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Advanced Disposal Faces Labor, Recycling Headwinds in Q3 2018

Advanced Disposal Faces Labor, Recycling Headwinds in Q3 2018
The company is ramping up its benefits package and working with outside recruiters for the first time in an effort to attract quality workers, including drivers and mechanics.

Ponte Vedra, Fla.-based Advanced Disposal Services, Inc. recently reported its Q3 earnings. The revenues for the third quarter of 2018 were $400.6 million, up from $392.7 million in 2017. And despite having a pretty solid quarter, the company faced labor and recycling headwinds.

"Advanced Disposal has generated operating cash flows of $234.4 million and adjusted free cash flow of $119.7 million year-to-date," said Richard Burke, CEO of Advanced Disposal, in a statement. "Our commitment to disciplined pricing and cash flow generation has resulted in a continued strengthening of our balance sheet as we reduce leverage over time. Based on our year-to-date results, we remain on track to be either within or above the range of our full year guidance targets."

On a conference call with investors, Burke addressed the industry’s labor shortage and how Advanced Disposal is trying to overcome that challenge.

“We’ve changed the way we are attacking [the labor shortage], and we are using outside recruiters for the first time in our history,” stated Burke. “The recruiters are dialing out, being aggressive and targeting markets where we are short, and we are using all the social media we can, laying out our benefits package for everyone to see and doing things to enhance that benefits package in order to make us more attractive to quality drivers and mechanics.”

Here’s a breakdown of the firm’s earnings report:

  • Net loss during Q3 was $4.9 million, or $0.06 per diluted share, and adjusted net income, which excludes certain gains and expenses, was $15.1 million, or $0.17 per diluted share.
  • Revenue was $400.6 million, up 2.0 percent overall and 4.2 percent excluding an $8.6 million reduction related to the adoption of the new revenue recognition standard.
  • Recycling revenue was down 1.3 percent but largely offset by a 1.2 percent increase in fuel fee revenue.
  • The company’s average yield was 4.3 percent and its organic volume declined 1.1 percent, predominately due to lower special waste disposal volume.
  • Year-over-year growth from acquisitions was 1.1 percent, as Advanced Disposal benefited from the rollover impact of acquisitions completed in the second half of 2017 and nine tuck-in acquisitions completed year-to-date 2018.
  • Adjusted EBITDA was $112.3 million, which was consistent with prior year levels despite a $4.2 million adjusted EBITDA decline from the sale of recyclables.
  • Cash provided by operating activities was $234.4 million year-to-date 2018.
  • Adjusted free cash flow year-to-date was $8.1 million, or 6.8 percent higher than the year prior, and totaled $119.7 million.
  • Solid waste collection accounted for 65.6 percent of reported revenue ($262.7 million vs. $259.1 million in 2017). Solid waste disposal and transfer accounted for 36.6 percent ($146.8 million vs. $145.3 million in 2017). Sale of recyclables (1.0 percent), fuel charges and environmental charges (7.9 percent), intercompany eliminations (decrease of 19.7 percent) and other (8.6 percent) accounted for the remainder.
  • The company’s cost of operations, excluding accretion expense, as a percentage of revenue was 61.9 percent, compared to 61.6 percent the year prior.
  • “Looking at our business more broadly, like others in our industry, we’re experiencing labor cost pressures, both from our drivers and mechanics as well as outside subcontractors. Hiring and retaining the best possible talent is always important to success, and we believe it’s even more critical today in an environment with unemployment below 4 percent,” said Burke on a call with investors. “The simple truth is there are more driver and mechanic job openings available than there are qualified candidates, so if you’re not investing in your people, you’re not going to retain your best talent. Given that backdrop, our top priority as an organization is winning in this area because it’s at the heart of every key metric that we have. Whether it be safety, service, customer satisfaction or bottom line financial results, we recognize we will need to continue to price above inflation to be able to invest in programs that enhance our recruiting and retention efforts while at the same time improving margins.”
  • “We had a severe accident in the quarter that resulted in a fatality, unfortunately,” said Burke on a call with investors. “[In response,] we have gone about a complete retraining on defensive driving, we’ve done stops, we’ve been doing daily huddles, etc. Safety has always been a core value of this company, and it continues to be as we enhance everything we are doing. We are also adding technology. We’ve had drive cams in the cabs since 2007, which give us a view to what’s going on around that truck, and we’re adding even better technology to our trucks. It’s in about 400 of our trucks no, and we plan to have it in half of our fleet by this time next year. By doing that, we’re training people and doubling down on the amount of time we spend on training. In a tight unemployment market, some of the talent coming through the door isn’t the talent we’ve seen in the past, so we’ve had to look at our training program and really double down on the amount of time spent in the cab and classroom before letting them drive our trucks.”
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