May 21, 2014
On May 15, Progressive Waste Solutions (BIN) held a half-day Investor and Analyst Day in New York City, featuring presentations from top management. In this month’s edition of the Circular File, we distilled the presentations into what we viewed as the key takeaways and highlights.
Setting a High Bar
President and CEO Joe Quarin laid out BIN’s five-year goals. First, BIN sees the potential to grow margins from 26 to 27 percent in 2014 to 29 to 30 percent in 2019. During the same time frame, the company is looking to bring down capital expenditures (capex) as a percent of revenues from more than 11 percent to 9 to 10 percent, helping to drive expectations for free cash flow as a percent of revenue to 12 to 15 percent from 10 to 11 percent currently. Return on invested capital (ROIC) is projected to rise to 8 to 10 percent in five years, from less than 6 percent, as a result.
Assuming 4 percent annual organic growth, combined with acquired revenue of $150 million per year on average, Quarin sees the potential to grow the company by 50 percent within five years. BIN is now poised to transform itself from a roll-up company, focused primarily on acquisition growth, to an integrated operating company.
Quarin also noted that a significant transition in the management team has taken place, with 12 out of 16 top management members joining the company in the last 24 months. He views the assembly of this management team as key to achieving the company’s goals, particularly given the evolving landscape and greater complexity in the solid waste industry.
Better, Not Newer
Kevin Walbridge, executive vice president and COO, next discussed the operational side of achieving the objectives. Walbridge is focused on three main areas—better allocation of capital in the field, standardization of best practices and, most importantly, local execution. Improving the fleet, with more automation and conversion to trucks powered by compressed natural gas (CNG), is one of the keys to improving the overall margin, due to increased route productivity and reduced direct labor and fuel costs.
Walbridge anticipates using existing replacement capital—not new spending—to enable greater automation. CNG-powered trucks currently account for roughly 10 percent of the fleet. But that figure is expected to rise to 18 to 20 percent of the fleet within five years. The standardization of best practices will revolve around the safety culture, purchasing power and repair and maintenance programs.
With regard to purchasing, the company has not leveraged its size in the past, and it is now developing a preemptive maintenance program to lower costs. Better labor utilization is a big margin lever, while fleet optimization throughout the organization will result in higher asset utilization and lower capex. Local execution entails providing local managers with better sales tools to execute market specific strategies, in order to deliver on the organic growth goals.
Overall, BIN will focus on price, but it will be a local market/local manager decision on how to balance price with retention. Local management decision making remains “in BIN’s DNA.”
Plenty of Room to Grow in the Core Business
Dan Pio, executive vice president of strategy and business development, then addressed BIN’s growth opportunities. First, he noted that the solid waste industry has historically been a large, low growth market, with average annual growth in waste generation of 0.2 percent in the U.S. and 1 percent in Canada from 2002 to 2012.
However, it is important to note that the U.S. figures include both construction and demolition (C&D) and municipal solid waste (MSW), with C&D still well below the prior peak. Population and GDP (gross domestic product) growth still are expected to drive future North American waste production growth by roughly 1 percent annually and, when combined with pricing, are expected to support the company’s average annual organic growth goal of 4 percent. Pio noted that the company views the increased complexity (diversion) in the business as an opportunity for large operators (versus a threat), and emphasized that it is growing at a moderate pace.
During the past eight years, BIN pegged the diversion growth rate at 5 percent in the U.S. and 3 percent in Canada. As a result, the company is investing in recycling and evaluating the opportunities in organics. BIN continues to see strong demand for curbside single-stream recycling, while noting the related challenges posed by increased contamination.
Pio then went on to address strategic growth, and noted that BIN had analyzed growth opportunities in its core business in both existing and new markets, as well as in new lines of business, and concluded that it can achieve its five-year goals without stepping out to non-core lines of business.
Besides the opportunities that Walbridge described in existing markets to achieve the goals, BIN assessed 900+ new markets and concluded that the size of the attractive acquisition opportunity is very large, and that the company only needed to get a small slice of it to reach its growth targets.
Management estimated that Canada represents an estimated additional $115 million of total EBITDA (earnings before interest, taxes, depreciation and amortization) potential in $460 million of attractive new markets, while the U.S. represents an estimated additional $6 billion of EBITDA potential in $24.45 billion of attractive new markets.
BIN only needs to acquire 2.5 percent of that available market in both the U.S. and Canada to achieve its acquisition goals. As a result, it has no urgency to invest in new lines of business at the present time, though it will continue to monitor them.
Creating Shareholder Value
Ian Kidson, executive vice president and CFO concluded the formal presentations by providing more color and detail on each of the goals that CEO Quarin had laid out. With regard to the EBITDA margin goal, the majority of the expected increase will fall into Walbridge’s bailiwick, with the bulk expected to be done in three years, given the low-hanging fruit that management sees. This equates to $50 million to $60 million in incremental annual EBITDA from cost-reduction opportunities, resulting in 250 to 300 basis points of margin expansion potential.
Kidson also noted that BIN’s current SG&A (selling, general and administrative expense) is scalable—the company can double in size on the existing management base. Given its regional margin targets—mid 30s percent in Canada, high 20s in the U.S. South, and mid 20s in the U.S. Northeast—it is apparent that the Northeast represents the largest margin improvement potential. The company’s relatively new focus on EBIT (versus EBITDA ), which is now incorporated into management incentive compensation, is expected to be a big driver of lower capex and higher free cash flow generation, which will be augmented with better allocation of capital.
All in, these pieces are expected to drive the ROIC target, though Kidson noted that strong revenue growth is also a factor in total shareholder return, not just ROIC. As seller expectations are high, M&A is off to a slow start this year, particularly given BIN’s focus on capital discipline, and Kidson noted that the company has an active share repurchase plan as its second priority for free cash flow allocation.
Although not yet formally awarded, Kidson also touched on the pending New York City contract. He noted that it represented a price, rather than volume, benefit for BIN’s Seneca Meadows landfill. The potential contract opportunity is $3.6 billion over 20 years at 2,500 to 3,000 tons per day.