Waste Connections, Republic Services Report Q1 2018 Earnings Growth, Recycling Struggles

The two firms reporting 2018 first quarter earnings each posted growth in revenues and challenges with recycling.

Toronto-based Waste Connections Inc.’s revenues for the first quarter of 2018 were $1.140 billion, up from $1.091 billion in 2017. And Phoenix-based Republic Services Inc. reported $2.4 billion in revenues for the first quarter of 2018, a 5.6 percent increase from the year prior. While both companies saw increases in revenues, they experienced struggles with recycling due to weather, the recently enacted China ban and contamination standard and other reasons.

Here’s a breakdown of the earnings reports for both firms.

Waste Connections Reports Strong Revenues

Waste Connections’ operating income was $188.7 million, up from $26.4 million in Q1 2017, which included $141.7 million in non-cash impairments and other charges.

“Better than expected solid waste price growth and E&P waste activity drove strong performance in the period and position us well for the remainder of 2018. Adjusted EBITDA margins in the first quarter increased 80 basis points year-over-year in spite of both the precipitous decline in recycled fiber values and weather-related impacts across a majority of our operational footprint,” said Ronald J. Mittelstaedt, CEO and chairman of Waste Connections, on a call with investors. “We are extremely pleased that given the strong start to the year and our recent acquisitions, adjusted free cash flow is tracking to exceed our original outlook of $850 million for 2018. Moreover, as anticipated, we resumed our share repurchase program, opportunistically buying back approximately $42 million of shares in the first quarter.”

The company experienced positive acquisition activity, as it signed or closed multiple acquisitions within the first quarter of 2018.

“Acquisition activity is another bright spot for 2018. Year-to-date, we’ve signed or closed acquisitions with total annualized revenue of approximately $165 million, including three new market entries. Since our previous update in February, we acquired Right Away Disposal, an integrated provider of solid waste collection, recycling, transfer and disposal services in Arizona’s fast-growing Pinal and Maricopa Counties, consisting of three collection operations, one recycling facility, two transfer stations and a municipal solid waste landfill,” said Mittelstaedt on a call with investors. “We also acquired the Heart of Florida Landfill in Central Florida, a municipal solid waste landfill that complements existing operations. And in early May, we signed a definitive agreement for a new market entry to acquire a provider of collection, recycling and transfer services with approximately $55 million of annualized revenue, expected to close in June. We are fortunate that the strength of our financial profile and free cash flow generation provide us with the flexibility to continually increase the return of capital to shareholders while funding an above average amount of acquisition activity.”

  • Core price grew 3.9 percent in the U.S. and 4.8 percent in Canada. Volume decreased 1.1 percent and recycling decreased 1.9 percent.
  • Solid waste collection accounted for 70.8 percent of reported revenue ($807.2 million vs. $766.1 million in 2017). Solid waste disposal and transfer accounted for 19.4 percent ($221.3 million vs. $213.5 million in 2017). Solid waste recycling ($22.5 million), E&P waste treatment, recover and disposal ($55.6 million) and intermodal and other ($33.4 million) accounted for the remainder.
  • Net income attributable to Waste Connections in the first quarter of 2018 was $124.9 million, or $0.47 per share on a diluted basis of 264.6 million shares. In the year ago period, the company reported net income attributable to Waste Connections of $14.9 million, or $0.06 per share on a diluted basis of 263.9 million shares. Shares and per share numbers reflect a three-for-two share split completed in June 2017.
  • Adjusted net income attributable to Waste Connections in the first quarter of 2018 was $148.6 million, or $0.56 per share, versus $130.3 million, or $0.49 per share, in the prior year period.
  • Adjusted EBITDA in Q1 2018 was $356.9 million and 31.3 percent of revenue, compared to adjusted EBITDA of $332.8 million and 30.5 percent of revenue in the prior year period.
  • The firm also reported adjusted free cash flow of $220.2 million compared with $237.5 million in the first quarter of 2017.

Republic Services Sees Strong Growth in Price and Volume

Republic Services’ net income was $237.9 million for the first quarter of 2018, versus $187.8 million, for the comparable 2017 period.

"We are pleased with our strong start to the year. Through the execution of our strategy, we delivered solid growth in both price and volume, expanded EBITDA margins and produced double-digit growth in earnings and free cash flow per share independent of the benefit from tax reform," said Donald W. Slager, president and CEO of Republic Services on a conference call with investors and analysts. "Our first quarter results position us well to achieve our full-year goals.”

Here are some other highlights from the company’s earnings:

  • Adjusted net income for the three months ended March 31, 2018, was $237.9 million versus $187.8 million a year ago.
  • Adjusted EBITDA was $699.4 million, an increase of approximately 7 percent over the prior year. Adjusted EBITDA margin was 28.8 percent of revenue, an increase of 140 basis points over the prior year. Excluding the impact of the new revenue standard, adjusted EBITDA margin increased 30 basis points over the prior year.
  • Adjusted free cash flow was $356 million, an increase of 48 percent over the prior year.
  • Residential collection contributed $548.5 million in revenue, 6 percent of the company’s total. That was down from $564.3 million in 2017. Small-container revenue increased from $733.6 million in 2017 to $748.6 million in 2018. And large-container revenue increased from $495.3 million in 2017 to $515.4 million in 2018.
  • Transfer revenue increased from $282.2 million to $288.3 million year over year. With intercompany activity removed, the numbers were $110.6 million in 2017 and $119.7 million in 2018.
  • Landfill revenues increased from $504.7 million to $549.7 million. With intercompany activity removed, landfill revenues were $272.3 million in 2017 and $306.5 million in 2018.
  • Core price increased revenues by 3.8 percent, which consisted of 4.6 percent in the open market and 2.5 percent in the restricted portion of the business.
  • Republic invested $26 million in tuck-in acquisitions during the first quarter and another $53 million in April.
  • Average yield in the collection business was 2.4 percent, which included 2.6 percent yield in the small container business, 2.6 percent yield in the large container business and 2.1 percent yield in the residential business.
  • Volumes increased 1.9 percent in Republic’s large container business. Volumes were flat in the small container business, which included a 90 basis-point impact from intentionally shedding certain work performed on behalf of brokers. Volumes decreased 2.7 percent in the residential business.
  • Landfill volumes increased 12.7 percent. That included C&D of 5.7 percent and special waste of 35.9 percent. MSW volumes decreased 1.1 percent versus the prior year.
  • Revenues from sales of recycled commodities decreased 1.3 percent, which primarily relates to the decrease in recycled commodities prices. Excluding glass and organics, average commodity prices for Republic decreased 31 percent to $112 per ton in the first quarter from $162 per ton in the prior year.
  • “It’s important to keep in mind that our recycling processing and sale of commodities business is only 4 percent of total revenue, and despite a headwind in the first quarter from lower commodity prices and higher labor costs on our sorting lines, we still outperformed relative to our expectations given the strength of our solid waste business,” said Slager on a call with investors. “We continue to believe that recycled commodity prices will increase from April levels and have already begun to see clear evidence of this in the last couple of weeks. We continue to make progress moving to a fee-based pricing model with a more equitable risk sharing arrangement. We believe the current situation in China will serve as a catalyst in transitioning our municipal customers to a more durable model. Our customers have told us that recycling is important to them, and we remain committed to de-risking this core service offering for generations to come.”
  • Republic continued to convert contracts from CPI to a more favorable pricing mechanism for the annual price adjustment. It now has approximately $570 million in annual revenue that is tied to either a waste-related index or a fixed-rate increase of 3 percent or greater.
  • The company was recognized on the first annual Barron's 100 Most Sustainable Companies list as well as the 2018 World's Most Ethical Companies List by the Ethisphere Institute.
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