Worthing F. Jackman, president and CEO of Toronto-based Waste Connections, Inc. (WCN), kicked off a call with investors on October 29 stating that strong organic growth in solid waste and a sequential increase in exploration and production (E&P) waste activity has enabled WCN to deliver better-than-expected results during Q3 2019.
In addition, Jackman noted that continued price-led solid waste growth and a slight pull forward of special waste activity drove underlying margin expansion in solid waste collection, transfer and disposal of an estimated 60 basis points in the quarter. More importantly, he said, adjusted free cash flow was $763 million year-to-date, or 18.9 percent of revenue, and almost 13 percent year-over-year, which puts WCN “firmly on track to meet or exceed the adjusted free cash flow outlook for the full year.”
WCN announced that revenue for the third quarter totaled $1.412 billion, up 10.3 percent from $1.281 billion in the year ago period. The company also reported a 6.1 percent price and volume growth for the quarter, which exceeded its outlook, and adjusted EBITDA of $443.6 million, or 31.4 percent of revenue.
“Our strong operating performance, free cash flow growth and balance sheet strength positioned us for another double-digit percentage increase in our quarterly cash dividend, while maintaining tremendous financial flexibility,” said Jackman in a statement. “We remain well-positioned to fund expected above average acquisition activity in the near term and increased return of capital to shareholders over the long term. Relatively consistent solid waste organic growth plus the contribution from acquisitions closed year-to-date already sets us up for overall revenue growth in the mid to high single digits and underlying margin expansion in solid waste collection, transfer and disposal in the upcoming year, with additional acquisitions and any potential improvement in commodity-related activities providing further growth.”
Here are some additional highlights for Q3 2019:
- During the call with investors, Jackman reported that volume growth was 6.1 percent. “We reported our strongest quarterly volume results in almost two years in Q3 with volume growth better than expected at positive 90 basis points due primarily to an outsized quarter of special waste activity,” he said.
- MSW tons were up in most regions led by markets in WCN’s western and southern regions. Special waste volumes were up across all the company’s solid waste regions in the U.S. with notable activity in several states, including California, Florida, Illinois, Missouri and Minnesota, noted Jackman. Construction and demolition (C&D) tons, in contrast, were down in every region except in the southern region due in some markets to tough year-over-year comparisons.
- Recycling revenue, excluding acquisitions, was almost $13 million the third quarter, down $9.5 million year over year, and down about 15 percent sequentially from Q2. “We believe that the flow through from changes in recycling revenue in the third quarter was slightly worse than in Q2 with decremental margins of 150 percent due to the combination of lower fiber price values and third-party processing costs increased sequentially in the third quarter,” said Jackman. He added that old corrugated containers and mixed paper prices appeared to have stabilized for the moment, which WCN expected given increased demand from certain domestic mills. “Given capacity additions year to date and looking ahead into 2020, there are a number of mills and conversions scheduled to come online, which could increase demand for recovered recycled fiber by over 1 million tons,” added Jackman.
- WCN reported $66.4 million of E&P waste revenue, the highest such quarterly revenue in more than two years, noted Jackman. However, he said: “Given the typical seasonal decline in E&P activity in Q4 and moderation in the pace of activity we have seen in the last two months, we are cautious in our outlook and continue to be selective on new project developments.”
- Operating income was $236.6 million, which included $12.9 million in impairments and other operating items primarily related to the company’s termination of an E&P landfill development project in the Bakken Formation, and $1 million in acquisition-related costs. This compares to operating income of $232.9 million in Q3 2018, which included $6.9 million in fair value accounting changes associated with certain equity awards and $0.7 million in integration and acquisition-related costs, partially offset by a $2 million gain in impairments and other items primarily related to the divestiture of certain assets acquired in the Progressive Waste acquisition.
- Net income in Q3 2019 was $159.1 million, or $0.60 per share on a diluted basis of 264.6 million shares. In Q3 2018, the company reported net income of $150.8 million, or $0.57 per share on a diluted basis of 264.4 million shares.
- Adjusted net income in Q3 2019 was $192.9 million, or $0.73 per diluted share, versus $181.9 million, or $0.69 per diluted share, in the prior year period. Adjusted EBITDA in the third quarter was $443.6 million, as compared to adjusted EBITDA of $416.8 million in the prior year period.
- During the call with investors, Chief Financial Officer Mary Anne Whitney explained adjusted EBITDA was down 110 basis points year over year primarily due to two factors: an estimated 115-basis-point impact resulting from the year-over-year decrease in commodity-related recycling and landfill gas revenues and an estimated 55-basis-point impact from lower margin acquisitions completed since the year-ago period. Whitney added that the underlying adjusted EBITDA margin for solid waste collection, transfer and disposal revenue was up an estimated 60 basis points year over year.
- Revenue for the quarter was $4.027 billion, compared to revenue of $3.661 billion in Q3 2018.
- “Revenue for Q4 is estimated to range from $1.335 billion to $1.345 billion, with the range due primarily to our cautiousness around special waste and E&P waste activity,” explained Whitney during the call. “We expect price growth for solid waste to remain around 5 percent in Q4 with volume down between 1 percent and 1.5 percent. And we expect revenue from E&P waste activity in the range of $55 million to $60 million. We expect the decline in volumes primarily to reflect a reduction in landfill volumes due to lower visibility on special waste jobs limited to our run rate as of our July call. This outlook reflects an approximate $5 million decrease in potential waste volumes and approximately $5 to $10 million reduction in potential E&P waste activity.”
“We are extremely pleased with our year-to-date performance, particularly given the ongoing high-margin headwinds for the commodity-related activities,” concluded Jackman. “We remain well-positioned for potential acquisition outlays at the end of this quarter or early next year. Although we won’t provide a formal outlook for 2020 until next February, we’re able to provide some early thoughts assuming no change in the current economic environment. We believe that we could enter 2020 in the similar position that started 2019 when we provided our outlook this past February, at which time we had approximately $200 million in place from acquisitions plus the potential for additional contributions from our active pipeline.”
“We believe that we remain in a price-led solid waste organic growth range of between 4 and 6 percent, which should continue to drive underlying margin expansion in solid waste collection, transfer and disposal in the upcoming year,” he added. “Price is expected to remain around 5 percent and our volumes should reflect underlying trends in the macro economy. We are mindful of the protracted nature of the economic recovery, which has driven increasingly challenging year-over-year volume activity. Therefore, we believe there is room to remain guarded in our outlook for volume growth. All in, this could result in potential topline growth for 2020 of between 8 percent and 10 percent from solid waste organic growth and acquisition contribution that could already be in place early in the new year. At current recycled price commodity and landfill gas values, the 2020 headwinds could be less than half of what we expected in 2019. We expect to have better visibility on the economy and expect acquisition attribution, E&P waste activity and commodity-driven revenue in February when we provide a formal outlook for the coming year.”