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Growth Continues for Covanta, Republic Services in Q2 2018
While Covanta announces plan to close plant in Warren County, N.J., and Republic Services is dealing with recycling headwinds, both companies report continued growth for the second quarter of 2018.
7 Min Read
Morristown, N.J.-based Covanta Holding Corp.’s second quarter total revenue was $454 million, which is up from $424 million during the same period in 2017. And Republic Services’ net income was $234.9 million, or $0.71 per diluted share, for the second quarter of 2018, versus $202.9 million, or $0.60 per diluted share, for the comparable 2017 period.
Here’s a breakdown of the earnings reports for both firms.
Covanta Reports ‘Continued Momentum’ for Q2 2018
Covanta Holding Corp.’s second quarter total revenue was $454 million, which is up from $424 million during the second quarter of 2017. Adjusted EBITDA was $103 million, up from $93 million from the same period a year ago.
“The momentum that we built during the first quarter continued as we generated $103 million of adjusted EBITDA and $26 million of free cash flow during the second quarter,” said Stephen J. Jones, Covanta's president and CEO, on a call with investors. “These results reflect progress on many fronts—including record production at many of our facilities, strong waste pricing, growth in waste, improvements in metal recovery and pricing and effective cost management.”
“We are reaffirming our full-year guidance and with our current view on the year, we now expect full-adjusted EBITDA to be above the midpoint of our guidance range,” added Jones.
Here are some other highlights from the firm’s results:
During the call with investors, Covanta announced it recently decided to close its 550-ton per day Energy-from-Waste (EfW) plant in Warren County, N.J. According to Jones, given the facility’s size and the challenging local market conditions, the company didn’t see its potential to be a significant financial contributor going forward. Closure is expected in early 2019, and Jones said the company does not expect it to have a material impact on the financial metrics.
Similar to the first quarter, waste and service revenue drove the company’s target performance with both price and volume as key same-storage drivers. Covanta realized a 5 percent same-store volume growth primarily due to a full quarter operation in Fairfax, Va.
Environmental services revenue increased 14 percent, and profile waste revenues from the company’s EfW facilities grew by 9 percent.
Energy revenue, including capacity, increased $5 million compared to the same quarter in 2017. Energy prices were down by $5 million in Q2 2018 compared to Q2 2017. Energy volume saw an increase of $9 million this quarter compared to the same quarter in 2017. And capacity revenue improved by $1 million in the second quarter of 2018 compared to Q2 2017.
The company agreed to a new 15-year power purchase agreement (PPA) at its Marion County EfW facility in Oregon. The new power sale will begin in the later part of 2019.
The company entered into a new, one-year purchasing agreement for a portion of the output at Fairfax. This agreement includes renewable value for the aspects of the plant and the impact is reflected in the outlook for average prices in 2018.
Recycled metals revenue also increased. On the ferrous side, same-store revenues grew 43 percent, driven by both better prices and increased sales volumes. On the non-ferrous side, second quarter same-store realized prices increased by $3 million, or 61 percent, and sales volume was up $3 million, or 81 percent.
Maintenance expenses were $103 million this year compared to $110 million last year. Dublin operations and Covanta Environmental Solutions growth to drive increase in other operating expense year-over-year.
Adjusted EBITDA grew $7 million organically, primarily driven by plant production at Fairfax.
“Our second quarter results highlight our momentum across multiple fronts," said Jones in a statement. "Plant operations continue to show year-over-year improvement, led by the resurgence of Fairfax. Meanwhile, we are benefiting from improving waste pricing given the preferential location of our plants relative to alternative disposal during this period of strong waste flows. Improved plant production coupled with effective sales of our unique disposal capability is also driving incremental profiled waste volumes. Overall, I am very pleased with our performance to date and, in light of our current outlook for 2018, I expect our full-year adjusted EBITDA will be above the midpoint of our guidance range."
Despite Recycling Headwinds, Republic Services Sees Growth
Republic Services’ net income was $234.9 million, or $0.71 per diluted share, for the second quarter of 2018, versus $202.9 million, or $0.60 per diluted share, for the comparable 2017 period.
"We continued our strong start to the year in the second quarter, delivering double-digit growth in earnings and free cash flow per share,” said Donald W. Slager, president and CEO of Republic Services, in a statement. “We've invested over $120 million in value-enhancing acquisitions and returned approximately $700 million of cash to our shareholders since the beginning of the year. The strength of the solid waste business and the continued successful execution of our strategy enable us to offset recycling headwinds and reaffirm our full-year EPS and free cash flow guidance."
Here are some other highlights from the company’s earnings:
Adjusted EBITDA was $690 million and adjusted EBITDA margin was 27.4 percent of revenue. The solid waste business contributed 50 basis points of margin expansion, which was more than offset by headwinds from the recycling business and rising fuel costs.
Cash provided by operating activities was $610 million and adjusted free cash flow, a non-GAAP measure, was $323 million, an increase of approximately 173 percent over the prior year. Adjusted free cash flow per share increased 180 percent over the prior year.
Total revenue increased 3.9 percent over the prior year, excluding the impact of the new revenue standard. Revenue growth from average yield was 2.1 percent and volume increased 0.6 percent.
Core price increased revenue by 3.6 percent, which consisted of 4.4 percent in the open market and 2.3 percent in the restricted portion of the business.
The company invested $56 million in tuck-in acquisitions and an additional $42 million in early July, bringing the company's total year-to-date investment to $123 million.
Republic continued to convert CPI-based contracts to more favorable pricing mechanisms for the annual price adjustment. The company now has approximately $590 million in annual revenue tied to either a waste-related index or a fixed-rate increase of 3 percent or greater.
Residential collection contributed $560.2 million in revenue. That was down from $576.4 million in 2017. Small-container revenue increased from $747.1 million in 2017 to $763.9 million in 2018. And large-container revenue increased from $528.7 million in 2017 to $555.3 million in 2018.
Transfer revenue increased from $312.0 million in 2017 to $320.8 million in 2018, and landfill revenues increased from $569.7 million to $580.6 million.
Average yield in the collection business was 2.4 percent, which included 2.6 percent yield in the small container business, 2.5 percent yield in the large container business and 2 percent yield in the residential business.
Volumes increased 2.5 percent in Republic’s large container business. Volumes were flat in the small container business, which included a 80 basis-point impact from intentionally shedding certain work performed on behalf of brokers. Volumes decreased 2.8 percent in the residential business.
Landfill MSW volume increased 1.8 percent, C&D volume increased 8.3 percent and special waste volume decreased 4.5 percent.
Revenues from sales of recycled commodities decreased 4.4 percent, which primarily relates to the decrease in recycled commodities prices and tons sold. Excluding glass and organics, average commodity prices for Republic decreased 42 percent to $91 per ton in the second quarter from $157 per ton in the prior year.
“At this time, China's actions continue to create a supply-demand imbalance for recovered paper. This unprecedented imbalance is causing commodity prices to remain low and processing costs to increase as mills become more selective in the quality of material they buy,” said Slager on a call with investors. “While this situation is painful in the near term, we believe these market conditions will serve as the catalyst needed to transform recycling into a durable, sustainable business model in which companies can continue to invest for the benefit of their communities without undue risk.”
“The Republic team is taking action. We are working diligently to both minimize the near-term impact of these headwinds and accelerate efforts to shift our municipal customers to a fee-based pricing model with a more equitable risk-sharing arrangement,” said Slager on a call with investors. “First, in the open market, we are raising prices to cover higher processing costs resulting from stricter contamination requirements. Second, in the restricted market, our sales team is meeting face to face with our 1,000-plus municipal recycling customers. We are requesting an immediate price increase and adoption of a new pricing structure at or before contract renewal. This structure includes a fee to collect the material, plus a net processing fee that factors in processing cost, contamination levels and commodity prices.”
Republic is also leveraging technology to increase productivity, reduce cost and improve the quality of material recovered at our processing centers.
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