Waste Connections revenue up for Q3

Solid waste pricing growth and acquisitions have helped to drive “better-than-expected” results in the third quarter of the year for Toronto-based Waste Connections Inc.

Revenue in the third quarter has totaled $1.88 billion, up from about $1.6 billion in the same quarter of 2021. Waste Connections reports that third-quarter operating income is $326.8 million, which includes $25.1 million primarily in impairments and other operating items and transaction expenses, compared with an operating income of $285.1 million in the third quarter of 2021, which included $9.7 million primarily related to transaction expenses, impairments and other operating items.

In addition, Waste Connections reports that net income in the third quarter is $236.9 million, or 92 cents per share on a diluted basis of 257.9 million shares, including a $15.3 million net of tax benefit, or 6 cents per share, primarily as the result of the impact from changes in foreign currency exchange rates on certain debt in the period. In the third quarter of 2021, Waste Connections has reported net income of $114.4 million, or 44 cents per share on a diluted basis of 261.1 million shares, including a net of tax loss on debt extinguishment associated with the prepayment of senior notes of $84.2 million or 32 cents per share.

Waste Connections says adjusted net income in the third quarter is $284.9 million, or $1.10 per diluted share, compared with $233.1 million, or 89 cents per diluted share, in the third quarter of 2021. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the third quarter was $588.1 million compared with $505.6 million in the third quarter of 2021.

For the first nine months of the fiscal year, which ended Sept. 30, Waste Connections revenue is at $5.343 billion, up from $4.527 billion in the previous year period. Operating income, which includes $38.5 million primarily attributable to impairments and other operating items and transaction-related expenses, is $930.2 million, compared with operating income of $790.3 million in the same time period of 2021, which included $23.7 million in impairments, fair value changes in equity awards and transaction expenses.

Financial drivers

“Strong execution once again provided for better-than-expected results, driven in the third quarter by continued acceleration of solid waste pricing to 10.1 percent and higher [Exploration and Production] waste activity, along with acquisitions closed during the period,” says Worthing F. Jackman, president and chief executive officer at Waste Connections. “As anticipated, acquisition activity continues to run well above historical levels, with $535 million in annualized revenue closed in 2022 plus an additional $35 million under definitive agreement expected to close by year-end or early in 2023.”

He says acquisitions for the quarter include multimarket solid waste franchises in California and Oregon; market expansions in Arizona and Texas; new market entries in Pennsylvania, British Columbia and Quebec; and market expansions within the company’s established footprint in Massachusetts.

Jackman adds that the company overcame 50 basis points in incremental headwinds, mostly from the decline in recycled commodity values in September. During the company’s third-quarter earnings call Nov. 2, Jackman said recycled commodity revenues were down almost 35 percent year over year, reflecting a sequential decline from the second quarter of the year of about 30 percent, which he said was twice the amount that was expected.

Mary Anne Whitney, executive vice president and chief financial officer at Waste Connections, said the company’s continued push on pricing helped to navigate lower recycled commodity prices in the quarter. She added that the company is looking ahead to any future challenges related to commodity pricing.

“Starting with the expected impact next year at current pricing, depending on the ultimate flow through to the bottom line from these declines, you could see that it’s anywhere from 70 basis points or 80 basis points margin to 100 basis points,” she said. “And that’s how we’re thinking about what needs to be overcome … when we think about overall reported margins. With respect to derisking that aspect of the business, just a reminder that that’s what we have been doing, and we think about that from, first of all, starting at the curb, pricing accordingly as we have through these downturns in recycled commodity values to make sure on the hauling side we’re getting compensated for that. Secondly, the projects we have in development right now where we are internalizing more of our recycled commodities, meaning handling the processing ourselves so that we’re not exposed to paying processing fees to third parties, which is where you can get hit incrementally in times like this when the values go down. And part of building those new facilities is the updated technology, which provides for better quality coming out the back end, which is another way you derisk it and you work to maximize the value by marketing your materials and taking advantage of your bulk, which is another thing we do.”

Jackman reported that year-over-year commercial collection revenue was up about 15 percent due mostly to price. He said roll-off revenue was up by about 11 percent. Additionally, he said landfill rates per ton were up more than 9 percent and up about 3 percent on revenue. He added that special waste tons were down 16 percent in the period but that related revenue was up nominally year over year. He said municipal solid waste tons were down 4 percent and construction and demolition tons were up 3 percent in the third quarter of the year compared with the same period in 2021.

Full-year outlook

Waste Connections reports that net income for the first nine months of the year was $641.3 million, or $2.49 per share on a diluted basis of 258.1 million shares, including an $18.9 million net of tax benefit, or 7 cents per share, primarily as a result of the impact from changes in foreign currency exchange rates on certain debt. For the first three quarters of 2021, the company reported net income of $451.7 million, or $1.72 per share on a diluted basis of 261.9 million shares, including a net of tax loss on debt extinguishment associated with the prepayment of senior notes of $84.2 million, or 32 cents per share.

Adjusted net income for the first nine months of the year is $755.5 million, or $2.93 per diluted share, compared with $629.5 million, or $2.39 per diluted share, in the first three quarters of 2021. Adjusted EBITDA for the first nine months of the year is $1.657 billion, compared with $1.424 billion for the first nine months of 2021.

When considering results for its 2022 fiscal year, Waste Connections says it estimates its revenue to be approximately $7.190 billion compared with the company’s previously revised revenue outlook of about $7.125 billion. The company estimates net income to be about $836.7 million, and adjusted EBITDA is estimated to be about $2.210 billion, or about 30.7 percent of revenue, compared with the company’s previously revised adjusted EBITDA outlook of $2.19 billion, or 30.7 percent of revenue.

In addition, Waste Connections says capital expenditures are estimated to be $850 million for the year, in line with its original annual outlook. Net cash provided by operating activities is expected to be about $1.963 billion and adjusted free cash flow is expected to be about $1.160 billion, or about 16.1 percent of revenue, compared with the company’s previously adjusted free cash flow outlook of $1.160 billion, or 16.3 percent of revenue.

“Our performance through the third quarter and acquisitions closed year to date enhance our visibility for expected double-digit revenue growth in 2023, led by pricing expected to remain at elevated levels, plus rollover contribution from acquisitions already signed or closed year to date,” Jackman says. “In addition, we expect underlying margin expansion to overcome headwinds from recent decreases in recycled commodity values.”