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September 1, 2015
In August ADS Waste Holdings (ADSW), more commonly known as Advanced Disposal, filed a registration statement with the Securities and Exchange Commission (SEC) relating to the proposed initial public offering (IPO) of its common stock. The registration statement (available here) reveals a good deal on the firm’s operating highlights and contains voluminous detail for those who wish for more information!
At this point, specific details on the actual offering itself are few, as this is a preliminary SEC filing. Namely, the number of shares to be offered and the price range have not yet been determined. That said, the IPO could raise up to $100 million, and the proceeds from the sale of the common stock will go to repay debt. The proposed ticker symbol is “ADSW.” According to the document, it appears that there will be selling stockholders, which presumably includes Highstar Capital, the private equity owner of ADSW. But the filing also notes that after the offering Highstar will still hold a controlling interest in ADSW.
In 2014, ADSW generated $1.4 billion in revenues and ranked eighth in the 2015 Waste 100. The company has 39 landfills, 75 transfer stations and 23 recycling facilities, though it was noted that the sale of recycled commodities only accounted for 2 percent of its revenues. Transfer/landfill accounts for 18 percent of revenues, with residential, commercial and roll-off comprising 29 percent, 27 percent and 18 percent, respectively.
Unsurprisingly, the company has a significant presence in the Southeast, stemming from the original Advanced Disposal footprint, and the upper Midwest, stemming largely from its 2012 acquisition of Veolia ES Solid Waste. A number of Northeast assets that were acquired with Interstate Waste were subsequently divested, but the company retains a significant presence in Pennsylvania.
Similar to Waste Connections, ADSW emphasized that it was very focused on exclusive municipal and secondary markets, which accounted for 80 percent of its revenue. Interestingly, the primary market revenue of the remaining 20 percent stems largely from four cities: Atlanta, Chicago, Detroit and Philadelphia. And, similar to the “old” Republic Services prior to its merger with Allied Waste, the document noted the underlying favorable demographics of the markets it serves, particularly in the Southeast region, which comprises 35 percent of its revenues. Another 39 percent of revenues is derived from the Midwest, with the East accounting for the remaining 26 percent.
Also of general interest, the document cited (based on several named industry sources), an estimated 10-year industry compounded annual growth rate (CAGR) of 2.4 percent from 2009 to 2019. The industry is estimated to reach $66 billion in 2019 versus $59 billion in 2013.
The senior management team averages more than 20 years of industry experience. CEO Richard Burke comes from the Veolia side and began his waste career with Waste Management. John Spegal, chief operating officer, was at Allied Waste Industries/Browning Ferris Industries prior to ADSW, while Steven Carn, chief financial officer and treasurer, has been with ADSW or a predecessor company since 2001.
The company grew from roughly $538 million in revenues in 2012 to $1.32 billion in 2013, in large part because of the transformational acquisition of Veolia ES Solid Waste in 2012 for $1.9 billion. However, Advanced Disposal also experienced significant growth before that, as 2010 revenues were roughly $373 million. From 2012 to 2014, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) from continuing operations rose from $143 million to $377 million, with a corresponding margin increase from 26.5 percent to 26.9 percent. Adjusted free cash flow rose from $7 million in 2012 to $93 million in 2014, and as a percentage of total revenue increased from 1.1 percent to 6.6 percent in the same timeframe.
For the six months ended June 30, the most recent financial data available, revenues increased modestly from $681 million in 2014 to $686 million in 2015, while adjusted EBITDA from continuing operations rose from $173 million to $182 million, with a corresponding margin increase from 25.4 percent to 26.5 percent. Adjusted free cash flow rose from $35 million to $42 million in the same timeframe. In its second quarter release, ADSW management noted that the company achieved pricing gains of 2.5 percent, but results were negatively impacted by lower special waste volumes and recycled commodity prices. During the past several years, capital expenditures as a percentage of total revenues have fluctuated between 11 percent and 13 percent.
ADSW prefers to be in, or pursues, markets where it can be vertically integrated or where the market is disposal neutral, and markets that are characterized by favorable dynamics and/or demographic trends. Specifically, the company intends to expand the business by adding new commercial and industrial customers, securing additional exclusive municipal contracts and executing tuck-in acquisitions. The company also noted a “relentless focus” on prudent cost management and pricing discipline. More generally, the document cited an estimate that approximately 20 percent of the overall solid waste market remains in private hands (privately owned waste collection operations), while approximately 23 percent of the overall U.S. solid waste market is still controlled by municipalities, indicating a still considerable opportunity for further consolidation and privatization.
With regard to exclusive municipal contracts, ADSW noted that since its acquisition of Veolia, it has been awarded 109 new long-term exclusive municipal contracts and has an historic renewal rate of such contracts of approximately 85 percent. Also since the Veolia transaction, the company has executed 33 tuck-in acquisitions, primarily of collection companies.
2015 has been an active year for acquisitions as well. ADSW announced three hauler acquisitions in June, bringing the year’s total so far to seven and totaling nearly $30 million. To enhance efficiency and productivity, ADSW has invested in compressed natural gas (CNG)-fueled vehicles and automation. CNG-powered vehicles currently comprise 12 percent of the routed fleet, while 51 percent of ADSW’s routed residential fleet has been converted to automated vehicles.
In the risk factors section of the preliminary prospectus, there were few truly company specific risk factors listed, with the exception of a history of losses and high indebtedness. Commodity price risk, new proposed greenhouse gas (GHG) regulations and the changing nature of the waste stream (often called the “evolving ton”) were fairly far down on the list of risk factors.
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.
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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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