Business Report: First Quarter 2023 Themes

In the last week of April, all the publicly-traded solid waste companies reported first quarter earnings and held their follow-up conference calls. In this edition of Business Report, we highlight the common themes, and note the differences, in the numbers and the messages.

Organic Growth Reflects Continued Pricing Strength

Pricing again took center stage, with all the companies reporting better than expected pricing. GFL Environmental (GFL) led the pack, with core solid waste pricing of 12.6%, with Waste Connections (WCN) and Casella Waste (CWST) not far behind at 11% and almost 9%, respectively. Republic Services (RSG) and WM (WM) reported very strong yield of 6.5% and 6.2%, respectively. Almost all the companies had pricing that sequentially accelerated from fourth quarter to first quarter levels. Price acceptance was universally reported as being very high—across the board churn was reported to be around historic lows and retention often described as at record highs. Two commonly cited sources of price strength were post-collection pricing, particularly in the landfill line of business, and unsurprisingly, the help from CPI-linked pricing, which was cited to be at levels anywhere between 5.5% and 7%-8%.

Volume commentary was more mixed. RSG and WM had relatively strong solid waste volume growth of 1.6% and 0.8%, better than fourth quarter levels, and GFL and CWST volumes remained positive at 0.7% and 0.3%, respectively. WCN volumes were weaker, down 1.3%, in part due to its larger exposure to the severe weather on the West Coast, which impacted landfill volumes and roll off. Additionally, WCN stood out as more definitively noting potential economic weakness in its business, particularly in landfill and industrial volumes in March. The other players were more sanguine and generally noted that they remain watchful but had not yet really detected material economic weakness in their numbers. WM noted positive net service intervals, and CWST said key operating metrics are stable.

Recycled Commodity Prices and RINs Remain Depressed, But Largely As Expected

Recycled commodity prices remained in the basement in the first quarter, but largely as expected. Although WCN management saw no real improvement, RSG and WM noted fourth quarter to first quarter improvement in their recycled commodity price per ton figures and further gains in April. Currently, both companies remain comfortable with their full year forecasts of $125 per ton and $70 per ton, respectively. CWST cited a 20% rebound in its recycled commodity prices off the bottom.

Renewable fuel standard credit prices (RINs) also remained in the doldrums at around $2.00. Generally, it is assumed that RINs reflect the low Renewable Volume Obligations (RVO) levels that the EPA proposed in December of 2022. The various landfill gas to RNG players have all provided commentary to the EPA in the current comment process, and many are hopeful that an increase in the RVO may be a catalyst for RIN prices. The EPA is subject to a June 2023 deadline to finalize the RVO standards.

Margins Expected to Improve Despite Stickier Cost Inflation, and Guidance Reaffirmed

Generally, management teams noted that cost inflation was higher and stickier than they expected (or hoped). Internal cost inflation expectations for the year had generally been assumed around the mid-single digits, with the first half of the year starting higher. Although most management teams didn’t make formal changes, internal inflation costs were often characterized as now likely to be in the mid-to-high single digit range. The most common culprit, cited by all, was higher repair and maintenance costs, stemming from lingering supply chain issues for parts and particularly the continued delays in getting new trucks. Both WM and WCN noted an improvement in truck deliveries finally but also noted it was certainly not yet normalized! That said, a bright spot that seemed to be emerging was labor, which has been the biggest crunch. Wage increases were often cited as being back down around 5%-6%, versus high single digit, even low double digit, increases seen last year. In combination with lower wage cost pressure, a number of companies cited higher retention and lower turnover figures.

Putting all the above pieces together, the companies all maintained margin guidance for the year, which generally implies year-over-year increases, despite starting the year in the red, given the recycled commodity price declines in particular. In the first quarter, the focus remained on underlying solid waste margins, which remained positive for all the players. CWST and GFL were the notable outperformers here, with underlying solid waste margins popping 220 and 190 basis points, respectively.

All the companies reaffirmed full year guidance across basically all their metrics—price, volume, EBITDA and free cash flow. GFL noted most explicitly that it was likely to be in a position to raise guidance after the second quarter, and though more circumspect in its dialogue, RSG is also tracking more clearly ahead of expectations based on the first quarter results. Free cash flow guidance was reaffirmed, despite generally slow starts to the year, given the drag of recycled commodity prices and various company specific factors.

The Future Price/Cost Spread—Outsized Margins Still in the Future?

In the follow-up conference calls there was a lot of focus on the price/cost spread and its future direction. Pricing was expected to remain strong from a combination of higher CPI-linked pricing help, increasing pressure on landfill costs and better industry discipline overall. And, although stickier than expected as previously noted, gradually moderating cost inflation is still expected, particularly in the second half of 2023 and into 2024. Bottom line, most management teams still see the potential for margin improvement to be above the more typical historical levels of 30-50 basis points exiting 2023 and into 2024, and that was obviously the key rationale for holding margin guidance for the full year, despite tough first quarter comparisons. The only difference on this bullish outlook between management teams was varying degrees of confidence in the timing and potential outperformance.

Another Outsized Year for M&A

Obviously, the GFL/CWST divestiture/acquisition news announced just before earnings was the biggest merger and acquisition (M&A) event in terms of sheer size in the quarter. Yet, GFL noted that it expected to make $300-$500 million in acquisitions in the year, while CWST noted that the transaction with GFL will double its potential total addressable market for acquisitions to $1 billion. RSG reaffirmed expected acquisition activity in excess of $500 million in a combination of solid waste, recycling and environmental services companies. WCN closed on $45 million in acquired revenue in the quarter, which also puts it on pace to have a “better than average” year.

Sustainability Investments Remain On Track

Sustainability investments, particularly RNG from landfill gas plants, remain a key investor focus. Although all the companies have now announced formal programs and put plans in place—led by WM in terms of size and scale—first quarter conference calls contained nothing new, and management teams noted primarily that they were on track to complete previously announced 2023 projects.