Waste Connections seeing ‘record’ seller enthusiasm for M&A, multiple West Coast deals in works

Q2 Earnings

Revenue	$1.534B
Year-Over-Year Change	17.5%▲
Net Income	$117M

Waste Connections raised guidance for the year, based on positive recovery trends, while also highlighting a large M&A pipeline with “record” seller interest during its Thursday earnings call.

Even as commercial collection business remains down in some areas, the company reported 11.4% solid waste price-plus-volume growth and said all regions were bouncing back. Prior acquisitions boosted revenue by $41.1 million, net of divestitures. The company has closed 14 acquisitions so far this year to date, worth approximately $115 million in annualized revenue, with CEO Worthing Jackman projecting that even more is likely by the end of the year.

Economic update

• Quarterly solid waste volumes were up 6.5% year over year, with growth across all market areas and a return to pre-pandemic levels everywhere except the company’s eastern region. Overall landfill tons were up 17% — including an increase of 11% for MSW, 20% for C&D and 33% for special waste. Commercial collection revenues were up 16%.
• Core pricing was up 4.7%, driven in part by inflationary pressures for wages and other categories. Executives noted this trend will continue into the back half of the year, unlike the normal cycle of price increases being weighted toward the beginning of the year.
• Wage escalation tracked around 5%-5.5% heading into the second quarter, above the normally expected 3%-3.5%, as the company made supplemental adjustments to help with retention and recruitment. Jackman said labor challenges may have limited roll-off collection growth in certain markets, but he didn’t describe it as a major factor.

Waste Connections had a similar outlook to its competitors in this latest earnings cycle — business is essentially back after the pandemic, and any further recovery will be upside. That will likely come in the form of missing commercial collection volumes from offices, schools and other activity in regions that came out of pandemic restrictions most recently.

“Tons are essentially back, pulls are essentially back,” said Chief Financial Officer Mary Anne Whitney, citing landfill and roll-off volume trends. “It’s really the commercial piece which is lagging, which of course would take longer to get back.”

In addition to parts of Canada, New York City is one area the company highlighted as still underperforming. An estimated $30 million worth of business still hasn’t been recovered there, compared with 2019 levels. Jackman said the return of offices could even be a fourth-quarter event at this point, and company executives repeatedly noted all of their guidance expectations for the rest of the year don’t assume any further economic recovery.

The coronavirus delta variant was cited as one factor in that thinking, as well as a potential issue with labor availability, but Jackman said the company’s local teams were prepared.

“I think our industry reflects a lot of the data you see in the U.S.,” he said. “You’ve seen an increase in positives, so that’s been regional in nature in some cases and hot spots in others. That impacts staffing, that has the contact tracing-quarantine [effect], but our folks work through it.”

Other updates

• Waste Connections reported $41.5 million in quarterly recycling revenue, driven by higher values for multiple commodities as well as year-over-year volume increases. Jackman previewed plans for two new MRFs in unspecified U.S. locations that will be designed to reduce labor needs.
• The company’s oil and gas waste division revenue came in at $31.2 million, up 26% from the prior quarter, in an early sign of possible recovery after it saw notable financial declines last year. On the landfill gas side, RIN pricing remained strong, and Jackman reiterated plans for a likely five new gas-to-energy projects in the near-term and more in the future.
• Unlike some in the industry that said supply chain constraints have affected capital expenditure plans, Waste Connections believes it’s now on track to outpace expectations by as much as $50 million this year and spend upward of $675 million. Jackman did note the implementation of certain in-cab technology, such as cameras, has been delayed by microchip shortages.

Looking ahead

• Waste Connections now expects third-quarter revenue of $1.56 billion. Full year guidance has been raised to an estimated $5.975 billion in revenue, net income of $690 million and adjusted free cash flow of $1 billion. An estimated $400 million has gone toward dividends and stock buybacks this year.
• The close of a recent $2.5 billion credit facility positions the company for ample M&A spending going forward. Deals worth another $75 million in revenue are already expected to close this year across franchise markets in California, Nevada and Oregon, pending local approval. Jackman said the pipeline also includes the potential to enter “many new markets.”
• Like others, Jackman cited a potential change in capital gains tax rates as one of the key factors driving seller interest. Citing California as an example, he said the combined state and federal policies could lead to capital gains being taxed at over 57%. “These are three-, four-generation-old companies that all of the sudden have to give most of the proceeds to the government after all their hundred years of work,” he said. “So we’ve seen a lot of tax-driven conversations.”