Leone Young, Principal

August 11, 2020

7 Min Read

Over the past two weeks, the publicly-held solid waste companies reported second quarter results and held follow-up conference calls. In this edition of the Waste360 Business Report, we present the highlights, as well as explore the similarities and differences, of what were simply stellar results across the board.

Surprisingly Strong Margins Lead to Second Quarter Upside Surprises

All the companies responded rapidly to the fall in volumes from coronavirus-related lockdowns and closures. Routes were optimized, overtime was cut and discretionary expenses like travel and entertainment were curtailed, such that total company EBITDA margins rose for almost all the companies, anywhere from 10 basis points to 175 basis points, despite all the companies also experiencing and absorbing material COVID-19-related expenses, both from purchases of items like PPE, as well as from actions they took to aid their employees in the pandemic.

Only Waste Connections’ (WCN) overall company margin was down, due to its larger exposure to the E&P waste business, which has been severely impacted. WCN’s underlying solid waste margin rose 30 basis points, and its margin decline was also far less than management had estimated in early May. As a result, solid waste companies exceeded second quarter earnings expectations across the board.

Volumes Fell, But Not As Much as Feared, and the Recovery in the Second Quarter Was Sharp

Solid waste volumes in the second quarter were down 10% at WCN, 11% at Waste Management (WM), and 12% for Casella Waste (CWST), while the volume impact for GFL Environmental (GFL) and Republic Services (RSG) was slightly more muted at 8% and 7%, respectively. Almost all lines of business had negative volume growth, particularly in commercial and industrial and landfill, with the exception of residential, which was described as settling in at between 5%-10% up. Similarly, all the companies reported a sharp recovery in volume declines from the lows in April to much better June levels, such that the overall volume decline was generally not as bad as feared or telegraphed in early May when the first quarter results were reported.

Fairly consistently, commercial and industrial volumes were noted as down mid-single digits exiting the quarter in June versus down low-to-mid double digits at the April lows. Several players also noted that of the commercial and industrial customers who had suspended service, more than 50% had now resumed service. WM noted that municipal solid waste (MSW) landfill volumes had improved to a decline of 3.5% in June from an average of a negative 9% in the quarter.

Several participants also pointed out that special waste had picked up in the last few weeks after a hiatus — indicating that projects seemed to be placed on hold rather than cancelled. GFL noted less volume impact in their secondary markets, versus urban, while WM, WCN and CWST put more emphasis on regional differences — with the extent of volume recovery dependent more on the severity and duration of the lockdowns, such as in parts of Canada and the US Northeast.

There was a lot of focus on July trends, not only as a jumping off point for the remainder of the year, but also in light of the recent surge of coronavirus cases in a number of states, particularly in the South and West. Generally, most of the companies noted further recovery in volumes in July, but perhaps at a more measured or tapered pace than April through June. Only CWST management indicated that July volumes had flattened out and that they were not seeing their usual seasonal uptick — perhaps given a greater reliance on U.S. Northeast resort areas that remain heavily impacted. None of the companies have seen an actual reversal in the positive volume trends as a result of the surge in coronavirus cases and subsequent slowdown of some of the state reopenings. In fact, several players noted that what they are seeing on the ground is not matching what we’re seeing in the media!

Industry Price Discipline Is Holding Though Actual Results Varied

Unsurprisingly, all the companies reported core price or yield that was modestly below the first quarter results, as companies at least paused price increases and/or waived fees on hard hit small business customers. WM reported the largest sequential decline, unsurprising given their well-telegraphed efforts to provide qualifying small and medium business customers with one month’s free service, as well as also pausing increases and extending payment terms, and WM noted that July core price had started to trend back toward pre-pandemic levels. All that said, pricing remained solidly positive, indicating that industry price discipline remains intact, particularly in the post-collection lines of business, where all the companies have worked to recoup the escalating costs over the last few years.

Guidance Was Generally Reinstated, At least in Part, and It could Prove Conservative

Given the demonstrated ability to flex costs down rapidly, as well as the faster and stronger recovery in volumes than was initially expected, WM, WCN and CWST reinstated full year 2020 revenue, margin or EBITDA, and free cash flow (FCF) guidance, and all the projections generally exceeded analysts’ consensus estimates, which we would note had all been raised  in the couple weeks prior to the companies reporting. RSG reinstated FCF guidance that encompassed the bottom end of its guidance range pre-COVID-19. GFL did not give formal 2020 guidance but provided more detail on FCF levels and margin color for the second half of the year. Quite consistently, the guidance for the full year implied second half margins that were lower than first half results, or implied a volume/revenue recovery that was more muted than June levels as well.

With regard to the margin expectations, the benefits from lower fuel costs and container weights and higher old corrugated cardboard (OCC) pricing were pointed out as probably not sustainable, among other company specific factors noted. And, although all of the companies were very pleased with the volume recovery thus far, there obviously remains a great deal of uncertainty about the pace and shape of the economic recovery from here, even without a possible re-imposition of lockdowns or slowdown in reopenings.  Or, hopefully, the guidance proves to be conservative!

“Resiliency” was a word that came up frequently in the course of the reports and conference calls, not only in terms of the solid waste business models but the free cash flow generating characteristics of the business. Although WM flagged a slowdown in customer receipts, generally the companies reported that cash collection was strong, given the essential nature of the service, and that bad debt expense increases and cancellations were still relatively modest. As a result, the conversion from EBITDA to free cash flow remained very strong, despite the fact that several companies, notably WCN, planned to resume certain capital expenditures that were previously put on hold.

M&A Activity Resumes After Pandemic Hiatus

WCN, CWST and GFL reported a resumption in tuck-in acquisition activity and completed at least several in the quarter. CWST is more than halfway to its acquired revenue goal, while RSG also signaled that it remains comfortable with the outsize acquisition investment this year of $600-$650 million. Acquisition pipelines were described as robust, and the pandemic was noted as just causing delays, not a freeze in activity. Interestingly, acquisition multiples were largely described as unchanged.

Lessons for the Future

All the management teams noted how much they had learned about their businesses and operations through the course of the pandemic, and all felt their companies were going to come out of this stronger. One benefit of this is that costs are likely to come back into the business more slowly than volumes and revenues recover—leading to the likelihood of longer-term margin enhancement.

Another likely result of the pandemic will be an even faster adoption of technology—whether it is the digitalization of the customer experience, the increasing use of robotics and artificial intelligence to make recycling safer, or the faster conversion to automated side loaders to improve the profitability of the residential business. Finally, the companies’ success in rapidly shifting to a work from home situation for many employees may lead to long-term dividends as well. 

About the Author(s)

Leone Young

Principal, LTY ERC, LLC

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. From 1990 through 2008, Young was with Citigroup in New York as Managing Director, Senior Environmental Services Analyst and was responsible for industry coverage and stock recommendations for companies in the environmental services sector for Citigroup's equity research department. She was ranked #1 in the Institutional Investor poll for eight consecutive years.

Young is noted for her historical perspective, depth of industry knowledge and collaborative approach with clients and companies.

Young has a BA in Economics and an MBA in Finance from Cornell University.

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