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Casella Waste Systems Inc  (NASDAQ:CWST)
Q4 2018 Earnings Conference Call
Feb. 22, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Casella Waste Systems, Inc. Q4 2018 Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Joe Fusco. Mr. Fusco, you may begin.

Joseph Fusco -- Vice President

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 2018 fourth quarter and full year results. These results were released yesterday, and 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.

But first, as you know 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. And in addition, any forward-looking statements represent our views 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 under the heading Events and Presentations.

With that, I'll turn it over to John Casella.

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Thanks, Joe. Good morning, everyone. We are pleased with our fourth quarter results and our results for fiscal year 2018. 2018 was an exciting year in which we continued to execute well against our key strategies and our 2021 plan. We meaningfully grew the business through the 10 acquisitions with $77 million in annualized revenues, opportunistically refinanced our credit facility, successfully implemented our new ERP system. And in January of 2019, we completed an equity offering with $100 million in proceeds. Pulling all this off as we did was a true team effort and all in all, we positioned ourselves very well for 2019 and beyond.

Our 2018 execution is a (technical difficulty) as reported yesterday. For the year, we grew revenues over 10%, we grew normalized free cash flow by over 21%, we drove down our consolidated net leverage ratio down to 3.62 times, and we increased adjusted EBITDA by $9 million. This is particularly impressive given that, during the same period, we experienced an $8 million adjusted EBITDA headwind from recycling. So the rest of the business improved by $17 million, which highlights the strength and performance within our solid waste customer solutions and organic businesses.

Fiscal year 2018 results beat our guidance ranges that we increased in the third quarter for revenues and normalized free cash flow, while we were within our revised guidance range for adjusted EBITDA. It's a great accomplishment for the entire team.

Looking out over the next several years, we are well positioned to drive additional shareholder value into the business, given the strength of our cash flow growth, our robust acquisition activity to date, we are on track to outpace our normalized free cash flow growth targets set as part of our 2021 plan.

We are increasing our normalized free cash flow target range for fiscal year 2021 to between $65 million to $70 million or roughly 10% to 15% per year of growth. In 2019, we remain focused on executing against our 2021 plan. The five key strategies are consistent with the plan as announced in August of 2017, which includes increasing landfill returns, improving collection profitability, creating incremental value through resource solutions and using technology to drive growth and efficiencies in addition to allocating capital for strategic growth.

Our first strategy in 2021 plan is increasing landfill returns. We continue to enhance returns through price execution, operational programs, sourcing new volumes at higher prices and our efforts to advance key permits. In 2018, we increased the average landfill price per ton by 6.5%. At the same time increased landfill funds year-over-year. The pricing landscape in the Northeast is favorable and should continue to be for some time, given the continued disposal capacity constraints. As we advanced pricing on existing volumes and replaced lower priced waste streams with higher priced volumes, we continue to blend up our overall pricing as we improve returns.

Given how dynamic the northeast market is -- we have been moving disposal contracts to shorter terms to allow us to adjust pricing more appropriately as the market changes. Aside from pricing, we are positioned well to further leverage our excess annual landfill capacity as more waste moves from east to west coupled with internalization value of our recent and targeted acquisitions. Our efforts will continue in regard to expanding permitted landfill capacity to meet the disposal demands of the northeast. We look forward to ongoing success here as we work through one of the most challenging regulatory and political environments in the country. Most of our sites have over 15 years of permitted capacity and we've made good progress advancing key permitting activities, such as the expansion received in the third quarter related to Clinton County Landfill increasing the annual capacity from 175,000 tons a year to 250,000 tons per year.

Our second strategy in the 2021 plan is driving further profitability within our hauling business. Ed will run through some additional details, but we continue to outperform and execute well against our pricing strategies and operational strategies. In the quarter, collection price was up 5.6% year-over-year, which reflects our focus on disciplined and nimble programs that enable us to outpace heightened disposal recycling and labor cost inflation. We expect to continue advanced strong pricing in 2019.

Our risk mitigated SRA fee and E&E fee programs again work well to offset the recycling commodity pressures and higher fuel costs during the fourth quarter. Even as these fees have escalated, given the market conditions, we have experienced limited customer churn or price rollbacks. Our team also continue to do an excellent job in integrating acquisitions, which is an important part of driving high free cash flow growth and additional shareholder value. The third strategy in the 2021 plan is creating incremental value through resource solutions. We continue to advance profitable growth in our customer solutions and organic businesses while the recycling business was a headwind for 2018.

As I mentioned, recycling was an $8 million adjusted EBITDA drag on the year and negatively impacted margins, recycling commodity prices were down through the year and we also incurred higher processing and transportation costs, as we had to slow down the lines to improve quality along with sell materials into new end markets.

On a positive note, the fourth quarter recycling adjusted EBITDA was up nearly $800,000 year-over-year, even with our ACR per ton down approximately 18%. This is reflective of our continued focus on our risk mitigation programs such as our SRA fee, where we fully recovered higher recycling cost across the solid waste operations in the quarter.

We continue to refine contracts that allow us to offtake the commodity risk and pass through higher processing costs through higher tip fees through our third-party volumes. Our expectation for 2019 is that recycling will provide a tailwind even though, even if commodity prices stay at these low levels as several of the largest third-party contracts reset. Our customer solutions team performed exceptionally well this year with adjusted EBITDA growth of approximately 78% and margin improvement of over 250 basis points, as they continue to capture share of wallet for major industrial customers across our franchise area.

The fourth strategy in the 2021 plan is using technology to drive profitable efficient growth. In 2018, we further advanced and refined our long-term technology plan. We are pleased with the early progress we have made against this strategy was notably, include successful implementation of our new NetSuite ERP program. Our technology plan is focused on driving profitable revenue growth improving how we interact with and sell to our customers and improving operating and back office efficiencies. We are currently focused on improving sales and customer service through process additional function of our CRM.

Moving to the final strategy of 2021 which is allocating capital to balance delevering with smart growth, we executed very well against this strategy in 2018. As part of our 2021 plan we outlined a goal to acquire or develop $20 million to $40 million per year of the annualized revenue. In 2018, we outpaced this target acquiring $77 million of annualized revenue through a disciplined approach. With the recent equity offering and our ability to continue to grow free cash flow organically, our balance sheet is well positioned to continue to opportunistically grow the business.

We believe that we have the potential to outperform again in 2019 based on the strength of our near-term deal pipeline. We believe there's an opportunity to acquire $400 million (ph) -- to acquire over $400 million of revenues that overlays our existing operations or that is adjacent strategic markets, deciding to continue to have significant opportunity over the top of the existing operations in the Northeast.

In 2019, we also continue to further integrate our acquisitions completed in 2018 to advanced operational and back office synergies. We are particularly excited about our new market entry into Rochester where we acquired four businesses during 2018 with most recent purchase of Al's Maintenance in December. Rochester is a major population center located near three of our New York landfills and we look forward to leveraging our ability to vertically integrate volumes into better consolidate our Rochester operations.

One area that is not specifically outlined in the 2021 plan, but it is very important to our continued long term success underlies all of our initiatives is focused on further building our team and creating the kind of culture that has made it successful. With the help of the human resources team we initiated implementation of a career path program for maintenance technicians and drivers, putting career path in place is critically important as we go out into the future, so that those individuals, when they come into the Company have a clear understanding of how they can advance, within Casella and increase their value to the company and their ability to provide for their families.

Career path program incentivizes key roles to enhance both their skills by giving our employees a measurable and transparent path to advancement. While we're still in the early innings of this initiative, we are starting to see the benefits and overtime believes that the program will improve employee satisfaction, help recruitment, reduce turnover and ultimately to higher productivity, lower safety incidences, very excited about the program and the addition of Kelley Robinson to our team from an HR standpoint.

Wrapping up, as reflected in our guidance, our 2019 plan is tracking well against our 2021 plan and displays continued execution of our key strategies within -- with the goal of driving additional shareholder value. We expect continued strength in solid waste, robust acquisition pipeline and recycling tailwinds with the reset of several contracts at the end of '18 and early '19.

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

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, John. Revenues in the fourth quarter were $174.7 million, up $23.5 million or 15.5% year-over-year with roughly $13.4 million of the increase driven by acquisition activity.

Solid waste revenues were up $17.9 million or 16% year-over-year as a percentage of solid waste revenues, with price up 4.5%, volumes flat or volumes up 0.5% excluding the business interruption during the period. Revenues in the collection line of business were up $15.3 million year-over-year with price up 5.6% across all lines of business, volumes flat, risk recovery fees up $1.6 million and acquisitions, up $9.9 million.

Our disciplined pricing strategy has been working very well balancing customer retention with new business growth with appropriate levels of pricing to offset the building inflation across our many aspects of our operations. Revenues in the disposal line of business were up $3.2 million year-over-year with a growth driven by strong pricing, $3.5 million of acquisition activity and higher landfill volumes.

This was partially offset by lower transfer station volumes and the closure of the Southbridge landfill in early November. Disposal volumes were negatively impacted by $600,000 during the quarter due to a business interruption at a transfer station that we're rebuilding after a fire forced us to close the facility in late June. The Southbridge Landfill closure resulted in a $1.8 million decline in disposable revenues during the period.

As we discussed last quarter, we had to slow times at our landfills in the fourth quarter to ensure that we did not exceed our annual permit commitment with sample (ph) sites. Economic activity remains very strong across the region and landfills and waste to energy facilities will mainly add capacity in 2018. This tightness in the market gives a great pricing backdrop coming into 2019.

We increased our reported landfill pricing by 3.7% year-over-year and importantly, we increased our average price per ton at the landfills by 5.6% as we improve the mix of our customers and volumes during the period. Recycling revenues were down $1.5 million year-over-year with $2.3 million lower commodity pricing, $700,000 lower volumes, partially offset by $1.4 million of higher third party tipping fees. This doesn't include the higher intercompany processing fees that we charged ourselves.

Average commodity revenue per ton or as we say ACR was down $15 per ton or 18% year-over-year in the quarter on lower fiber pricing. Our average commodity revenue per ton though was up 5% from the third quarter to the fourth quarter and we conservatively model commodity prices to stay relatively flat at current levels throughout fiscal year 2019.

Organics revenues were up $4 million year-over-year and higher volumes, mainly associated with the new two year sludge T&D contract and customer solutions revenues were up $3.2 million year-over-year due to several new multi-site retail customers and continued strong growth in our industrial services business. Adoption of ASC 606 revenue recognition guidance reduced our reported revenues and reduced our cost of ops by roughly $1.5 million during the fourth quarter as compared to how we would have historically booked these transactions. This is the last quarter, we'll have this comparison. This change did benefit our margins by roughly 15 basis points in the quarter.

Adjusted EBITDA was $33.8 million in the quarter, up $3.6 million or 12% year-over-year with margins slightly down during the period. Solid waste adjusted EBITDA was $31.9 million in the quarter, up $2.5 million year-over-year (technical difficulty) with strong pricing and acquisition activity driving the year-over-year growth, partially offset by higher direct cost, transportation and third-party disposal and $1.9 million of lower adjusted EBITDA at our Southbridge landfill due to the closure in early November.

Increased intercompany recycling tipping fees were fully recovered during the period by the higher SRA fees and increased fuel cost year-over-year were fully recovered by our floating energy and environmental fee. Solid waste adjusted EBITDA margins were 24.5% down year-over-year. Our margins were negatively impacted during the quarter, mainly due to higher third-party transportation and higher third-party disposal costs as we are forced to spend more money moving waste out of our landfills to third-party sites at Southbridge close and many of our landfills are very close to annual permits and we have to shift tons around in November and December. This trend will mitigate as we moved into January or has mitigated into January and February.

Recycling adjusted EBITDA was up $700,000 year-over-year with lower commodity prices and lower volumes, offset by $3.2 million of higher tipping fees and lower rebates during the period. As commodity prices improved sequentially from the third to fourth quarter, our trailing cost recovery fees and our trailing revenue share contracts were applied fully recovered lower commodity prices. Adjusted EBITDA was $700,000, in the other segment, up $400,000 year-over-year with very strong performance in the customer solutions business with adjusted EBITDA, up $700,000 year-over-year.

Cost of ops was up $17.5 million year-over-year with roughly $10 million of the increase driven by acquisition activity and most of the remainder driven by higher third-party transportation and disposal cost.

G&A costs were up $1.7 million year-over-year, but down 90 basis points as a percentage of revenues as we began to gain leverage from the acquisition activity and our five-year technology plan. Depreciation and amortization costs were up $3.1 million year-over-year, mainly due to higher depreciation on trucks and equipment related to our five-year fleet in Yellow Iron plant and acquisition activity during the period.

The fourth quarter included several unique items. We took a $15.8 million Southbridge landfill closure charge, which included a $8.7 million contract settlement charge for the settlement of litigation with the town of Southbridge. We also trued up our closure accrual with a $6 million charge to reflect changes in engineering estimates for the capping and closure of the site, and we incurred $1.1 million of legal and transaction costs associated with Southbridge during the period.

We took a $1.1 million impairment charge for the unconsolidated investment recycle rewards. This investment dates back over 10 plus years ago and the impairment was not contemplated when we pre-announced result on January 22. We incurred $900,000 of expense from acquisition activity and other items during the quarter.

On a very positive note, we revaluated our tax strategy in 2018 due to US tax reform and we are able to take advantage of bonus depreciation to offset nearly all of our federal tax liabilities during the year, while still preserving our federal net operating losses for future use. We began the year with approximately $110 million of Federal NOLs and we ended the year with $113 million of NOLs. We expect to utilize the same strategy into 2019.

Our normalized free cash flow was $47.1 million in 2018 up 21.3% from the same period last year. The increase was driven by improved operating performance, partially offset by reduction of cash flows from changes in our assets and liabilities and offset by higher capital expenditures due to higher spend on revenue growth.

As of December 31st, 2018, our consolidated net leverage ratio was 3.62 times, which is down 1.8 times since December 31st of 2014. Our total debt, net was $555.2 million, which is up close to $58 million year-over-year. Our debt was up mainly on acquisition activity and the refinancing of our senior secured debt and tax exempt debt during 2018.

On January 25th, we completed an offering of 3.565 million shares of Class A common stock and generated net proceeds of $100.9 million. Pro forma for the equity offering, our consolidated net leverage ratio would have been 2.96 times on December 31st, 2018 and pro forma, our availability on the revolver and cash position, gave us availability of roughly $212.3 million. Pro forma for the deal, we have roughly 67% of our debt at six positions today.

As John mentioned, we believe our capital structure is in a great position and will allow us to execute our strategy to grow through smart investments and acquisitions in 2019. As stated in our press release yesterday afternoon, we announced our guidance for 2019 by estimating results in the following ranges, revenues between $710 million and $725 million or up 8.6% at the midpoint; adjusted EBITDA between $152 million and $156 million or up 11.6% at the midpoint; and normalized free cash flow between $51 million and $55 million or up 12.6% at the midpoint.

Please note that we did file a corrective press release last night to fix an error in the normalized free cash flow reconciliation for our 2019 guidance. The correct guidance range is $51 million to $55 million as stated in the press release text. We had included an incorrect estimate related to planned expenditures for the Southbridge Landfill closure and Potsdam remediation expected to be completed in 2019.

The 2019 budget includes roughly 5.5% revenue growth from the rollover impact of acquisitions, completed during fiscal year '18, however our 2019 budget does not include the impact from any acquisitions that have yet to be completed. We expect our adjusted EBITDA growth to be driven by the following factors in 2019. We expect our collection business to be up $6 million to $7 million driven by 3.5% to 4% price, partially offset by wage and disposal inflation. We expect a $8 million headwind from the Southbridge Landfill closure during 2019. All other disposals like landfills and transfer stations, we expect to be up $7 million to $9 million driven by 3.5% to 4.5% price and some volume growth as well.

We expect a tailwind from recycling, which is really exciting -- with recycling up $5 million to $6 million. We expect roughly $8 million to $10 million of rollover benefit from acquisitions already completed in 2018. And we expect to about $4 million to $6 million of other headwinds in the business, including some headwinds from landfill gas energy and some increases in G&A. Overall, we expect EBITDA to be up 10% to 13% year-over-year with roughly 50 basis points of margin expansion.

In conclusion, we're tracking really well against our 2021 strategic plan and we're excited about what's in front of us in 2019. And with that, I'll hand it over to Ed.

Edwin D. Johnson -- President and Chief Operating Officer

Thanks, Ned. Good morning, everyone. 2018 was a significant transitional year for the Company. After years of focus on operational improvements, strengthening our daily process and discipline and driving performance to acceptable levels 2018 became a year to refocus on growth. We exceeded our expectations. But before I get into the details of our transformation. let me walk through the cost of ops results for the quarter.

Our consolidated cost of ops as a percentage of revenue was up 70 basis points in the quarter versus the same quarter last year. Recycling and our other non-solid waste businesses had only a minor effect on this percentage in Q4. So we are starting to anniversary the commodity price drops of a year ago.

Recycling has become a processing for a fee type of business now, so we expect financial performance going forward to be more stable. Focusing on our solid waste business components, our collection operations generated a little over 47% of our revenue in the quarter. Cost of ops as a percentage of revenue increased from the same quarter last year by about 41 basis points.

On last quarter's call, I mentioned that acquisitions can affect your metrics during the transition period and certainly that's the case here. Factoring out the acquisitions to get to a same store basis, our cost of ops improved by 40 basis points. As we assimilate the acquisitions, they will come in line with our existing operations.

Our disposal segment includes landfill operations and transfer station operations. The landfills generated 13.3% of our revenue and the transfer stations which are effectively disengaged for the landfills produced another 10%. The landfills by themselves had another great quarter, driven by strong pricing, 3.7%. And on an even stronger average price per ton improvement of 5.6% and our cost were about flat. However, our cost on the transfer piece has increased, particularly the transportation cost. Combining the two, we still improve cost of ops as a percentage of revenue by about 40 basis points. So, pricing is strong enough to cover, and we expect that to continue.

Now I'd like to get back to the growth opportunity and comment on some of the things we're doing to assure success and some of the ancillary benefits of growth. First, the opportunity. Our industry, particularly in the northeast faced many challenges over the past 10 years. There were equipment issues resulting from new emission standards, recycling commodity risk which were residing with the collection companies, increasing disposal shortage, driver and mechanic shortages and a tough regulatory environment, just to name a few.

As we overcame these challenges, we found our smaller competitors that continued to struggle. We offer opportunities for the owners, the owners' families in the business and their employees to join a Company with a great reputation and a strong culture with positive values and the ability to solve their business challenges, while taking their investment off the table, more like mergers and acquisitions.

Since it became apparent in our market that we were back in the game, our pipeline of potential deals has expanded exponentially. The resulting opportunity for growth through acquisitions is coming at the perfect time for us. Our ship is in order. Yes, we have everyday challenges, just like everyone else, but we have processes in place to handle them and more importantly people in place with the decision making skills needed to meet those challenges.

We've not talked much in the past about our management development activities, but those leadership programs at Casella, which were in place long before are right here, are up and running strong. And we continue to develop the kind of decision makers that will lead the Company in the future. And that they're now providing bench strength for our growth. Over the past year, we've added a few key resources primarily through promotion and backfilling to assure that we not only grow through acquisitions, but we are successful in integrating these operations and realizing the synergies that make this strategy successful. We also continue to improve our systems and processes and over time, the integration process will become easier and easier. The growth strategy also enhances our ability to attract and retain talent.

Our culture of continuous improvement not only applies to our processes, but to our people as well. And growth provides opportunities to learn and to advance in the Company. I'm not only talking about management, our driver and mechanic career path programs provide direct training and advancement opportunities at the very core of our business.

So with those few comments, I would like to turn it back to the operator now to start the question-and-answer session.

Questions and Answers:

Operator

Thank you. (Operator instructions) Our first question comes from Tyler Brown of Raymond James. You may proceed with your question.

Tyler Brown -- Raymond James -- Analyst

Hey, good morning, guys.

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Good Morning, Tyler.

Tyler Brown -- Raymond James -- Analyst

Good morning. Hey, Ned, super helpful on the EBITDA bridge. One clarification though, on the negative $8 million from Southbridge, is that net of redirecting waste? Or is there a possibility to soften that number either this year over time?

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah. There is a possibility over time. If you look at, I said all other disposal sites being up $7 million to $9 million year-over-year was about 3.5% to 4.5% of price and then some disposal volume growth. Some of that growth is going come from our own tons. In '20, about two years ago, we got a permit increase at our Chemung Landfill from 200,000 tons a year to 437,000 tons a year and then in late 2018 with our permit increase at our Clinton Landfill from 175,000 tons a year to 250,000 tons a year. We've actually held back some of this capacity for this date to come where we would be able to redirect some of our volumes from Southbridge out to New York state to take care of our customers. Not all of it's going to go there, some of it's going to stay in Massachusetts going to third-party sites. So, there is a little bit of benefit in our other landfills from Southbridge. We are spending more money though transporting that waste out to New York state.

We are driving some additional hires third-party volumes to Chemung and Clinton, in the year as we access that additional capacity coming online. Longer term, as we work through permitting at North Country, it is probably even more of an opportunity to drive value, integrating a few more Massachusetts tons into that site as well.

Tyler Brown -- Raymond James -- Analyst

Okay. That's very helpful. A quick clarification on the free cash side. So I know in the normalized free cash flow, you exclude the $12.5 million on the landfill closure, the remediation expenditures, you add that back, but will that expenditure flow through cash from ops? And will that largely go away in 2020?

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah, I was running along on my script. So I'd say it is the whole back in that phase. But net cash provided for operating activities are noticed in our guidance, is pretty flat year-over-year. And the reason is, because we're taking down current accruals for landfill capping closure, the remediation at Potsdam, all those reside as liabilities and in our forecast through our budget for 2019, that cash goes out the door as we complete those activities. So, net cash provided by operating activities, it really skewed in the year by close to $12.5 million to $13 million through these activities. And this is going to be a big year at Southbridge after we get through this initial tapping into big year of closure will come to a point where we spent $5 million or $6 million a year or the year after. And then that will drop to a couple of million dollars for the year or two after that.

Potsdam is a site that was acquired in the late '90s. We've been working with the EPA from probably 15 years where this is, unfortunately, part of this site we acquired had a old metals business and there were some remediation efforts that need to happen. And it has taken this long -- along with our partners, Niagara Mohawk and Alcoa to come to a conclusion with the EPA to have a remediation plan, and we believe the work will finally take place in 2019 to clean up that site appropriately. So that's appropriately accrued, but it's been a short-term accrual over the last year that will reverse out and hit our free cash flow. You know, that's a pretty large swing and that's why we're calling that out, and it's all non-routine.

Tyler Brown -- Raymond James -- Analyst

Right. Okay. And then same type of question on the $8.5 million of added CapEx, will that abate also going forward or should we expect that if you can make continued M&A.

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

So, a good bit of that associated with M&A. We really as we buy businesses, we of course have pro formas for a multi-year period of time looking at the entire fleet and other capital needs of where replacements need to come. But in the first six months to the year of an acquisition, we're really focused on integrating it with our business. And there might be some facility changes, equipment upgrades, you name it. And there's a heightened level of CapEx and we really do that in many ways as part of the purchase price to get the assets integrated. So we are calling that out, and you will see as we do acquisitions may wish to give a little bit more visibility as well what's coming in the near term.

Tyler Brown -- Raymond James -- Analyst

Okay, that's helpful. And then interesting commentary on the NOLs. But at this point, when would you expect to become a meaningful cash taxpayer?

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

So, bonus depreciation stays at 100% through 2022, and what's interesting is, we're getting a double benefit, because as we acquire businesses especially through asset acquisitions we're taking a 100% bonus depreciation on their assets as well. And everything we're buying except for landfill assets, so we shielded over 100% of our pre-tax income in 2018 through bonus depreciation.

Bonus depreciation stays at 100% through 2022 then drops to 80% and kind of comes down over the next five years after (technical difficulty) so tax law stays the same. Our NOLs will take us out through 2024 or even later with our current planning where we're not going to be a meaningful cash tax payer.

Tyler Brown -- Raymond James -- Analyst

Okay. That's very interesting. And then my last question here for John, on the M&A side, you guys obviously have a lot of powder on the balance sheet. You talked about exceeding the $20 million to $40 million target, but curious, should we still expect to see small onesie, twosies? Or could there be something more meaning, I guess in the acquisition pipeline?

John W. Casella -- Chairman, Chief Executive Officer and Secretary

I think you continue to see the smaller activity. I think that there is -- there are a few opportunities similar to what we did in Rochester, other markets that are within our footprint that we're not in, Tyler, that could be a little bit more meaningful than a $8 million or $10 million acquisition, but you really going to see more of the same as opposed to anything really different from an acquisition standpoint.

Tyler Brown -- Raymond James -- Analyst

Okay. All right. Thanks, guys. Appreciate it.

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Thank you, Tyler.

Operator

Thank you. And our next question comes from Michael Hoffman of Stifel. You may proceed with your question.

Michael Hoffman -- Stifel, Nicolaus & Company -- Analyst

Thank you, team for taking the questions.

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Hey, Michael.

Michael Hoffman -- Stifel, Nicolaus & Company -- Analyst

Hey, John, Ed, Jason, Joe Fusco. City of Boston, if I -- I have my data right, is in -- in a rebidding mode, of all three major contracts. This collection -- the disposal, the recycling, so this has sort of multi-parts to it. One, can you share your current direct exposure? Two, what do you think happens to the disposal price versus the last round, if I -- my memory reserves the last round, was in the low $70s plus cost escalators? And the third part of that is, if this comes out at a number with a $90 handle on it, how is that sort of trickle through for you? Is it -- is obvious if we ended at $80 and may go to $90 and that's a 12% increase. Do you get to raise all your prices 12%?

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah. So, the only direct exposure we have right now to City of Boston contract is on the recycling side. And we've been talking for the last year about a few contracts where we're upside down. One was with independent where we're up (technical difficulty) on that one contract. We reset that on January 1st, to current market rates, and it will be -- pickup of almost $2 million a year on that one contract. And then the second contract we're under water with the City of Boston, we did bid on that contract. It's in process right now -- we bid to make money and to reduce our risk profile. So we feel pretty positive about that. Some of that competitors in the market...

John W. Casella -- Chairman, Chief Executive Officer and Secretary

With the swing on the Boston contract.

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah. If we win at current rates, it will be about $3 million a year swing.

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Yeah.

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

Positive swing for us. And that, that will be awarded for July 1st, so we can pick up about a half a year on that. So some of that really is in our numbers for the year if our recycling, while it's improving year-over-year, even though we're modeling commodities to be flat. City of Boston, several people did bid on the trash including Republics, small parts of it; Covanta, on all of it; Wheelabrator on small parts of it. And there is some visibility yesterday on the bids coming from the market. It really won't impact us. Our waste doesn't flow through the City of Boston. We're not calling for the residential customers in the City of Boston either, but it will be market signal, that's pretty important.

Michael Hoffman -- Stifel, Nicolaus & Company -- Analyst

Do you think that $8 (ph) or $9 (ph)?

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

So, the bids...

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Yes.

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

The bids are anywhere from mid-$80s to mid-$90s, the best we can tell.

Michael Hoffman -- Stifel, Nicolaus & Company -- Analyst

And is it fair to say that we are ending somewhere at the high-$70s, low-$80s. So whichever one wins, let's say the midpoint $90, does that percent change? Can you do that type of percent change, just ratably across your network or that sort of sets the direct whole number and then the rolling number going out to you?

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah.

Michael Hoffman -- Stifel, Nicolaus & Company -- Analyst

So, if you have a $50 number somewhere, can you raise it 10%? Could you raise it buy bucks?

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

So, if you look at kind of like our price increases, both on the hauling side and on the disposal side, they're really very blended numbers. If you get under the hood, they might range from anywhere of 0% or 1% or 2% increases all the way up to 15%, 20% increases, because there are a number of contracts that reside in that book of business. So if you look at any one of our landfills as customers are rolling off contracts depending upon how long ago the enter those contacts, they could be seeing a 10% increase, a 20% increase or more depending on where they sit and where the other advantages are in the market. John, you said in year script we're entering in very short-term agreements, right now. If any...

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Yeah. I think that there is no question they're going to see double-digit inflation in the Massachusetts market, Michael.

Michael Hoffman -- Stifel, Nicolaus & Company -- Analyst

Okay, that's what I was trying to get to.

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Yeah, I don't think there's any question about it. It's also a lot of pressure from a transportation standpoint as well.

Michael Hoffman -- Stifel, Nicolaus & Company -- Analyst

Okay. Second question for me. We've watched you meaningfully improve the cash conversion of the model and I think because of your mix of other revenues, which are lower margin, part of the right way to think about this is the percent of EBITDA. So what's the probability, you could get to a 40% or better cash conversion? You are in the 30s now and one, what does take to do it? And how long would it take it?

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah. Good point. So, our free cash flow as a percentage of revenue is slightly dilutive. Our organics business in many ways has a lot of brokers components and our customer solutions business has a large degree of brokerage revenues. So our revenues, are grossed up and our direct costs are grossed up. So it's a little bit less margin flowing through those businesses, but nice cash conversion as you laid out. So, looking at -- free cash flow as a percentage of EBITDA is important. And as we said, we've got a game plan over the next several years to add over 200 basis points to that conversion rate. We're working hard at that.

The pathway to get it into the 40s (ph) is a little further out. We haven't laid that out for investors. But if you look at the numbers, we laid out, yesterday evening $65 million to $70 million free cash flow by 2021. That gets us, I'm not sure if I've got a percentage in front of me Jason, but that gets us more into the high-30%.

Jason Mead -- Director of Finance

High-30%, yes. Close to 40%.

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

It was pretty close to 40%. So, we are in a trajectory. It is something we're very focused on Michael.

Michael Hoffman -- Stifel, Nicolaus & Company -- Analyst

Okay, that's great. And then last one for me, what's the probability that you can drive SG&A to 12% and will not work you and your finance team the best, but what's the probability, you can get to 12%?

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah. So, we do have a multi-year plan on the technology side. We are quite inefficient today in the back office and no fault of anyone is just, the solid waste business is complex every customer has different pricing structures, different billing structures is a lot going on, and we have a lot of paper that moves in all elements of our business. So, we made the first step with the ERP implementation in 2018 with NetSuite. I'd like to say where we are today, a year later as we're just about as efficient as we were beforehand. We've got a lot of work, especially on the digitization side of taking paper -- taking approval steps, taking manual intervention out of the work, we'll be very focused on that over the next year, plus. The side of the business where we really start to gain more leverage is when we upgrade our billing, work for the management routing systems, both on the G&A side and on the operating side.

We are six months into a product selection process on that side and remarkably, there's not a lot of amazing solutions out there for the solid waste business. There are lot of people who have built solutions for small, kind of like HVAC type businesses where you have maybe 10 service calls in a day. But service management solutions with 400, 500, 800 staffs in the day are not out there as much. So we're still evaluating next steps forward there and it is part of our management plan to take 75 basis points to 100 basis points out by 2021. And there's no reason this stock, if we can get more and more efficient and will gain some scale as well you saw in 2018 with acquisition work. We expect in 2019 we're not adding people at the same pace as revenues.

John W. Casella -- Chairman, Chief Executive Officer and Secretary

I think Ned in the finance team, Michael, did a great job of getting us to new platform which NetSuite in the cloud we've been on it now for six months, the transition is full, but we're starting now -- will be, starting to bring out and bring in the efficiencies of moving to that platform from the platform that we've been on for 35 years. I think the execution on time, on budget in terms of getting to NetSuite in the cloud and getting to the next generation of software was really well done, but we haven't gotten the efficiencies, it will take probably this next year to really get additional efficiencies from the ERP program to say nothing of stepping into a new program from a routing and billing perspective, I think we are moving to the future, very rapidly.

And I think most importantly, we're going to be a lot easier for our customers to do business with, when we get, get that implementation the five-year technology plan implemented. I think it's going to bring a lot of productivity and efficiency to the organization. And we're at the beginning stages of that. First thing we had to do is get on the new platform. And it's really exciting, because we're going to have one database for the entire Company and that's a real step in the right direction.

Michael Hoffman -- Stifel, Nicolaus & Company -- Analyst

Terrific. That's it for me. I appreciate it.

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Michael.

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Thanks, Michael.

Operator

Thank you. And our next question comes from Sean Eastman from KeyBanc Capital. You may proceed with your question.

Sean Eastman -- KeyBanc Capital Markets -- Analyst

Hi, guys. Congratulations on closing out really strong year. I just wanted to start on the acquisition pipeline and just trying to get a sense for the potential this year. I know you guys said, you'll do above the original target, but just wondering, how we should be thinking about that $77 million you guys added in 2018. Was that really outsized number? Or does this pipeline sort of support...

John W. Casella -- Chairman, Chief Executive Officer and Secretary

I think it's fair to say that there was a bit of pent-up demand. It was the first year, we got started and we got a little bit of activity out in front. But I mean, I think that, we've said that we've got, we're tracking with LOIs for the upper end of the range, around $40 million right now, that we're working on. We've got good visibility. So we think that we're going to be certainly at our target from acquisition standpoint. We necessarily say that we're going to repeat '18, but certainly we're going to be at the upper end and that's where we are in terms of the visibility with LOIs that we're working on right now?

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

But, it's also we're metering a bit. I think it would be fair to say, integrations more important than getting the deal done even in many ways. So, you don't -- and talked about people earlier and adding a few key resources in making sure, we get the work done on integration. So we're -- we're running on a few deals right now, jogging on in a few others to making sure we get integration work done from 2018 acquisitions.

Sean Eastman -- KeyBanc Capital Markets -- Analyst

Okay. Great. Sort of my next question. You guys did speak to it in the prepared remarks, but just wondering, how to think about the challenge ahead on integration considering '18 came in so much above the initial expectations, maybe just a bit more color on the teams that are in place, and some of the measures there with the synergies.

John W. Casella -- Chairman, Chief Executive Officer and Secretary

It's really exciting. I mean one of the things that we've done is, we've added some talent from an accounting standpoint, particularly in the western region with Dennis and -- Dennis Pantano or Michael Stehman, that we've added an additional regional controller there, it gives Michael little bit more opportunity to help on the integration side. He was the regional controller, and now we've brought in another controller to free up Michael, from an integration standpoint and as well as Dennis. And we brought in some new talent from controller standpoint for that market.

We've done some things from an operating standpoint, additional support there with Ed from an operating standpoint with, Sean. So, I mean as we identify those areas that we need additional resources we're executing on that and putting additional talent in place to make sure that we integrate those businesses appropriately quickly and get the integration behind us as quickly as we can.

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

And typically in integration, we are talking something into existing business within months, you're running pretty close to efficiency in 6 to 12 months, you're all the way there. Rochester, we're putting four stand-alone businesses together, a lot of logistics there. And as we laid out as we did these acquisitions, it's going to be a year and a half to were fully integrated and up and going in that market, is a lot of work, tons of opportunity as well for us. So we're...

John W. Casella -- Chairman, Chief Executive Officer and Secretary

And actually going to be over a couple of year period of time in that. Some of the existing disposal contracts don't roll off for another year, year and a half. So, we will be able to internalize some of that waste until probably two years out. So, but that's all incorporated into our plan -- incorporated into the pro formas. That's how we perform it. So, no surprises there at all. But it will take -- it will take a little bit more time as Ned said with regard to the integration, full integration of the Rochester market. So, little more complex than a normal tuck in -- into an existing facility there. We're taking four businesses and putting them together.

Sean Eastman -- KeyBanc Capital Markets -- Analyst

Super helpful. Really appreciate your time. Congrats, again. Thanks.

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Thank you.

Operator

Thank you. And I'm not showing any further questions at this time, I would now like to turn the call back over to Mr. Fusco for any further remarks.

Joseph Fusco -- Vice President

I'd like to turn it back over to John Casella for closing remarks.

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Thanks, everybody for your attention this morning. We look forward to discussing our first quarter 2019 earnings with all of you in early May. Thanks. Everyone have a great day.

Operator

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone have a wonderful day.

Duration: 54 minutes

Call participants:

Joseph Fusco -- Vice President

John W. Casella -- Chairman, Chief Executive Officer and Secretary

Edmond R. Coletta -- Senior Vice President, Chief Financial Officer and Treasurer

Edwin D. Johnson -- President and Chief Operating Officer

Tyler Brown -- Raymond James -- Analyst

Michael Hoffman -- Stifel, Nicolaus & Company -- Analyst

Jason Mead -- Director of Finance

Sean Eastman -- KeyBanc Capital Markets -- Analyst

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