In the latter part of April and into early May, the largest solid waste companies reported their first quarter results and held follow-up conference calls. The main story running consistently through the earnings was the strength in volumes.
All of the companies reported volume results that were ahead of their guidance provided only a few months ago. Of particular note were landfill volumes, which were generally up double digits, while Casella Waste’s (CWST) landfill volume rose nearly 20 percent!
Unsurprisingly, driven by construction strength, construction and demolition (C&D) volumes rose more than 20 percent for over half of the companies, while special waste remained positive as well, though with varying degrees of strength. What was more remarkable, however, was the continued and consistent strength in municipal solid waste (MSW) landfill volumes—on a workday-adjusted basis (there was one extra day in the quarter compared to a year ago), Waste Management’s (WM) MSW volumes rose 13 percent, Waste Connections’ rose 11 percent, Advanced Disposal’s (ADS) rose 9 percent, while Republic Services’ (RSG) rose nearly 5 percent.
Progressive Waste Solutions (BIN) also characterized its landfill volumes as unusually strong, though it did not hold a conference call, in which it generally provides more detail. As a result, RSG and WCN total volumes rose more than 1 percent ahead of guidance, to 2.5 percent and 3.2 percent, respectively. BIN had a very strong pop in total company volumes, to 4.5 percent (4.8 percent in the US), versus expectations of around 1 percent.
The biggest surprise came out of WM, however, where total volumes turned positive about six months sooner than the company had anticipated, coming in at 1.3 percent, while its traditional solid waste business volumes rose 1.8 percent, both workday adjusted. Although everyone noted the benefit of the mild winter weather and construction strength, robust volume trends across almost all lines of business and geographies was universally cited as well.
Thus, it was generally acknowledged that volumes were likely to come in at the high end of, or above, expectations for the full year, but given the mild weather, companies were obviously unwilling to speculate that the first quarter’s gains were sustainable. Given the nature of the industry, once the extent of the second quarter seasonal uptrend is seen, estimated volume growth for the year will be much easier to determine.
Pricing for all the companies was either solid, or surprisingly good, driven by the volume strength and greater retention. RSG’s yield was 2 percent, just as expected, while WCN’s pricing ticked up to 3.1 percent versus expectations of around 2.9 percent. ADS’s yield rose to 1.9 percent versus 1.5 percent last year, while WM’s core price and yield were 5.3 percent and 2.6 percent, versus expectations of around 4 percent and 1.5 percent to 2 percent, respectively. CWST also had strong pricing of 4.7 percent, driven by collection pricing of 6.7 percent.
The notable exception here was BIN. Overall pricing came in 1.6 percent (1 percent in the U.S.), versus recent levels and expectations closer to 2 percent. Although pricing was particularly strong in the roll off/industrial lines of business, driven by high demand and diminished capacity, pricing nevertheless remained disciplined in commercial collection and MSW disposal as well and generally demonstrated sequential upticks.
Again, the pricing picture underscores that the underlying solid waste economic backdrop is very favorable, and a number of players characterized it as the best since 2007.
But Where Are the Margins?
Given what should be high incremental margins on volume growth, particularly landfill volume growth, the upside volume surprises often did not translate into margin upside, however.
Headwinds that were common to the industry included the negative extra workday impact (variously attributed at 40 to 60 basis points), the continued drag from low commodity prices on the recycling business and the low consumer price index (CPI) impact on index-based contracts (also variously attributed at around 30 to 40 basis points).
As a result, all the management teams reemphasized the importance of restructuring recycling contracts and changing the recycling business model, as well as their progress in doing so. With regard to CPI, both RSG and ADS talked about the need to move to alternative price indices and their progress in that regard. Then there were the one-offs, some expected, some not.
Once again, for WCN, strength in its solid waste operations was undercut by greater-than-expected weakness in its E&P waste business. RSG was hit with higher-than-expected healthcare expenses, while ADS had higher insurance claims. As a result, margins were generally in line to a bit weaker than expected, and in the case of RSG, WCN and ADS, even below the prior year, though all the companies reported earnings per share (EPS) basically in line with expectations.
The notable exception here was WM, which reported a substantial EBITDA margin gain of 130 basis points, above expectations, despite calling out much higher leachate expenses, which ADS also mentioned. CWST’s operating margin also rose over 300 basis points on its pricing and landfill volumes.
Guidance Reaffirmed; Probable Upside for Waste Management
Given that the year is in such early stages, combined with the mild winter weather begging the question as to how much volume might have been pulled from second quarter into first quarter, company managements’ were reluctant to formally change volume guidance, much less full year earnings guidance, particularly given some of the aforementioned margin headwinds.
That said, WM intimated that the company was very likely to raise guidance after the second quarter, the question was by how much. With regard to free cash flow, all the companies were very comfortable with their full year guidance, despite the fact that WM, RSG and WCN noted that capex spending had been pulled into the first quarter, generally on early truck purchases.
WCN did adjust its year one pro forma free cash flow guidance for the combined WCN/BIN by the previously discussed 3 percent, due to the Treasury’s proposed inversion rules. All in all, in a very uncertain global economic backdrop, the solid waste companies are certainly sitting pretty, particularly as container weights, diminishing capacity, housing activity and other metrics seem to indicate that the business has not yet peaked!
M&A Conversation More Muted
After being front and center all last year, conversation regarding merger and acquisition activity was much more muted on first quarter conference calls. RSG and WM reiterated their belief that they would do the normal amount of tuck-in acquisitions ($100 million to $200 million), and ADS noted it had completed four tuck-ins in the quarter.
Waste Connections Picks Up Two More Synergies
Although WCN adjusted free cash flow modestly for the new inversion rules, management signaled that the expected merger with BIN was proceeding on target, with a shareholder meeting scheduled for May 26, and probable close as early as June 1.
Not only is the merger seemingly proceeding smoothly timewise, WCN seems to have picked up two more potential synergies, making its underlying acquisition assumptions more conservative. First, in the time since the deal was announced, the Canadian dollar has appreciated beyond the expectations. Second, and potentially larger and more long lasting, WCN intends to improve BIN’s pricing discipline—with 4.8 percent more US volume under its belt to do so on!
Leone Young is the Principal of LTY ERC, LLC, providing consulting and research services to, and conducting special projects for, the environmental services industry, primarily the solid waste sector.
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