WasteExpo 2013: A Q&A with Casella Waste

Waste Age: How is the restructuring that you’ve undertaken going?

John Casella, chairman and CEO: About the time the capital markets collapsed, the economy collapsed, and the commodity markets collapsed. In the middle of that mess we lost (unintelligible; some of the benefits?) in our credit facility. We were able to get refinanced, but we got refinanced, and we lost $20 million in cash flow, because we went 11 percent money instead of 4 or 5. And consequently we worked to sell the recycling assets outside the northeast that were not fully integrated.

So we sold those assets, we got a very handsome multiple on that, paid down a significant portion of the debt, and started to take back a portion of the free cash flow that we lost. We took back at that point in time we went out and refinanced and took back about $11 million of the $20 million in free cash that we lost. This past year we took out the rest of the second lien notes that we had in place and completely redid the credit facility and took back the other $10 million in free cash that we had lost.

At the same time, we were doing everything that we needed to do from a strategic standpoint. From an operating perspective, we weren’t … we were falling behind. Operations weren’t going well, and operationally, we really needed to make a change. I made that change in December, put Ed (chief operating officer Ed Johnson) in that role, put Ned (Coletta) in the CFO role, and so, from an operating perspective, we’re getting back to our roots. Where decision making is really a local decision, and that’s where the decision making really needs to be. And so, we’re really in a position now, we’ve got 25-30 years of disposal capacity in a market where there’s tremendous exports out of the Northeast every year. And we’re in a position to capture the tons that we need back to our landfills.

From an operating standpoint bringing operational efficiency back and bringing local control back to the operating folks. And I think, clearly our view anyway, makes much more sense for us to execute the strategy and create the value with the asset base that we have, rather than looking at any other options at this point.

WA: You spoke about the need for more waste tonnage?

Coletta: It’s more a matter of western New York where our financial pain as a company has been the last two years. Our western New York landfills are running below capacity today. They were running at 85 percent capacity utilized two years ago and now they’re running 60-65 percent capacity. Landfills have very high fixed costs – the last ton in the gate has a lot of margins – and that decline has weighed heavily on our financial results. For us the clearest way to rebound our financial results and get back on track is attracting more tons to those sites.

Johnson: That’s a real needle mover, getting tons back to those western landfills. So we’re following two different approaches. One is structural, where we put in place a new special waste team. The team consists of two people that were brought in on the technical side, they’re used to working with the DEP and DEC where they can get special waste permitted into the landfill fairly quickly, also file all the paperwork and make it a very professional process for the customer so they know their waste is properly treated.

The other side is the sales side, which is about relationship building and bringing professionalism to the bigger customers that produce that waste. And develop relationships with the remediation companies, the engineering companies, as well as industrial producers. That’s on the structural side. On the real strategic side, if you look at the western landfills, there’s too much capacity in that market. You have to be very careful when pulling tonnage from a competitor, that they’re going to respond.

And then you have a price situation. And so our approach is to bring waste from farther away and not upset the immediate market. And to do that, it’s all a transportation and disposal price that you’re dealing with. So we’re looking at the East Coast, we’ve brought in some people that have connections in the East Coast but also that have rail experience so we can lower the transportation costs. We’re executing that strategy very cautiously to make sure we find out what we don’t know about rail, but we’re moving pretty steadily along.

WA: What potential pitfalls do you think might be there with rail?

Johnson: Hidden costs. That’s what we’re concerned about. On paper it looks highly profitable for us. There’s just so many pieces to it. Loading the material onto rail in the East, paying the rail tariff, unloading the material, then draying (?) it to your landfill, or in the case of McKean, unloading it from the track.

WA: How does the Juniper Ridge landfill fit into your plans?

Casella: Juniper is an important facility, but from an overall standpoint, we think we’re going to be successful there over the long term. Whether we’re successful this go-around or not, it’s pretty evident that Maine’s going to need disposal capacity. And the other facilty, the PERC (check an archived story on this acronym) that will be coming off of a long term contract in 2018 they’re obviously going to see the same things that we saw at Maine Energy, they’ll have the same issues that we had there when that contract goes away.

We think that ultimately we’ll be successful in Juniper. When we executed the strategy, the successes we had strategically, we had to sell Maine Energy – we got it sold. We’re in the process of taking it down. We had to get the transfer station up to be able to take the waste that was going to Maine Energy through the Westbrook transfer station to get it to our other facilities. We’re able to get North Country’s litigation put behind us after 20 years of litigating that facility with the community. And so we have waste going to the North Country facility as well as the Southbridge facility. Really, it’s our view that Juniper is going to be successful on a long-term basis, whether or not we get success with the permit mod we’re seeking now, ultimately, Maine’s going to need the capacity.

WA: How big a benefit was selling Maine Energy?

Casella: Being able to sell the facility, it was obviously a net negative for us. It’s a real positive for us, it’s a real positive for the community because they can redevelop that whole area, so it’s really a win-win for both Casella and the community. It’s a capital intensive business, there’s a lot of capital that has to go into those facilities on an annual basis – obviously that’s a real positive for us from a free cash flow standpoint.

WA: You’ve said being a regional hauler you don’t have other parts of the country to balance out a region when it’s down – has that been a big part of the difficulties for Casella?

Casella: Yeah, I think it’s fair to say that the Northeast economy seems to be lagging the rest of the country; there are other parts of the country that are doing better. If you had a national footprint obviously you’d have that benefit. Clearly, that’s one of many factors of having a regional business; as that economy goes, so does the company. Fortunately though, I think for us and I think for the Northeast I think we’ve hit bottom. Things have begun to stabilize and in the right direction.

WA: Any last thoughts?

Casella: I think the challenges of the last three or four years are behind us at this point in time. I think we have the right people in the right spots, we know what we need to do in terms of profitability, what we need to do relative to tons in the landfill. We’ve got a four-pronged approach in terms of tons to the landfill, in terms of special waste for remediation companies, engineering companies, the rail piece – all of that is out in front of us, and we’re looking forward to executing that strategy and creating a significant amount of value.