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A Note From The Editor:
In conjunction with its earnings release on March 1, Casella Waste (CWST) announced the completion of its previously announced divestiture and the refinancing of its 9.75% Senior Subordinated Notes, which were due 2013. We were able to catch up with Casella's CEO, John Casella, soon afterward. In this month's Circular File, we recap the various transactions, the rationale behind them and the positives expected to stem from them, as well as Casella's strategy going forward.
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The Divestiture and the Refinancing
On March 1, Casella announced the completion of its previously announced divestiture, which included the sale of 17 non-integrated recycling facilities, for $134.1 million, which after expenses, was used to pay down $120 million in debt. In conjunction with the divestiture, Casella also completed the refinancing of its 9.75% Senior Subordinated Notes due 2013 with 7.75% Notes due 2019. On March 21, the company announced an amendment and extension of its revolving credit facility. As a result, Casella’s leverage was reduced to 4x debt to EBITDA from 4.4x, with significant interest expense savings expected.
Initially Surprising, But Deleveraging was Paramount
Given Casella’s focus on resource transformation solutions as a key part of its strategy, the sale of the recycling facilities was initially surprising to some. However, given Casella’s high debt levels, deleveraging the balance sheet became of paramount importance to the company, such that all options were on the table. That, combined with the very attractive valuation the company received for the assets (~9.5x LTM EBITDA), became the driving force behind the divestiture, providing the “best bang for the buck” to pay down debt, versus other divestiture options on the table. While acknowledging that the sale was somewhat “bittersweet”, CEO Casella noted that the assets sold were non-integrated and outside of its core geographic area, and that the company’s strategy remains intact, albeit in a smaller footprint. Another balance sheet consideration was ongoing capital allocation requirements—capital was far better spent on integrated facilities, particularly in light of growing state and local budget constraints that have made less public money available for these facilities.
Timing—How Sweet It Is
With the transactions, Casella made substantial progress to its leverage goal of 3.5x, and increased its flexibility enormously. The combination of the divestiture and the refinancing (in fact, one drove the other), not only pushed out a looming debt maturity, but will drive substantial interest savings, estimated at $12 million initially, off of an annualized interest expense base of roughly $53 million. This, in turn, will drive significantly improved cash flow generation. As a result, Casella is in a much better position to continue to deleverage from internally generated cash flow, and while other divestiture candidates remain, such as GreenFiber and RecycleBank, Casella can now be more opportunistic, wait for the economy to improve, and get what it considers the “right price” for the assets. By amending its revolving credit facility (which includes adding an accordion feature), the company will also be in a position to pay down its very expensive 11% Second Lien Notes after July of 2012, when they are callable, which will generate another $12 million in estimated interest savings. Therefore, in a very short time, and given the favorable credit conditions, Casella was able to repay or refinance over 60% of its balance sheet to more favorable terms and lower cost debt. Consequently, CEO Casella also noted that they have no need to do an equity offering at these levels, particularly as they have no immediate use for the proceeds.
The McKean County Landfill—Expected to Ramp Without Price Impact
Somewhat ironically, as it was coincident with the debt pay down announcement, Casella also announced the acquisition of the McKean County
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landfill in Pennsylvania. However, as the asset was bought out of bankruptcy proceedings, the purchase price was de minimis--$500,000 and the assumption of contractual obligations and closure/post closure liabilities, estimated at a net present value of $4.2 million. The site is permitted to accept 1000 t/d by truck, and is currently operating at 500 t/d, with potential capability of 5000 t/d by rail. (The cost to put in a rail siding is $1.5 million, which the company plans to undertake sooner rather than later.) Given the very low cost of the capacity, and the initial intent to use the site to minimize transportation costs and maximize permit utilization among three other sites in the company’s Western Region, Casella does not foresee the need to impact price in order to ramp up tonnage at the site.
After Shrinking, Casella Can Now Focus on Profitable Growth Again
With the heavy lifting on the balance sheet behind the company, CEO Casella sees a number of internal, and perhaps one or two external, opportunities to improve profitability and further lift operating cash flow. A major focus at Casella is its “shared services/customer care” initiative. Essentially, the company is in the process of centralizing, or pulling in from the field, a number of functions, among them customer service, A/P, cash collection and other accounting functions, such that division management can focus on their markets, with the intent to maximize opportunities in their waste sheds, better understand customer needs, and obtain better pricing. (Cost savings are also anticipated as well.) Externally, building out and densifying collection operations around the Southbridge and McKean County landfills will be the primary focus.
What Will You Do With All That Free Time?
CEO Casella noted that he had been acting as “assistant CFO” for much of the past three years, reacting to the double whammy of the financial crisis and the Great Recession, and the very deleterious impact they had on Casella’s balance sheet. Looking forward to new priorities, CEO Casella says a first priority will be to meet the pricing challenge—reaching the company’s goal to price 50 basis points above CPI. The key to that remains the shared service/customer care initiative, which he noted involved a significant cultural shift at the company, which is still in process. As a result, a renewed emphasis on leadership training— helping division managers develop the right skills and tools required to meet the new challenges—remains critical to the success of the initiative. Also critical, and a thrust of customer care, is giving the customers what they are asking for—zero waste solutions, renewable energy options and organics processing services. In other words, now Casella can “get back to the implementation of its vision to be a resource transformation solutions provider to its customers.” |
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We Want to Hear From You
We would like your feedback, thoughts, suggestions, etc., as we create future issues of The Circular File. Please send questions or comments to rita.ugianskis@penton.com or lyoung74@comcast.net. Your input will be invaluable.
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