Waste Connections CEO talks earnings, recycling and acquisition activity

Waste Connections, headquartered in Toronto, announced its third quarter financial earnings Oct. 28. According to the company, its revenue for the quarter was $1.412 billion, which was up from $1.281 billion in the third quarter of 2018.

Other third quarter financial highlights include:

• An operating income of $236.6 million, up from $232.9 million year over year.
• Net income of $159.1 million, up from $150.8 million year over year.
• Adjusted net income of $192.9 million, up from $181.9 million year over year.
• An adjusted EBITDA of $443.6 million (31.4 percent of revenue), up from $416.8 million year over year.
• Year-to-date revenue of $4.027 billion, up from $3.661 billion year over year.
• Year-to-date adjusted free cash flow of $762.9 million, or 18.9 percent of revenue, which was up 12.9 percent.

"Strong organic growth in solid waste and a sequential increase in [exploration and production] (E&P) waste activity enabled us to deliver better-than-expected results in the period,” Waste Connections CEO Worthing Jackman said via a statement. “Continued price-led solid waste growth and a slight pull-forward of special waste activity drove underlying margin expansion in solid waste collection, transfer and disposal of an estimated 60 basis points in the quarter. More importantly, adjusted free cash flow of $763 million year-to-date, or 18.9 percent of revenue [which is] up almost 13 percent year-over-year, puts us firmly on track to meet or exceed the adjusted free cash flow outlook for the full year that we communicated in July.”

"Our strong operating performance, free cash flow growth and balance sheet strength positioned us for another double-digit percentage increase in our quarterly cash dividend, while maintaining tremendous financial flexibility,” Jackman continued. “We remain well-positioned to fund expected above-average acquisition activity in the near term and [an] increased return of capital to shareholders over the long term.  Relatively consistent solid waste organic growth, plus the contribution from acquisitions closed year-to-date, already sets us up for overall revenue growth in the mid to high single digits and underlying margin expansion in solid waste collection, transfer and disposal in the upcoming year, with additional acquisitions and any potential improvement in commodity-related activities providing further growth."

Jackman held an earnings call Oct. 29 to discuss the company’s third quarter results. Here are the highlights.

On the company’s third quarter earnings:

“In the third quarter, solid waste price plus volume growth was 6.1 percent. The total price of 5.2 percent slightly exceeded our outlook for the quarter with a strength once again reflecting additional price increases implemented in 2018 and 2019 to address accelerating cost pressures and provide, through collection pricing, further recovery of the much-discussed seismic change in the recycling market.

“Pricing in Q3 ranged from about 3.5 percent in our more exclusive market’s western region to over 5.5 percent in our more competitive market regions. We reported our strongest quarterly volume results in over two years in Q3 with volume growth better than expected at positive 90 basis points, due primarily to an outsized quarter of special waste activity.

“Some of that landfill activity has been expected to incur in Q4 when comparisons are tougher and, therefore, [it] doesn’t change our outlook with respect to full-year volumes. Looking at year-over-year results by minor business on a same-store basis in the third quarter, commercial collection revenue increased approximately 6 percent with a majority of related price increases, a portion of which were due to structural changes in recycling market.”

On the success of different business segments:

“Looking at scheduled commercial business, which includes small and large container activity, net new business has increased in each quarter year-to-date. In addition, service increases have outstripped service decreases in each quarter this year. Roll-off revenue increased approximately 7 percent, the U.S. pulls per day increased 2.3 percent, and revenue per pull was up 2.9 percent. In Canada, pulls per day increased by about 4 percent, and revenue per pull increased about 2.5 percent.

“Solid waste landfill tonnage increased about 5 percent on increases in both MSW (up about 6 percent) and special waste (up 10 percent), while C&D tons were down 4 percent year-over-year. MSW tons were up in most regions led by markets in our western and southern regions. Special waste volumes were up across all of our solid waste regions in the U.S. with notable activity in several states, including California, Florida, Illinois, Missouri and Minnesota.

“C&D tons, by way of contrast, were down in every region except our southern region—dealing some markets tough year-over-year comparisons.”

On the slowed recycling sector:

“Recycling revenue excluding acquisitions was almost $13 million in the third quarter, down $9.5 million year-over-year, or approximately 43 percent, and down about 15 percent sequentially from Q2. Old corrugated containers (OCC) prices in Q3 averaged about $43 per ton, slightly lower than expected, and down 51 percent from the year-ago period.

“We believe that the flow-through from changes in recycling revenue in the third quarter were slightly worse than in Q2 with decremental margins of approximately 150 percent due to the combination of lower fiber values and higher third-party processing cost, which increased sequentially in the quarter, resulting in an impact of approximately 14 million in EBITDA, or 80 basis points to reported margins, and $0.04 per share of EPS in Q3.

“OCC and mixed paper prices appear to have stabilized for the time being, which we had expected given increased demand from certain domestic mills converted to allow for the use of recovered fiber and feedstock. Given capacity additions year-to-date and looking ahead into 2020, there are a number of additional mills and conversions scheduled to come online, which could increase demand for recycled fiber feedstock by over 1 million tons.”

On the company's E&P business:

"Landfill gas revenue decreased approximately $7 million, or 40 percent, year-over-year due primarily to the lower value of renewable energy credits or RIMs for which certain gas sales qualify. The average RIM price in Q3 was about $0.69, down 47 percent sequentially from Q2 and down 68 percent year-over-year with a high flow on the decline in revenue resulting in a 35-basis point impact to reported EBITDA margins and approximately $0.02 per share of EPS.

"Looking at E&P waste activity, in the third quarter we reported 66.4 million of E&P waste revenue, our highest such quarterly revenue in over two years, up 4 percent sequentially in spite of continued declines in rig count during the quarter, which are now down 23 percent since year-end 2018. Our quarterly results have held up year-to-date in spite of those declines due to our asset positioning and diversity of basins, including Louisiana/Gulf of Mexico where the rig count decline has not been as pronounced.

"That said, we believe near-term E&P waste activity peaked in August as it has since moderated through a run rate of approximately $60 million per quarter. Given the typical seasonal decline in E&P activity in Q4 and moderation in the pace of activity we have seen over the past two months, we are cautious in our outlook and continue to be selective on new project developments.

"In fact, we made a determination in Q3 to forgo any future development efforts associated with the landfill in the Bakken [Basin] for which we held a permit and regarding the remaining landfill projects in the Permian [Basin]. ... [We] continue to move forward with construction on one of them and are holding off on the other for now."

On the company’s acquisition activity:

“Looking at acquisition activity, we have already closed what we would consider an above average amount of acquired revenue in 2019, and acquisition dialogue has continued to increase over the past few months. Since our earnings call in July, we have extended our offers totaling over $600 million in outlays, a portion of which could be completed by year-end.

“In fact, we could potentially double our already completed $160 million in annualized acquired revenue by year-end or early next year, starting 2020 with above average contributions from acquisitions along with the continuing robust pipeline for further activity. In addition, we closed on the acquisition of [a] greenfield solid waste landfill project in the period for which the final permit was received by the sellers. This landfill, which should be operational by early 2021, improves our asset positioning in a legacy progressive waste collection-only market where we currently utilize a third-party disposal site.”