February 2024 Business Report: Fourth Quarter 2023 and 2024 Outlook Highlights

Over the past three weeks, the publicly-traded solid waste companies reported their fourth quarter 2023 results and presented 2024 outlooks in follow-up conference calls. Typical words to describe either 2023 results or aspects of the 2024 prospects were “outsized” and “exceptional.” In this edition of Business Report, we highlight, and compare and contrast, the companies’ results and outlooks.

Pricing Growth Remains Strong with Volume Results More Mixed

Once again, fourth quarter organic growth was characterized as price driven—with Waste Connections (WCN) and GFL Environmental (GFL) leading the pack with core price of 8.7% and 7.9%, respectively. Across the board, pricing was better than analysts expected, even as it generally fell sequentially, which was also anticipated given the decline in inflation. Republic Services (RSG) was the exception, with yield up 50 basis points from the third quarter.

Similar to last quarter, volume trends diverged among the players. WM (WM) and RSG posted positive fourth quarter solid waste volume results of 1.9% and 0.3%, respectively, both figures coming in ahead of analyst expectations. GFL, WCN, and Casella Waste (CWST) all posted negative volumes, with GFL surprising analysts to the downside at -3.6%, while the negative volumes at WCN and CWST moderated from the third quarter levels and were generally unsurprising.  The common theme between the three companies was the deliberate shedding of unprofitable business, though pockets of weakness in temporary roll off or special waste were also variously noted. It was also pointed out that with the relatively higher (proportionately) merger and acquisition (M&A) activity at CWST, GFL and WCN, it was to be expected that there would be more to shed from acquired businesses. WCN and GFL forecast an even larger volume decline in the first quarter of 2024, in part due to weather.

Recycled Commodity and RINs Pricing Became Tailwinds…

As expected, given the steady march up in old corrugated cardboard (OCC) and mixed paper in the fourth quarter, recycled commodity pricing, in particular, turned into a tailwind for all the companies, aided by at least a stabilization in recycled plastics pricing. Renewable fuel standard credit (RINs) pricing also turned into a tailwind on a spot basis, but the extent to which it benefitted individual companies was somewhat dependent on how much of their RINs were sold forward or under longer-term contracts. In making recycled commodity price assumptions for 2024, most of the companies projected a continuation of the fourth quarter or current levels, which at this point looks conservative given the continued gains in OCC and mixed paper pricing in January and February. WM has embedded a recycled commodity price assumption even a touch below its fourth quarter average.

But the Widening Price/Cost Spread Drove the Outsized Fourth Quarter Margins

Although commodities were incrementally positive in the fourth quarter, the widening price/cost spread drove the outsized (and generally above expectations) margin growth posted by all the companies. WM’s collection and disposal and RSG’s overall EBITDA margin both rose 260 basis points, well above analysts’ forecasts, while GFL’s solid waste margin rose 250 basis points, though its overall company margin was hampered by a facility fire. Underlying cost inflation was generally pegged as settling down into the mid-single digits, which, when combined with the consistently strong pricing, drove at least 100-150 basis points of margin improvement across the companies. Not surprisingly, the labor and repair and maintenance lines generally had the greatest cost improvements as turnover fell, wage inflation moderated and fleet deliveries began to recover to normal levels. RSG did note “stickiness” in repair and maintenance costs, however. Bottom line, margins drove EBITDA results that were at least in line, and generally modestly above, analysts’ expectations, while RSG and WM enjoyed bigger beats relative to analyst forecasts.

2024 Guidance Generally Considered in Line, But Considered Conservative Across the Board

The companies issued 2024 outlooks which were broadly, particularly with regard to EBITDA, characterized as in line with expectations, with RSG’s forecast modestly above. Pricing forecasts tended to come in at levels only modestly below 2023 actuals, which were positively received. Volume forecasts again varied—with WM and RSG calling for modestly positive volumes, while GFL, WCN and CWST forecasting modestly negative volumes. Again, there were company specific factors involved in those negative volume forecasts, though shedding remains the primary cause. Underlying volumes (reflecting economic conditions) were consistently pegged around flat. Margin expectations were also more varied. WM and RSG forecast 2024 margins up 30 basis points and CWST 40 basis points, at the midpoint, while WCN and GFL are forecasting about 120 and 100 basis points, respectively, of margin improvement in their businesses. Despite the projections of very healthy (and above “typical”) margin growth, the EBITDA outlooks were also uniformly considered conservative. In addition to the aforementioned commodity price conservatism, there were a number of company-specific reasons noted by analysts as providing upside to the guidance, though a commonality running through those factors is that all of the companies have some form of self-help at play—automation initiatives, digital innovations, instituting surcharges and fees, lower turnover goals—that company management teams did not factor into their projections.

Free Cash Flow Dampened by Sustainability Investments

Although the free cash flow (FCF) outlooks were not considered particularly surprising or disappointing, they were not a highlight either! All the companies expect to make stepped up investments in their sustainability businesses, particularly in renewable natural gas (RNG) facility investments, in 2024. WM has also targeted 13 automation upgrades or new material recovery facilities (MRFs) in 2024, and both WM and GFL highlighted expanded investment in Canadian MRFs stemming from recent EPR contracts both have won. Despite the project delays and higher commodity volatility associated with sustainability investments, all the companies reaffirmed their commitments, given the high-margin, high-return characteristics of these businesses, and all the companies also reaffirmed their longer-term 2026 incremental EBITDA projections for those businesses, or in several cases, upped them. Sustainability growth forecasts were also noted as another area of potential conservatism. Company managements are generally underpinning their incremental EBITDA projections for RNG projects based on a $2 RIN value, versus current levels which have been bouncing around $3. That said, as far as sustainability investments are concerned, 2024 is likely to be the peak capex year.

Another Outsized Year of M&A Activity Expected

Although it has sounded like a broken record over the last several years, company managements see another year of outsized acquisition activity. Although M&A has not been a WM focus over the last couple of years, management kicked off the M&A commentary by noting that 2024 may see heightened activity. Although GFL has already “capped” its expected acquisition outlays to $600-650 million this year, it noted that it had entered into an agreement to acquire a Southeast solid waste company (expected to close in the second quarter) that would account for around half that expected outlay. CWST noted that an “exceptional” year of acquisition activity in 2023 was not expected to hamper its M&A appetite in 2024. With its Arrowhead acquisition and New York City franchise wins, WCN noted that new market areas and a whole group of companies have opened up as potential targets. Needless to say, this heightened potential acquisition activity was noted as yet another source of upside in the coming year!