Q3 Earnings

Waste Connections reported quarterly volumes at their highest levels in more than two years, E&P revenue coming in better than expected and ongoing growth through acquisition. Total pricing came in at 5.2% (slightly above projections) and landfill volumes were up by 5% due in part to an outsized quarter for special waste. 

Still growing

• Waste Connections CEO Worthing Jackman reported, during the company's Q3 earnings call, that offers worth more than $600 million in outlays have been extended since late July. "In fact, we could potentially double our already completed $160 million in annualized acquired revenue by year-end or early next year, starting 2020 off with above-average contributions from acquisitions along with the continuing robust pipeline for further activity," he said.
• Per its quarterly filing, Waste Connections spent nearly $39 million in cash on three new acquisitions during Q3. At least one acquisition appears to be in Massachusetts, a market previously exited through divestment in 2017, bringing the company's presence to 42 U.S. states and six Canadian provinces.
• Jackman reported one deal was for a greenfield solid waste landfill project "in a legacy Progressive Waste collection-only market where we currently utilize a third-party disposal site." Construction is expected to start next year, with operations beginning by early 2021.

Waste Connections has now spent nearly $471 million (including more than $50 million in debt) to acquire 13 companies through Q3 of this year. Jackman explained the company's strategy was for "outsized" M&A activity from 2017-2020, with plenty of flexibility for remaining opportunities. 

Asked by one financial analyst why the company wouldn't resume share buybacks, given its strong performance and low leverage, Jackman replied that Waste Connections likes "the flexibility we have around deploying our capital for properly priced and strategically consistent M&A." Larger competitors Waste Management and Republic Services have been more active with buybacks in recent years, though the former has paused much of its activity pending the acquisition of Advanced Disposal Services.

Jackman said it's possible Waste Connections could spend anywhere from $0.5 to $1.5 billion on acquisitions in the next 12 months, while still having room to spend another $1 billion on buybacks. The pipeline includes tuck-ins in the $10-15 million revenue range, new market entries worth $30-40 million and possibly a couple larger options that fall well under $200 million. Leaving the door open, Jackman clarified none of this discussion includes potential opportunities that may still arise from federal divestment requirements in the Waste-Advanced deal.

Commodities

• Waste Connections reported $66.4 million in E&P revenue, its highest quarterly total in more than two years, even as rig count continues to decline. The company believes activity may have "peaked" in August and anticipates crude oil prices will remain steady for the near future. It also chose to abandon a landfill project in the Bakken formation for unspecified reasons, resulting in an $8 million impairment charge.
• Q3 recycling revenue, excluding acquisitions, was close to $13 million. This marked a 43% drop YoY and a 15% decline since Q2, driven by low fiber prices and higher third-party processing costs. Executives pointed to new paper mill capacity coming online as a potential sign of price stability in the months ahead.
• Following a trend from Q2, Waste Connections also saw an approximately $7 million decline in revenue from landfill gas (down 40% YoY) due to very low RIN values. CFO Mary Anne Whitney estimated that recycling and RIN pricing could make for a $20-25 million headwind going into 2020.

Looking ahead

• Waste Connections is projecting Q4 revenue of $1.335 to $1.445 billion and adjusted EBITDA of approximately $405 million. The company also reaffirmed its full-year free cash flow guidance for $915 million.
• In Q4, the company expects price growth for solid waste to stay around 5%, with volume down by 1-1.5%. C&D volumes were down during Q3 and visibility on future special waste projects is low. While stating that underlying MSW trends driven by consumer spending appear steady, Waste Connections said the company is cautious about predicting economic trends. 
• "We're mindful of the protracted nature of the economic recovery, which has driven increasingly challenging year-over-year volume comparisons and therefore we believe it is prudent to remain guarded in our outlook for volume growth," said Jackman.