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Advanced Disposal Sees Strong Cash Flow, “Disciplined Pricing” in 2018

Advanced Disposal the largest privatelyheld companynbspin the Waste 100 filed with the US Securities and Exchange Commission for an initial public offering of common stock in AugustMichael E Hoffman industry analyst and managing directornbspStifel Nicolaus amp Co Inc and Leone Youngnbspthe Principal of LTY ERC LLC and editornbspof Waste36039s monthly Business Insights newsletter each analyzed what the IPO might signify
During a call with investors, Advanced Disposal Services delivered its fourth quarter 2018 and full-year highlights, as well as its outlook for 2019.

Despite an environment that saw commodity prices fall 42 percent on average in 2018 and diesel fuel cost per gallon increase by 41 percent, Ponte Vedra, Fla.-based Advanced Disposal Services experienced a positive core business anchored by price-led growth, a favorable acquisition market and strong cash flow generation for the fourth quarter of 2018.

During its fourth quarter 2018 earnings call with investors on February 22, Advanced Disposal announced revenue of $394.8 million for the three months ended December 31, 2018, versus $384.4 million in the same period of the prior year. Net income during fourth quarter 2018 was $2.5 million, or $0.03 per diluted share, and adjusted net income, which excludes certain gains and expenses, was $11.4 million, or $0.13 per diluted share.

Fourth quarter 2017 net income included a $40.4 million benefit from the Tax Cuts and Jobs Act and was $42 million, or $0.47 per diluted share, and adjusted net income was $11.2 million, or $0.13 per diluted share.

"Cash flow generation continues to be a key area of focus for us, and we are pleased that in 2018, we generated cash from operations of $308.3 million and improved adjusted free cash flow by 10 percent," said Advanced Disposal Services CEO Richard Burke in a statement. "We also remain committed to disciplined pricing and achieved average yield of 3.4 percent in 2018. Overall, we are well positioned as a company as we move into 2019."

During the call with investors, Burke stressed that the fourth quarter capped off a solid 2018, where the company executed on a number of key financial targets, including organically growing the business by nearly 4 percent, led by its best pricing year of 3.4 percent and completing $30 million of acquisitions spend. Acquisitions included a fourth quarter purchase of a company with hauling operations and a municipal solid waste landfill with 50 years of remaining space in a growing Eastern Alabama market near metro Atlanta, noted Burke.

Fourth quarter and full-year highlights include:

  • Fourth quarter revenue of $394.8 million was up 2.7 percent overall versus the prior year and 4.8 percent excluding an $8.2 million reduction related to the adoption of the new revenue recognition standard.
  • Achieved fourth quarter average yield of 4 percent and full-year average yield of 3.4 percent.
  • Achieved adjusted EBITDA remained flat at $108.7 million for the fourth quarter. The company reported it improved EBITDA by $9 million versus the prior year and met its overall EBITDA guidance set out at the beginning of the year, generating $318 million of cash from operations, resulting in an adjusted free cash flow of $45.6 million.
  • Full-year revenue of $1,558.2 million was up 3.4 percent overall versus the prior year and 5.6 percent excluding a $33.7 million reduction related to the adoption of the new revenue recognition standard.
  • Revenue from sales commodities declined 30 basis points due to declines in fiber prices. “For us, this includes the price received for OCC [old corrugated cardboard], falling from an average of $84 per ton in Q4 2017 to $63 per ton in Q4 2018,” stated Burke. “We have continued our previously discussed efforts in the fourth quarter to educate our customers around the impacts of contamination and the cost of recycling along with securing price increases related to the collection of recyclables.”
  • Net income for the full year was $9.4 million and adjusted EBITDA grew $9 million versus the prior year to $427.1 million.
  • Full-year cash provided by operating activities was $308.3 million.
  • Full-year adjusted free cash flow increased 10 percent to $145.6 million.
  • Fourth quarter organic volume growth declined 0.3 percent, led by a decline in special waste volume, but full-year organic volume grew 0.5 percent.
  • “That said, service increases continue to outpace service decreases,” said Burke during the call. “And we are seeing positive momentum on our residential line of business. This includes a recently awarded 70,000-home disposal neutral in an existing Orlando operations contract commencing on October 1 in Osceola County, Fla. This contract further strengthens our Interstate 4 corridor footprint as we work to profitably expand in this market.”
  • Net income for the fourth quarter was $2.5 million, or $0.03 per diluted share.
  • Adjusted net income improved $0.2 million to $11.4 million for the fourth quarter versus the prior year and adjusted diluted earnings per share remained at $0.13.
  • Acquisitions drove 40 basis points of growth in the fourth quarter as the company completed 12 acquisitions during 2018—11 of these deals strengthened Advanced Disposal’s existing operating footprint, reported Burke. “The 12th acquisition was a new platform deal in Alabama that includes both hauling operations and a well-positioned MWS [municipal solid waste] landfill, which will give us momentum around inorganic growth heading into 2019.”

“We also continued to invest money in Q4 toward our digital transformation,” said Burke during the call. “This is a multifaceted effort that will improve our customer experience by providing customers with the tools to interact with us how and when they want to.”

By April, the company plans to pilot a new customer portal that will enable commercial roll-off and subscription residential customers to use their smartphones or computer to review their account or record their scheduled services, such as replacing a container or scheduling an extra pickup.

“Wrapping up 2018, free cash flow remains our most important financial measure of success,” added Burke. “We are pleased that for the full year, we improved adjusted cash flow by 10 percent versus 2017 to $145.6 million. This allowed us to reduce leverage by 30 basis points during the year as we remained committed to reducing leverage over time.”

Fiscal year 2019 guidance:

  • Revenue is estimated to be between $1.603 million and $1.629 million. This includes average yield of 3 percent to 3.6 percent and organic volume of (0.4 percent) to 0.3 percent.
  • Adjusted EBITDA is estimated to be between $440 million and $452 million.
  • Capital expenditures are estimated to be between $191 million and $201 million.
  • Adjusted free cash flow is estimated to be between $140 million and $152 million.
  • Estimated tax rate for the year is estimated to be about 27 percent.

“Over the past five years, Advanced Disposal has now more than doubled its adjusted free cash flow. As we look forward to 2019, we continue to see favorable backdrop for our core solid waste business,” said Burke. “The pricing environment remains favorable and while volume growth is important, we will not sacrifice price to achieve near-term volume gains. Our acquisition pipeline remains strong and, for 2019, we expect to spend $50 million to $75 million over the course of the year versus our typical $30 million to $50 million target.”

“Operationally, our top priority will remain in the recruitment area for drivers and mechanics because it is that heart of every key metric that we have—whether it be safety, service, productivity, customer satisfaction or bottom-line financial results,” he added. We recognized we will need to continue to price above inflation to be able to deliver the best in programs that enhance our recruiting and retention efforts while at the same time improving margins.”

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