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Business Report: Mergers & Acquisitions Drive Record Growth in Solid Waste Sector
Merger and acquisition activity is at historic highs, with WM, Casella, and WCN leading the way in 2024. GFL plans to ramp up acquisitions in 2025 following the divestiture of its Environmental Services business.
6 Min Read
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Over the past several weeks, publicly traded solid waste companies reported their third-quarter 2024 results and held follow-up conference calls. In this edition of the Business Report, we highlight the common themes and note the differences between the companies.
Price-led Organic Growth Remains Solid
As has been the case all year, pricing was solid, but sequentially down, as inflation notches down. In several cases, however, pricing was just slightly under the analyst expectations, though not alarmingly so! The exceptions were GFL Environmental (GFL) and Waste Connections (WCN), which logged core solid waste pricing of 6% and 6.8%, respectively, modestly ahead of expectations.
For the first time this year, however, volume was generally a positive surprise. WM’s (WM) collection and disposal volume was a modest positive at 0.3%, a sequential improvement. GFL’s, WCN’s and Casella Waste’s (CWST) volumes were still negative, but improved sequentially and were better than expectations. The exception was Republic Services (RSG), where volumes declined more than expected, which in part prompted the company to pull in its full year revenue guidance to the low end of the range. Across the board, municipal solid waste (MSW) landfill and commercial volumes were flattish to positive, indicating a fairly flat, but stable, underlying macro environment. Also very consistently, industrial and construction and demolition (C&D), or roll off, volumes were described as soft. Although WM had strong special waste volumes, a number of the other companies also cited weakness in that segment. That said, management teams were cautiously optimistic about a potential turn in the special waste business next year, citing timing issues and a strong pipeline.
Fiber Drops in October, Potentially Setting Up as a Fourth Quarter and 2025 Headwind
Due to a combination of impacts from the ILA port strike and Hurricanes Helene and Milton, recycled fiber prices, particularly old corrugated cardboard (OCC) and mixed paper, declined materially in October and has fallen further in early November. Recycled paper pricing had held fairly steady throughout the summer, after a steady climb up earlier in the year. As a result, it remained a tailwind for all the companies in the third quarter, but a number of management teams flagged it as a potential drag in the fourth quarter, particularly WCN. It is hoped that the decline will be relatively short lived as the port strike was quickly resolved and the Southeast recovers from the hurricanes, but if recycled paper prices remain at current levels, that will prove to be a modest headwind for companies in 2025, when compared to full year 2024 pricing. Renewable Fuel Standard credit (RINs) pricing was strong and stable throughout the third quarter, but a number of analysts have voiced concerns and potential risk to RINs pricing in a Trump Administration, though it was also noted that the voluntary market has grown and strengthened since the first Trump Administration.
Historically Strong Margins Generally Drive EBITDA Beats and Guidance Raises
The difference between pricing and the underlying cost of inflation, or the “price/cost spread” was universally lauded as strong and at above trend levels, while inflation was generally put in the 4%-5% range. Additionally, all the companies are benefitting to varying degrees from lower turnover and internal cost efficiency programs. As a result, almost all the companies reported the strongest solid waste margins they had ever seen! CWST reported a more mixed quarter, however, on several company specific items—a continued year-over-year decrease in C&D volumes due to the impending closure of a competitor’s landfill as well as two large insurance expense accruals.
Resulting from the margin performance, almost all the companies reported upside surprises to the analyst estimates for EBITDA, generally on the order of around 2%. Again, the exception was CWST, due to the one-off hits previously cited, while GFL was in line. As a result of the third quarter EBITDA upside surprises, WM and RSG raised their full year EBITDA guidance either toward or to the upper end of the range, WCN increased its EBITDA guidance, while CWST and GFL maintained theirs. It should be noted, however, that the new or reaffirmed full year EBITDA guidance often implied fourth quarter results that analysts found a little disappointing, as they implied a growth slowdown or less margin expansion. A combination of tougher comparisons, lower recycled commodity prices, weather impacts and a degree of conservatism were most often noted as impacting the fourth quarter projections.
M&A Strength Continues Unabated
For a number of the companies, notably WM, CWST and WCN, 2024 is shaping up to be a historic year for merger and acquisition activity. For WM, besides the acquisition of Stericycle, it is closing in on about $1 billion in acquisition investment. WCN is on pace to acquire over $700 million in annualized revenues, while CWST has acquired six businesses with over $200 million in annualized revenues. GFL is more restrained this year, as previously telegraphed, but it noted a strong pipeline and the expectation that acquisition activity will again pick up in 2025 after the close of the sale of its Environmental Services business, which it expects to be able to execute an agreement on prior to reporting fourth quarter results in February. GFL also noted in its third quarter press release that it expects to net at least $6 billion in proceeds, $3.5 billion of which will be used to deleverage, bringing its leverage ratio down to an estimated 3x-3.5x. RSG expects to complete about $300 million in acquisition investment by year end, shy of its original full year target of $500 million. But, management also noted a strong pipeline and said that timing issues, rather than lack of opportunity, were behind the shortfall.
Sustainability Investments to Become More Material in 2025
Although some delays were still noted, for the most part, companies plan on bringing on line in 2024 the number of renewable natural gas (RNG) plants that they had targeted, with a number expected to come on line in the fourth quarter. That, in combination with material recovery facility (MRF) upgrades, EPR contracts and polymer facilities, is expected to result in more material incremental EBITDA contributions from sustainability businesses in 2025 for all the companies, which will flow through to higher free cash flow.
Glimpses into 2025—Another “Outsized” Year
Although all the companies do not provide formal guidance until they report the fourth quarter in February, analysts generally begin to push for more color or commentary on the third quarter conference calls. Across the board, management teams noted expectations for another “outsized” year for both margins and EBITDA growth. Revenue growth was most often characterized as likely to be in the mid-single digits, while the price/cost spread was still expected to remain quite positive. Individual company cost efficiency programs are expected to yield further benefits in 2025, while, as previously noted, EBITDA contributions from sustainability investments are expected to kick into higher gear. Recycled commodity prices were the only potential headwind that was called out by a few management teams. And lastly, although not generally included in current estimates, future acquisition activity is expected to further boost growth!
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