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Waste Connections Exceeds Outlook in Q3 – Noting A Healthy Increase in M&A Activity

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Waste Connections, Inc. (WCN) announced its results for the third quarter of 2020. Solid waste volume improvements and increased recovered commodity values drove better than expected results.

Healthy M&A activity also was discussed at length. Worthing F. Jackman, president and CEO, said that, “The acquisition pace of activity has actually increased and the dialogue is as active as we have seen years.” He also mentioned that the company has already signed and closed 16 acquisitions with $135 million in annualized revenue. He also believes that the company could head into 2021 with 2% top line growth already in hand from M&A.

Here is a look at the numbers for Q3:

  • Revenue: $1.390 billion, exceeding outlook
  • Net income attributable to Waste Connections: $158.0 million
  • Adjusted net income attributable to Waste Connections: $188.6 million
  • Adjusted EBITDA: $432.6 million, or 31.1% of revenue, exceeding outlook
  • YTD net cash provided by operating activities: $1.186 billion
  • YTD adjusted free cash flow: $778.4 million, or 19.2% of revenue and up YOY
  • Quarterly cash dividend: Increased 10.8%, the tenth consecutive increase in 10 years

“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,” said Jackman.

Jackman added, “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% of that increase. Moreover, year-to- date adjusted free cash flow of $778 million, or 19.2% 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.”

COVID-19 Impacts

Waste Connections continued to be impacted by COVID-19, albeit to a lesser extent than in the prior period in many markets. The impacts to solid waste activity from COVID-19 reflected the pace of reopening activity and varied by market, geography, the size and customer mix in each market. Through Q3, about 68% of solid waste commercial customers and 57% of associated revenue 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% and 42% respectively through the second quarter. As a result, solid waste collection, transfer and disposal revenue was down 2% YOY on a same store basis in the third quarter, an improvement of 330 basis points from Q2, which was down 5.3% YOY.

Looking Ahead

The impact of the COVID-19 outbreak on their 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 pandemic or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.

Jackman stressed that you need to take care of your people in any type of challenging environment going forward. By focusing on your people, it allows them to focus on their health, their own finances, the communities they serve, and it is imperative to stay ahead of it in order to support them.

As Jackman noted in the earnings call, he also believes that the company could head into 2021 with 2% top line growth already in hand from M&A. He said what drives a majority of our transactions is lineage transitions and that they are positioned well and have flexibility to fund continued outside acquisition activity.

When asked about ESG and sustainability, Jackman said that, “Our recently released Sustainability/ESG Report is what we’ve been doing for 20 years. What we can all do better going forward is to continue to be more visible about what we do.”

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