Waste Connections Q3 revenue exceeds outlook as commercial activity continues rebound

Waste Connections Inc., Ontario, Canada, announced its results for the third quarter on Oct. 28.

According to the company, revenue in the third quarter totaled $1.39 billion, as compared to $1.41 billion in the year ago period. Operating income was $230.7 million, which included $7.9 million of costs primarily resulting from impairments and other operating items and acquisition-related costs. This compares to operating income of $236.6 million in the third quarter of 2019, which included $13.4 million of costs primarily resulting from impairments and other operating items.

Net income attributable to Waste Connections in the third quarter was $158 million, or 60 cents per share on a diluted basis of 263.5 million shares. In the year ago period, the company reported net income of $159.1 million, or 60 cents per share on a diluted basis of 264.6 million shares.

Adjusted net income attributable to Waste Connections in the third quarter was $188.6 million, or 72 cents per diluted share, versus $192.9 million, or 73 cents per diluted share in the prior year period. Adjusted EBITDA in the third quarter was $432.6 million, as compared to adjusted EBITDA of $443.6 million in the prior year period.

For the nine months ended Sept. 30, revenue was $4.05 billion, up from $4.03 billion in the year ago period. Operating income, which included $453.1 million of costs primarily related to the decrease in property, plant and equipment at certain E&P landfills as a result of the company's impairment testing, was $215.3 million, compared to $643.6 million for the same period in 2019, which included $44.7 million of costs primarily resulting from impairments and other operating items.

Net income attributable to Waste Connections for the nine months ended Sept. 30 was $74 million, or 28 cents per share on a diluted basis of 263.7 million shares. In the year ago period, the company reported net income attributable to Waste Connections of $433.6 million, or $1.64 per share on a diluted basis of 264.5 million shares.

Adjusted net income attributable to Waste Connections for the nine months ended Sept. 30 was $517.2 million, or $1.96 per diluted share, compared to $538.1 million, or $2.03 per diluted share in the year ago period. Adjusted EBITDA for the nine months ended Sept. 30 was $1.235 billion, as compared to $1.255 billion in the prior year period.

"Sequential improvement in solid waste volumes and increased recovered commodity values drove better than expected results in the third quarter and provide incremental momentum going forward. Our strong operating results, financial performance and frontline support continue to differentiate Waste Connections during this year's unprecedented health, economic and social challenges," Waste Connections President and CEO Worthing Jackman says.

"Higher margin flow-through from improving revenue during the quarter provided better than expected adjusted EBITDA margin and adjusted free cash flow generation. Adjusted EBITDA as a percentage of revenue in the period was approximately 40 basis points above our outlook in spite of 30 basis points higher than expected discretionary frontline and incentive compensation costs impacting the quarter, which resulted from our more than $35 million commitment in incremental costs primarily directed to discretionary supplemental pay for frontline employees. Solid waste margins expanded by almost 200 basis points compared to the year ago period, with collection, transfer and disposal accounting for over 80 percent of that increase. Moreover, year-to-date adjusted free cash flow of $778 million, or 19.2 percent of revenue, increased year over year, putting us firmly on track to exceed the adjusted free cash flow outlook for the full year that we communicated in August and positioning us for double-digit growth in adjusted free cash flow in 2021," Jackman continues.

"As anticipated last quarter, our strong operating performance, free cash flow generation and balance sheet strength positioned us for a double-digit percentage increase in our quarterly cash dividend, for the tenth consecutive year. We are also on track for another year of above-average acquisition activity, while maintaining optionality for opportunistic share repurchases,” Jackman concludes. “As we look ahead, we expect to emerge from this challenging period better positioned financially, with tremendous flexibility with respect to capital allocation, and operationally, with higher operating leverage in solid waste and both safety-related incidents and voluntary turnover levels already achieving multi-year lows."

Financial Impact from COVID-19

During the third quarter, Waste Connections noted its business continued to be impacted by COVID-19, albeit to a lesser extent than in the prior period in many markets. Revenue in solid waste commercial collection and solid waste transfer and disposal continued to reflect the extent to which the slowdown in activity associated with shelter-in-place or other closure restrictions or requirements in effect since the first quarter of 2020 has persisted.

The impacts to solid waste activity from COVID-19 that the company experienced during the third quarter reflected the pace of reopening activity and varied by geography, the size and customer mix in each market. In some markets, impacts began to abate in the second quarter, when a portion of the lost volumes returned; in other cases, impacts abated more during the third quarter when reopenings resulted in increased service requirements by commercial customers and higher landfill volumes and roll-off activity.

In markets where reopenings continue to be delayed or where additional restrictions have been imposed, the improvements were less pronounced. Through the third quarter, about 68 percent of solid waste commercial customers and 57 percent of associated revenue in competitive markets the company tracks that had suspended or reduced service due to COVID-19 had since reached out for either a resumption of service or an increase in frequency, up from 53 percent and 42 percent respectively through the second quarter. As a result, solid waste collection, transfer and disposal revenue was down 2 percent year over year on a same-store basis in the third quarter, an improvement of 330 basis points from Q2, which was down 5.3 percent year over year.

The company says that the impact of the COVID-19 outbreak on its business, results of operations, financial condition and cash flows in future periods will depend largely on future developments, including the duration and spread of the outbreak in the U.S. and Canada, its severity, the actions to contain the novel coronavirus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.