Casella Waste Systems Inc

NASDAQ:CWST

Earnings Call Transcript 2020-Q2

[Joseph Fusco, executive]

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 second quarter results. These results were released yesterday afternoon. And along with a brief review of those results and an update on the company's activities and business environment, we will be answering some of 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.

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.

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

[John Casella, executive]

Thanks, Joe. Good morning, everyone, and welcome to our second quarter 2020 conference call. To begin with, I'd like to acknowledge and sincerely thank our dedicated workforce. Our management team did an unbelievable job keeping our people safe, so they could provide the services to our customers and communities. And a special thanks to the frontline workers who continue to work hard through this challenging time. Their efforts made it possible to provide this essential service in a safe, effective manner to the customers and communities that we serve.

The company remains diligent and focused on ensuring the well-being of our employees along with the business -- along with business continuity. We're nimble, observant as it relates to CDC guidelines and state orders. Leaders throughout the company have done a top-notch job communicating, organizing, implementing mitigation measures, including the distribution of PPE, social distancing, contact tracing, disinfecting procedures, limiting nonessential travel and in-person meetings and working-from-home transitions.

Our sales and customer service and operation teams have been exceptional with their proactiveness and sensitivity to our customers, their needs, their service and sustainability needs as well. This flexibility not only allows us to maintain strong relationships with our customers, but it also enables us to rightsize service interview, and most importantly, flex variable costs. Further, we have leveraged our systems to monitor and track key sales and operational metrics through this period, resulting in a responsive scaling of our operations. Overall, our efforts have reduced the number of cases and limited business interruption that we have experienced thus far.

Moving to the quarter. In this challenging environment, volumes within the solid waste were significantly impacted by COVID. Nevertheless, the resilience of the business and our continued execution against key strategic initiative is apparent in our results. Despite the volume-related headwinds, coupled with other COVID-related expenses, we improved adjusted EBITDA by 8.9% year-over-year while expanding margins. We have also improved adjusted free cash flow in the quarter while maintaining our consolidated net leverage ratio well within our targeted range.

I would also like to highlight that we have closed on 6 acquisitions to date in 2020 with approximately $16 million of annualized revenues. It's notable that 4 of these acquisitions have closed since April. We continue to be excited about our growth opportunity, and our pipeline remains robust.

Overall, we're very pleased with our response to the pandemic. We see the effectiveness of our proactive response to COVID, operational programs, positive pricing improvement within our Resource Solutions business, execution against our acquisition growth strategy and continued capital discipline.

Next, I'll move on to some color on the recent performance of our operations as well as our continued execution against our key strategies. Disposal volumes were down nearly 16% in the quarter, mostly as a result of the effect of COVID on the economy. In anticipation of lower volumes, we dug in flex costs where we could across our disposal operations. As you know, landfills have a much higher fixed cost and collection operations. Nevertheless, our operations team did a tremendous job with prudent cost reductions while maintaining heightened focus on our safety and compliance protocols.

Through July, we're seeing landfill volumes up slightly sequentially. However, we are not experiencing the typical seasonal ramp we usually see during the summer months. Our focus will remain on providing a central environmental services that meet the needs of our customers. We will continue to develop strong relationships with our host communities, customers and our stakeholders. We aim to have continued success in obtaining expansions that will allow us to continue to meet the disposal needs of society.

A quick update on our North Country Landfill in New Hampshire. In mid-March, we refiled our permit application for Stage 6. Permit application was recently deemed administratively complete, and we're hopeful for a final approval by fall.

Now to the Collections business. As expected, with shutdowns, lower economic activity levels related to COVID, commercial and industrial volumes were negatively impacted in the quarter. Collection volumes were down over 10% year-over-year. However, overall collection revenues increased due to the rollover effect of acquisitions and positive pricing. Despite the volume win, collection adjusted EBITDA and margins improved year-over-year in the quarter.

As I mentioned, we have been very proactive and flexible with our customers during this unprecedented time. Our teams worked diligently in helping where needed to modify service levels, suspend service levels in some cases. These actions enabled us to quickly

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costs such as labor overtime to appropriate levels. We were able to modify routes and better optimize costs, all while ensuring that continued success of our operational excellence initiative, which is focused on service compliance, reduce safety incidents and efficiencies.

Moving on to Resource Solutions. In January, we combined and realigned our recycling, organics and customer solutions teams into 1 organization called Resource Solutions. This newly formed segment will allow us to better meet our customers' sustainability and service needs over time through our ability to better leverage our sales force and back office. The Resource Solutions organization had another strong quarter, led by the recycling business, where we improved adjusted EBITDA and margins year-over-year.

Our risk mitigation programs are working well, and we continue to focus on operational initiatives and producing high-quality end products. We have effectively passed recycling commodity risk back to our customers. We remain committed to meeting our customer sustainability needs as well as ensuring our employees' safety through the reduced -- reducing exposure risk along the processing lines by way of distancing measures, increasing the cleaning of equipment, et cetera.

Within Resource Solutions, the Customer Solutions and Organics business also performed well during the quarter with combined adjusted EBITDA growth even while experiencing lower economic activities due to the pandemic.

Lastly, I would like to highlight our capital allocation and growth strategy. As I mentioned before, we completed 6 acquisitions thus far in 2020 with approximately $16 million of annualized revenue. In the quarter, we completed 2 acquisitions, a tuck-in operation in Central New York and a transportation operation in the Rochester, New York market. In July, we closed on 2 more tuck-in acquisitions. We have seen acquisition activity slow down slightly over the past few months with COVID, but we still have been able to close on deals that were in process. We believe there will be continued -- there will continue to be a sizable opportunity to grow the business in a disciplined manner and to further drive free cash flow growth. The pipeline remains healthy, and our balance sheet and teams are well positioned to continue to execute against this initiative.

Wrapping up, as trying as the past few months have been, we are incredibly proud of the response of our employees along with the company's execution and performance. In recognition of the incredible work and dedication of our employees, we'll be paying a onetime special bonus to our frontline and hourly back-office employees. Thanks again for representing our core values and culture. Together, we've helped to keep our communities running throughout the crisis.

We'd also like to welcome Rose Stuckey Kirk to our Board. Rose is an exceptional leader who brings important skills and perspectives to our Board to help us further build our business.

And with that, I'll turn it over to Ned to walk through some of the financials.

[Ned Coletta, executive]

Thank you, John. Revenues in the second quarter were $188.8 million, up $1.3 million or 0.7% year-over-year, with 5.3% of the year-over-year change driven by acquisition activity. Solid waste revenues were down 1.1% year-over-year with price up 4.4% and 6.8% growth from acquisitions and volumes down 12.3%. Revenues in the collection line of business were up 2.1% year-over-year with price up 4.3%, 9.2% growth from acquisitions and volumes down 10.6%. In the commercial line of business, we saw volumes down 12.5%. And in the roll-off line of business, we saw volumes down 16.4%. Collection volumes were up sequentially from April through June, as we hit a low point of COVID-related volume losses in April.

Revenues in the disposal line of business were down 9.1% year-over-year, with landfill pricing up 6.2%. Landfill tons were down 18.4% year-over-year as economic activity and construction projects were both negatively impacted by COVID. Landfill tons, though, were up 25.6% sequentially from April through June as we hit a low point of COVID-related volume losses in April. As a comparison, during the same period in 2019, landfill tons were up 4.9% sequentially, which is more of our normal seasonal pattern.

Resource Solutions revenues were up 6.5% year-over-year, with organics up 3.4%, mainly on newly contracted volumes; customer solutions up 5.3%, with new contract growth offsetting COVID-19 impacts. Recycling revenues were up 18.8% year-over-year, mainly driven by higher commodity pricing. Average commodity revenues per ton were up 45% year-over-year in the quarter, mainly on higher cardboard pricing, partially offset by lower plastics and metals pricing. But please note, cardboard pricing hit a peak in May and has dropped nearly $40 a ton and back to March levels into July.

Adjusted EBITDA was $44 million in the quarter, up $3.6 million or 8.9% year-over-year. Adjusted EBITDA margins were 23.3% in the quarter, up 175 basis points year-over-year. There were a lot of moving pieces that impacted adjusted EBITDA in the second quarter given COVID-19. I'll give a little color on these pieces. The largest negative impact on our business was lower solid waste volumes, with volumes down $17.6 million year-over-year in the quarter. This translated to roughly an EBITDA headwind of about $5.6 million with a 30% decremental. Also, we had about $1.6 million of COVID-specific costs during the quarter.

On the positive side, as John mentioned, we effectively used our business intelligence tools to track key indicators and proactively flex costs to lower revenues. This included downsizing our workforce through the reduction of hours, the reduction of overtime, layoffs, freezing hiring and salary increases, limiting discretionary spending across all parts of the business. In addition, we maintained our pricing discipline across all lines of business given substantial capital intensity in the ever-increasing regulatory and environmental costs in our business. Instead of reducing pricing, we actively worked with our customers to adjust service levels to the actual waste to recycling needs during the period.

Solid waste adjusted EBITDA was $40.6 million in the quarter, up $3.1 million year-over-year. The increase year-over-year was mainly driven by great performance in the collection line of business, the positive rollover impact of acquisitions completed in the last 12 months, partially offset by lower performance of disposal line of business.

Resource Solutions adjusted EBITDA was $3.3 million in the quarter, up $400,000 year-over-year, mainly due to higher performance in the Recycling business. Net income was $12.1 million for the second quarter, which was up $200,000 year-over-year. However, please note that our tax provision was a $2.4 million headwind year-over-year as we had a $2 million benefit for income taxes in the second quarter last year due to an acquisition.

Net cash provided by operating activities was $62.5 million year-to-date through June 30. This was up $24.2 million year-over-year, driven by higher operating results and $13.8 million of positive changes in our assets and liabilities, including the great management of accounts receivable. Adjusted free cash flow was $27.5 million year-to-date, up $22.1 million year-over-year. We continue to invest in planned capital expenditures at the newly acquired operations during the quarter to drive operating synergies and integration efforts. In addition, we also continue to invest in the development of the Phase 6 landfill expansion at the Waste USA Landfill.

As you may note from our press release, during the second quarter, we changed the name of our free cash flow metric from normalized free cash flow to adjusted free cash flow. The calculation remains exactly the same. This is just a naming change. We made this change to the name to be more consistent with industry peers while at the same time we enhanced the disclosure to our non-GAAP measures in our press release.

As noted in our press release yesterday afternoon, we have reintroduced our financial guidance ranges for fiscal 2020, given our increased visibility on the negative impacts of COVID-19 on our business, coupled with our strong execution to date through the quarter. The guidance ranges we put out yesterday assume a stable to modestly improving economic environment for the remainder of the year. However, they do not contemplate a severe relapse of COVID-19 or new stay-at-home orders shutting down commercial and economic activity again in the Northeast.

I'd like to note that our guidance ranges for the remainder of the year contemplate that adjusted EBITDA will remain generally flat from the second to third quarter. This is versus our normal seasonal trend that has business activity typically growing during the summer months. We experienced a very rapid recovery in business activity from late April through mid-June as the stay-at-home orders were first lifted and many businesses reopened and construction activity resumed. However, this rebound has flattened somewhat through July, and we do not expect a normal seasonal business uptick from the second to third quarters.

To date, roughly 55% of the commercial/industrial services that were reduced or suspended due to COVID have been turned back on. We estimate that another 15% to 20% will return in the fall when schools and other seasonal businesses resume. However, it is unclear when the remaining 25% to 30% of these services will resume. Further, we expect certain operating expenses to increase through the remainder of the year, such as higher disposal costs in the collection line of business, lower operating efficiencies due to traffic increases, higher fuel costs and even higher medical costs, as those services come back on.

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

[Edwin Johnson, executive]

Yes. Thanks, Ned, and good morning, everyone. Well, we've never had a quarter quite like this one. The operational challenges presented by the pandemic were so unique that it was hard to predict where we're going to end up, but our proactive recognition of effects to the business and the execution of our team to quickly cut costs resulted in a much better outcome than we anticipated. We also learned a few things about the natural resiliency of the business. Even with volumes down due to the economic realities of COVID, the cost of ops, percentage of revenue improved by 324 basis points as compared to Q2 last year and drove a 175 basis point improvement in adjusted EBITDA margin. It's important that you understand some of the moving pieces here while it may be hard to predict the near future and some of the things we're doing to protect as much of the margin improvement as we can. Our operating margin improved in all major lines of business, but the largest improvement was in Collection. The team has done a great job cutting costs to cushion areas of lost revenue. I remain extremely proud of our people for what they have been able to accomplish. But we have also had some unanticipated benefits that I'll talk about in a minute.

At the start of the crisis, our immediate focus was not only on protecting our workforce but also protecting our business by flexing costs, helping customers and keeping our employees safe. We went to staggered starts in the morning, reducing exposure between employees and at the same time streamlining our daily launch. We tightly controlled direct labor hours to adjust for service suspensions from our commercial customers and reduced roll-off pulls from our industrial and construction customers. Where possible, we redistributed the remaining workload, both to save jobs and so that the labor hours saved were primarily the more costly overtime hours. At the same time, we also benefited from our pricing discipline earlier in the year. 75 -- 78% of our budgeted price increases for the year were done in the first quarter. So we did not have to push through PIs when customers were dealing with the pandemic, and Q2 reflected collection pricing up 4.3%, primarily from the rollover effect.

As to the unanticipated benefits, as events evolved, one of the first things we noticed was that even our residential routes were finishing earlier, and we realized that we were getting a significant traffic benefit, particularly in our more urban markets from the stay-at-home orders. This obviously saved us some operating costs. As stay-at-home orders are lifted, we are seeing some increase in traffic, but it's very difficult to predict when traffic will fully return to normal. Another benefit was a reduction in disposal weight in the remaining commercial account base. This helped to partially offset the reduction in revenue and an increase in residential weight. Yes, and I know on the last call, I said that early data in April was showing only a seasonally normal increase in resi weights. This was proven wrong as the quarter produced an 11% increase in pounds per stop. It is difficult to predict the timing of the commercial weights, the resi weights and the commercial and industrial revenue returning to normal.

Lastly, as you may recall from past quarters, we've introduced various employee retention programs over the past year or so, including career paths for our drivers, mechanics and heavy equipment operators and push through market-based pay scale adjustments. And these programs were showing great progress pre-COVID. We had a significant boost in the quarter.

With more customers stuck at home, we found the appreciation level of our essential service rose. There was an increase in unsolicited positive customer comments at our customer care center, on social media and in other customer data we track like our Net Promoter Score. This positive feedback, which we route back to the drivers where possible, coupled with an increased appreciation from the workforce that their job was not interrupted by the pandemic economics and that we were concerned about their health and safety, increased morale and materially reduced our turnover and related costs. We're happy with the progress. We're not sure how much of this is a permanent improvement, but we are going to do all we can to keep our workforce happy and our turnover down.

With all these moving pieces on the collection side, the near future is a little harder to predict. We do feel comfortable enough though to provide guidance, albeit with a slightly larger adjusted EBITDA range than normal.

On the landfill side, as would be expected, our volumes were down about 209,000 tons or 18.4% as compared to the second quarter last year. As landfills have a high fixed and low variable operating cost structure, you would expect the margin squeeze, but the cost of ops as a percentage of revenue improved over Q2 last year by 44 basis points. Part of this improvement is price. With positive disposal market dynamics in the Northeast, price was up 6.2% as reported, and the more meaningful average price per ton was up 10.2%. Though part of this improvement is cost reduction, driven primarily by our largest site, the Ontario Landfill, you may recall we made a significant investment in the Ontario Landfill last year. And we changed many of our daily operating procedures, improving both compliance and efficiency at the site.

I want to give a special shout out to Mark Johnson, our VP of Landfills; Brian Sanders (sic) [ Sanders Brian ], our new General Manager at the site; and the rest of the Ontario team for not only returning that landfill back to Casella standards, but doing so in a manner that has reduced our operating cost. Operating trends are good. Now we just need the volume to return.

Our Resource Solutions group had an outstanding quarter as well, exceeding our original budget expectations, both on revenue and bottom line with a 300 basis point improvement in cost of ops over last year. This group includes our recycling operations, which benefited from both higher price of processing prices and higher average commodity prices while only suffering a slight volume decline. The balance of the Resource Solutions group also exceeded expectations despite some minor service suspensions due to the virus.

Last quarter, I went into a great amount of detail regarding the operational changes we put in place to protect our employees to comply with rapidly changing rules and guidance within each of the states that we operate to accommodate our customers for their changing needs and to predict the long-term health of the business. All of these changes remain in effect. I want to reiterate what I said then, our people are doing an awesome job, and I couldn't be more proud and appreciative of the team. Thank you.

I'd like to turn it back to the operator now for -- to start the Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Hamzah Mazari from Jefferies.

[Hamzah Mazari, analyst]

My first question is just stepping back aside from COVID, when you look at your solid waste margins, pre-COVID, we had talked about potentially getting those margins up, maybe close to 300 basis points. Could you just remind us what are the large buckets that you see that improvement coming from and over what time frame? I realize COVID has pushed that timeframe out, but just remind us again what you see as margin potential in solid waste in that segment?

[John Casella, executive]

Yes. Thanks, Hamzah. Over the last several quarters, we've really started to translate more of our pricing to margin enhancement in solid waste and across the entire business, as you've seen. And if you flash back to 2018 and early 2019, we had some large inflationary headwinds in the business for a few quarters. Labor was probably the largest. We were suffering higher-than-normal turnover with a tight labor market. And we had a huge effort to go through rightsized wages across the business and also create career paths for our key employees. We also were seeing quite a bit of inflation as we closed the Southbridge Landfill and shifted tons to other sites and had to incur more disposal, transportation costs. And there's this general inflation across the business in long-haul transportation in other areas. We did a great job really working through this in late 2019. And by the fourth quarter, we fully anniversaried some of these heightened costs, and we started to push through somewhere around 175 to 200 basis points of margin improvement. And if you look at the underlying kind of building blocks of where we're getting that margin improvement from pre-COVID, it's pricing and excessive inflation. It is our key operating programs that Ed and his team are leading; dynamic routing, our service excellence program, a focus in the roll-off line of business on efficiency and correct pricing, it's our safety programs, our focus on our employees. It goes across a lot of areas and then also acquisitions.

As we've ramped up the acquisition pipeline, we had a period of time where we're bringing in a lot of new acquisitions at lower margins. So it was taking us a number of quarters to generate the integration synergies and get on to our operating platforms. We've gotten to more of a cadence with that, and we're starting to see a positive benefit as well as they come into our system. So a lot of moving pieces there. COVID has just tons of complexity in the quarter, but those underlying reasons as to why we're improving margins pre-COVID are still there. And we believe, to your point, over the next several years, there is an ability to drive our solid waste margins from the 26%, 26.5% range up to the high 20s. We haven't given a specific timeline on that, but we believe inherently we can do that.

[Hamzah Mazari, analyst]

Got it. Very helpful. And just a question on just landfill pricing going forward. You guys compete with a lot of waste-to-energy plants in your area. Just frame for us, what do you see as the risk to landfill pricing? Is it just the waste-to-energy plants get more aggressive? Is it waste-to-rail is very expensive? Is it just regulation? Just frame for us how you think about that dynamic?

[Ned Coletta, executive]

Sure. I think that the first thing that you have to realize, Hamzah, about the waste-to-energy facilities in the Northeast are all full. There may be a little bit of volume contraction, obviously, from the economic reality of COVID. But going into it, all of those facilities were full. And in the summer season, they're -- in a lot of cases, they have shut down, outages and a lot of waste is moving out of the Northeast, even -- I suspect even today with the impact from an economic standpoint of COVID, there's a lot of waste moving out of the Northeast. So I think that -- I don't -- I wouldn't anticipate seeing any major issues there in terms of the incinerators going after volume. I think that we're more likely to see consistent activity from a pricing standpoint as we've seen over the last year or 2.

[Hamzah Mazari, analyst]

Got it. And just last question, I'll turn it over. What were July volumes for you? I'm just trying to compare to the 12.4% that you reported for the quarter. What was July relative to that, down 12%?

[Ned Coletta, executive]

Yes. We haven't fully closed the books for July. But as I said a little bit earlier, we had a really strong volume trend from April through late June, and then our volumes have generally kind of flattened out a little bit in July. And do you know, Jason, in June, kind of what we were down year-over-year?

[Jason Mead, executive]

Yes. Well, from a landfill perspective, if we just focus on tons for a second, we were down about 8% year-over-year in landfill tons in June. And in July, we're kind of seeing similar trends as Ned said, as things have pretty much stabilized over the last few weeks.

[Ned Coletta, executive]

I could follow up and get some more specifics. I don't exactly have in in front of me.

[Hamzah Mazari, analyst]

No problem. Yes, we can do it offline.

[Operator]

Your next question comes from the line of Tyler Brown from Raymond James.

[Patrick Brown, analyst]

Ned, I just want to follow back up on that. Do you, by chance, have just broadly revenue in July, maybe the change there?

[Ned Coletta, executive]

No. But June, I just pulled up, I have it in June. So if we're looking at the month of June, our revenues as a business were up around 6% year-over-year and the solid waste business was up around 2.5%. So our volume losses moderated a bit. They were about 6% to 7% in the solid waste business, down year-over-year. And as we said a minute ago, the July trends are pretty similar to June.

[Patrick Brown, analyst]

Okay. Yes. No, that's very helpful. Appreciate that. Okay. So you guys obviously gave some great color in your prepared remarks. And again, my big question here is really the second half guide versus the first half number. So historically, you see something like, I think, a 10% revenue, and call it, a 20%, 25% step-up in EBITDA sequentially from the first half. This guide assumes, obviously, low, low single digits sequentially in both. And I appreciate the prepared comments. But is there any way that you can help bridge that gap? And I don't know if it would be helpful to talk about the onetime bonus. Is that being paid in Q3? But just simply, how much conservatism is basically in there just knowing that we don't know what we're going to see through the rest of the year?

[Ned Coletta, executive]

So the onetime bonus was accrued half in the second quarter and half in the third quarter. So that is in our forecast for the third quarter. And a lot of it -- we've transitioned from managing our business on a monthly basis to transitioning to really having a lot more daily stats and weekly stats as our business intelligence has gotten better. And as we're looking at these trends in the month of July and looking at key indicators like how much of the COVID suspensions or cancellations have come back online, what's still remaining, when do we think that will come back online, what's happening with economic activity, construction starts, you name it. We're just not seeing the typical major step-up in the summer. And some of it could be seasonal businesses like resorts and things like that are coming online. Some of it is just, I think, fear. People aren't starting new projects and the like. And right now, the best we can tell, we'll see a more flattish trend from Q2 to Q3. However, to your point, maybe there's some conservatism, but it's hard to tell. The other point of this is just on the cost side. So we've dug in every which way on our cost understanding in Q2, where we benefited, how we benefited and what can move into the future. And some of it as Ed laid out, just things like traffic and the like, and we even had things like lower medical costs that we think will start to refer to normal trends in Q3 as hospitals are reopened for business. So we don't have a perfect answer...

[Edwin Johnson, executive]

Restaurants, beaches, the main coast is not fully open. We don't anticipate that the summer activity is going to be anywhere near where it normally is. And then certainly comparable to what we saw in June, but just -- we're not going to see the level of activity from a tourism standpoint, from opening up. We're just not -- we don't anticipate seeing summer business that we normally do, Tyler.

[Patrick Brown, analyst]

Okay. That's very helpful. I appreciate it. I know there's a lot of unknowns out there. So switching gears, John, it sounds like -- it feels like the M&A pipeline is very strong. I think you used the word robust. I think in the quarter, one of your waste-to-energy competitors actually acquired some hauling assets. So, I guess, from an M&A competition perspective, has anything changed there? Or do you still feel like there's obviously that -- a good opportunity to allocate capital there?

[John Casella, executive]

There's a tremendous opportunity there. It continues to be -- the pipeline is very significant. There is a little more activity from a competitive standpoint. You're right about that, Tyler, with some of the waste-to-energy folks. But again, we've been in the market for a long, long time. We've been working on it now for 2 years. We've built the pipeline over that period of time. And I think the interesting thing, too, that has happened is going into COVID we saw a lot of pressure on independents from a labor standpoint, a lot of pressure from a disposal pricing standpoint and also commodity prices were just awful in terms of they were going from a situation where they're getting significant amount of value for recyclables to paying for processing. So -- and then you add COVID on top of that, and we're seeing even more people who prior to COVID, I would not have thought that they would be interested in really understanding what the value of their business is now. So COVID has added another dimension, and I think we're going to see more disruption from an acquisition standpoint because of this.

[Operator]

Your next question comes from the line of Sean Eastman from KeyBanc Capital.

[Hamza Jaffer;KeyBanc Capital Markets;Analyst, analyst]

This is Hamza Jaffer, speaking for Sean Eastman. Compliments to the team. Nice work this quarter. I just wanted to dive deeper on the plans to leverage cost synergies across operations in the back office. Where have you gotten some traction since the onset of the pandemic? What kind of run rate do you have on this initiative? And what operationally is expected to be sustained in 2Q and in the second half?

[Ned Coletta, executive]

Yes. So these are a number of long-range investments and programs we have ongoing. And as you know, we successfully upgraded our financial ERP about 1.5 years ago, and we continue incremental programs to drive efficiency in the back office. One area we're very focused right now is on the procurement side. There's a lot of manual work being done in our business today, and there's a great opportunity to digitize that further and drive improvement without a lot of risk. So we're excited about that. Ed's team has been leading a pilot of a new onboard computing dynamic routing system that will be testing over the coming months to drive more efficiency on the road through that program. But I think the key is on the technology side we've done a really nice job with low risk, doing things through fixed price programs and limited pilots to understand the viability before having large risk in any area. So as we look at the runway over the next number of quarters, next several years, there's a lot of great opportunity to drive more efficiency in the business. COVID kind of skewed that a little bit in the quarter. But if you look pre-COVID and you look at the specific programs, we continue to have incremental cost benefits.

[Jason Mead, executive]

We also got a significant amount of value in terms of reduced turnover. 2 years ago, we started a new program in terms of career development with Kelley. With the arrival of Kelley Robinson, that program has really done very, very well in terms of really helping with our turnover numbers, where we have been able to attract drivers, mechanics. We were able to keep people. Some of the things that we have been able to achieve from a turnover standpoint is very, very significant in terms of lowering our cost of ops. So we'll continue to see that going out into the future as well. So very positive.

[Hamza Jaffer;KeyBanc Capital Markets;Analyst, analyst]

Got it. That's helpful. And price growth held in nicely for 2Q. Any color how you anticipate collection disposal yields to trend into the back half as we see the economy going through a moderate space of -- pace of growth?

[Jason Mead, executive]

I think one of the things -- I'm not sure I really understand your question, but one of the things that we've also been able to do is, at one point in time, we had about 60% of our back-office folks working from home. And some of the things coming out of COVID that would be positive as we've been able to do that very effectively. And one of the areas that we've been able to do that is customer care. So we've been able to really monitor people, have an understanding of how well they're doing. So that should be a positive on a go-forward basis in terms of -- as we continue to grow, that was one area where we're growing real estate, growing office space, et cetera. And that should be really helpful -- something coming out of COVID, that would be very helpful. Some of the other things that we found, having our people come in, in waves, there's some operating things that were coming out of COVID on a positive that has also helped to reduce costs. So Ed's got a number of things that we want to on a go-forward basis try to make sure that we keep as much of the savings as we possibly can.

[Hamza Jaffer;KeyBanc Capital Markets;Analyst, analyst]

Got it. And on the pricing side, do you see a sustained 4% to 5% for the back-half? Or is it more on the lower side?

[Ned Coletta, executive]

I think that the majority of our pricing was done, fortunately for us, in the first quarter. We don't anticipate significant pricing in the second half of the year. As I said, most of the pricing for the year for us was done right after the first of the year in January and early February. So we don't -- and it's really positive because we've not been increasing pricing through the COVID pandemic.

[Operator]

Your next question comes from the line of Michael Hoffman from Stifel.

[Michael Hoffman, analyst]

Nice job.

[John Casella, executive]

Thanks. We're going to keep working hard for you, Michael. We've got to improve. We've got to improve where you are.

[Michael Hoffman, analyst]

Got it. I got it. That's why I got this list of questions. So here we go.

[John Casella, executive]

Okay. Terrific. Terrific. I'm all ears. We're going to -- we're -- Ned, Ed, myself, Jason, we're keeping our head down, work hard.

[Michael Hoffman, analyst]

All right. If we can talk about cadence about the second half, just to flex it a little bit. So can you help us with what your deal rollover should be in the second half so we get that right? And then if I picked up correctly, Ned, scribbling away on the prepared comments, you're telling us we should assume flat EBITDA sequentially 3Q versus 2? I may have missed that.

[Ned Coletta, executive]

Yes. Yes. That's what we currently have in our model right now and then...

[Michael Hoffman, analyst]

Okay. And then what about the deal cadence?

[Ned Coletta, executive]

Sorry -- in the deal cadence, for deals we've completed year-to-date, we expect about -- there's around $12 million of revenues in 2020 and about $4 million into next year and is about $2 million of EBITDA this year and about 3 -- about $1 million next year of those revenues in the first year. So looking at this back-half of the year, Jason, I'm not sure if I have this math done by quarter.

[Jason Mead, executive]

Yes. So year-to-date through June, from an acquisition perspective, we've had $20.5 million of revenues.

[Ned Coletta, executive]

So that includes stuff rolled over from last year.

[Jason Mead, executive]

That includes rollovers from last year as well.

[Ned Coletta, executive]

We may have to do a little math on that to disaggregate it too.

[Jason Mead, executive]

Sure.

[Michael Hoffman, analyst]

Okay. Well, you bought $16 million year-to-date. You haven't quite done it evenly. So because if you're saying $12 million for the end of the year, that feels like maybe it's $6 million or $7 million in the second half and you did $4 million or $5 million in the first half.

[Ned Coletta, executive]

Yes, it's probably pretty close. I can figure that out afterwards. But about $12 million -- of the deals we've done in 2020, about $12 million of that revenue will show up in 2020. Now exactly how it splits, maybe it's $7 million or $8 million in the last half of the year. We can get a finer pen on that.

[Michael Hoffman, analyst]

Okay. That would be helpful. And then what has the pandemic done from a timing of when you run through the NOLs? Because you were kind of running out through it by '22. Now how are we thinking about the NOL?

[Ned Coletta, executive]

Yes. So we've been really effectively using the accelerated depreciation as part of the 2018 tax reform. So as you know, almost every acquisition we do is an asset deal. And we've been taking advantage of accelerated depreciation. So we've been preserving our NOLs remarkably well. And at the end of last year, I think it was $112 million of NOLs roughly still remaining. So if we look out into the future, our goal, of course, is to produce as much pretax income as possible and drive margins. So it is changing, of course, over time. But if we continue to do some smart acquisitions and use accelerated depreciation to shield earnings in the current period, really gives us an opportunity to bring those out later than 2022 or 2023, Michael, to your point.

[Michael Hoffman, analyst]

Okay. So that's good to know. We keep free cash flow. And then you had this capital spending issue related to closing Southbridge and some work to be done in Ontario and all 3 New England states of Maine, New Hampshire and Vermont. How do I think about the direction of capital spending in '21? I guess it's way early for guidance, but as a percentage of revenue should it be less?

[Ned Coletta, executive]

Yes. So if you look at our capital spending, we've been spending 10%, 10.5% on just replacement capital, running the business. And then this quarter, we've actually tried to break out as well some additional details on where there are additional investments going in the business. So when we complete acquisitions, we're very heavily investing in the year after we complete those acquisitions in -- to get integration synergies, to consolidate facilities, you name it. It's all contemplated as part of the original pro forma. So we're investing money there. And then, of course, we're investing in this very large expansion at the Waste USA Landfill. We're putting in 25-year infrastructure at the site. So those capital expenditures have been running 2-ish percent of revenues. We'll continue with Waste USA 1 more year, and then that project will be generally completed into 2021. The acquisition capital, I guess, from our vantage point, if we can keep the same pace of acquisitions, spending that roughly 1% to 1.5% of revenues, integrating those acquisitions might be something that continues to roll into the future.

[Michael Hoffman, analyst]

Okay. All right. That helps. And then Connecticut has decided not to let MIRA get rebuilt or expanded. So what does that do from a dislocation standpoint on helping to sustain landfill pricing?

[Edwin Johnson, executive]

I think that there's a real opportunity, obviously, in Connecticut, depending upon what happens there. Obviously, they would like to see processing, and I think that there's 1 million tons, just under 1 million tons that is potentially going to be impacted and be in the marketplace. And as you know, Michael, we've still got McKean. We've got rail serve permit there, 5,000 ton a day. So I mean, we have the capacity. McKean continues to be an option for us. If we had an opportunity to have a long-term contract there, even for a portion of that waste, that would be something that would cause us to invest the capital in McKean to put the infrastructure in place to receive by rail. So it represents an opportunity on a go-forward. So it's, in our view, more of the same in terms of the supply and demand challenges that we're going to continue to see in the Northeast over the next 3 to 4, 5 years.

[Michael Hoffman, analyst]

Okay. And then last one for me is, you have talked about education being about 5%, 6% of revenues. If you look at The Chronicle of Higher Education's website, they're not terribly optimistic about higher education reopening. You've got a lot of higher education in your market. So is that part of the conservatism? Is -- maybe we don't get back to school [ some odd way ] not by secondary.

[Ned Coletta, executive]

Sorry. To that number, when we said it was like 6-ish percent, that was actually of our commercial collection business. So of our actual total revenues, education is may be less than 2%. So of our total collection business, it's maybe 3% to 4%. And John, you might want to answer about the coming back online. I think...

[John Casella, executive]

Yes. I mean I don't think that -- I think that part of the conservative approach that we've had for the balance of the year is, it's not likely that we're going to see a very large portion of it come online. So I mean, I think, that your comment is probably correct, Michael. It's really up in the air as to how much is going to come back online at this point in time.

[Edwin Johnson, executive]

And just to remind everybody, there's normally a seasonal service on hold that occurs in education, but it happens sort of late May, early June and then they restart again. So that's the thing we won't get seasonally, is that service on hold normal recovery of that, let alone it closed early this year.

[Ned Coletta, executive]

Yes. Yes. So when you get into details of COVID, we had a number of customers that we coded in March and April that so we're reducing service levels, we're suspending service due to COVID. And as I said earlier, about 55% of those customers, those services are back online. And then you start to cut through it, we expect more to come online through the summer and the early fall. And then there's things like educational institutions that wouldn't have come back online to the early fall, to your point. And as we cut through customer by customer, as much as 30...

[John Casella, executive]

Summer is like almost over. We're in August already, right? So we don't have much of the summer left, Ned.

[Ned Coletta, executive]

I know. Yes, New England, it's not very long. But we're not sure how much of it comes back online, to your point, Michael, but also, it's not a huge part of our book of business also. But it is in the Northeast, it's something we have a number of great customers in that segment.

[Michael Hoffman, analyst]

Okay. That helped a lot. What I'm hearing is that free cash flow should trend up in '21 because you're going to manage costs at a slower recovery than sales that we're leveling off in activity, you're keeping -- you're going to keep normalizing and rightsizing the business accordingly, and we continue to watch free cash flow improve.

[Ned Coletta, executive]

Yes.

[Jason Mead, executive]

Yes.

[Operator]

I would now like to turn the call back over to management.

[John Casella, executive]

Thank you, operator. Thanks, everyone, for your attention today. We look forward to discussing our third quarter earnings with you in the fall. Have a terrific rest of your day, and stay safe. Thanks, everybody.

[Operator]

This concludes today's conference. You may now disconnect.