Advanced Disposal continues steady growth
Advanced Disposal Services' first quarter results for 2018 show no major surprises and largely good news for the company on all fronts except recycling.
- Average price yield was 1.9% and organic volume growth was 2.4%, with the company's residential business serving as the biggest driver. Adjusted free cash flow was up by 22% to $49.3 million year over year.
- CEO Richard Burke said efforts to push commercial prices are working, and the company reported average churn around 8-11%. CFO Steve Carn reported annual customer defection rates turned positive for the first time in 2017.
- Burke also reported the February addition of Ernest Mrozek, former CFO of Service Master Company, to the board of directors. Two others from Highstar Capital resigned because their ownership percentage went down, meaning the company's board now has six independent members.
These results show the industry's fourth largest player continuing to amass strength. Moody's recently upgraded its rating, and Carn projected more rating agencies could do the same. Growth from acquisitions as compared to last year was 3.6%, factoring in the rollover of 2017 deals as well as five new tuck-ins during the first quarter of 2018.
Capital spending ($34.8 million) accounted for about 9.5% of revenue, which executives foresee coming down in future years as the company catches up on the infrastructure spending involved with having relatively newer landfills. Of that total, $5.8 million went to landfill gas and leachate spending.
Unlike some other publicly traded companies, Advanced derives less than 2% of its revenue from recycling. Though like his fellow CEOs, Burke has also commented on market trends in recent weeks. At WasteExpo he said the industry needed to become "much more dogmatic about those contracts" and "more diligent about the education side around what can go in the cart." That sentiment continued in the call.
- Because recycling accounts for such a small portion of Advanced's business, its impact was limited to a $2 million decline in EBITDA for the quarter year over year. Still, Burke said the goal is to continue reducing this volatility by ensuring that contracts cover operating costs for collection and processing of all material — even if that means sharing more of the commodity benefit down the line.
- Burke also echoed Waste Management's recent comments about prioritizing recycling over "diversion," especially for municipal customers with single-stream systems that have high contamination. He said "the majors all get that and everybody is speaking with a single voice on that topic."
- "This includes having honest conversations around commodities like glass that in many instances don't have a viable secondary market, are harmful to our equipment and our employees and can contaminate fibers that would otherwise be recycled," said Burke.
After a more active period of growth, Advanced is still aiming for $30-50 million in deals this year and remains focused on retaining the employees it already has.
- Following the five tuck-ins this year, Advanced won't necessarily shy away from an auction, but remains more focused on deals that tie into existing infrastructure. "We have a fairly substantial pipeline of tuck-ins and that will be our bread and butter, but we will look at chunkier deals too and be opportunistic as they come up," said Burke.
- As for retention, Burke said turnover rates are above 20% and that remains a factor until about three years on the job. In addition to financial incentives, Advanced also sees safety culture as a way to help retain workers. Burke said the company had a 10% improvement last year in terms of coaching effectiveness, but also sees room for improvement.
- Asked about what to expect on municipal contract competition, Burke said the second half of 2018 would present many chances, and that the company "will continue to be opportunistic and somewhat aggressive on those where we see them as a disposal neutral opportunity to have a new platform to grow from ... We'll look at that and then also we'll prioritize the municipal contracts that are within a certain radius around an existing landfill that we don't have."
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