On June 20, Waste Connections (WCN) held an Investor Day in Houston, celebrating its 20th year and highlighting its merger with Progressive Waste Solutions (BIN), which closed roughly one year ago. The half day of presentations contained a wealth of qualitative and quantitative information from a wide variety of company management.
Initial Premise—Solid Waste is a Commodity Business
Waste Connections management’s initial premise—that the solid waste business is a commodity business—forms and drives the company’s strategy. Management believes that price is the most important determinant to the vast majority of its customer base, as long as a minimum required level of service is provided. To that point, CEO Ron Mittelstaedt noted that he believes only two percent of WCN’s customers base their solid waste provider choice on anything other than price. The corollary to this is the belief that private companies in competitive markets often dictate collection margins, and therefore, industry price discipline can be eroded in economic slowdowns as the “mom and pops” strive to maintain volume.
Intentional Market Selection and Asset Positioning Key to Success
Given that initial assumption, WCN management believes the key to success is intentional market selection and asset and contractual positioning in order to create a moat, allowing superior, more consistent pricing. Thus, management first prefers and targets exclusive franchise markets. This type of market and/or contract provides maximum density and stable pricing and returns. WCN also focuses on secondary markets, where it either owns the landfill or disposal is market neutral, which it views as inherently less competitive, as it can build a leading market share more easily.
WCN will generally enter a competitive, urban market only if it can be fully integrated with a higher barrier-to-entry commercial collection focus. This company focus is certainly nothing new—it has been a hallmark of WCN’s strategy since its earliest days, and management continues to believe it differentiates them from their competitors. In the course of the presentation, management went on to say that it believes this very intentional strategy drives 75 percent of their success.
A great deal of the Investor Day focused on the corporate culture, which management also believes sets WCN apart from its peer group and contributes the remaining 25 percent to its success. The cornerstone of WCN’s culture is servant leadership—essentially an inverted management pyramid structure, where senior corporate management does not control their employees, but rather empowers them, and it is incumbent upon senior leadership to help their employees succeed, not the other way around.
The outgrowth of this type of management culture is a more decentralized management structure, where more employees are empowered to make decisions at the local level, reflecting local conditions, and not just follow corporate strategic initiatives or mandates. That said, standards, particularly with regard to safety, price and returns are clearly conveyed, and local execution and accountability is therefore expected. Behavioral-based safety indoctrination is a primary goal of management as well, as management believes that human capital is the most important capital.
The Proof is in the Numbers
Company management believes this differentiated combination of market and asset positioning and corporate culture drives superior financial results on almost every metric and measure they focus on. In particular, management highlighted WCN’s total recordable incident rate, which has not only gone down steadily over the last 20 years within the company itself, but is also lower than that of the industry. Besides being “the right thing to do”, safety focus also results in significantly lower claims and expenses over time. Management also stressed the company’s industry leading performance in price growth, margins, turnover and free cash flow conversion. This in turn has led to superior stock price performance as WCN has outperformed the return of the S&P 500 by four times over the past decade.
A great deal of the Investor Day highlighted the improvements in the BIN assets and results post the merger, which management noted was a direct result of infusing the WCN culture into the acquired operations. Senior management from the Eastern, Southern and Canada regions all presented, discussing the various changes in their areas, but consistently, all three areas had significant improvements in safety incidences, turnover and margins, ranging between down 45 percent to 70 percent, down by 15 percent to 40 percent and up by 200 basis points to 950 basis points, respectively.
In general, WCN management found a very centralized culture within BIN, which was over-focused on data and backward looking, with poor safety standards and capital allocation, particularly with regard to the fleet. All in, WCN management underestimated the extent of the problems within BIN, but thus, underestimated the potential opportunity, which turned out to be much greater than they originally thought. Bottom line, the company believes it is 12 months to 18 months ahead of schedule with regard to integration. Underlying (or legacy) BIN pricing has already risen from sub 1 percent to over 3 percent and EBITDA has improved from $480 million to $600 million, while lower capital expenditures and higher free cash flow conversion have resulted in the underlying free cash flow at BIN doubling. Management sees rollover benefit from all the above mentioned improvements continuing into 2018/2019, further aiding growth.
Technology and Sales Tools Expected to Drive Continuous Improvement
WCN management emphasized that the business drives its information technology (IT) programs, not the other way around. The corporate IT team works with the field to develop more customized solutions that are more suited for local market conditions, rather than imposing top down initiatives. Currently, the company is taking the best of both WCN’s and BIN’s technology and sales tools and combining them, and in particular, management noted that BIN had a sales marketing and prospecting tool that provides very accurate revenue forecasting that is now being integrated into the combined platform, with a focus on quality of revenue.
The Next Growth Frontier
The combined platform now provides a much bigger footprint for increased merger and acquisition activity in the future, which is expected to be a big growth driver in the next one to three years. The company feels its addressable acquisition target market is now closer to $4 billion, up from $2.5 billion for legacy WCN. Additionally, WCN is also divesting less than it originally anticipated, as several markets were more “fixable” (i.e. New York City) than had been anticipated.
Although the company did not raise guidance at the Investor Day, company commentary on the BIN progress, as well as discussion of continued solid waste volume strength into the second quarter, combined with the tailwinds of improved E&P waste activity and stronger recycled commodity prices, all indicate higher guidance is likely to be forthcoming at the time of the second quarter report and conference call!
Leone Young is the Principal of LTY ERC, LLC, providing consulting and research services to, and conducting special projects for, the environmental services industry, primarily the solid waste sector.