There can be little doubt that 2018 was a great year for most in the waste industry. The five biggest public waste firms generated $7.6 billion in cash flow from operations and spent $8.4 billion, and companies were happy to take on debt while reinvesting heavily into the industry.
But while most industry participants benefited greatly from this spending, investing in one place always deprives others of the same coin. As we move into 2019 and beyond, a key question is how the spending habits of waste industry giants will change.
2018: Firms had faith
In looking at 2018, some capital went to shareholders. Both Waste Management and Republic Services increased their dividends and kept up their large buyback programs. Waste Management returned $1.8 billion to shareholders and Republic paid shareholders $1.175 billion.
However, most industry cash-flow went to reinvestment, illustrating that industry executives expect continued strength in the waste industry. Firms bought new equipment while participating in the acquisition bonanza started by the tax reform.
Waste Management and Republic Services spent more than $3.5 billion on acquisitions and capital expenditures. Waste Connections committed to acquiring American Disposal Services and several smaller businesses, investing over $830 million in new deals.
The pattern was even more explicit in the smaller public firms, such as Advanced Disposal Services and Casella Waste Systems, where no dividends were paid and profits were entirely reinvested into new assets. Advanced focused on organic investments in trucks and landfill infrastructure; whereas Casella increased M&A activity by more than 1600% year-over-year.
| Waste Management | Republic Services | Waste Connections | Advanced Disposal | Casella | |
| Cash-flow from Operations | 3,570 | 2,243 | 1,411 | 308 | 121 |
| Dividends | 802 | 462 | 153 | 0 | 0 |
| Buybacks | 1,000 | 714 | 59 | 0 | 0 |
| Acquisitions | 466 | 277 | 830 | 26 | 89 |
| Capital Expenditures | 1,694 | 1,071 | 546 | 189 | 73 |
| Sum of Outflows | 3,962 | 2,524 | 1,588 | 215 | 162 |
Fiscal year 2018. Amounts in millions. Source: SEC filings compiled by author.
2019: Year of capital expenditures?
All firms expect continued reinvestment in the industry, but only Advanced expects increased acquisition activity in 2019.
Last year, the top five public waste companies in the U.S. spent 7.5% of sales on acquisitions. Using 2019 guidance from management teams and investment banks, it looks as if the top five public waste companies will spend 4.5% of sales on acquisitions. In aggregate, all five will spend in the $1-1.2 billion range unless major deals become available. This contrasts with total 2018 acquisition activity by the same companies of $1.69 billion.
The largest firms in particular are expecting less acquisition activity. Waste Management and Republic Services combined invested $743 million in 2018 on acquisitions. This year, they expect to spend between $400-600 million.
Some firms are prioritizing capital return to shareholders instead, Republic Services aims to pay out roughly $200 million more to shareholders in 2019 than it did in 2018. Waste Management is going the opposite way and reducing its overall capital return target by $130 million.
Smaller firms look to be continuing their heavy investments into buying or improving assets. Capital expenditures at both Advanced and Casella are guided to remain above 11.5% of sales, with 9% generally being thought of as the required reinvestment to maintain existing assets.
Guidance numbers indicate strong — but lower — acquisition spending in 2019. Capital return to shareholders, i.e. capital leaving the industry, looks stable at approximately $3.2 billion for the public companies. Investments in trucks, landfills and other infrastructure is guided to increase roughly 5% for publicly traded firms.
The decreased acquisition activity doesn’t seem to indicate a lack of confidence. If management teams were expecting market weakness, they would focus on deleveraging balance sheets and cutting down on reinvestments in assets. Instead, we’re seeing capital expenditures above maintenance levels and additional debt on balance sheets. Some capital expenditures are driven by market and regulatory factors, but spending above 10% implies a willingness to deploy capital into the industry.
Most management teams are reiterating a solid acquisition pipeline in 2019, but many interested families and companies may have already sold amid the tax reform acquisition-bonanza. When also factoring in that multiples have also expanded slightly (0.5-to-1 turn of EBITDA, partly due to asset quality) and most firms will be wary of overpaying by leveraging their balance sheet — if only because ratings agencies will be keeping a careful eye on price-discipline. Normally this would depress multiples, but well-capitalized private-equity buyers continue to compete for many assets in the waste industry.
Still plenty of powder
Major corporations depend on corporate credit ratings to obtain money from the bond market. Firms generally avoid credit downgrades unless they have a strategy that requires investments in excess of cash flow generation. Below is a table that indicates the current leverage levels and the limit at which the rating agency Moody’s would consider downgrading.
| Waste Management | Republic Services | Waste Connections | Advanced Disposal | Casella | |
| Moody's Senior Unsecured Rating | Baa1 | Baa2 | Baa2 | B3 | B3 |
| Debt/EBITDA limit | 3x | 3.25x | 3x | 5x | 5x |
| Current debt/EBITDA (est) | 2.3 | 2.95 | 2.45 | 4.45 | 3.95 |
| Borrowing capacity to limit ($M) | 2,950 | 870 | 834 | 233 | 148 |
As evidenced by contrasting inflows-outflows in the first table with borrowing capacity in this one, the largest public waste companies could keep up the pace for several years. Waste Management will be especially well-positioned to hold a hand under private-transaction-multiples if financial markets act up.
Optically we might see slight decreases year-over-year on some capital allocation items, but the waste industry still seems more optimistic than many other parts of the economy. Consider that smaller firms are leveraged in excess of 3.5x EBITDA, but that they’re still investing almost the entirety of cash flows into new assets while disregarding both dividends and debt repayments.
Firms always face the choice between paying shareholders, investing in the industry, and remaining well-capitalized. In 2018 the entire industry went almost entirely towards the first two priorities. Now, we're seeing a slight shift toward caution from Waste Management and toward shareholders from Republic Services. Both Casella and Advanced are entirely focused on investment. Waste Connections continues to prioritize acquisitions and its balance sheet instead of capital return.
