Despite Headwinds, Waste Management, Waste Connections Beat Q3 Earnings Expectations

The third quarter presented major challenges to the publicly-traded solid waste haulers, but the first two companies to report—Waste Management and Waste Connections—each beat earnings expectations.

Two major storms in the South disrupted operations in several markets during the quarter. But increased costs caused by the storm were at least partially offset by a pickup in volumes due to mounting storm debris. Meanwhile, China’s moves to limit some types of recyclables that are imported to the country have caused a hit in commodities pricing. Both companies signaled that recycling would be a continuing headwind for the rest of 2017 and into 2018.

Waste Management Posts Revenue Gains

Houston-based Waste Management posted revenues for the third quarter of 2017 of $3.716 billion compared with $3.548 billion for the same 2016 period. That was slightly ahead of consensus estimates of $3.712 billion. Adjusted earnings per share amounted to $0.90 versus the consensus estimate of $0.85. The company also beat free cash flow estimates, posting $512 million vs. the consensus of $336 million.

Net income for the quarter was $386 million compared with net income of $302 million for the third quarter of 2016.

During a conference call with investors, Waste Management President and CEO Jim Fish called the quarter perhaps the best in the company’s history, pointing to the fact that for the second consecutive quarter the firm posted record operating EBITDA growth. Operating EBITDA grew more than 17 percent year-over-year and 7 percent on an as-adjusted basis.

In terms of dealing with the fallout of China’s moves, Waste Management has been actively exploring—and securing alternate end markets—for its recycled materials, including Southeast Asia and India.

At the same time, the company stressed that it has focused on reducing contamination and can meet heightened requirements from China.

"“We’ve been looking at reducing contamination for years," Jim Trevathan, Waste Management executive vice president and COO said during the call. "It’s part of our recycling strategy … in improving our business model. We’ve got excellent people. We’ve got excellent assets. … We’ve got a good accountability process in place. … We’re meeting their current expectations for that material. …[But] it’s even going to be a stronger focus to us to meet those requirements.”

So while in October the company reported that recycled commodity prices bottomed out, it expects some mild bounce back in the fourth quarter.

“The October lows are not the right baseline to use,” Fish said during the call.

On the technology front, Fish announced that Nikolaj Sjoqvist has been named the firm’s Chief Digital Officer. Sjoqvist has been with Waste Management since 2012 serving in the roles of vice president of pricing and vice president of revenue management.

Fish has continually talked about investment in technology as a priority for the firm since taking over the role late last year.

Based on its results through the first three quarters, Waste Management has raised its full-year guidance on adjusted earnings per diluted share and free cash flow.

Other highlights for the quarter

Waste Connections Hits $1.2B in Revenue

Toronto-based Waste Connections Inc. posted revenue in the third quarter of $1.206 billion, up from $1.085 billion in the year ago period. That beat the consensus estimate of $1.188 billion.

Operating income was $218.8 million, which included $7.2 million in charges primarily related to costs for transactions completed in the period and certain costs associated with the Progressive Waste acquisition.  This compares to operating income of $158.7 million in the third quarter of 2016, which included $20.3 million of items primarily related to the Progressive Waste acquisition completed on June 1, 2016.

Net income attributable to Waste Connections in the third quarter was $123.2 million vs. $88.6 million a year ago.

In addressing the hurricanes during a call with investors, Waste Connections Chairman and CEO Ron Mittelstaedt talked about the muted impacts.

“We have seen volume pickup in south Texas and Florida. We’re just saying when look at it in overall scheme of the company’s portfolio, a $10 million to $15 million pickup in revenue doesn’t move the numbers,” Mittelstaedt said. “That’s less than 10 basis points of movement.”

The company also saw between $3 million and $4 million in incremental costs are result of the storms. It does not anticipate much pickup in the fourth quarter from additional storm debris volume.

On the mergers and acquisitions front, Mittelstaedt said he believes there is pent up demand that will lead to a boost in deal volume.

“There [are investors] waiting on tax changes,” Mittelstaedt said. If there is a reduction in the corporate tax rate, as the Trump administration has advocated for, Mittelstaedt said there will be a two- to three-year window before tax change “goes the other way.” If tax reform goes through, it will unleash the volume.

However, even if tax reform is not passed, Mittestaedt thinks the deals will happen anyway.

“People will then realize it won’t get better and most likely it will get worse,” he said.

In terms of the company’s overall results, Mittelstaedt said in a statement, “As anticipated last quarter, our strong operating performance, free cash flow growth and balance sheet strength provided for another double-digit percentage increase in the quarterly cash dividend.  We remain well positioned to fund expected above average acquisition activity in the near term while continuing to increase our return of capital to shareholders."

In terms of recycling, Waste Connections expects to offset headwinds in coming quarters with strong results in its solid waste and E&P business lines.

Other highlights: