Now that Q1 reports are in from all publicly-traded solid waste companies, it is clear that operations remain stable amid the coronavirus pandemic, both financially and logistically. But companies have also seen significant shifts that could endure for months. Annual guidance has largely been suspended, with significant uncertainty about what comes next.
In addition to our same-day coverage of earnings reports from the big four North American players – Waste Management, Republic Services, Waste Connections and GFL Environmental – Waste Dive has been tracking other solid waste companies as usual. Multiple trends are clear when also factoring in reports from Advanced Disposal Services, Casella Waste Systems and Covanta.
Lost volumes are coming back, but it will be gradual and incomplete
- Waste Management reported a 20% decline in third-party landfill volumes and a 16% decline in commercial volumes during April. While the company is seeing signs for early optimism, CEO Jim Fish repeatedly noted the unpredictability of commercial business going forward. "I just don't know what happens with schools, what happens with airlines. And of course, that whole hospitality space is a massive question at this point," he said.
- Republic Services similarly reported declines (April container and third-party landfill volumes were down 20%) but thought the worst had likely passed. Executives recognized some customers will not return, but did not offer any ranges for how many.
- Waste Connections saw overall volumes drop by 12% in April, driven by much higher decreases in the Northeast and Canada. The company had its own reasons for early hope in terms of business activity picking back up, but CEO Worthing Jackman emphasized this outlook was "not assuming anything about getting back to prior levels."
- GFL Environmental reported an 8.7% decline in solid waste revenue for April, year-over-year, driven in large part by significant effects in Canadian cities — Montreal and Toronto saw double-digit volume decreases starting in March. In one sign of a possible turnaround, CEO Patrick Dovigi said hotels in major Canadian cities that might normally be serviced three or four times per week (and had declined to one) were back up to two.
- Advanced Disposal Services reported "experiencing volume declines in all of its lines of business except residential due to deteriorating macroeconomic conditions and stay-at-home orders resulting from the COVID-19 pandemic." While the company didn't break out percentages in its quarterly filing, it reported multimillion dollar revenue effects across all regional segments.
- Casella Waste Systems reported smaller disruptions during Q1, with overall revenues only down 0.9% in April, but has seen effects nonetheless. Revenues were down more notably for commercial and roll-off collection, as well as disposal, when excluding the effects of recent acquisitions. April landfill tonnages were down 22%, due in part to a major drop-off in New York volumes. The company reported positive landfill trends in late April, but CFO Ned Coletta said it was "a little early to fully understand what that means."
- Despite a mostly positive first quarter, Covanta reported ongoing pressure on commercial MSW volumes, along with profile waste due to shifts in the automotive industry and other sectors. Profile waste volumes are down 15-20%, according to CEO Steve Jones. The company is facing downward pressure on roughly 30% of its waste revenue, he said. Covanta is also looking at internalizing some of the 200,000 tons typically sent to third parties for disposal. Jones estimated backfilling commercial and industrial volumes with “lower price alternative waste sources” is reducing tip fee revenue by $5 million per month.
Residential volume increases are putting pressure on some business models
- Waste Management reported a 25% uptick in residential waste volumes and the issue came up repeatedly during the company's earnings call as an area that will be addressed with municipalities, because 75% of its business is under some form of contract. "I mean look, nobody signed up for 25-plus-or-minus percent increases in residential volumes," said COO John Morris, adding that with more people expected to continue working from home "this is a key focal area for us."
- Republic Services CEO Don Slager said now that the company had emerged from a stabilization period in April, it would begin engaging with municipalities for some financial recognition that residential weights were up 15% for the month.
- GFL Environmental saw residential volumes rise by as much as 15% in some parts of Canada and Michigan. While the Canadian business is tonnage-based, and about 40% of the U.S. business is on a subscription basis, the company will try to recoup higher costs for the rest. "Given what we experienced in 2018 with the recycling, I’m going to say it would be all additive and bonus if we were able to get something," said Dovigi.
- Waste Connections didn't call out notable residential issues, in part because much of the company's municipal work is done under franchise contracts with regular rate reviews. Casella reported residential volumes were up around 15% from March, and does 75% of that business on a subscription basis, but wasn't immediately focused on price increases as this was believed to track with seasonal trends.
- Covanta did not report the same significant uptick in residential volumes noted by other companies, but Jones said the company is currently leaning on its long-term municipal contracts, many of which are based on processing residential waste. Jones noted tip fee revenues associated with residential waste have “remained strong,” in a break from the downward trends associated with commercial and industrial volumes.
The industry can flex costs quickly and work leaner
- Every hauler reported some amount of reduced spending on overtime, travel, fuel and numerous other areas. Waste Connections and Casella reported some furloughs or layoffs. Limiting or freezing hiring, along with salary increases, was also reported across multiple companies.
- Companies with a larger proportion of landfill assets reported plans to ramp down capital expenditures for new cell construction as projected lifespans extend due to volume declines. Waste Management is planning a 10% cut in annual spending and Republic outlined a similar reduction in "growth capital." Waste Connections anticipates a 20% reduction.
- GFL Environmental may have a smaller portion of landfill assets, but executives said they've still identified $100 million in planned spending on fleet replacements and other needs that can be cut "if we need to." While Casella's portfolio is smaller, with certain landfill closure or expansion projects already well underway, the company also found an estimated $10 million in “discretionary capital expenditures" to freeze for the year.
- Covanta was among the first companies to announce cost-saving measures in April as the pandemic took hold. The company cut its dividend to save $90 million and initiated another $15-30 million in cost reductions. This included temporary compensation reductions for executive leadership and support employees, some furloughs and a hiring freeze.
M&A and expansion activity may be delayed, but continues
- Waste Management, like others, reported the M&A process had been delayed for its own acquisition of Advanced by weeks or more due to logistical factors. Republic continues to anticipate hitting a $600-650 million target for the year, with a deal to buy Santek Waste Services on track, and Slager said "we think it'll still be a good year for us in the M&A department." Waste Connections didn't share any projections, but Jackman said multiple deals are in the works and "the level of activity really hasn't changed for us."
- GFL already spent $1.13 billion Canadian dollars on M&A in Q1 and said more deals are in the works. Dovigi noted some sellers may decide it's not worth trying to survive another downturn and thinks valuations may change for "bronze" and "silver" level companies.
- Casella has completed four smaller acquisitions to date, with a focus on expanding its New York presence, but expects a temporary pause. Still, CEO John Casella said he sees “a great runway in front of us to create a lot more value over the next few years as we continue to grow.”
- Covanta is in early negotiations with Pasco County, Florida for an incinerator expansion, which Jones called “a positive sign on the potential for domestic growth and of our strong position in the market.” He also noted active discussions with two or three other local governments.
No one really knows what comes next
- GFL doesn't anticipate permanent impairment to its commercial business, but expects a complicated path back. “I think our governments are struggling on actually how to reopen," said Dovigi. "It was easy to shut it down, but I think they're trying to understand how they actually reopen. But we are seeing material upticks in people now wanting to get their service back online."
- "While it's impossible to predict if we are at the bottom, we have seen several key indicators, such as commercial and industrial service level changes, the number of roll-off pulls and landfill tons, begin to stabilize and, in some cases, improve over the last several weeks,” said Coletta about Casella's outlook.
- Republic was among the industry's most optimistic, but executives recognized that could all change. "If we get into a double dip, right, because we have a reemergence at broad scale and have widespread sheltering in place in the fall, that would be a different scenario," said President Jon Vander Ark, noting projections rely on the bottom not being as bad as expected and business picking back up into Q3.
- Waste Management's Fish was frank during his earnings call and other media appearances about "the big unknown" around commercial business projections. "How are these small businesses going to recover from this? Are they going to recover? How many of them will choose to just throw in the towel?" he asked. "[T]he piece that I think all waste companies are going to really have to kind of get our heads around is what happens to small business because it is unprecedented that you take the entire $23 trillion U.S. economy and shut it down."