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Recycling Headwinds Abound, but Casella Sees Growth in Q2 2018
Despite the deterioration of recycling commodity prices from the first quarter, Casella reaffirms its adjusted EBITDA and normalized free cash flow guidance ranges for the fiscal year.
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Rutland, Vt.-based Casella Waste Systems, Inc. reports that despite recycling headwinds, its revenues were $165.6 million for the second quarter, up $11.6 million, or 7.6 percent, from the same period in 2017.
According to the company, revenue growth was mainly driven by robust collection and disposal pricing; higher solid waste volumes; higher organics and customer solutions volumes; and the roll-over impact from acquisitions, which was partially offset by lower recycling commodity prices and volumes.
“We had another strong operational quarter, as we continued to execute well against our key strategies as part of our 2021 plan,” said John W. Casella, chairman and CEO of Casella Waste Systems, in a statement. “We remain focused on driving normalized free cash flow growth by increasing landfill returns, improving collection profitability, creating incremental value through resource solutions, using technology to drive profitable growth and efficiencies and allocating capital to balance delivering with strategic growth.”
However, Casella reports its recycling business continued to face headwinds as commodity pricing for recycled paper and cardboard declined further in the second quarter. The company’s average commodity revenue per ton was down roughly 55 percent year-over-year in the quarter and down roughly 12 percent sequentially from the first quarter to the second quarter.
“Commodity prices have stabilized in June and into July, and we are pleased that our trailing SRA fee is now fully recovering higher recycling costs in our hauling operations, albeit the program is designed to recover costs and as a result has pressured margins,” said Casella in a statement.
“However, we are still absorbing all of the commodity pricing risk on several legacy third-party processing contracts at our recycling facilities, and our variable costs have increased as we have had to slow processing lines to improve quality while incurring higher transportation costs to deliver commodities to new markets,” he added. “Looking forward to 2019, we expect recycling to provide a positive tailwind, even if commodity prices stay at historically low levels as several third-party recycling processing contracts will reset over the next 12 months.”
Other second quarter and year-to-date highlights include:
Overall solid waste pricing for the quarter was up 4.3 percent, driven by strong collection pricing, up 4.9 percent, and robust landfill pricing, up 4.1 percent, from the same period in 2017.
Net income was $1.7 million for the quarter, or $0.04 per diluted common share for the quarter, an increase in net income of $55.4 million, as compared to net loss of $53.7 million, or $1.28 per diluted common share, for the same period in 2017.
Adjusted net income was $9.6 million, or adjusted diluted earnings per common share of $0.22 for the quarter, as compared to adjusted net income of $10.8 million, or adjusted diluted earnings per common share of $0.25, for the same period in 2017.
Adjusted EBITDA was $37.1 million for the quarter, up $1 million, or 2.8 percent, from the same period in 2017, with growth mainly driven by improved performance in the company's collection and disposal lines of business, partially offset by a decline in the recycling business.
Net cash provided by operating activities was $48.1 million year-to-date, up $8.1 million, or 20.2 percent, from the same period in 2017.
Normalized free cash flow was $16.1 million year-to-date, up $2.7 million, or 19.8 percent, from the same period in 2017.
As part of the company’s long-term, strategic 2021 plan, during the second quarter, Casella increased its average landfill price per ton by 6.7 percent and increased landfill tons volume by 3.6 percent year over year. “Expanding permitted landfill capacity is an ongoing challenge for all solid waste operators in the Northeast,” said Casella on a call with investors. “The Northeast has one of the toughest regulatory and political environments in the country. The good news is most of our landfills have over 15 years of permitted capacity, and we continue to make progress advancing key permitting activities.”
Also, part of the company’s 2021 plan is driving further activity in its hauling business, and acquisitions are and will be a key ingredient to drive high free cash flow growth and additional shareholder value, Casella explained.
“We continue to advance profitable growth in our customer solutions and organic businesses while the recycling business remains a large headwind,” noted Casella during a call with investors. “Our average commodity per revenue ton is down 55 percent year-over-year and down 12 percent sequentially from the first quarter to the second quarter. If these revenue headwinds weren’t enough, we have seen our variable costs increase by almost 25 percent as we have had to slow processing lines to improve quality, while incurring higher transportation costs to deliver commodities to new markets.”
The company acquired approximately $19 million of annualized revenues year-to-date and is on track to exceed its target range for 2018 given its near-term pipeline.
The second quarter included: a $0.2 million Southbridge Landfill closure charge primarily related to ongoing legal expenses; $0.3 million of expense from acquisition activities and other items; and a $7.4 million loss on debt extinguishment primarily related to the refinancing of a senior secured credit facility. The same period in 2017 included a $64.1 million Southbridge landfill closure charge associated with the company’s decision to cease operations at the site by December 31, 2018.
Operating income was $15.1 million for the quarter, as compared to operating loss of $47.3 million for the same period in 2017. Adjusted operating income was $15.7 million for the quarter, down $1.2 million from the same period in 2017.
Operating income was $16.0 million year-to-date, as compared to operating loss of $40.7 million for the same period in 2017. Adjusted operating income was $20.5 million year-to-date, down $2.9 million from the same period in 2017. Adjusted EBITDA was $61.7 million year-to-date, up $2.5 million from the same period in 2017.
“Our solid waste, customer solutions and organics operations all continued to outperform budget in the second quarter, and we expect this outperformance to continue through the remainder of the year,” said Casella in a statement. “Despite the further deterioration of recycling commodity prices from the first quarter, and our expectation that commodity prices stay flat at the current historically low levels for the remainder of 2018, we have reaffirmed our adjusted EBITDA and normalized free cash flow guidance ranges for the fiscal year ending December 31, 2018. We have increased our revenue guidance range for the year given our higher cost recovery fees, including our SRA and Energy & Environmental fees, and higher organics volumes on a new transportation and disposal contract.”
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