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November 2021 Business Report—3Q Common Themes and Variations


The publicly-traded solid waste companies reported their third quarter 2021 earnings and held follow-up conference calls over the past two weeks. In this edition of Business Report, we discuss the common themes, and note the differences, between the various industry players’ results.

Strong Organic Growth Drove Earnings and Cash Flow

Across the board, solid waste companies reported strong organic growth that was above expectations. The companies benefitted from outsized strength in recycled commodity and renewable energy prices, as expected, but underlying solid waste trends produced the upside surprise in revenues. Core price (or yield) was better than expected or projected by management teams, while generally it was up sequentially. Waste Connections (WCN) led the pack with price growth (inclusive of surcharges) of 5.1%, but Republic Services (RSG) saw the greatest sequential acceleration in yield from 2.6% in the second quarter to 3.2% in the third. Given the ongoing inflationary pressure, price growth was generally expected to also accelerate in the fourth quarter.

Volumes also surprised to the upside. RSG and Waste Management (WM) were the standouts in this department, with volume growth of 4.3% and 3.8%, respectively. Continued strength in commercial and mid double-digit growth in special waste were cited. Casella Waste (CWST) also had strong volume growth of 2.8%, as disposal volumes from New York markets picked up. CWST management noted that landfill tons from New York still remain well below pre-pandemic levels. GFL Environmental (GFL) also reported relatively strong volume growth of 2.4%, particularly when considering that roughly 40% of its business is derived from Canada, which has experienced ongoing delay in reopening activities. Although volume comparisons get progressively tougher as we exit the pandemic depressed comparisons, continued solid volume performance was expected in the fourth quarter, with further reopening opportunities and strong economic growth underpinning that expectation. In particular, both RSG and CWST noted that volume growth would have been even stronger without the labor constraints prevalent throughout the business (and the economy).

Labor Constraints and Costs and Other Inflationary Pressures—Margin Performance Varies

The overwhelming focus on all the calls were the constraints on labor availability, and hence growing labor costs, stemming from a combination front-line wage increases, higher retention costs, increased benefits and more training. WM put its underlying labor cost inflation at almost 9%, and WCN echoed that, noting about double-digit increases in labor costs. CWST noted wage increases of 300 basis points above budgeted levels. This, combined with inflationary pressure in other cost categories (fuel, steel, tires, etc.), put greater pressure on margins in the third quarter than management teams had seen in years. WCN and GFL managed to overcome this, posting EBITDA margins that were up 60 and 90 basis points year over year, respectively, with both companies crediting early in the year, proactive price increases. RSG eked out a margin gain of 10 basis points and CWST held flat, both crediting strong pricing, but also cost savings tools and technology investments that the companies have put in place that were now bearing fruit in the operating expense line. In addition to labor cost pressure, WM noted that its repair and maintenance costs increased, in part due to the fact that the company had to put some of its higher cost trucks back out on the road to meet the greater-than-expected volume demand. As a result, its margin compressed year over year, also in part due to the impact of its recycling brokerage business. As these various inflationary cost pressures are not expected to be “transitory”, at least over the near term, the companies were generally a little more cautionary on margin trends in the fourth quarter, though WCN’s fourth quarter guidance implies that the fourth quarter EBITDA margin is expected to be up year over year.

Free Cash Flow Shines—Automation and Technology in Focus in Capital Expenditure Budgets

Again, across the board, free cash flow handily beat expectations, driven by the top line and EBITDA growth and augmented by the fact that all the companies have been steadily improving their conversion ratios—the percentage of EBITDA that is turned into free cash flow. Supply chain constraints were also uniformly cited as having an impact on the business, with uneven impacts on capital expenditure (capex) budget expectations. RSG, GFL and WCN modestly increased their capex budget expectations for the year. WM noted that it was targeting the low end of its capex guidance, primarily due to supply chain constraints. That said, WM is accelerating its automation efforts, in particular noting that it had doubled expectations for recycling capex from prior years, in order to more quickly rebuild and automate its single stream material recovery facilities (MRFs), where the labor pressures and high turnover are particularly acute. Although WM was perhaps the most vocal on this issue, all the companies highlighted a focus on greater technology and automation investment to combat inflation.

Guidance Raised for 2021

WCN, GFL and CWST raised guidance for revenue, EBITDA and free cash flow (FCF), while RSG raised guidance for free cash flow and earnings. WM raised revenue guidance and reaffirmed its EBITDA and free cash flow ranges. Amazingly and unprecedented, all the companies have formally raised guidance two or three times this year! EBITDA expectations for all the companies are at least 5% greater than when they started the year.

M&A Accelerates, Providing More Momentum into Next Year

As has been well telegraphed all year, M&A activity is extremely heightened for the solid waste industry. In addition to the drivers that have previously been cited—the need to upgrade technology and potential tax law change considerations—now the labor constraints have been added as a very acute, more recent driver. In any case, the upshot is that a number of old-line family firms, such as E.L. Harvey and Sons and Peoria Disposal Company (both of which we would not have pegged as sellers in the past) have been acquired by WCN and GFL, respectively, and both WCN and GFL are running well in excess of what they consider a “normal” acquisition year. In particular, GFL has spent $2.2 billion on 37 companies with $735 million in annualized revenues, about 2 ½ times what management anticipated at the start of the year. CWST has acquired nine businesses with $86 million in annualized revenue, more than double the upper end of its normal targeted range. RSG is on track to invest more than $1 billion in  acquisitions. Given its greater size (and thus heightened Department of Justice scrutiny), RSG is targeting a mix of solid waste and environmental service companies, while WCN and CWST still see plenty of M&A runway in traditional solid waste.

Glimpses into 2022

We would note that in the past WCN and RSG have tended to give the most detailed or specific forward year (2022) guidance in their third quarter conference calls. And although they still provided a bit more specificity than the other players, they were also a bit more general than has been the case in the past—understandably, given the still lingering pandemic uncertainties and rampant labor and other cost inflation. That said, WCN forecast 5.5%-6% price growth (noting a likely 100 basis point tailwind from higher CPI-indexed pricing on the indexed part of their business), with continued underlying solid waste margin expansion and double-digit free cash flow growth. GFL is looking for price and volume growth of over 6%, and also spoke to a 100 basis point tailwind from CPI. When combined with acquisition rollover, it sees top line growth of over 15% and free cash flow growth of over 20% next year. RSG more generally talked to yield of 3%+ and volume growth somewhere between pre-pandemic levels and the 2021 growth rate, resulting in expected high single-digit FCF growth. Across the board, all the companies saw accelerated pricing in 2022, due to both the inflationary pressures and higher CPI, and opportunities for continued volume growth better than pre-pandemic levels. And generally, all are optimistic that they can price for, or ahead of, inflation, and when combined with planned cost reductions from automation and technology, foresee the potential for margin expansion in 2022, though there can be a timing lag in when that occurs.

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