Casella Waste Systems Inc (CWST) 2020 Q3 法說會逐字稿

Thank you for joining us this morning 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 Director of Finance.

Today, we will be discussing our 2020 third 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.

Of course, you'll be shocked to hear that 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 view 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 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 available in the appendix to our investor slide presentation, which is available in the Investors section of our website at ir.casella.com.

And with that, I'll turn it over to John Casella, who'll begin today's discussion.

Thanks, Joe. Good morning, everyone, and welcome to our third quarter 2020 conference call. I would like to start today's call by again acknowledging and thanking our workforce, particularly the dedicated men and women of our front lines. Their hard work and commitment through these unprecedented times has enabled us to continue to safely provide our social and central environmental services to our customers as well as the communities that we serve. Safety is paramount. We remain highly focused on ensuring the well-being of our workforce and observant as it relates to CDC guidelines and state orders.

Our mitigation measures and our communications have been well organized and deliberate. We have adequately equipped our teams with PPE, and we've implemented effective standards related to social distancing, contract (sic) [contact tracing], disinfecting procedures, nonessential travel and in-person meetings, work from home and business continuity. Through this, we have limited the number of cases across the organization as well as minimized business interruption.

Moving on to the quarter. As expected, solid waste volumes were again down year-over-year due to COVID. Despite the lower volumes, coupled with COVID related expenses, we improved adjusted EBITDA by 5.9% year-over-year, while expanding margins. We also improved adjusted free cash flow in the quarter, while further driving down our consolidated net leverage ratio. Overall, we continue to execute well against our strategic initiatives despite headwinds related to COVID. The proactive response, our sales, customer service, operational teams benefited our performance in the quarter. We continue to meet our customers' service interval and sustainability needs while effectively scaling variable costs.

We are executing our pricing programs, and we continue to opportunistically grow the business in a disciplined manner through acquisitions. Notably, as announced last week, we recently completed an equity offering with gross proceeds of $151 million before underwriting discounts and expenses. This transaction positions us well for further acquisition opportunities and execution against our growth strategy.

Next, I'll highlight the recent performance of our operations, as well as our continued execution against our key strategies. From a disposal perspective, volumes were down in the quarter, again due to COVID. This represents a sequential improvement from the second quarter, and we continue to see volumes slowly meter back online. In fact, September, landfill tons were down less than 3% year-over-year. That said, we expect modestly negative to stable volumes through the remainder of the year. With landfill tonnages expected to be slightly down year-over-year in the fourth quarter.

Although we are experiencing headwinds related to lower disposal volumes, we've been able to partially offset the negative impact through our positive pricing programs and our focus on flexing variable costs across our operations without sacrificing our safety and compliance standards.

On October 9, we received an important permit modification from the New Hampshire DES for our North Country Landfill. The permit modification increased the site's disposal capacity by 1.2 million cubic yards, which will provide approximately 6 years of additional capacity. We are pleased with this outcome, and we look forward to our ability to continue to provide resource management services to the more than 50,000 commercial and residential customers in over 150 communities that we service in New Hampshire.

Now to the collection business. As expected, volumes were down in the quarter year-over-year with lower activity levels across certain commercial and institutional customers, again, due to COVID's effect on the economy. Collection volumes were down 6% year-over-year in the third quarter compared to down 10% year-over-year in the second quarter. So similar to disposal volumes, we experienced positive sequential activity level trends in the collection business through the third quarter. Despite our volume headwind, collection adjusted EBITDA and margin improved year-over-year in the quarter as a result of our pricing programs, rollover effect of acquisitions and our operational initiatives, including our heightened focus on rightsizing variable costs to the service levels.

System enhancements over the last year have improved our ability to analyze and respond to these key trends in operational metrics in a more responsive and intelligent manner. This visibility in response coupled with proactive effort related to our customer service needs enabled us to scale our operations in a meaningful manner, driving out costs of the business to better align with the lower volumes, again, that we're experiencing because of COVID.

Moving on to Resource Solutions. This segment is comprised of our recycling, organics and customer solutions businesses. In January, these operations were combined as part of our strategy to drive further value and cohesiveness from our sales force and back office teams. The focus remains on enabling our customers to meet their sustainability needs through our service offerings, expertise and resources.

Resource Solutions' performance was again strong in the quarter, in particular, our recycling operations executed very well, improving adjusted EBITDA and margins year-over-year. The team has been diligent from a safety perspective along the processing lines, while at the same time, is focused on achieving operational goals and continuing to improve the business. Our tipping fee and SRA fee programs are nimble and are effectively passing recycling commodity risk back to our customers.

Our Customer Solutions and Organic businesses have performed well year-to-date, with a combined year-over-year adjusted EBITDA growth even while experiencing the lower activities related to COVID.

Lastly, I would like to highlight our capital allocation and growth strategy. We continue to execute well here through October. We've completed 9 acquisitions thus far in 2020 with approximately $21 million of annualized revenue. In the quarter, we completed 2 tuck-in acquisitions. On October 1, we closed 3 more acquisitions, 2 of which were tuck-ins and the other, Pinto Trucking Service in the Greater Buffalo market. It's a nice strategic fit with our Western New York operations and provides an opportunity to expand our presence in that market as well as build additional vertical integration.

Overall, our pipeline remains robust. Our teams and the balance sheet are well positioned to meaningfully grow the business and drive further free cash flow growth. Recently -- the recent equity offering strengthens our position to opportunistically acquire businesses with the right strategic fit and certainly the right return profile.

And with that, I'll turn it over to Ned.

Thanks, John. Good morning, everyone. Before we discuss the quarter, I'd like to give a brief overview of the equity raise we completed last week. We issued 2.7 million shares of Class A common stock and yielded $151 million of gross proceeds before underwriting discounts and transaction fees. This was an opportunistic equity raise, as we said, and we do not plan to use the proceeds to immediately repay debt. We plan to use the capital to continue to fund smart acquisition and development growth over the coming months and the coming year. The proceeds are not targeted to one single larger transaction. We plan to continue to focus on acquiring smaller private waste operators to build greater density, drive internalization and gain additional operating and G&A leverage.

As of September 30, we had $549.1 million of debt and $21.1 million of cash, and our consolidated net leverage ratio was 2.99x. If we netted 100% of the equity raised against our debt as of September 30, our leverage would drop to 2.17x or a reduction of 0.8x. In addition, pro forma for the transaction, our available liquidity was $339 million as of September 30.

Moving on to the quarter. Revenues in the third quarter were $202.7 million, up $4.1 million or up 2.1% year-over-year, with 3.7% of the year-over-year change driven by acquisition activity. Solid waste revenues were slightly up 0.1% year-over-year with price up 4%. We had 4.6% growth from acquisitions and volumes down 8.4%.

Revenues in the collection line of business were up 3.3% year-over-year, with price up 3.7%. We had 6.3% growth from acquisitions, and volumes were down 6.4%. Collection volumes continue to rebound through the third quarter as various commercial customers reopened or increased services, construction projects resumed and overall building activity increased. And overall economic activity rebounded across our mainly secondary and rural markets in the Northeast. Given these sequential improvements, by September, our solid waste volumes were down only 4.8% year-over-year for the month.

Revenues in the disposal line of business were down 5.8% year-over-year, with landfill pricing up 6.9%. Landfill tons were down 9.1% year-over-year as economic activity and construction projects were both negatively impacted by COVID.

Resource Solutions' revenues were up 8.9% year-over-year, with organics up 2.6%, mainly on new contracted volumes, Customer Solutions was up 7.9%, mainly driven by growth of services at existing customers and several new industrial customers.

Recycling revenues were up 18.9% year-over-year, mainly driven by higher commodity pricing and higher volumes in the business. Average commodity revenue per ton was up 37% year-over-year in the quarter, and this was mainly on higher cardboard pricing and mixed paper pricing, partially offset by lower plastics pricing. Adjusted EBITDA was $51.3 million in the quarter, up $2.8 million or up 5.9% year-over-year, and our margins were 25.3% for the quarter, up 90 basis points year-over-year.

Improving adjusted EBITDA was a huge achievement, given the large COVID headwinds we had in the quarter. With solid waste volumes down $12.8 million year-over-year, this translates to roughly an EBITDA headwind of $4 million. Also, we had roughly $1 million of COVID-specific costs during the quarter.

Solid waste adjusted EBITDA was $47.4 million in the quarter, up $2.7 million year-over-year. This increase was driven by higher performance in the collection line of business, higher performance in the disposal line of business and the positive rollover impact of acquisitions completed in the last year.

Resource Solutions' adjusted EBITDA was $3.7 million in the quarter, flat year-over-year with recycling up $1.4 million at higher performance. Cost of operations in the quarter was down $900,000 year-over-year and down 180 basis points as a percentage of revenues. Almost all cost categories improved as a percentage of revenue as our team effectively flexed costs to lower revenue levels, and we anniversaried many of the inflationary headwinds that had negatively impacted margins in 2018 and early 2019.

General and administrative costs in the third quarter were up $2.5 million year-over-year. Roughly $1.8 million of the increase was driven by higher bonus accruals due to timing differences year-over-year, $300,000 increase was driven by acquisition activity and $0.5 million was related to higher bad debt accruals during the period.

We've done an outstanding job improving our accounts receivable during the quarter and over the last 9 months. Our days sales outstanding was 32.3 days as of September 30, and this is down nearly 7 days from December 31, 2019.

We entered the COVID pandemic with a stable and mature credit and collections program. And during the pandemic, we've improved our customer outreach and communications and created additional flexibility as necessary. This has had a very positive impact on our collection efforts. However, as we noted last quarter, we've taken a conservative stance on the recoverability of accounts midterm, especially now that the federal stimulus programs are starting to wind down.

Third quarter included 2 unique items on the income statement. One was we incurred $200,000 of expense from acquisition activities; and two, we incurred $2.6 million of expense related to our efforts to close the Southbridge Landfill. This $2.6 million included $2 million during the period as a legal settlement charge to resolve outstanding litigation at the site.

Net cash provided by operating activities was $111.9 million year-to-date, up $40.4 million year-over-year, driven by higher operating results and $23.4 million of positive changes in our assets and liabilities year-over-year, including the great management of accounts receivable.

Adjusted free cash flow was $60 million year-to-date, up $35.9 million year-over-year. We continued to invest during the quarter in planned capital expenditures at our newly acquired operations to drive operating synergies and integration efforts. In addition, we continue to invest in the development of the Phase 6 landfill expansion at the Waste USA landfill.

As noted in our press release yesterday afternoon, we raised our financial guidance ranges for the fiscal year, given our strong performance in the third quarter and additional visibility into the rest of the year. With roughly 70% of our business in secondary and rural markets across the Northeast, we experienced a stable to improving economy since the low point of COVID in late April through October. Roughly 65% of commercial and industrial collection services on a revenue basis that were reduced or suspended due to COVID have been turned back on. We estimate that another 10% will return in the early winter when seasonal businesses and ski areas restart for the season. It is unclear to us when the remaining 25% of these services will resume. This translates to roughly $6 million a year or roughly 1.7% of collection revenues. Our increased guidance ranges for the year assume a modestly declining to stable economic environment for the remainder of the year as the second wave of COVID is emerging. However, the ranges do not contemplate a severe relapse of COVID-19 or new stay at home orders shutting down commercial and economic activity again.

Please note that we raised our 2020 adjusted free cash flow range back to the original level we set back in February. We plan to pay back the $5 million of CARES Act money in December, given our strong cash flow generation year-to-date. We place great importance on free cash flow generation, and we are quite proud to reestablish our original guidance levels despite the significant headwinds this year.

We have forecasted that adjusted EBITDA will be flat to slightly down year-over-year in the fourth quarter as some landfill volumes that we had expected to receive in the fourth quarter were received early in the third quarter, we also expect certain operating overhead costs to continue to ramp back to more normalized levels. And there's a lot of uncertainty right now as COVID cases are ramping across Northeast.

With that, I'll hand it to Ed. Thank you.

Thanks, Ned. Good morning, everyone. I'll start with a quick update on our COVID procedures. As John indicated, we're staying very disciplined with our operational practices that we put into place in March, and we continue to have excellent results, keeping our workforce safe and on the job, servicing our customers. Although most of our markets have had lower infection rates than larger metropolitan areas, in the last few weeks, we have seen spikes. So we know the risk is still there, and we continue to be very diligent. This has become a new normal for us, and I remain proud of our team and their ability to adapt.

Having said that, some of the changes in our operating environment that we experienced in the early stages of the pandemic returned closer to normal in the quarter. Traffic has returned. So operating hours and labor costs are a little closer to budget, and the disposal weights are normalizing as customers either have resumed business or adjusted service. Pounds per container yard is back to within 2% of normal on the commercial side. And on the resi side, pounds per lift is down to within 6% of normal.

Some of the commercial volume has returned, we're now only down about 3.5% from COVID related service suspensions and roll-off pulls are not quite as robust as a year ago. But even with these factors, the cost of ops as a percentage of revenue improved by 180 basis points as compared to Q3 last year and drove a 90 basis point improvement in adjusted EBITDA margin.

With the recent uptick in the pandemic, we are continuing to track activity levels carefully so that we can respond operationally to a change in circumstances. Our operating margin improved in all major lines of business, but the largest improvement this quarter came from our landfills. As landfill operations are relatively insensitive to volume, this was a pretty remarkable result and was achieved both from pricing power and from more efficient operational management and partially due to the fact that we enjoyed a very dry summer.

The quick stats, tonnage was down due to COVID by about 9%, but revenue was down less than 3%, and operating costs were reduced by around $2 million, almost 10%, most of which would have taken place even if tonnage had remained the same. Average price per ton was up 8%. Collection operations also performed well. A little more than half of our revenue is generated from our collection activities, and we improved cost of ops as a percentage of revenue by 125 basis points.

With the initial impacts of COVID becoming more stabilized, we have returned to our efforts to increase automation and ferreting out inefficiencies. Pricing remains strong at 3.7%.

Our Resource Solutions group had another outstanding quarter as well, continuing to exceed not only last year's contribution to EBITDA, but our original budget expectations as well. This group includes our recycling operations, which benefited from both higher processing prices and higher average commodity prices on a slight increase in tons processed. The balance of the Resource Solutions group, our organics group, industrial and national accounts, also exceeded expectations despite some continuing service suspensions due to the virus.

We look forward to finishing the year strong operationally, and we'll be working through our budgets for 2021 over the next few months. Thank you for your attention. And now I'd like to turn it back to John.

Thanks, Ed. As Ned reflected in our raised guidance for 2020, we are performing well during these challenging times. The collective response and effort through this crisis of our devoted hard-working teams is something that we're all quite proud of. In the quarter, just before Labor Day, we took great honor in paying out a $1.8 million special bonus to our frontline personnel and hourly employees. We look forward to a strong finish to the year and continued execution against our key strategies.

And with that, operator, I'd like to open it up for questions.

(Operator Instructions) Our first question is from the line of Michael Hoffman of Stifel.

Ned, on the free cash flow guide, just to -- I'm just trying to keep up with how fast you were talking, my writing. The new guide or revisited guide reflects paying back the CARES Act. Is that correct?

Yes, it does.

I think that's actually better than the original guide because you had the CARES Act because that's the way to think about it, right, or net neutral and back to even.

Yes. So I mean the original guide for the year, we didn't know about the -- there was no CARES Act that day, right. So we are kind of back even to that. But we're tracking even better against the guide we put out, August because at that point in time, I did not contemplate paying that.

And then, when you look at the volume trends related to commercial and you think back to the Great Recession, and it might have taken 4 or 5 years for this to play out, '08 through kind of '12, '13. Are we basically repeating the same amount of lost business and it's now stabilized? And from this point forward, we can talk about sort of on an annual basis, a growth pattern?

Yes, I'll start off and then John can hop in. So we're sitting right now at about 5%, exactly 5.2% of commercial revenues down from service reductions. And this is on a revenue basis, not a customer basis. We've had customers reduce or suspend services in certain instances. And it's not far dissimilar but -- except in one way, I mean, with this happening basically overnight, we're able to flex costs very effectively and reroute trucks. And you don't step into it by a million different cuts. It happened quickly and we right sized.

No, I think that with some of the benefit of the IT work that you and the whole finance team and the IT team has done has really given us the ability to act very quickly. We're able to keep track of the revenues on a daily basis, and we understand what divisions are flexing up and are going up and down from a revenue standpoint, so we can flex much more quickly in terms of getting the cost out and rightsizing the business for the revenues that they actually have. So some of the benefit of the work that we've done from a systems standpoint over the last couple of years, really, has come to play over the last -- probably the last 2, 3 quarters, in particular.

So if you thought about your incremental margin in January or February, before we knew we were going to have this -- what we've had. And now, you look at your incremental margin, how does it compare?

So when you say for each dollar new collection revenue or when you say incremental margin?

Right. If you think about the operating leverage of incremental growth, what did that look like in January, February? Now you've gone through this pandemic, nothing like a crisis to get you to focus on the cost more intensively. We come out of it. I'm assuming the incremental margin is better because you're going to be able to do some of this business on a leaner cost structure.

I think you're right. I'm not sure if we have a perfect number because I think we've even surprised ourselves over some of where we've been able to flex. Ed talked about, in his script, some of the work we've done at the landfills to make fundamental change. Also…

Routing efficiencies, in terms of the reroute, equipment efficiency, and putting automation in place in different -- it just is a combination of everything that's really come to bear from an operating standpoint, the operating programs that have been put in place with you and [Sean] are paying dividends.

It's amazing, when you're in your COVID case, what you can come up with, you can really -- and now with the new IT system, we can really dig into the numbers and see where we might develop more efficiencies.

Yes. We might have said it last quarter, I'm not certain, but we froze a budget CapEx, $10 million, right, when COVID hit. And then as soon as we really got our arms around our cash flow projections, we started to call our truck vendors to see if we could actually buy more trucks this year. And Ed was able to find a number of Curotto-Can trucks to get onto the road immediately, and we accelerated part of our capital plan from 2021 to drive greater efficiency late in the year. And they're just getting on the road now. We're starting to gain a little bit, but that's the type of stuff we're trying to do to drive long-term efficiency.

Okay. M&A is -- how would you frame the pipeline? And then the last question would be, Waste Connections invented this phrase COVID fatigue. It'd be interesting at how you're handling the prospects of COVID fatigue on the employees, this kind of intensity of awareness of risks in health and PPE?

I think that the pipeline is really strong, Michael. As you know, all of the drivers, COVID has created another issue for independents across our footprint. So pipeline is really strong. We saw a little bit of a lull over the last couple of months in terms of activity with people getting out. I think we've got a little bit more. -- that activity has begun to increase over the last probably month or 6 weeks, maybe, in terms of activity being, meeting with potential candidates, really getting out in -- from a business development standpoint. So I think that we'll begin to see that improve, assuming we don't have a setback, and that's a big assumption at this point in time, especially in that recently over the last couple of weeks, we've seen, obviously, the cases go up across the Northeast. Not -- not substantially but certainly up for the numbers that we've been seeing. So -- but the pipeline is strong.

And in terms of -- the last thing that I said was, how proud we were of our people and the work that they've done. And as I said just before Labor Day, we paid out almost a $2 million bonus to our frontline and hourly employees. And while I think everyone is seeing a little bit of COVID fatigue, I think we're well positioned with our people to get through the rest of the year, hopefully get to a vaccine. And we're thinking about what are the things that -- what's the next thing that we need to do for our people over the course of the holidays, that's something that we're discussing now.

But right now, I think with what we've done with the bonus, the work that the management team has done to protect our people. And then the bonus being put in place in early September, notwithstanding, the fact that I think everyone is a little fatigued of COVID. Our team is in good shape.

We have another question from the line of Tyler Brown from Raymond James.

So Ned, so obviously, 90 basis points of total margin expansion was just, I mean, it's just really impressive. I mean you had down internal growth, I think incremental COVID costs. John, I think you just said $2 million of frontline payments, and incremental bad debt. I could go on and on. So can you help build that bridge for me? So I mean, how do you -- with all of those bad guys, what were the good guys that were just really working for you?

So it's interesting because I was looking at this almost from a different perspective. This morning, we were down a little bit from Q2 to Q3, and we've had some stuff start to creep back into our cost structure, like medical costs were up, or overtime is up a little bit. So from our standpoint, we've started to maybe start to normalize several of those cost categories. But on the good side, it's price, it's price in excess of inflation. It's our core operating programs. It's the things that existed prior to COVID, are shining through. It's reducing our turnover. It's better safety performance. So it's like 30 different things that show up all over the income statement, and they are the same things that were there in Q4 of '19 and Q1 of '20. And the COVID noise is there, as you're saying. I mean, the special bonus alone was a 50 basis point headwind in the quarter to our margins. So we are performing very well, and our long-term investments in our programs are yielding nice margin enhancement.

And so, as you think about -- let's talk about 2021 since we're so close. But big picture, I mean, you talked about flexibility, you talked about planning. It feels like you've structurally pushed the margin ball forward? Or do you think that you maybe take a step back in margins in '21?

We haven't finished budgeting for the year. And we haven't guided for the year. But as we look at what we're doing structurally as a company and what some of the challenges we had in 2018 and 2019, such as labor and turnover and some of the transportation differences we had. We've really moved through those knotholes, and we had done that ahead of COVID. And then now, there are fundamental lasting changes in our business that we've made. Our pricing programs are in excess of inflation. So as we look to next year, we do expect to have margins up. Maybe not 90 to 200 basis points. I think we're up 240 basis points year-to-date, that's pretty spectacular. For us, success would be up 50 basis points next year.

And then you talked a little bit about this, but if I just go back and look historically, I think your EBITDA steps down about 15% sequentially on average from Q3 to Q4. I know M&A can impact that. There's some stuff in there. But it looks like in the guide, you're looking for nearly a 25%, at the midpoint, sequential decline. I think you talked about overhead and some landfill tons, but is there a bit of conservatism in there?

I think there -- clearly, there is. I mean, Ned obviously, will go through in even more detail. But when you think about it, there's a bit of conservatism. We don't know what's going to happen with the ski business across the Northeast, and we certainly are not projecting that, that's going to come back 100% because there's no way in hell it's going to come back 100%. They're trying to figure out now how they're going to social distance on the slopes and how many people they'll be able to put on the hill. And what does that mean for the restaurants and the additional service support in terms of restaurants, hotel, motels, everything else around it from a commercial standpoint, which obviously is a big part of the fourth quarter.

Yes. We're taking a pretty conservative view on volumes in the fourth quarter. We had a strong fourth quarter last year. As you know, we had a huge margin enhancement quarter last year. We're up 180 basis points year-over-year. So as we're looking at this, we're not purposely trying to be overly conservative, but we've developed a model that's assuming volumes are down 6% at the midpoint. We're assuming as well that some of the costs, as we saw from the second to third quarter with medical costs up, OT up, fuel up, a little more traffic, as Ed said, with productivity. We're assuming those trends continue to normalize into the fourth quarter. We have continued to beat on a lot of things. But from our vantage point, right now, with all the uncertainty, we're being a bit conservative.

And then, Ed, I got a quick question. So I think you guys said, 70% of your revenue is in, call it, rural or secondary markets. And you threw a lot of numbers at us. But did you see a demonstrable difference in the volumes in your secondary markets versus, call it, your big metros like Boston?

Yes. On the -- certainly on the collection side, absolutely. I mean, many of the rural markets were hardly affected or were affected for very short periods of time, whereas places like Boston and Rochester were affected for a longer time. And when we get to the traffic question, Rochester, in particular and Boston, what you know is world-renown for their traffic had all of a sudden, the streets opened up in the second quarter, and we've seen that traffic start to come back.

Yes. Now Ed I live in Atlanta. So I know all about traffic. My last one real quickly, just on the M&A side. But do you think that the PPP money that if you just look at the data, it feels like the vast majority of small private haulers took advantage of. Has that impacted converting some of that potential M&A? That almost gives some haulers maybe a lifeline? Or has that been an impediment at all?

I think that -- I don't think there's any question, but that's given them, in some cases, Tyler, given them a lifeline. But I don't think that -- I think people that are getting tired and getting ready to monetize their business. There's a lot of different factors. That's certainly one and it certainly helped maybe some people put it off for 6 months, but reality has not changed, right? They have to structurally fix the business in order for reality to change. And all that does is just pushes the inevitable off a bit. But I think you're right. To a degree, it's pushed it back a little bit.

We have Hamzah Mazari from Jefferies.

My first question is just around just free cash flow. Is double-digit free cash flow going forward, sort of, the right metric to think about for you guys? I know you spoke a lot about margin today. Timing of M&A probably impacts that. You have an NOL, so maybe taxes are not a big deal. So just maybe walk us through the free cash flow side versus -- I know you talked a lot about margin.

So as we laid out in our 2021 plan, a few years back, our goal is to grow free cash flow at 10% to 15% a year or more. And as we look to next year and the year after, we think that goal is completely achievable. This year, even with all these headwinds and moving pieces, we're well on track to do that. We've really had some amazing management on the working capital side through accounts receivable, but we've been trying to work down our accounts payable as well to historically low levels to just make sure we have an offset there. As I said also, we're paying back the CARES money. So as we look into next year, we're trying to make sure we have as normal of a pattern as possible to ensure that, that growth.

And then, I think, you guys have talked about $400 million as sort of this pipeline on M&A. But could you maybe talk about your appetite to get into adjacent markets and what that does to your pipeline? And are you seeing any competitive dynamic changes in terms of people bidding against you on M&A? It seems like one waste-to-energy player is looking at -- has been looking at collection assets that didn't in the past.

And I think that -- clearly, we're sitting with a tremendous opportunity over-the-top of the existing infrastructure. But clearly, we will look at adjacent markets that are just very -- the Pennsylvania that -- those markets that are close to the existing infrastructure, Hamzah. And you're right, I mean, I think that the Wheelabrator, Tunnel Hill transaction has another competitor in the marketplace for acquisitions. And certainly that's a bit of a factor. But again, we've been in the market for 40 years. We know most of the players. So I think we'll do just fine.

And just sort of last question, just a clarification. What is your revenue exposure to sort of the seasonal businesses that you referenced sort of skiing, restaurants in the resort areas, all that kind of stuff?

It's around $2 million a year less.

(Operator Instructions) You have another question from the line of Sean Eastman from KeyBanc.

Just in light of the equity offering, we've got a lot of color on the strength of the acquisition pipeline. But I just wanted to maybe approach from the hurdle rate perspective. You guys have highlighted very strict capital hurdle rates on the program. Just curious where the market sort of sits today relative to that? And maybe how that's changed since you launched this program a couple of years ago. And then, maybe if you could just reflect on the deals you've done over the past couple of years in terms of pulling those returns out of that capital? That would be a helpful discussion.

I think at this point in time, from our perspective, it really hasn't changed. We're going to continue with the same discipline in terms of -- the financial discipline that Ned has laid out and that we've been following for the last couple of years, Sean. So I don't think that there's any changes at this point in time. As Hamzah said, there's -- we have Wheelabrator in the market as another competitor, but I think that a lot of people that are in this market, we've been working with one way or the other, for a long period of time. And certainly, that's a little bit different with another competitor in the market. But we think that we'll, as I said before, I do just fine. And I don't know if Ned, maybe, wanted to walk through the margins.

Yes. we always look at everything after tax unlevered returns through every opportunity we have, just to make sure we look at risk premiums, the same, whether we're bidding on new work or putting an asset to work or buying a business. And it really depends on where the risk profile is, but we're trying to buy businesses north of 15% returns. And in many cases, we're looking at greater than 20% returns depending upon the risk profile, how to overlays. You look over the last couple of years, and we're paying post year 1 EBITDA 6.5x or so. So it's not -- and that hasn't dramatically changed. We're trying to find opportunities where assets fit with ours, and we can drive some nice synergies, and we can do that within a 2-year time frame. So we've been pretty successful doing that and we'll continue to focus in the same area.

And then also just in context of the equity offering. You have this, sort of, $20 million to $40 million of annualized acquired revenue target out there. You've been above that consistently. On a go-forward, is that still the right target?

Yes. We think that it is. We're not going to change the target in as you -- the question you asked before, in terms of changing how we're looking at it from a financial standpoint. I mean, obviously, we're going to be towards the upper end of that range, and we've been over that range for a couple of years. So I think, clearly as a conservative view, it's likely that we'll be closer to the $40 million than we will the lower end of the range. But I don't see at this point in time that we would change it.

Yes. And we don't budget acquisitions either. It's 100% opportunistic. As you know, we don't guide long-range acquisition. So we're out knocking on a lot of doors, and we've got a lot in the pipeline. And we've added resources both on the finance side, the operating, the IT side, we've tried to on the…

Development side.

Development side. We've tried to position ourselves where we can pick up our cadence and be more effective from an integration, HR people, use system standpoint and get into operating synergies even faster. So we're trying -- over the last few years, we've had a lot of learning experiences, and we keep trying to improve and make sure we can convert more and more effectively.

Last one from me is, you guys talked about being conservative on the sort of go-forward volume recovery, with the stimulus money coming out and there's that remaining 25% of volume that you're unclear on. But it just doesn't seem like that's a big number in terms of revenue. And then -- so I just wanted to get some context on that comment. And then also just around that 25%, what exactly is in there? Just to get a sense for what the real risk is and trying to understand like what the inherent ceiling is on this volume recovery?

Yes. So I was talking specifically about the commercial line of business. So there's been 3 places our business has been hit. Small commercial customers; then the roll-off business, which had some industrial customers who are down, some construction and demo that's down; and then at the landfills. So there's kind of been 3 different areas to add up. We're back to roughly a 95% of projected run rate at the commercial, small can commercial. We're back a little bit north of that from a construction standpoint.

And the landfills, Jason, do you have a read recently who are probably back to…

90%, I would say.

90%, 92%. So we're a little bit lighter at the landfills, and some of that has to do with just -- we get some volumes out of the greater New York City area, north of New York City. We don't run trucks there, but we service customers, and that's still an area that hasn't rebounded as much as other secondary and rural markets.

So when we talk about the impact, and we're talking 5% to 6% overall volume impact we've had in solid waste. It's not just that small can commercial. There are some lagging impacts in roll-off and at the landfills as well.

We have Alexander Leach from Berenberg Capital.

What's the environment been like for new customer additions across the business in Q3? And then sort of on the flip side, how has demand been holding up for existing customers in customer solutions. I know you mentioned a number of industrial customer wins, but how has demand held up for everyone else?

So in Resource Solutions, I'll start there. I had Jason dig into this for me over the last week, and it's interesting. Probably our largest area of growth in the Resource Solutions or in the customer solutions or larger industrial was addition to services for existing customers, which is exactly one of our key strategies, growing the share of wallet. So it's very nice to see that trend continue through COVID. Some of our special project work has been a little bit lower because we haven't been able to be on-site and working with these customers and working through those projects. So our backlog is increased there, and I think that's actually nice into the future. And then as we look out -- what was the last part of the question? So it was industrial…

What was the last part of the question, Alex?

Well, the first part was, what's the environment been like for new customer additions across the business in Q3? And the second part was just about customer solutions.

Yes. Sorry. So I answered your customer solutions part. The new customer addition part, we've actually seen some net new customer additions on the commercial side of the business and new business formation. It hasn't outstripped the COVID service reductions. But in our secondary and rural markets, there is some new business formation right now, and we have seen new customers coming into the business, but it's still not at a pace to outstrip those reductions.

Yes. I think that we've seen clearly an increase in roll-off pulls holds from a residential standpoint as well with people being home, there's a lot of activity in terms of remodeling, cleaning out, things of that nature. So probably that's an area where we've also seen some benefit as well.

And then just quickly, could you give a bit more color on the lower level of collection pricing increases this quarter. Is that largely just due to pricing concessions for commercial customers who are struggling with the pandemic? Or is there anything else in that playbook?

We really haven't given a lot of pricing concessions per se. It's more of just a timing. So we got out the door with quite a bit of our pricing in the first quarter, ahead of COVID. And then as our customer base in the world dealt with COVID, we paused some of our pricing programs through the second quarter into a early third quarter. And then we'll get back out with them because we do have real inflation in our business, and we do need to reflect that through to our pricing. So I -- there is no real disruption long term. It's just a matter of -- we pushed back some of our start dates for pricing in the second and third quarter.

A majority of our pricing was done in the first quarter, as Ned said, though, majority of our price increase for the year was done in January.

There are no further questions from the line, presenters. You may continue.

Well thanks, everybody, for joining us this morning. We look forward to discussing our fourth quarter 2020 earnings and our 2021 guidance with you in February of next year. Thanks, everybody. Have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you for joining us. Thank you, presenters.