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Waste Connections Sees "Sequential Improvements" in Q4, Provides 2021 Outlook

Waste Connections Waste Connections Truck

Waste Connections, Inc. (WCN) announced its results for the fourth quarter of 2020 and provided a company outlook for 2021.

President and CEO Worthing F. Jackman noted solid waste volumes improved at an higher-than-expected rate of more than 250 basis points. Recycled commodities and renewable fuels increased in value which drove adjusted EBITDA margins 50 basis points above the expected estimates for Q4.

He continued, “With expected solid waste pricing plus volume growth of 5% and increasing recycle recycling and renewable fuels values, 2021 is already positioned for continued top line growth and 50 basis points margin expansion, with additional upside from any further reopening activity or recovery in the economy or acquisitions completed during the year.”

The 2021 outlook did not include any further reopening activity as a result of 2020’s COVID-19 shutdowns.

Waste Connections reported a revenue of $1.398 billion in Q4, up from $1.362 billion year-over-year, about $63 million above the company's outlook due to "higher than expected solid waste volumes and recycling and renewable fuel values, as well as about $12 million from acquisitions closed during the quarter," stated CFO Mary Ann Whitney.

Operating income was $197.1 million, up from $194.2 million in Q4 2019. Net income dropped to $130.7 million in Q4, at $0.50 per share on a diluted basis of 263.6 million shares, down from $133.3 million at $0.50 per share on a diluted basis of 264.6 million shares in 2019.

Full-year highlights included:

  • Net income in 2020 was $204.7 million, or $0.78 per share on a diluted basis of 263.7 million shares.  In 2019, WC reported net income of $566.8 million, or $2.14 per share on a diluted basis of 264.5 million shares.
  • For the year ended Dec. 31, 2020, revenue was $5.446 billion, up from $5.389 billion in 2019.
  • Operating income, which included $482.1 million in costs primarily related to the decrease in property and equipment at certain E&P landfills as a result of the Company's impairment testing, was $412.4 million, as compared to $837.8 million in the prior year, which included $77.4 million of costs primarily resulting from impairments and other operating items.
  • Adjusted net income(b) in 2020 was $695.8 million, or $2.64 per diluted share, compared to $719.6 million, or $2.72 per diluted share, in the year ago period. Adjusted EBITDA(b) in 2020 was $1.662 billion, as compared to $1.674 billion in the prior year period.
  • Solid waste organic price of 4.3% was played out “as expected” in 2020, with combined price plus five and growth turning positive in Q4 for the first quarterly period since the onset of the pandemic on continued pricing strength, plus a higher than expected 260 basis points of sequential volume improvement.

Q2 solid waste volume lows of negative 10% were revisited, with recovery at negative 6% in Q3 as well as an improvement to negative 3% in Q4 2020.

“This progression reflected the continuous recovery and activity we have seen since the depths of the pandemic and sets us up for positive reported volumes in 2021,” Jackson said. “Beginning in Q2, even without the benefit of any further economic recovery, any continued reopening activity, or improvements to the economy related to COVID-19 or other factors will be expected to drive higher than expected overall volumes in 2021. Underlying solid waste margin performance in 2020 demonstrated the consistency of our focus on quality of revenue and managing costs.”

WC exceeded each of the updated outlooks for adjusted EBIT margins of 30.5% in 2020 even with the 80 bp detrimental that came with lower EMP waste activity as well as the 70 bp impact because of COVID-19 worker support costs.

Jackson noted, “Not that we would adjust for such COVID related costs, but it's worth noting that these discretionary costs alone accounted for more than 60 basis points year-over-year margin decline in 2020.”

Details were provided about how the company’s culture and value system allowed WC to continue regular service for customers, reduced voluntary turnover and improved safety performance during the 2020 year.

“We often note our belief that culture values and human capital are our greatest assets and instrumental in delivering differentiated results,” Jackson said. “This belief got in our response early on to the pandemic which focused on reducing employee concerns regarding income, health care and family obligations.”

WC allocated $35 million in discretionary work support in the form of supplemental wages for frontline employees. With this focus on culture, the company was able to decrease voluntary turnover by 18% during the year.

In addition, safety-related incident rates fell by 12% year-over-year. Jackson noted that 60% of the company’s operating locations had zero safety-related incidents, resulting in a total recordable injury rate (TRIR) of less than half of the industry average.

2021 Outlook

Solid waste revenue is estimated to be $5.8 billion in 2021, with expected price plus volume growth of 5%. 

"With NP waste revenue and the values for recycled commodities and renewable fuels assumed about in line with current levels and adjusted EBITDA 2021 as reconciled in our earnings release is expected to be approximately 1.8 billion or 31% of revenue up to 50 basis points year over year," Whitney said.

Here is a full look at WC's estimates for 2021:

  • Revenue is estimated to be approximately $5.80 billion;
  • Net income is estimated to be approximately $669 million;
  • Adjusted EBITDA(b) is estimated to be approximately $1.80 billion, or about 31.0% of revenue;
  • Net cash provided by operating activities is estimated to be approximately $1.575 billion;
  • Capital expenditures are estimated to be approximately $625 million; and
  • Adjusted free cash flow(b) is estimated to be at least $950 million, or 16.4% of revenue.

"Similar to the full year outlook, underlying margin expansion and solid waste hauling transfer and disposal is projected at 60 basis points in Q1," Whitney said. "Depreciation and amortization expense for the first quarter is estimated to be about 13.8% of revenue, including amortization of intangibles of about $32.6 million or $.09 per diluted share net of taxes and interest expense net interest income is estimated at approximately $42 million. And finally, our effective tax rate in Q1 is estimated to be about 19%, subject to some variability and below the expected full-year rates due to tax benefits associated with vesting of equity-based compensation."

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