our 2021 plan. We expect continued strength across our solid waste and resource solutions operations and a paced reopening of the major cities across the Northeast. And with that, I'll turn it over to Ned. Thanks, John.

Revenues in the first quarter were $189.5 million, up $6.6 million, or up 3.6% year-over-year, with 2.1% of the year-over-year change driven by acquisition activity. Solid waste revenues were up 2% year-over-year, with price up 3.4%, acquisition growth of 2.9%, and volumes down 3.3%. This is actually a sequential improvement from the fourth quarter 2020 when our solid waste volumes were down 4.6% year over year. Revenues in a collection line of business were up 3.1% year over year, with price up 3.5% and volumes down 2.3%. 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 shut off services due to the COVID-19 pandemic. We experienced a very steady rebound of service levels from May 2020 through October 2020, and then we saw a slight decline of service levels in November and December as COVID waves hit the Northeast. This negative trend reversed in early 2021, and we have seen a slow but steady rebound of collection service levels year-to-date. Through late April, we have recovered roughly another 5% of the losses, and we have now recovered over 70% of the commercial and industrial collection services on a revenue basis that were reduced or suspended due to COVID. Revenues in the disposal line of business were down 2% year over year in the quarter, with landfill pricing up 3.5%, and our landfill tons down roughly 3.8% year over year. As John pointed out, much of the negative year-over-year variance is due to lower economic activity in the greater New York City area. Resource solutions revenues were up 8.1% year-over-year, mainly due to higher recycling commodity prices, partially offset by lower tipping fees. Our average Khmer revenue per ton was up 150 percent year-over-year in a quarter on substantially higher cardboard and mixed paper pricing, higher metals pricing, and higher plastics pricing. Adjusted EBITDA was 38.8 million in a quarter, up 5.3 million, or up 15.9 percent year-over-year. And our margins were 20.5 percent in a quarter, up 215 basis points year-over-year. Our solid waste adjusted EBITDA was $34.6 million in the quarter. This is up $3.9 million year-over-year with the gains driven by both collection and disposal lines of business. Our resource solutions adjusted EBITDA was $4 million in the quarter, up $1.4 million year-over-year with improvements from recycling and organics processing. While our commodity prices were up significantly year-over-year, This increase was mainly passed back to our customers through lower tipping fees or lower SRA fees. These floating fee structures effectively manage over 90% of our commodity risk today. Cost of operations in the quarter were down $1.4 million year-over-year and down 318 basis points as a percentage of revenue. Almost all cost categories improved as a percentage of revenue as our team effectively flexed costs to lower revenue levels. and continue to execute very well against key operating initiatives. General and administrative costs in the quarter were up $2.8 million year over year, with $3.6 million of the increase driven by higher bonus and equity accruals due to timing differences and higher performance this year. Given the reversal of the tax valuation allowance in fiscal 2020, We now expect the income statement tax provision of roughly 31% in fiscal 2021. However, our cash taxes will remain low at approximately $1.5 million in the year, given our net operating loss position. In the quarter, our income tax provision was $2.4 million. This is up $2.3 million from the same period in 2020, and as expected, we only paid cash taxes of $200,000 in the quarter. As of March 31st, we had $550.2 million of debt, $152.6 million of cash, and liquidity of $326.2 million. Our consolidated net leverage ratio as defined by our credit facility was 2.66 times as of March 31st, However, if we net 100% of our cash against our debt, our true net leverage was 2.11 times. We're very happy with our capital structure where it sits, and it allows us to continue to execute against our strategy to grow with investments and acquisitions. Net cash provided by operating activities was $32.1 million in the quarter, up $17.4 million year-over-year, driven by higher operating results and $11.5 million of positive changes in assets and liabilities year over year. This positive change was mainly driven by timing differences related to accounts payable and the continued great work by our accounts receivable team managing our receivables at historically low levels. Adjusted free cash flow was $11 million in the quarter, up $6.9 million year over year. We continue to invest in the planned capital expenditures at newly acquired operations during the quarter to drive operating synergies and integration. And we also continue to invest in the development of the phase six landfill expansion at the WasteUSA landfill in the quarter. We expect this expansion to be completed in 2021. We don't typically raise our guidance levels in the first quarter, given the short duration from publishing our initial guidance in February. However, given the solid execution year-to-date, combined with our increased visibility of economic trends, we did update our fiscal 2021 guidance ranges yesterday. We reaffirmed our revenue and net income guidance ranges, and we raised our ranges for adjusted EBITDA, adjusted free cash flow, and net cash provided by operating activities. The updated 2021 ranges assume a stable economic environment continuing through the remainder of the year with only a modest rebound in solid waste volumes as major cities in our markets are very slowly reopening from the pandemic, most notably New York City. The increase in adjusted EBITDA and adjusted free cash flow ranges is mainly driven by higher operating margins combined with slightly lower than planned solid waste pricing and slightly higher than planned volumes. We expect solid waste volumes to be up roughly 8% year-over-year in the second quarter and to be up roughly 1% year-over-year in the third and fourth quarters. To put this into context, last year solid waste volumes were down $41 million due to lower economic activity associated with COVID. And at the current midpoint of our guidance, We only have $10 to $12 million of volume growth in 2021. As we typically point out, the guidance does not include the impact of any acquisitions that have yet to be completed, and we do include 1.5% of revenue growth associated with acquisitions that we completed last year into the first quarter this year. And with that, I'll hand it over to Ed.

Yeah, thanks, Ed, and good morning, everyone. From an operational standpoint, we had a really strong start to the year. Usually, the first quarter is uneventful. It's the winter quarter, and seasonally, it's typically a lower revenue and margin quarter for us. But this year, our performance is notably strong. We improved margin significantly across all lines of business. As we break down the details, you will see that the improvement was primarily driven by operational efficiencies. Consolidated cost of ops as a percentage of revenue improved by over 300 basis points over Q1 last year. Our landfill results continue to reflect the fundamental improvements we started making over a year ago. By focusing on daily fill plans, leachate management, efficient soil usage, and proactive gas collection, we are staying ahead of issues that are costly to fix after the fact. We are now seeing the benefits. The effect of COVID on economic activity, particularly volumes coming out of New York City, kept volumes low in the quarter. Tonnage was down from last year's first quarter 3.8 percent, and our pricing was a little muted at 3.5 percent. But as I have pointed out in the past, landfills are high fixed-cost operations, and margins tend to struggle in lower volume. But we are continuing to bring down costs, and cost of ops is a percentage of revenue improved by over 220 basis points, and produced our best Q1 EBITDA margin contribution in over 10 years. We are seeing volumes return in April, so we're optimistic that the economy in the Northeast is starting to come back, and certain sectors like construction seem to be leading the recovery. Our collection operations, which generated a little over 50% of our Q1 revenue, had similar results. Volume was down 2.3% in the quarter versus Q1-20, but cost of ops as a percentage of revenue improved by roughly 240 basis points. We improved our key productivity metric, which is variable margin contribution per labor hour, by 15.9% over Q1 last year. The main driver of this improvement was in our residential service, where our focus has been on automation, but the roll-off and front-load lines of service also improved. In addition to our focus on automation, we added a corporate routing support function a year ago and have improved our routing efficiency. Routing efficiency is something that deteriorates slowly over time in a division and can be hard to recognize quickly at the division level. Adding the dedicated resources to continually review our routes has been a powerful driver for cost reductions. As a result of increased automation, improved routing, our pricing discipline, and other key initiatives, we have consistently improved our overall variable margin contribution per labor hour quarter after quarter ever since we adopted that metric a few years ago. Our resource solutions group produced similar margin improvements. Our volume and revenue remained flat, and like the other segments, the big savings has been on the cost side. Over time, we continued to tweak the level of automation on our processing lines, and this is coming through in labor savings, partially offset by the continuing extra cost of COVID protection to keep our workers safe. Processing volumes have been steady. year over year, and cost of ops improved by over 330 basis points in this line of business. Simply stated, we had a great quarter, and I wanted to close with a comment about our management team. As always, I am very appreciative of the extra efforts that our division managers and ops managers have made to keep our employees safe, to serve our customers through the pandemic, and also make operational improvements in their market over the past 12 months. An additional factor that is helping to make all this possible is our focus over the past three years in building the depth of our upper management, adding a senior VP of ops focused on collection activities, a VP of post-collection, the home office ops support team I mentioned earlier, and two regional ops positions. In addition, the restructuring of our resource solutions group has added structure to our operations for processing and non-processing of materials. It also helps that we have a very operationally focused HR department that is supporting our divisions and keeping us ahead of labor challenges. With these changes in place, I have confidence that our progress will continue. With that, I'd like to now turn it back to the operator to start the Q&A.

As a reminder, to ask a question, please press star then 1. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from Tyler Brown with Raymond James. Your line is open.

Good morning, Tyler. Good morning, Tyler. Okay, good. You can hear me. Hey, so thanks for the commentary on New York City and how that impacted landfill tonnage, I guess, across the broader region. But I was kind of hoping you could put a finer point on it. Just how important was the city going to sleep on the volumes over the past year? I mean, maybe I'm not appreciating it, but again, just a finer point on how important that was.

Yeah, last year, our landfill volumes were down 11%, roughly 460,000 to 480,000 tons year over year. And remarkably, about 80% of that decline was related to customers in New York City or the surrounding areas. And Historically, it's not that big of a mix, but we saw other parts of our franchise really come back. You and I have had this conversation before with us being 70% in the secondary markets. We saw some really nice economic trends and construction trends later in the year from the secondary markets, but New York City just completely lagged. That same trend came into Q1, Tyler.

Interesting. I know, Ed, you kind of alluded to it, but With the weakness in the volume, I do kind of wonder, did that have a broader impact on landfill pricing kind of late last year and into this year? And if so, if things do kind of kick back up, do you expect that to maybe re-accelerate?

Yeah. So as you know, landfills are very volume sensitive. So last year, the economy in Q1 pre-COVID was kind of booming. I mean, we had all the tons we could handle. and we pushed through some pretty heavy pricing. But once COVID hit, that slowed down a bit. And going into Q1 this year, we were short of volumes, so we weren't that aggressive on price. And now April's come, and now we're actually tracking very nicely in April. So the volumes seem to be coming back now. So it'll help us with the price level.

It actually started coming back in March, right? It was January, February. It actually really began to come back fairly significantly in March and has continued through April.

I'll make two other comments. If you look everywhere other than some of our kind of New York downstate customers, our pricing programs are very much intact and we're getting the same level of budgeted pricing increases in the business. And you're also seeing a little bit of the impacts from last year. So price is not just related to one quarter. It's a buildup of the three quarters in the current quarter. So we did do a little bit less pricing in Q2, Q3, Q4 of 2020 given COVID. And then coming into this year, many parts of the business were back on track and to Ed's point, and certain of those customers in New York were probably eased up a little bit in Q1 from what we typically would do.

Interesting, because if you look back, I think you repriced the heavy part of the collection book early in 20, like right before COVID.

That's right.

So do you think the shape of how your pricing will look, Ned? Do you actually think your collection pricing will accelerate as the year goes on, just with the mathematics of easier comps? I'm just curious. Yeah.

Yeah, so the shape of our curve every year is the first quarter is the highest pricing quarter, and then it actually declines given how our price increases roll out. And we've readdressed the shape this year. It's actually going to accelerate through the year given what we just talked about where the comps get easier year over year, and we've held back a little bit of pricing as Ed just discussed as well. So we actually will see a little different trend this year in our pricing model. But we're not losing confidence in our pricing power in the market, nor are we giving pricing concessions. It's just a different cadence of the program.

Right, yeah. No, that's helpful for modeling. Okay, and then I don't want to dwell on the guidance too much, but just to be clear, so there wasn't any change in the volume assumption in that change. I mean, there was no change in revenue. Is that right?

No, there wasn't. As I said earlier in my comments, we have price maybe – quarter at the midpoint, maybe a quarter percent lower, but we haven't lost any confidence in our pricing programs. And we have lines maybe a quarter percent higher at the midpoint internal model. So not a drastic change, but a lot's changing very, very rapidly right now. That news out of New York City yesterday is big. We're seeing some of the best trends we've seen in construction in over 10 to 15 years in the Northeast. So it's a dynamic environment. And our tweak to guidance was just that. It's a small tweak. You know, we don't typically touch guidance in the first quarter. And as we come into the second quarter, you know, we're really going to be reassessing where we are in the year. And, you know, you know us. There could be more as we get more visibility into the year and execute further.

Okay. Yeah, no, that's very helpful. And then just lastly, maybe just a quick question on M&A. So, John, I mean, you mentioned a robust pipeline. I think you said $400 million of addressable revenue out there. Just any thoughts on what we should expect this year or maybe hope to expect on the M&A front?

Yeah, I mean, I think that we're pretty excited about where we sit there with the vaccination moving forward. Things are beginning to open up a little bit more. I think that, you know, we're We're working on $80 million to $100 million of that $400 million in various stages, Tyler, and I think we'll see some activity towards the second half of the year from an acquisition standpoint.

Okay. All right, guys. Thank you so much for the time. Thank you.

Thank you.

Our next question comes from Hamza Mazzari with Jefferies. Your line is open. Thank you.

Hey, good morning. Good morning. Just on the M&A side, you know, you're working on 80 out of the 400. How long have you been working on the 80 million? And do you think that, you know, capital gains tax changes accelerates transactions for you guys, or are you not hearing that?

I think that it probably does, but it's probably only recently in the last month or two where there's been activity, discussions around the implications of a Biden tax increase, particularly as it relates to, obviously, capital gains. So I think probably six months is the answer to the first part of that question. Hamza, we've been working on those transactions for probably about six months now. probably in the last month or so, we're starting to hear a little bit of noise on tax indication.

Gotcha. And just my second question, and I'll turn it over, is just on pricing, just following up on the pricing, I understand the deceleration in Q1, but Just thoughts on what is the sustainable pricing for Casella? And what I mean by that is, you know, 2018, 4.5%. 2019, a little over 5%. During COVID last year, 4.2%. Now we're at 3% and change, but it builds up, as you said. But on a sustainable level, going forward, you know, help us get comfortable. Is 4% the right number? Is 3% the right number? Is it five? Just help us think through that a little bit. And the reason why I'm asking is, you know, we're trying to get comfortable if you've seen sort of this big catch-up on pricing, and now, you know, your normal price is three and change going forward.

Yeah, good question. That question has a couple of legs to it. And as you know, not a lot of our business is in markets with a CPI linked. I mean, it's maybe 10% to 15% of our contracts. And we've been moving that contract base to more and more of the trash and garbage index, which is now sitting north of 4%. Most of our contracts we can price at will on the subscription residential, small can commercial, roll-off line of business. and we had been pricing pretty aggressively to stay ahead of some meaningful inflation in the Northeast. If you stop to look at our margin improvements over the last year, they're excellent, very, very good. So our key operating programs are working good. We're pricing a little bit lighter than we had a few years ago, but it's partially by design, partially the cadence we talked about a minute ago. So our game plan for the year is still that 3.5% to 4.5% range. As we look out the future years, We're still looking around that 4% range. But when it really comes down to it, we're tweaking. We're looking at elasticity. We're looking at our margins. We're trying to have a constant cadence of improving margins as a business, and that weighs into the pricing strategy.

Got it. Very helpful. Thank you so much.

Thank you, Hamza.

Our next question comes from Michael Hoffman with Stiefel. Your line is open.

Hey, thank you very much. Ed, did you see normal seasonality from just overall the business pattern, and then things were recovering underneath it, and that's part of the help, and then you ran it better? Yes, absolutely.

So the normal seasonality is still there, but the COVID effect is still in that January, February period. of volume. So now we're seeing almost a totally normal seasonal uptick March and April.

Got it. Okay. And then, Ned, just to refine the point of, so you're sticking with the ranges 1 to 2.5 or volume 3.5 to 4.5, but you're now suggesting to all of us we ought to settle in around a 1.9 or 2 as your full year number for volume and a 3.5 to 3.7 for the price. Did I hear that message incorrect?

That's where we are in our model at this moment, Michael, and we'll look to update again next quarter. But we probably are shy lighter on price given that we held back a little bit of pricing in Q1 just with some of those New York City impacts. and we're seeing a little bit higher volumes. But there's not a massive change there to the cadence for the year. And as I talked about earlier, we only really have about $10 million of the solid waste volumes coming back this year that we lost last year of the $40 million. So, you know, the projection's not for absolute recovery. It's for a partial recovery.

So... But digging into that $10 million, is the unit price of that $10 million flat year over year?

No.

It's up or down? It's up. It's up. Okay. So you're getting some of that $10 million recovery as the price as opposed to, if I looked at it on the tons, I'm not 25% of the tons back yet, something less plus price.

Yeah, if you look at it, I mean, the biggest laggard in the portfolio is on the landfill tonnage side. We're running at, let's say, 93% of expected run rate. We're running close to 100% of expected run rate on the temporary roll-off side, and we're running about 95% to 96% expected run rate on commercial. So, you know, that's definitely the laggard. And as Ed pointed out, there's a lot of leverage on the landfill side to margins as well.

Great. So of the 460,000 to 480,000, the 80% that's New York, is more of that a high-value ton like an MSW than a C&D ton that might not be as high value?

Yeah, it's about two-thirds, one-thirds, two-thirds MSW, one-third C&D, Michael, in the mix. And we saw, you know, as you know, we have both commercial customers out of the city that are bringing us MSWs. and we have commercial customers bringing out C and D, the residential waste in the city goes through the Department of Sanitation contracts.

John Aucott Right. So, points of leverage here are the governor doesn't prevent the mayor from opening on July 1st because there's . Well, he's got to distract the attention from something, right? Anyway, so let's say it happens. The MSW is a buyer quality ton that starts to ramp back up, and that gives you some incremental pricing leverage. That helps the spot market, and therefore that's the reversion of the mean higher is the leverage. Is that the way to think about it? Okay. Okay. And, you know, you run your business appropriately, and when it happens you're going to be able to capture this leverage because of the way you've got the cost structure leaned out is the other part of it.

Yes, absolutely. Absolutely.

Okay. On the M&A world, if capital gains ends up being a driver of someone's decision, how late can they make the decision, or they word it the other way, when do you have to start a process so if the calendar year was the trigger, you could get deals done relative to a tax motivation? How late does somebody have to say, buy me?

I think it certainly depends on the size of the business, Michael. Obviously, the larger the business, the more time it's going to take to get through that, especially if you have to go through Hart-Scott, et cetera, et cetera. But I think that we're only beginning to see people think about it in the last 30 to 45 days, where prior to that, it wasn't really on the radar. But I do think that there's... More activity now. People are starting to think about it. So the timing is going to be, you know, really based on the size of the business. Smaller businesses, you know, I think much shorter period of time to get through due diligence and get it done properly.

And type of transaction as well. An asset purchase is typically a lot simpler and faster for us than the stock purchase.

Yeah. Okay, last one for me. We hosted... the CEO of wind waste on a call recently and asked the question about where he thought 2024 Boston disposal could end up. And he suggested a sort of 110 to 120 range versus the low 90s that it was renewed in 2019. How much of the 4% long term pricing is dependent on that happening where the knock on consequence all the way through the market is that helps lift the pricing versus just what you're doing today?

Yeah, I think if you look at the marketplace, there's some pretty key facilities that are tracking towards closing in the next handful of years, Michael, as you're aware, like Brookhaven on Long Island. We've got the Allied Niagara facility up in the Buffalo market. the Albany landfill. We also have Mira, the burn plant in Connecticut, scheduled to close in June of 2022. So there's like two and a half to three million tons of capacity coming out of this market. And you might be off a year or so either way. You kind of stretch to end of life. But there's a lot of capacity coming out of this market. There's not enough places to put all that garbage. So The pricing is not dependent upon the city of Austin. The pricing is just going to be a supply, demand, and balance and where that waste needs to go. And there's a lot of opportunity, I think, as we look over the next five years.

Okay. And then last one, I forgot to ask this. McKean, what's the progress on this sort of thinking out over the next two years, being able to open up that rail haul opportunity? How are you doing on that?

We're in the process right now of the team is – is working on the permits, we're working on design. So I think that we're on track to move that forward in the next couple of years, Michael. As you know, we've got some of the permits already in place. We need some additional permits. We've got to get fully designed to the most productive design from a rail perspective. So moving forward, and certainly we think that we're on track right now.

Okay, great. Thank you very much.

You're welcome. Thank you, Michael. Thank you.

Our next question comes from Sean Eastman with KeyBank. Your line is open.

Good morning, Sean. Good morning, Sean. Good morning, Sean. Morning. Morning. Strong start to the year. Thanks for taking my questions. Absolutely. I just wanted to go back to Hamza's question on sort of the sustainable yields in the business. I mean, it's really... you know, more a function of the underlying inflation in the business, right? I mean, when we hear companies sort of sounding the alarm bell on inflation and, you know, labor, you know, you guys can be nimble around that given the disposal capacity dynamic and given that only 10 to 15% of the book is indexed to CPI.

Is that right? Yeah. Yeah, you're 100% right. I mean, you're pointing out something super important where we're not reliant upon trailing government-driven statistics like CPI and urban CPI and whatnot to drive our ability to recover inflation. As you've seen over the years, in 90% of our collection book of business, we can price either per contract or at will, and we have a lot of ability to move rapidly. Now, you don't want to try and catch up to inflation. You want to try and be ahead of it. We're very cognizant that the economy is heating up quickly. The government's put a lot of money into the economy. And, you know, labor markets shifted rapidly again to be tight. So we are cognizant of those factors. And as I said earlier, you know, our game plan with price really is to expand margins. And, you know, we're constantly moving that lever to get to the right point.

And we're doing that on an immediate basis from a labor perspective. Each time that we've had to go in and rethink our competitiveness from a wage rate standpoint in each market, we're obviously calculating what that's going to cost and going back and pricing that on an immediate basis.

Okay, got it. That's very helpful. And then, you know, the outlook for 2021, you know, prudently changed. you know, builds in a partial recovery. Can you help at all with just how to think about, you know, what sort of the incremental margin on a full recovery would look like, you know, given, you know, the operating efficiencies and, you know, other moving parts? I just wanted to check back in on that.

Yeah, so we lost $40 million of revenues last year due to COVID. About half of it was in the collection line of business. Half of it was at the landfill. And as we're coming back this year, in the model, Jason, more of the 10 coming back is in collection than at the landfill. Do you know what that split is? I think it's like 60-40 or maybe even a little more. And we look at that. I think we're getting all the landfill tons back. As soon as the economy comes back, we have such tightness with sites closing, that's all coming back. On the collection side of the business, maybe some of these customers never come back. I mean, certain businesses, certain industries, but they'll be replaced by other things. And our COVID tracking is not perfect in that way because we're looking at specific customers, specific services, and are they coming back online? So I think on the landfill side, that $20 million of revenue, when that comes back in, that's coming back in with greater than 50% incremental margins. It's just a lot of value there. And on the hauling side of business, I would suspect not all of it ever comes back. But what we have seen coming back in comes back in the 30-plus percent incremental, 35% incremental margin type range. On the flip side, you've got to be a little bit cautious because we're running all-time low on overtime for labor. The labor markets are so tight that we'll have to bring more labor online. We've also been a little bit cheaper on trucking in certain instances, fuel. There are some things that have been positive in there. I think ourselves and others in the industry, we're all being a little bit cautious because we've never seen a recovery like this and You know, until we see more water under the bridge, it's hard to fully estimate where that will shake out. But Q1 was a good arbiter with margins up 215 basis points year over year.

And then to your point, if I could just add one thing to that comment, yes, with the margins up 215 basis points year over year in the first quarter, excellent. As you look out through the rest of the year, as volume comes back in, all to Ned's point, our guidance implies margins are up roughly 20 to 50 basis points over the rest of the year, year over year. So perhaps a little bit muted, but to Ned's point, a little bit of cautiousness there just on our behalf as volumes come back into the system and as levels tick back up.

Okay. Again, really helpful. And then you guys have talked about this sort of 100 million – of acquisition revenues kind of in advanced stages. What's the makeup of that in terms of how many companies are in there, the sort of general size? And given the comments on activity heating up on the M&A front and how things are shaping up, do you think it's likely that we see greater than that $20 to $40 million acquisition revenue target closed in 2021?

Yeah, I think it's fair to say, Sean, that it's likely that we'll be at the high end or above our target from an acquisition standpoint at the $40 million, yes.

And on the mix of businesses, you'll continue to see us focusing on a lot of smaller companies. Generally, there's a lot of good talking opportunities, a lot of good adjacent markets, and that's where primarily our focus is in the marketplace, and we've done very well.

Okay, terrific. I'll turn it over. Thanks so much. Thanks, John.

Our next question comes from Alexander Leach with Barenberg Capital Markets. Your line is open.

Good morning, Alex. Good morning. So most of my questions were off that, but just a quick one from me. I know you referred to this in your prepared remarks, but can we get an update on the automation of your fleet? I believe you were around 40% to 45% of resi last year at the end of Q4, and you were planning to make some significant progress on that in Q1. So where are you guys at now, and how much more room is left for improvement there?

So a big mover in that automation is on the resi side, and it's in Rochester. So we had a significant... We had phase one of a two-phase process happen in the fall of last year, and now we're going to phase two right now. It's in process. The equipment's been delivered, and we're training drivers, and we're implementing a reroute around the new automation there. So that's going to drive our automation level over 50%, just on ballpark figures.

Sure. Okay, so... you're still around that 40% to 45% level, and then it should be pushed over to 50% over the next few months.

Yeah, it'll bump up probably by Q2, right? And we have a whole automation initiative, so we're reviewing all of our other operations right now and identifying automation opportunities.

And the automation opportunities, Ed, are also combined with the new rollout of our routing software, EasyRoute. Right. So it's kind of in tandem. We've got a whole new dynamic routing optimization package, and then the team is also looking to automate trucks. We're using that to reroute and gain efficiencies. Right. Okay, great.

And sorry to go back to the volumes guidance again, but just to make sure I've got this right in my head, the NYC reopening, is that captured within the top end of the range, or is there upside there?

There's definitely upside. We really haven't assumed a large economic rebound from New York City or any other major areas in the model. As we talked about, even at the upside of the range, Jason, we're only coming back in how many million dollars combined, do you know? We'll have to calculate that, but it's not a lot more. It's, you know, $5 million more or something. It's not all in there. Okay, great. Thanks. You're welcome. Thank you.

Our next question comes from Tyler Brown with Raymond James. Your line is open.

Hey, thanks for the quick follow-up. Question on Hyland. So I think last November you got the referendum to expand that from 460,000 to a million tons. So number one, I'm just curious how that ramp has gone, if at all. And then this is a really big picture question, but two, strategically, just how important is that expansion to the entire future of your Western theater?

I think it's very important. You know, so... We're in permitting now. The process is moving along very nicely. As you know, Tyler, probably the biggest win, obviously, is getting through the referendum with the community, which went really well. Hats off to the team. They just did an outstanding job. So that facility is going to be very significant, moving from 470,000 to just around a million tons a year. it's going to have a significant presence in our New York disposal capacity over the next decade for sure, no question about it. There's a lot of uncertainty in terms of some of the facilities that are in place, whether they're going to continue or not, and that will also impact it. Ned talked about Brookhaven. He talked about the incinerator shutting down in Buffalo. So, you know, there's a lot of capacity that's coming out of the New York market. So that facility will be, you know, a big part of our capacity on a go-forward basis.

Okay, but the full expansion hasn't been gotten. So the permit hasn't been actually released to you. No, not at all.

So we don't have any of that benefit in our numbers at this point in time.

And it's probably several years now, John.

Oh, it's several years. Okay. Okay.

Okay. Several years.

At least a year. At least a year out. But maybe two. Got in the nose. Okay.

I get where you're going with that. Okay. I get that. We'll move on from that. And then, Ed or whoever, I may butcher this a little bit, but I'm just curious, how much –

on average is transportation as a percentage of the landed cost into the landfill on average big picture generally speaking in the northeast oh man it depends it depends depends on where you are but yeah i mean a transfer station it might be 40 and depending on what the transportation lane is at 35 of the tipping fee at that transfer station but it kind of depends

Because how far you're going.

Exactly.

Yeah. I mean, yeah, obviously. But anyway, I was just kind of looking for a broad average.

I mean, obviously, the further away, the higher the percentage. And I think the percentage can get, you know, much higher than 40%, depending upon how far you're, you know, traveling. You know, in some cases, you could have $60, $65, $70 a ton in just trans.

I mean, it's obviously a very tight transportation market. You know, I obviously know this way too well. So I'm just curious, I mean, does that piece, is it really moving, that subcontractor piece, if you will?

It doesn't move kind of linearly because everything we do is either contracted or on our own long-haul trucks. So we do subcontract quite a bit of that out. But you're typically moving under three- to five-year contracts because you There's a lot of equipment involved. So there aren't any big resets we've had recently that impacted, but it is something we pay attention to.

Okay. All right, guys. Thanks for the time. Good. Thanks, Tyler. Thanks, Tyler.

There are no further questions. I'd like to turn the call back over to John Casella for any closing remarks.

Thank you, Operator. And thanks for joining us this morning. We look forward to discussing our second quarter 2021 earnings discussion with you in late July. Thanks, everybody. Have a great day.

Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone, have a great day.