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Casella Waste Systems Inc (NASDAQ:CWST)
Q3 2020 Earnings Call
Oct 30, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 Factor 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 will begin today's discussion.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

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 frontline. 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, contact tracing, disinfecting procedures, non-essential 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 onto 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 continued to execute well against our strategic initiatives despite headwinds related to COVID. The proactive response to our sales, customer service and operational teams benefited our performance in the quarter.

We continued to meet our customers' service interval and sustainability needs while effectively scaling variable costs. We are executing our pricing programs, and we continued 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 continued to see volume 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 tonnage is 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 9th, we received an important permit modification from the New Hampshire DES for our North Country Landfill. The permanent modification increased the site's disposal capacity by 1.2 million cubic yards, which will provide approximately six 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 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 and operational metrics in a more responsive and intelligent manner. This visibility and response coupled with proactive effort related to our customer service needs enabled us to scale our operations in a meaningful manner driving our 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 the 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 in 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 continued to execute well here through October. We've completed nine acquisitions thus far in 2020 with approximately $21 million of annualized revenues. In the quarter, we completed two tuck-in acquisitions. On October 1, we closed three more acquisitions, two of which were tuck-ins and the other Pinto Trucking Services 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 balance sheet are well positioned to meaningfully grow the business and drive further free cash flow growth. 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.

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

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 achieved 2.7 million shares of Class A common stock and yielded $151 million of gross proceeds before underwriting discounts and transaction fees. This is 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 In 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 30th, we had $549.1 million of debt and $21.1 million of cash, and our consolidated net leverage ratio was 2.99 times. If we netted a 100% of the equity raise against our debt as of September 30th, our leverage which were up [Phonetic] to 2.17 times or reduction of 0.8 times. In addition, pro forma for the transaction are available liquidity was $339 million as of September 30th.

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%, with a 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%, with 6.3% growth from acquisitions, and volumes were down 6.4%. Collection volumes continued to rebound through the third quarter and 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 is 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 translated 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 flex costs to lower revenue levels and we anniversaried many of the inflationary headwinds that had negatively impacted margins in 2018 and early 2019.

General 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 nine months. Our days sales outstanding was 32.3 days as of September 30, and this is down nearly seven 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 mid term, especially now that the Federal stimulus programs are starting to wind down. Third quarter included 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 continue to invest during the quarter and 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 estimated 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 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 remainder of the year as the second wave of COVID is emerging. However, the ranges do not contemplate a severe relapse 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 placed great importance on free cash flow generation and we are quite proud to reestablish our rational 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, we received early in the third quarter. We also expect certain operating overhead cost to continue to ramp back to more normalized levels and there is a lot of uncertainty right now as COVID cases are ramping across Northeast.

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

Edwin D. Johnson -- President and Chief Operating Officer

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 in place in March and we continued 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 return closer to normal in the quarter.

Traffic is returned, so operating hours and labor costs are a little closer to budget and the disposal weights are normalizing as customers either would resume business for adjusted service. Pounds per container yard is back to within 2% of normal on the commercial side and on the revenue side pounds per lift is down to within 6% of normal. Some of the commercial volume has returned we are 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 was 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, 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 will be working through our budgets for 2021 over the next few months.

Thank you for your attention, and now I would like to turn it back to John.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

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 and 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.

Questions and Answers:

Operator

[Operator instructions] Our first question from the line of Michael Hoffman of Stifel. Your line is open.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Good morning, Michael.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Good morning, hope everybody is well.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

We are.

Michael Hoffman -- Stifel Nicolaus -- Analyst

How is the fall foliage, it is good given it was down?

John W. Casella -- Chairman, Chief Executive Officer & Secretory

It was white. It was after it was down.

Michael Hoffman -- Stifel Nicolaus -- Analyst

It was white. Oh my goodness. Well, the ski season might open soon. Ned, on the free cash flow guide, just I was trying to keep up with how fast you're talking, my writing, the new guide or revisited guide reflects paying back the CARES Act. Is that correct?

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

Yes, it does.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay, all right. So it seems that it's actually better than the original guide because you had the CARES act, if that's the way to think about it, right or net neutral and back to even.

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

Yeah, so I mean the original guide for the year, we didn't know about it. There was no CARES Act back then, right. So we are kind of backed even to that, but we are tracking even better against the guide, we put out August, because at that point in time. I did not contemplate pain.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay 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 four or five years for this to play all the way through kind of 12-13. Are we basically repeating the same amount of loss business and it's now stabilized and from this point forward we can talk about sort of on an annual basis of growth pattern.

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

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

John W. Casella -- Chairman, Chief Executive Officer & Secretory

And I think that some of the benefit of the IT work that you in the whole finance team and the team has done is 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 right sizing the business or the revenues that they actually have.

So some of the benefit of the work that we've done from a system standpoint over the last couple of years really has come to play over probably the last two to three quarters, in particular.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay. So if you thought about your incremental margin, in January, 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?

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

So when you say for each dollar of new collection revenue or the incremental margin.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Right. If you think about the operating leverage of incremental growth, what dis that look like in January, February and 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 margins better, because you're going to be able to do some of this business on a leaner cost structure.

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

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

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Routing efficiencies in terms of the reroute equipment efficiency putting automation in place in different -- just due to 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 and Sean are paying dividends.

Michael Hoffman -- Stifel Nicolaus -- Analyst

It's amazing when you're in your COVID caves 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.

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

Yeah, 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 trucks vendors to see if we could actually more trucks this year and Ed was able to find a number of Curotto-Can trucks to get onto road immediately and we accelerated part of our capital plans from 2021 to drive greater efficiency late in the year, 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.

Michael Hoffman -- Stifel Nicolaus -- Analyst

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

John W. Casella -- Chairman, Chief Executive Officer & Secretory

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 low over the last couple of months in terms of activity with people getting out. I think we've got a little bit more and activity has begun to increase over the last, the last probably month or six weeks maybe in terms of activity being meeting with potential candidates really getting out and from a business development standpoint.

So I think we will begin to see that improve, assuming we don't have a set back 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 substantially, but certainly up for the numbers that we've been seeing so, but pipeline is strong and in terms of -- the last thing that I said was how proud we were of our people in 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 well, I think everyone is seeing a little bit of COVID fatigued, I think we are well positioned with our people to get through the rest of the year, hopefully get to a vaccine vaccine and we're thinking about what's the next thing that we need to do for our people over the course of the holidays.

It'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.

Michael Hoffman -- Stifel Nicolaus -- Analyst

Okay, thank you very much. Enjoy your early winter.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Thank you.

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

Thank you.

Operator

Thank you, sir. We have another question from the line of Tyler Brown from Raymond James. Your line is open.

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

Good morning, Tyler.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Good morning, Tyler.

Tyler Brown -- Raymond James & Associates -- Analyst

Hey, Ned. So obviously 90 basis points of total margin expansion was just -- I mean this is really impressive. I mean you had down internal growth. I think the 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, how with all of those bad guys what were the good guys that were just really working for you.

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

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, our over times up a little bit. So from our standpoint, we started to maybe start to normalize several of those cost categories, but on the good side, it's price and excessive 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 there are the same things over there in Q4 of 19 in Q1 of 20 and the COVID is there as you are 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.

Tyler Brown -- Raymond James & Associates -- Analyst

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 push the margin ball forward or do you think that you maybe take a step back in margins in '21.

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

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 knot holes and we have 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 90 to 200 basis points. I think we're up 140 basis points year-to-date, that's pretty spectacular, for us success would be up 50 basis points next year.

Tyler Brown -- Raymond James & Associates -- Analyst

Yeah, yeah. Okay. Okay, that's helpful 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 4, 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 in some landfill tons. But is there a bit of conservatism in there.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

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

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

Yeah. We've taken up -- 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 were 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, fuel up, a little more traffic as I said with productivity, we're assuming those trends continue to normalize into the fourth quarter. We have continued to be on a lot of things, but from our vantage point right now with all the uncertainty, we're being a bit conservative.

Tyler Brown -- Raymond James & Associates -- Analyst

Okay. 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 through 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.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Yeah, 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, which you know is a world-renowned for their traffic has all the industries opened up in the second quarter and we've seen that traffic start to come back.

Tyler Brown -- Raymond James & Associates -- Analyst

Yeah, I know and I live in Atlanta. So I know a lot of traffic. And my last one real quickly, just is 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, almost give some haulers maybe a life liners, has that been a headwind at all?

John W. Casella -- Chairman, Chief Executive Officer & Secretory

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

Tyler Brown -- Raymond James & Associates -- Analyst

Okay. Yeah. I was just -- OK, that's interesting. I don't want to take up too much time, but I appreciate the time you gave me. Thanks.

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

Thank you, Tyler.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Thank you.

Operator

Thank you. We do have another question from the line. Presenters, we have Hamzah Mazari from Jefferies. Your line is open, you may ask your question please.

Hamzah Mazari -- Jefferies -- Analyst

Hey. Good morning. Thank you. 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've talked a lot about margins?

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

Yeah. Thanks, Hamzah. Good morning. So as we laid out in our 2021 plan a few years back, our goal is to grow free cash flow 10% to 15% a year or more, and as we look to next year and 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 this normal of the pattern as possible to ensure that growth.

Hamzah Mazari -- Jefferies -- Analyst

Got it. 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 players looking at -- has been looking at collection assets that didn't in the past?

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Yeah, 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 will do just fine.

Hamzah Mazari -- Jefferies -- Analyst

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?

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

It's around $2 million a year or less.

Hamzah Mazari -- Jefferies -- Analyst

Got it. Small. Got you. Okay. Thank you so much.

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

Thank you.

Operator

Thank you. [Operator Instructions] we have another question from the line of Sean Eastman from KeyBanc. Your line is open.

Sean Eastman -- KeyBanc -- Analyst

Hi guys. Nice quarter. [Speech Overlap] Sure a lot of hard work went into that. 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 a program. Just curious where the market, sort of, sits today relative to that, and maybe how that's changed since we 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.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

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 is any changes at this point in time. As Hamzah said there is -- we have Wheelabrator in the market. It is 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 will, as I said before, do just fine.

And I don't know, if Ned maybe wanted to walk through the margins [Speech Overlap]?

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

Yeah. 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 in 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. In many cases, we're looking at greater than 20% returns depending upon risk profile had overlays. If you look over the last couple of years, and we're paying post year-one EBITDA 6.5 times or so. So it's not -- it hasn't dramatically changed. We are trying to find opportunities where assets fit with ours, and we can drive some nice synergies, and we can do that within a two-year time frame, and we've been pretty successful doing that and we'll continue to focus in the same area.

Sean Eastman -- KeyBanc -- Analyst

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

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Yeah. 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 toward 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 will be closer to the $40 million than we will in the lower end of the range. But I don't see, at this point in time that we would change it.

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

Yeah. We don't budget acquisitions either. It's 100% opportunistic as you know. We don't guide long range acquisition. So we're 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 tried to...

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Development side.

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

Development side. We tried to position ourselves where we can pick up our cadence and be more effective from an integration, HR people, each 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.

Sean Eastman -- KeyBanc -- Analyst

Got you. Last one from me is, you guys talked about being conservative on the, sort of, go forward volume recoveries with the stimulus money coming out. Is that remaining 25% of volume that you're unclear on? But it 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 in trying to understand like what the inherent feeling is on this volume recovery?

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

Yeah. So I was talking specifically about the commercial line of business. So there has been three 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 this kind of in three different areas that 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. In the landfill sheets, you have a read, recently we're probably back to...

John W. Casella -- Chairman, Chief Executive Officer & Secretory

90%.

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

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 and 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 of our secondary 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 and roll off and at the landfills as well.

Sean Eastman -- KeyBanc -- Analyst

Okay. That's super helpful clarity. Again, compliments. Thanks, guys.

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

Thank you.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Thanks.

Operator

Thank you, sir. Presenters, we do have another question from the line. We have Alexander Leach from Berenberg Capital. Your line is open. You may ask your question.

Alexander Leach -- Berenberg Capital -- Analyst

Hi, guys. What's the environment been like for new customer additions across the business in Q3? And then some [Phonetic] on the flip side house demand been holding up for existing customers and customer solutions. I know you mentioned a number of industrial customer wins, but how is the demand held up for everyone else?

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Edmond?

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

So in resource solutions. I'll start there. 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 are larger industrial was addition to services for existing customers, which is exactly one of our key strategy, growing the share of wallet. This is 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 built to be on site and working with these customers and working through this project. So our backlog has 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 industrial?

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Industrial customers. Yeah. What was the last part of the question, Alex?

Alexander Leach -- Berenberg Capital -- Analyst

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.

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

Yeah. 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 in 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.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

And I think that we've seen clearly an increase in roll-off pulls from a residential standpoint as well with people being home is 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.

Alexander Leach -- Berenberg Capital -- Analyst

Okay. Great. Thanks. 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 all commercial customers who are struggling with the pandemic, or is there anything else that favor?

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

We really haven't given a lot of pricing concessions per se, it's more of just the timing. So we got out the door with quite a bit of our pricing in the first quarter ahead of COVID. And then as you know, our customer base in the world dealt with COVID. We paused some of our pricing programs through the second quarter into 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 have 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.

Alexander Leach -- Berenberg Capital -- Analyst

Great. Thanks, guys.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

Right. 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.

Alexander Leach -- Berenberg Capital -- Analyst

Right. Okay. Thanks, guys.

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

Thank you.

Operator

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

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

Back to you, John.

John W. Casella -- Chairman, Chief Executive Officer & Secretory

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

Operator

[Operator Closing Remarks]

Duration: 54 minutes

Call participants:

John W. Casella -- Chairman, Chief Executive Officer & Secretory

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

Edwin D. Johnson -- President and Chief Operating Officer

Michael Hoffman -- Stifel Nicolaus -- Analyst

Tyler Brown -- Raymond James & Associates -- Analyst

Hamzah Mazari -- Jefferies -- Analyst

Sean Eastman -- KeyBanc -- Analyst

Alexander Leach -- Berenberg Capital -- Analyst

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