Houston-based Waste Management, Inc. (WM) reported revenues of $3.97 billion for the third quarter of 2019, which is up from $3.82 billion for the same 2018 period. Despite this positive, the company experienced a larger-than-expected recycling headwind that resulted in a revenue decline of $86 million.

According to John Morris, chief operating officer for Waste Management, the $86 million decline was partially due to the fact that the company’s blended average commodity price in Q3 2019 was just under $40 per ton, a decline of 40 percent compared to last year and a further 8 percent decline from the 10-year low reached in Q2 2019. “Despite this precipitous drop, the steps we're taking to improve the recycling business held year-over-year decline to operating EBITDA to $7 million and EPS decline to about $0.01,” he said.

Adding to Morris' comments, Jim Fish, CEO and president of Waste Management, said, "The good news is that the steps we're taking to transform the recycling business with restructured fee-based contracts and investments in technology will insulate the business from commodity price swings, and we're starting to see results. We saw a 320-basis point improvement in contamination rates at our single stream MRFs [materials recovery facilities] in the third quarter.”

On the collection and disposal side of the business, Waste Management continued to see positive results.

“In the third quarter, we continued to see our collection and disposal lines of business deliver strong revenue and earnings growth, particularly in the segments of our business that reflect the resilience of the consumer,” said Fish in a statement. “This strong operational performance led to growth in cash from operations of almost 9 percent.”

“Overall, our collection and disposal business has performed exceptionally well in 2019, overcoming headwinds in our commodity-sensitive businesses, recycling and renewable energy,” said Fish on a call with investors. “The results in our commodity-sensitive businesses, which make up less than 10 percent of our total revenue, have been below our expectations. We've discussed all year the historically low recycling commodity prices, but we've also seen a negative $18 million impact in our operating EBITDA plan through the first nine months of the year related to renewable natural gas credits.”

Waste Management has been investing in its renewable energy business to close the loop between its landfill gas and compressed natural gas (CNG) fleet, according to Devina Rankin, chief financial officer of Waste Management.

“Our capital expenditure guidance excluded the potential increase in renewable energy capital given the uncertain timing of the potential investments,” she said on a call with investors. “Because pricing for RINs [renewable identification numbers] declined significantly in 2019, we didn't make as large as an investment as we might have otherwise. Full-year capital spending for renewable energy plants is expected to be between $35 million and $40 million.”

Rankin added that Waste Management also made deliberate investments in its fleet, bringing the percentage of garbage trucks running on natural gas to about 60 percent and increasing the number of automated side loaders in the fleet by about 9 percent.

Waste Management also provided an update on the pending acquisition of Advanced Disposal Services, Inc., stating, “We continue to make progress toward closing this transaction, and we remain on track to complete the acquisition during the first quarter of 2020.”

Here are some additional key highlights for Q3 2019:

“We are pleased with the performance of our collection and disposal business through the first three quarters of the year, which positions us to achieve our full-year goals,” said Fish in a statement. “Our original 2019 guidance anticipated significantly higher contributions from our commodity-sensitive businesses than we have seen. The strong results from the collection and disposal business have overcome this impact, and we expect to achieve full-year 2019 results within our guidance range of adjusted operating EBITDA of $4.40 [billion] to $4.45 billion, free cash flow of $2.025 [billion] to $2.075 billion and adjusted earnings per diluted share of $4.28 to $4.38.”

“As we reflect on the year so far and develop our plans for next year, a couple of trends are starting to come to light, particularly in our collection and disposal business,” said Fish on a call with investors. “Our results across the solid waste business have been strong through the first nine months of the year, but they've been particularly strong in our lines of business that are driven by the consumer portion of the economy, commercial collection and MSW [municipal solid waste] landfill volumes. We have good visibility into these segments of our business and all indicators are pointing to continued strength.”