Takeaways from the 2022 First Quarter Earnings Reports

During the last week of April through the first week of May, the publicly-traded solid waste companies reported first quarter 2022 earnings and held their follow-up conference calls. In this edition of Business Report, we review the highlights, as well touch on the similarities and differences.

Price—Up and to the Right

Unsurprisingly, given accelerated inflationary trends, pricing was very strong across the board, with reported levels exceeding management guidance and analyst expectations by ~100 basis points.  Waste Management (WM) and Republic Services (RSG) reported yield of 5.5% and 4.2%, respectively, and core pricing for Casella Waste (CWST), GFL Environmental (GFL), and Waste Connections (WCN) topped expectations by similar amounts, at 5.6%, 6.6% and 7.1%, respectively. Despite historically high pricing levels, customer acceptance was uniformly described as very good, with customer retention generally put around 95%, while churn and rollbacks were also noted to be toward the low end of historic ranges. Although WM and GFL noted that pricing percentage gains may be the highest in the first quarter (simply due to the fact that it is the easiest comparison for the year), WCN sees higher pricing in the second quarter. Industry analysts also see good visibility into further robust pricing strength in 2023, when the CPI-linked contracts more fully reflect the inflation data occurring now.

Volume Performance More Varied

Volume performance was a bit more varied. RSG and WM had the strongest volume gains, with both at 3.6%, while GFL’s volume also beat expectations, particularly when adjusted for material recovery facility (MRF) contract volumes that did not recur. RSG noted reopening in California, and WM noted strong special waste trends, amidst generally broad-based strength, while GFL noted the benefit from the long-delayed reopening in Canada. Interestingly, WM management speculated that the company may be experiencing the benefit of market share gains, particularly at the expense of smaller private haulers, given the company’s investment in customer-facing technology and its sustainability service offerings. Both CWST’s and WCN’s volume results were more muted at around 50 basis points. CWST was particularly hard hit by winter weather impacts and construction delays in its landfill business but expected to recoup that during the course of the year. Importantly, none of the companies were cautious on volumes due to signs (or fear) of economic deterioration—in general, all the companies saw supportive economic trends, citing net new business and service increases.

Fuel Spikes While Recycled Commodity and RINs Pricing Were Largely as Expected

Although recycled commodity prices came down from fourth quarter averages, they remained a substantial tailwind on a year-over-year basis, though largely in line with management expectations. And, although renewable energy prices (RINs) were volatile during the course of the quarter, they also remained a substantial year-over-year tailwind, as well as largely coming in as management expected. Fuel, on the other hand, was obviously elevated all quarter and spiked during March as a result of geopolitical events. WM, RSG and CWST all have floating fuel surcharges in place that are designed to fully recover the EBITDA dollar impact from fuel, albeit with a lag. WCN also has fuel surcharges in certain areas but is also about 50% hedged. Ironically, GFL, who was probably the most negatively impacted by fuel, also sees the greatest opportunity. Management estimated that the company was probably only recovering about 45 cents out of every dollar of fuel increase, given its rapid acquisition rate and the varied response to fuel increases among its tuck-ins. Simply putting more of its business on the standard fuel surcharges utilized by much of the industry could provide good upside in management’s opinion.

Margins Down, But Generally Not Due to Underlying Cost Inflation (Excluding Fuel)

Across the board, EBITDA margins were down, which was expected, particularly in light of the March fuel spike. That said, again, the performance was mixed. After fourth quarter margins that surprised analysts to the downside, for WM and RSG margins were down year-over-year but not as much as analysts had anticipated, and WM’s operating cost margin improved sequentially, despite the fact that WM put its internal cost of inflation in the high-single digits. RSG put its internal inflation cost at around 4%. Given the two companies’ relatively strong margin start to the year, the outlook for their margin guidance did not change. Although WCN’s margin was only down 50 basis points (not significantly different than WM or RSG), the margin result was less than expected, seemingly taking analysts by surprise. CWST and GFL had larger than expected margin declines of around 100 basis and 50 basis points, respectively. Importantly, for WCN, CWST and GFL (and basically for the industry as a whole) margins are not deteriorating due to the inability of the industry to raise prices sufficiently to cover costs. The industry was largely able to price for its underlying inflation cost (and often a bit more), such that underlying core solid waste margins were generally characterized as up. Although there were company specific factors that were incremental, fuel and the dilutive impact of acquisitions were largely behind the lower margins at WCN, CWST and GFL. And, again, although the companies expect to recoup the dollar impact of higher fuel costs over the course of the year, the lag factor and the fact that it is a pass-through cost (which dampens margins), may impact full year margins by 20-40 basis points, according to several management teams.

Guidance Changes Likely After the Second Quarter

Despite mixed margin performance, all the companies beat EBITDA expectations handily given strong topline growth, and for CWST and GFL, very outsized acquisition activity in the first quarter. “We are very pleased with our strong start to the year” was an almost uniform quote in first quarter financial releases and conference calls. That said, in a return to a more normal historical pattern (as opposed to last year), all the companies noted that they would revisit and revise guidance at the time of the second quarter report, though obviously, the bias is to the upside. GFL and CWST did adjust guidance, but only to reflect the outsize acquisition activity just mentioned, without touching other underlying, original guidance metrics.

Free Cash Flow Usage Reaffirmed, but RNG Development Escalated at Several Companies

WM again noted that recycling and renewable natural gas (RNG) investments were the highest return investment for their free cash flow (FCF), exceeding solid waste acquisitions. RSG closed its acquisition of US Ecology shortly before earnings season but reaffirmed a strong pipeline and target for traditional solid waste and recycling acquisitions. Then, in conjunction with its earnings, RSG announced a joint venture with Archaea Energy to develop 39 new RNG facilities at its landfills. GFL also noted it is in a position to accelerate its RNG projects, while it recently completed the spin-off of its infrastructure business in order to focus on its M&A activity in solid waste. Both WCN and CWST managements affirmed that they have plenty of runway in prospective traditional solid waste and recycling acquisitions, and CWST talked about a potential target market of $500 million, versus $400 million the last time the company quantified its potential target market.