Sign in

    Casella Waste Systems Inc (CWST)

    Q2 2024 Earnings Summary

    Reported on Mar 11, 2025 (After Market Close)
    Pre-Earnings Price$105.46Last close (Aug 2, 2024)
    Post-Earnings Price$105.46Last close (Aug 2, 2024)
    Price Change
    $0.00(0.00%)

    What went well

    • Casella Waste Systems has a strong M&A pipeline, with recent acquisitions expected to contribute over $115 million in annual revenue. The company continues to see significant opportunities in strategic areas across their 10-state footprint . They plan to improve margins of acquired businesses from around 20% pre-synergy as they implement operating strategies and realize synergies over time.
    • Strength in the commercial collection segment is evident, with volume increases and strong pricing. The company is winning new business with higher-end, higher-profile customers such as institutional colleges, universities, large industrial firms, and medical centers that require differentiated services.
    • Despite inflationary pressures remaining north of 5% , Casella is effectively managing costs through nimble pricing strategies, advancing more price in the second half of the year to maintain the price/cost spread. They also report stability in the labor force, with turnover decreasing, supporting operational efficiency.

    What went wrong

    • Casella Waste Systems is experiencing higher-than-expected inflationary pressures, particularly in maintenance costs (parts, tires, outside repairs) and landfill capital expenses, with inflation remaining north of 5%. This persistent inflation could pressure margins if the company is unable to fully offset these costs through price increases.
    • The company's increase in EBITDA guidance is almost entirely due to acquisitions, with little contribution from organic growth. This reliance on acquisitions for growth may raise concerns about the sustainability of earnings growth if acquisition opportunities diminish.
    • Margins in acquired businesses are lower than in the core operations, with pre-synergy margins at around 20%, compared to the base business margins of approximately 25%. This could dilute overall margins in the short term and may take time to improve, posing a risk to near-term profitability.

    Q&A Summary

    1. Acquisition Impact on Guidance
      Q: Is the $10 million EBITDA guidance increase all from acquisitions?
      A: Yes, the $10 million increase in EBITDA guidance is entirely attributable to acquisitions. The company is on track with prior guidance before the acquisitions, which are expected to contribute less than six months' earnings, with one deal closing on July 1 and another on August 1.

    2. Revenue from M&A Activities
      Q: How much revenue will M&A contribute in '24 and '25?
      A: The recent acquisitions are expected to add $115 million of annual revenue. The guidance increase includes $40 million for this year, reflecting the acquisitions' impact. The rollover into 2025 would be the difference between the annual revenue and this year's contribution.

    3. Margins on Acquired Businesses
      Q: What are margins on new acquisitions, and will they improve?
      A: The acquired businesses have initial EBITDA margins of approximately 20%. The company plans to enhance these margins over time through operational strategies and synergies where possible.

    4. Inflation and Pricing Strategies
      Q: How are inflation and cost pressures affecting you?
      A: Inflation has been stickier than expected, remaining north of 5%. While labor pressures have eased slightly, costs for maintenance, parts, and repairs remain high. The company is adjusting its pricing programs in the second half to match these inflation trends and aims to increase the price/cost spread ,.

    5. Capital Expenditures and CapEx Intensity
      Q: Is CapEx intensity increasing due to growth and acquisitions?
      A: Over time, CapEx intensity is expected to decrease, as growth is driven by acquiring collection businesses, which are less capital-intensive than landfills. Capital expenditures as a percentage of revenue should trend lower.

    6. Leverage and Balance Sheet
      Q: Where will leverage be by year-end with active M&A?
      A: Pro forma leverage stands at approximately 2.9x. The company intends to keep leverage around 3x or below over time, even as it continues to pursue acquisition opportunities.

    7. Tax Rate and NOLs
      Q: How will NOLs affect taxes in 2025?
      A: The company will use up its pre-2017 NOLs this year and start using post-2017 NOLs next year, which shield 80% of federal cash tax. As a result, federal cash taxes will increase slightly in 2025 but remain low, with NOLs providing shielding for several years. The book tax rate should decrease from 35% this year toward the statutory rate of 27%.

    8. Recycling Business and EPR Legislation
      Q: Are you investing in recycling ahead of potential EPR laws?
      A: The company continues to invest in recycling infrastructure, upgrading facilities like Willimantic and those in Pennsylvania. Regarding Extended Producer Responsibility (EPR), they prefer to see recycled content legislation instead, as it could have a more positive environmental impact without creating parallel recycling systems.

    9. Commercial Collection Strength
      Q: Is the commercial collection business still strong?
      A: Yes, the commercial side is performing well, with volume increases and strong pricing. It's considered the brightest spot in the collection business, differentiating through high-quality service and attracting higher-profile customers.

    10. Impact of Rail Capacity on Waste Flows
      Q: Is increased rail capacity affecting your waste volumes?
      A: While some competitors are ramping up rail capacity, it's not significantly affecting the company's pricing or waste volumes. Municipal Solid Waste (MSW) volumes remain stable, although there has been some impact on Construction and Demolition (C&D) waste.

    Related Publications