Waste Management, Covanta Kick Off 2017 First Quarter Earnings Season with Revenue Growth

Overall revenue increased by 8.3 percent, or $264 million. The revenue increase was driven by positive yield and volume in the company’s collection and disposal business, which contributed $113 million to revenue growth, and significantly higher recycling commodity prices, which contributed $111 million of revenue growth.

Core price, which consists of price increases net of rollbacks, plus fees other than the company’s fuel surcharge, was 5.1 percent.

Internal revenue growth from yield for collection and disposal operations was 2.0 percent.

For both the total company and the traditional solid waste business, internal revenue growth from volume was positive 1.9 percent in the first quarter of 2017, or 1.4 percent after adjusting for one additional workday in the current quarter.

Average recycling commodity prices at the company’s recycling facilities were almost 70 percent higher in the first quarter of 2017 than in the prior year period. Results in the Company’s recycling line of business improved by $0.066 per diluted share when compared to the prior year period.

As a percent of revenue, operating expenses were 63.0 percent in the first quarter of 2017, as compared to 62.8 percent in the first quarter of 2016. Increased recycling commodity rebates and fuel costs drove the increase in operating expenses as a percent of revenue. Fuel costs were a negative $0.02 per diluted share when compared to the prior year period.

Net cash provided by operating activities was $721 million, compared to $732 million in the first quarter of 2016. The first quarter of 2016 included a $67 million benefit from terminating a cross-currency hedge.

Free cash flow was $396 million in the first quarter of 2017, compared to $428 million in the first quarter of 2016.

Stifel Managing Director Michael E. Hoffman reiterated a buy rating and a $80 target price on Waste Management. “We would describe the 1Q17 results as a strong start to the FY which gives WM comfort in reaffirming its guidance,” Hoffman wrote in a research note. “Recycling guided in February to add $0.04 to 1Q17, ended up stronger at $0.07 but in the reported results are also $0.02 of non-recurring cost for severance. Recycled commodity prices have rolled over hard in April. Fortunately WM had not built higher commodity prices into their FY17 outlook beyond 1Q17. If the trend in volume coupled with 2% yield holds into the seasonal uplift of 2Q and 3Q we would not be surprised to see FCF move from $1.5B to $1.6B, up $50mm to $1.55B to $1.65B.”

Organic growth contributed an overall revenue increase of $14 million.

Waste and service revenue grew by $8 million, that included $4 million in its energy-from-waste processing and environmental services revenue of $6 million.

Energy revenue decreased by $3 million due to lower production volume related to plant downtime.

Recycled metals revenue increased by $3 million driven by improved ferrous market prices and better price realization after metals processing, partially offset by lower volume due to the timing of shipments; and

Other revenue increased by $6 million due to construction activity.

Operating expenses increased by $26 million to $427 million. The year-over-year net increase included a $33 million increase in same store costs, driven primarily by a $9 million increase in plant maintenance, largely due to the timing and scope of outage activities, and an $18 million increase in other plant operating expenses, including additional costs related to plant downtime, organic growth in the environmental solutions business, and normal wage and benefit escalation. Transactions overall reduced operating expense by $7 million.

Adjusted EBITDA declined by $25 million on a year-over-year basis to $51 million, as improved waste and metals pricing were more than offset by facility downtime, impacting both revenue and plant operating expenses, increased scheduled maintenance activity, and the impact of contract transitions and the China asset sale last year.

Free Cash Flow decreased by $16 million to $(17) million, primarily as a result of the factors that drove adjusted EBITDA as noted above, partially offset by lower maintenance capital expenditures.

Hoffman maintained a hold rating and a $15.50 target price on the company. “As we expected everything but the kitchen sink was thrown into 1Q17. Sales beat us and the street but everything else was worse. CVA did reaffirm guidance with no changes in the broad terms expecting to make up the cost over-runs in 1Q17 with better operating leverage throughout the remainder of the year. CVA does not have a sales issue it has a cost issue and a balance sheet leverage challenge in our view,” Hoffman wrote in a research note.