WCN’s E&P Waste Activity Enables Better-than-expected Results in Q3 2019

During the call with investors, Jackman reported that volume growth was 6.1 percent. “We reported our strongest quarterly volume results in almost two years in Q3 with volume growth better than expected at positive 90 basis points due primarily to an outsized quarter of special waste activity,” he said.

Municipal solid waste tons were up in most regions led by markets in WCN’s western and southern regions. Special waste volumes were up across all the company’s solid waste regions in the U.S. with notable activity in several states, including California, Florida, Illinois, Missouri and Minnesota, noted Jackman. Construction and demolition tons, in contrast, were down in every region except in the southern region due to tough year-over-year comparisons.

Recycling revenue, excluding acquisitions, was almost $13 million in the third quarter, down $9.5 million year-over-year, and down about 15 percent sequentially from Q2. “We believe that the flow through from changes in recycling revenue in the third quarter was slightly worse than in Q2 with decremental margins of 150 percent due to the combination of lower fiber price values and third-party processing costs that increased sequentially in the third quarter,” said Jackman. He added that old corrugated containers and mixed paper prices appeared to have stabilized for the moment, which WCN expected given increased demand from certain domestic mills. “Given capacity additions year-to-date and looking ahead into 2020, there are a number of mills and conversions scheduled to come online, which could increase demand for recovered recycled fiber by over 1 million tons,” added Jackman.

WCN reported $66.4 million of E&P waste revenue, the highest such quarterly revenue in more than two years, noted Jackman. However, he said: “Given the typical seasonal decline in E&P activity in Q4 and moderation in the pace of activity we have seen in the last two months, we are cautious in our outlook and continue to be selective on new project developments.”

Operating income was $236.6 million, which included $12.9 million in impairments and other operating items primarily related to the company’s termination of an E&P landfill development project in the Bakken Formation and $1 million in acquisition-related costs. This compares to operating income of $232.9 million in Q3 2018, which included $6.9 million in fair value accounting changes associated with certain equity awards and $0.7 million in integration and acquisition-related costs, partially offset by a $2 million gain in impairments and other items primarily related to the divestiture of certain assets acquired in the Progressive Waste acquisition.

Net income in Q3 2019 was $159.1 million, or $0.60 per share on a diluted basis of 264.6 million shares. In Q3 2018, the company reported net income of $150.8 million, or $0.57 per share on a diluted basis of 264.4 million shares.

Adjusted net income in Q3 2019 was $192.9 million, or $0.73 per diluted share, versus $181.9 million, or $0.69 per diluted share, in the prior year period. Adjusted EBITDA in the third quarter was $443.6 million, as compared to adjusted EBITDA of $416.8 million in the prior year period.

During the call with investors, Chief Financial Officer Mary Anne Whitney explained adjusted EBITDA was down 110 basis points year-over-year primarily due to two factors: an estimated 115 basis-point impact resulting from the year-over-year decrease in commodity-related recycling and landfill gas revenues and an estimated 55 basis-point impact from lower margin acquisitions completed since the year ago period. Whitney added that the underlying adjusted EBITDA margin for solid waste collection, transfer and disposal revenue was up an estimated 60 basis points year-over-year.

Revenue for the quarter was $4.027 billion, compared to revenue of $3.661 billion in Q3 2018.

“Revenue for Q4 is estimated to range from $1.335 billion to $1.345 billion, with the range due primarily to our cautiousness around special waste and E&P waste activity,” explained Whitney during the call. “We expect price growth for solid waste to remain around 5 percent in Q4 with volume down between 1 percent and 1.5 percent. And we expect revenue from E&P waste activity in the range of $55 million to $60 million. We expect the decline in volumes primarily to reflect a reduction in landfill volumes due to lower visibility on special waste jobs limited to our run rate as of our July call. This outlook reflects an approximate $5 million decrease in potential waste volumes and approximately $5 million to $10 million reduction in potential E&P waste activity.”