Key Takeaways from Five Solid Waste Firms’ Q1’16 Results

Overall revenue increased by 4.5 percent, or $136 million. The revenue increase was driven by positive yield and volume in the Company’s collection and disposal business of $118 million.

“Our revenue increased for the first time since 2014, and we achieved positive volumes for the first time since 2012,” Waste Management President & CEO David Steiner said during a conference call with analysts. “Core price improved 90 basis points from the first quarter of 2015 to the highest level that we've achieved. And we also saw the highest core price ever in each of the commercial, industrial, and landfill lines of business. Core price in the industrial line was 10.7 percent; in the commercial line, it was 7.5 percent; in our landfill line, it was 3.3 percent; and in our residential line, it was 2.6 percent.”

Core price, which consists of price increases net of rollbacks and fees, other than the company’s fuel surcharge, was 5.3 percent, up from 4.4 percent.

Traditional solid waste business internal revenue growth from volume was positive 2.4 percent in the first quarter of 2016, or 1.8 percent after adjusting for one additional workday in the current quarter. Total company internal revenue growth from volume grew 1.9 percent in the first quarter and was 1.3 percent on a workday adjusted basis.

Net cash provided by operating activities was $706 million, compared to $499 million in the first quarter of 2015, an increase of over 40 percent.

Capital expenditures were $317 million, an increase of $84 million compared to 2015. The increase was due to an intentional change in the timing of our truck purchases, and the Company still expects full-year capital expenditures to be between $1.3 and $1.4 billion.

Free cash flow improved to $402 million in the first quarter of 2016, an increase of $117 million when compared to free cash flow for the first quarter of 2015.

The company reported net income of $156.7 million, or $0.45 per diluted share, for the three months ended March 31, 2016, versus $172.4 million, or $0.49 per diluted share, for the comparable 2015 period. Excluding certain expenses, on an adjusted basis, net income for the three months ended March 31, 2016, was $167.3 million, or $0.48 per diluted share.

Core price increased revenues by 3.4 percent, which consisted of 4.5 percent in the open market and 1.7 percent in the restricted portion of our business.

Adjusted EBITDA margin was 27.8 percent of revenue. The additional workday during the quarter lowered margin performance by approximately 50 basis points.

During a conference call with analysts, CEO Don Slager talked about the company’s efforts to deal with the challenges facing recycling. “Many municipal customers still believe there is significant value in the waste stream and are not aware of the cost to recover the material,” Slager said. “Currently, our municipal sales team is focusing on educating municipal staff and elected officials on the all-in cost of recycling in these low commodity markets. Although we're still in the early innings, we're making progress. We transitioned our largest municipal processing agreement to a fee-based structure, negotiated a rebate reduction with a large customer on the East Coast, and added a glass surcharge with a large customer in Texas.”

Net income was $44.8 million, or $0.36 per share on a diluted basis of 123.5 million shares.

Adjusted net income attributable to Waste Connections in the quarter was $55.2 million, or $0.45 per share, versus $56.9 million, or $0.46 per share, in the prior year period. 

Double-digit growth in solid waste landfill tonnage and strong increases in both commercial and roll off collection activity across all regions drove core price plus volume growth in the period to above 6 percent, the fourth consecutive quarter for this metric to exceed 5.0 percent.

“We're also extremely pleased to note that our proxy statement and Progressive Waste Management's information circular are in the process of being mailed to our respective stockholders, and the stockholders meetings are now set for May 26, to approve the combination of our two companies, we expect to close as early as June 1,” Chairman & CEO Ron Mittelstaedt said in a conference call with analysts. “We look forward to completing this transaction and realizing the benefits of the combination. However, before we get into much more detail around these benefits, let me turn the call over to Worthing for our forward-looking disclaimer, as well as other housekeeping items.”

The company reported consolidated revenues of $471.4 million, up 6.0 percent at constant currency. It also posted adjusted EBITDA of $112.3 million, up 9.6 percent at constant currency

Reported revenues increased $11.2 million or 2.4 percent from $460.2 million in the first quarter of 2015 to $471.4 million in the first quarter of 2016.

This increase was due in large part to a 1.6 percent increase in overall pricing, higher volumes of 4.5 percent and higher recycled commodity pricing, 1.5 percent, partially offset by lower fuel surcharges, (1.0 percent) and net divestitures, (0.4 percent).

Operating income was $21.5 million in the first quarter of 2016 versus $49.2 million in the first quarter of 2015. Net (loss) income was ($2.0) million versus $18.1 million in the first quarter of 2016 and 2015, respectively.

Total revenue increased by $20 million to $403 million from $383 million in Q1 2015. An increase in waste and service revenue was partially offset by decreases in energy and recycled metals revenue.

Same store North America energy-from-waste (EfW) revenue decreased by $5 million.

All other revenue (non-EfW operations) increased by $22 million on a consolidated basis. Waste and service revenue from non-EfW operations increased by $31 million, primarily due to contribution from newly acquired environmental services businesses and a full quarter of the New York City MTS contract. Energy revenue from non-EfW operations decreased by $13 million, primarily driven by an $11 million decrease in biomass revenue as a result of economically dispatching facilities and lower market pricing.

Excluding impairment charges), operating income decreased by $6 million to $1 million in Q1 2016 due to the revenue and expense items noted above.

Adjusted EBITDA declined by $3 million on a year-over-year basis to $76 million primarily due to lower prices for energy and metals ($10 million total) and the timing of plant maintenance expenses, partially offset by the contribution of the New York City MTS contract and newly acquired environmental services businesses.

Free cash flow decreased by $21 million to -$5 million, primarily as a result of higher maintenance capital expenditures, higher cash interest and tax payments, and the factors that impacted Adjusted EBITDA as described above.

Waste Management reported that average recycling commodity prices were approximately 12.0 percent lower in the first quarter of 2016 than in the prior year period. Recycling volumes increased 3.1 percent in the first quarter.

Stifel Analyst Michael E. Hoffman, in summarizing WM’s results, wrote, “A garbageman can control price, spending and service quality. When volumes recover it creates opportunity to drive operating leverage if a solid waste company is in control of price, costs and service quality. WM proved in 1Q it is and while it is being cautious, WM does not see a peak in the volume recovery for another couple years. Therefore it is highly likely WM raises guidance after 2Q results. If churn stays at 9%ish, volumes settle into a 1% YoY change and collection and disposal yield holds on at 2% or better guidance walks up $0.06 per share in our view.”

Republic Services continues to convert contracts from CPI to a more favorable pricing mechanism. It now has approximately $325 million in annual revenue that is tied to a waste-related index for the annual price adjustment.

Republic also continued to advance its fleet-based initiatives. Currently 16 percent of its fleet operates on natural gas, up from 15 percent in the prior year. Additionally, 73 percent of the fleet is automated, up from 69 percent.