Republic Services, Covanta Maintain Momentum in Q3 2018

Adjusted EBITDA was $728 million, and adjusted EBITDA margin was 28.4 percent of revenue. The solid waste business contributed 80 basis points of margin expansion, which was more than offset by a 150-basis point headwind from the recycling business, excluding the impact of the new revenue standard.

Cash provided by operating activities was $556 million, and adjusted free cash flow was $289 million, an increase of approximately 17 percent over the prior year. Adjusted free cash flow per share increased 21 percent over the prior year.

Total revenue increased 4.1 percent over the prior year, excluding the impact of the new revenue standard. Revenue growth from average yield was 2.4 percent, and revenue growth from recycling processing fees was an additional 25 basis points.

Core price increased revenue by 3.9 percent, an increase of 30 basis points from Q2. Core price consisted of 4.6 percent in the open market and 2.8 percent in the restricted portion of the business, an increase of 20 basis points and 50 basis points from the second quarter, respectively.

The company invested $53 million in tuck-in acquisitions, bringing its total year-to-date investment to $133 million. For the full year, Republic expects to invest approximately $200 million in value-enhancing acquisitions.

Republic continued to convert CPI-based contracts to more favorable pricing mechanisms for the annual price adjustment. The company now has approximately $625 million in annual revenue tied to either a waste-related index or a fixed-rate increase of 3 percent or greater.

Residential collection contributed $562.8 million in revenue. That was up from $576.5 million in 2017. Small-container revenue increased from $752.7 million in 2017 to $772.1 million in 2018. Large-container revenue increased from $541.3 million in 2017 to $560.3 million in 2018.

Transfer revenue increased from $312.8 million in 2017 to $322.6 million in 2018, and landfill revenues increased from $576.1 million in 2017 to $590.2 million in 2018.

Average yield in the collection business was 2.8 percent, which included 3 percent yield in the small container business, 3 percent yield in the large container business and 2.3 percent yield in the residential business.

Total volume decreased 10 basis points over the prior year. Volume in Republic’s large container business increased 60 basis points, and volume in the small container business decreased 30 basis points. Total container volume included a 90-basis point impact from intentionally shedding certain work performed on behalf of brokers. Volumes decreased 2.9 percent in the residential business.

Landfill MSW volume increased 3 percent, special waste volume increased 3.9 percent and C&D volume decreased 60 basis points versus the prior year.

Revenues from sales of recycled commodities decreased 1 percent, which primarily relates to the decrease in recycled commodities prices and tons sold. This is partially offset by the new recycling processing fee rolled out to recycling collection customers to cover higher processing costs. The fee contributed to the incremental of 25 basis points of pricing. Excluding glass and organics, average commodity prices for Republic decreased 37 percent to $106 per ton in the third quarter from $167 per ton in the prior year.

“Improving the customer experience continues to be a critical part of our overall business strategy,” said Slager during a call with investors. “We achieve this by developing and offering products that are designed to meet our customers' wants and needs and delivering superior service. Doing so helps us retain our customers for a longer period of time and earn a price increase each year. In turn, we successfully raised prices while maintaining our customer defection rate below 7 percent for a third consecutive quarter.”

Commenting on the current state of recycling, Slager said, “We don't want any of our people sort of getting weak in the knees. We need to push through to a new [recycling] model that gives us predictable, consistent returns in that business, and then share the upside with customers, if they do a good job and a responsible job with the contamination.”

Brad Helgeson, executive vice president and CFO of Covanta, reported that total revenue was $460 million in the quarter, up $27 million, or 6 percent, over last year. Similar to last quarter, operations at the Dublin facility generated $7 million of incremental services revenue year-over-year, while the Palm Beach operations added $2 million in the quarter.

Adjusted EBITDA was $122 million in the quarter, an increase of $5 million year-over-year. Adjusted EBITDA grew $11 million organically, driven by strong plant production, particularly at the Fairfax, Va., plant. The Dublin facility contributed $7 million of adjusted EBITDA in the quarter. “Consistent with last quarter’s comments, this year is progressing very well, and we expect adjusted EBITDA for 2018 to be in the upper end of our original guidance range,” said Helgeson during a call with investors. “Given our full-year range, we project adjusted EBITDA will be lower in the fourth quarter compared to the fourth quarter of 2017.”

Free cash flow was $85 million this quarter, which represents a $17 million increase over last year. The primary driver was working capital, which contributed $17 million on a comparable year-over-year basis. “We still expect working capital to be a net headwind for the full year,” explained Helgeson. “Excluding working capital, free cash flow was roughly flat year-over-year, with a $5 million in adjusted EBITDA.”

For 2018, Covanta plans to invest around $25 million in organic growth projects relating primarily to material processing facilities and increased metal recovery. The company anticipates investing a total of $35 million in transportation equipment to prepare for commencement of operations at the Manhattan Marine Transfer Station in New York. Approximately $10 million of that will incur in 2018, with the remainder to come in early 2019.

In 2018, in its 28th year of operations, the Fairfax facility will set records for waste processing and energy kilowatt hours generated. Several of the company’s tip fee facilities are performing at or near record levels, Jones noted.  

The company’s Long Beach facility has demanded an operating agreement as well as adding provisions for possible expansion. “When we announced the closure of the Warren County, N.J., facility last quarter, we noted that closure is the least preferred option,” said Jones. “The city of Long Beach and Covanta will work together to accept higher value profile waste. This is a win-win agreement that provides a better economic partnership for both parties. It is representative of one of the many ways out optimization efforts can lead to the improvement of our existing facilities, rather than closure or exit.”

In addition to the Long Beach amendment, Covanta reached an agreement to extend the service fee contract at the Huntington facility on Long Island in New York. The agreement extends the contract by five years. Operationally, same-store tip fee prices increased by more than 4 percent in the quarter.

Looking to the fourth quarter on future periods, Jones told investors they should expect to see Covanta’s Palm Beach plants providing $60 million of incremental revenue on over 1.7 million tons of waste. The Covanta Environmental Solutions business also saw a strong quarter, as it grew environmental services revenue by 9 percent. At the same time, profile waste into the EfW plant increased by more than 10 percent.

Metals recovery continues to improve with 14 percent and 29 percent improvements for ferrous and nonferrous recovery, respectively. On ferrous, same-store revenues grew 4 percent primarily due to increased sales volumes. In nonferrous, the company recognized higher prices due to increased separation and sales of higher value products. On the pricing side, Covanta recently saw a softness in scrap aluminum, now trading at around $0.44 per pound, and the company is slightly reducing the revenue outlook for nonferrous.

Jones also provided an update on U.K. development efforts. The new project near Edinburgh, Scotland, is a 215,000-metric-ton facility in which Covanta expects to see 25 percent of the equity. This project is far along in development, with planning and permits in hand as well as an agreement for long-term waste supplies, added Jones. He also noted other projects in the U.K. are projected to reach financial close in 2019.