Q2 Earnings

Waste Connections reported another busy quarter, including pricing growth of 5.2% and landfill volume growth of 6%, with big plans for the rest of the year.

Founder Ron Mittelstaeadt also made his first appearance on an earnings call since taking a leave of absence for family health reasons in February. Mittelstaedt, who officially stepped down as CEO last week, said new CEO Worthing Jackman had been serving as "principal executive officer" during that time and gave him a strong endorsement.

"He and our long tenured team did not miss the beat, continuing to execute our growth strategy and drive further improvements in safety, employee development and retention while moving the company forward in many areas. Our board has great confidence in him as our new CEO, and we believe that he is the right person to lead the company," said Mittelstaedt.

More M&A

• Waste Connections reported completing acquisitions worth $160 million in annual revenue to date. According to the company's quarterly filing, this cost nearly $432 million (including debt) for a total of 10 businesses.
• A new market in northern Texas, as well as an expansion in Rhode Island, were described as the two most notable. Tuck-ins were also completed in California, Kentucky, New York, Texas and Quebec. New York activity included the $3.86 million purchase of a Bronx transfer station from the owners of former company Sanitation Salvage.
• According to Jackman, "seller activity remains robust," and multiple other deals are in the works. The largest possibilities are companies with around $50 or $60 million of annual revenue.

Waste Connections finalized more than $1 billion worth of acquisitions in 2018 and projections for another big round of spending appear to be on track. During a February earnings call, Jackman said this meant the company had essentially done four years worth of spending in two years.

Jackman told analysts during this latest call that the company's addressable market was still largely the same, because the majority of deals being completed are one-on-one versus opportunities being more widely shopped by bankers. Still, he recognized that "it’s a frothier time from a dialogue standpoint," saying, "I think you’re seeing everyone benefit from that, not just any one company in particular."

As for whether Waste Connections has any interest in entering other markets, such as soil remediation or liquid waste — an apparent nod to GFL Environmental's new IPO — Jackman said no.

Recycling and renewables

• The two notable Q2 setbacks for Waste Connections came in the form of a $7.2 million YoY decline in recycling revenues and a $3 million decline in the value of RIN credits for renewable fuel. Recycling alone is expected to cut into EBITDA by $35-40 million.
• Executives pointed to a 47% decline in YoY prices for OCC as a key drag, along with the fact that only about 10% of the volumes coming into their MRFs are from third party contracts where fees can be applied more quickly.
• As for the declining value of RIN credits, Jackman described this area as largely in the hands of the White House and the EPA. Ongoing exemptions for refiners were cited by Jackman as a prime factor.

Despite being affected by the same commodity declines, Waste Management and Republic Services both reported early signs of a turnaround for recycling in their Q2 reports. Waste Connections, however, is in a slightly different position.

Recycling has historically accounted for a smaller share of the company's revenue — because much of that business is done under longer-term franchise contracts, it's taking more time to adjust rates. Jackman said he sees Waste Connections as about two years into a four- or five-year "journey" to fix this aspect of the business.

"We take a long-term view to working with our customers through the seismic changes the industry has experienced in recycling, preferring not to close recycling facilities or claim force majeure to terminate contracts," he said.

That opinion mirrors comments Jackman shared with Waste Dive during a May interview. At the time, he also pointed out that "three years ago, those same companies weren't going in and giving more rebates to the municipality because fiber was worth $200. Now that the basket is worth $30 or $40, and you throw in mixed paper, now they're asking for help."

Looking ahead

• 2019 revenue is now projected to be $5.375 billion, as compared to the original outlook of approx. $5.310 billion. EBITDA projections were revised down slightly due to recycling headwinds.
• Waste Connections has reportedly won more contracts than expected this year (about half of all bids where a final decision has been made) and will need to increase capital expenditures by about $35 million as a result. The company now anticipates spending $600 million for the year.
• Overall strong performance has put the company on track for a double-digit increase to its next quarterly dividend in October. While Waste Connections didn't buy any shares during the first six months of 2019, it's in the process of renewing board approval to repurchase up to 5% of stock in the future.