Q1 Earnings

Waste Connections is off to a "strong start" in 2019 per the company's Q1 earnings report, despite negative effects from weather events and a continually challenging recycling market. The company recorded adjusted free cash flow of $246.3 million, total price of 5.2% (reportedly its highest in more than a decade) and overall solid waste landfill tonnage that was up by about 1%.

CEO Ron Mittelstaedt was absent for the second earnings call in a row as he remains on a "leave of absence."

M&A Landscape

One question posed during the Waste Connections earnings call was whether Mittelstaedt's absence had hurt the company's ability to execute on large multibillion-dollar deals, but President Worthing Jackman disputed that notion.

"I wouldn't say anyone's skipping a beat," he said. "[F]rom our seat right now, we're quite pleased with how things have stepped up. Obviously, Ron stays in our mind just from a care and concern for him and his family. But again, I think you see it's a testament to the organization that he has put together that you've seen the results that we're printing right now."

• Waste Connections has reportedly closed acquisitions worth $100 million in annualized revenue to date, the majority of which will be reflected in Q2. The company spent $14.92 million in cash on acquisitions in Q1.
• Signed or closed deals include three new market entries in Colorado, Illinois and Iowa, along with tuck-in deals in Colorado, Montana, Nebraska, New York and Wyoming. This list includes Mountain Waste & Recycling and Lewis Clark Recycling & Disposal.
• Jackman said the company remains in a strong position for more "above average" acquisition activity during 2019 and could be at $125-150 million in acquired revenue by mid-year.

Jackman also confirmed interest in purchasing possible divested assets from the Waste Management-Advanced Disposal merger.

Whenever a deal of that scale is announced, it's tempting to question why other major players didn't go for it themselves. During the company's Q3 2018 call, for instance, Mittelstaedt expressed some skepticism over the multiples GFL Environmental paid for Waste Industries. Waste Connections apparently did eye Advanced as a possibility (as did Republic Services) but ultimately felt that the math didn't work out.

"So there's nothing organizationally, balance sheet or any other constraints, that prohibits us from doing that," said Jackman. "Obviously, we've had our own view of that acquisition over the years. We put it up and benchmarked it next to the Progressive acquisition that we completed in 2016. And the metrics are different as we see them. But again, that's just from our perch ... it's not just the markets you enter, it's the price you pay to get into them, and from our standpoint, we wish Waste the best ... this is not something we believe we missed."

Long View on Recycling

• Waste Connections reported an estimated $17 million in recycling revenue (excluding acquisitions) during Q1, down about 25% over already low 2018 figures. Average OCC prices at $77 per ton and mixed paper at -$7 per ton were driving factors. Combined with higher processing costs, this amounted to a $5 million EBITDA hit.
• Asked whether depressed prices had helped accelerate a shift to the company's new pricing model, Jackman said it remains "kind of whack-a-mole" situation depending on the region. As municipal contract cycles come up for renegotiation and some independent companies go out of business, change can come at any time.
• Jackman cited new paper mill capacity coming online in the next year or two as a potential inflection point, but anticipates the recycling business to remain tight at least until then as customers and policymakers come to terms with the new reality. "[D]iversion from landfills really meant divert to Asia, and that game is over. And so you have to — as an industry and as the economy — be sustainable within our shores to handle the recycling feedstock and deal with the discards and contamination coming out the back end within our own landfills."

Looking Ahead

• Recycling may have commanded outsized attention, but Waste Connections reported $63.1 million in E&P revenue for Q1 (up notably 14% YoY) and is starting operations at a new landfill in Wyoming that will further drive that growth.
• Asked about a potential economic downturn — an ongoing topic — Jackman said he believes a "slow and steady" recovery helped put the company on stronger footing, adding that they're "not seeing any signs of a slowdown at all."
• While it's too early for 2019 guidance, Waste Connections remains confident in hitting its goal of $950 million adjusted free cash flow. Q2 revenue is estimated to come in at around $1.36 billion, with price growth in the range of 4.5-5%.