Q3 Earnings

Waste Connections reported a better than expected third quarter this week, with 4.5% in solid waste pricing growth and a 14.3% increase in its regular quarterly cash dividend. Though one piece of news captured more attention during the earnings call than just about anything else.

Deal Mania

CEO Ron Mittelstaedt announced the company "recently signed an agreement for the acquisition of a multi-market collection-oriented company with annualized revenues of approximately $175 million, including two new markets and one tuck-in." Combined with 15 other deals so far, this is expected to bring annual acquired revenue to $360 million and make for the third-busiest year in company history. The big deal itself was described as the fourth-largest Waste Connections has ever done.

• Mittelstaedt declined to name the company, but divulged further details as analysts pressed. Calling it likely one of "the 10 largest private companies remaining in the industry," he said it has "extremely high quality of assets, phenomenal market position, number one or two in most of their markets, and very high management quality."
• "Internalization opportunities" were said to be available in two of the three market areas. Waste Connections already has a "strong presence" in one market, including disposal assets. Mittelstaedt said this isn't in a franchise market and is not west of Colorado.
• As for what else might be on the horizon, Mittelstaedt said there are still "a large amount of deals in our pipeline at various stages of either offer or due diligence to negotiate to offer." That includes everything from small tucks-ins around the half million dollar range to deals above $100 million.

Waste Connections has been bullish on acquisition opportunities for the past year or more and already entered multiple new markets in 2018. To reach this point, Mittelstaedt said the company has made offers for $1 billion-plus worth of revenue to an estimated 100 companies so far.

Due to a variety of factors, he believes the company will continue to see "above-average M&A activity level over the next few years," or at least until the next presidential election. As discussed in the past, Mittelstaedt believes activity will be heightened ahead of a potential change in political control post-2020 that could affect the tax code. Combined with a strong economy and "pent-up" demand from prior years, this is expected to create a "perfect storm for M&A in our sector." 

As for what GFL Environmental's recent acquisition of Waste Industries might mean for the marketplace, Mittelstaedt said that type of "very, very high multiple" was likely a "one-off deal" that was only the right fit in this situation.

"Waste Industries is an exceptional company that brings a lot of needed infrastructure to GFL. So we’re not going to begrudge them for doing a deal that made a lot of sense for them. I mean, we probably couldn't have got within $1 billion to $1.1 billion of those numbers on that valuation," he said. "It’s a material knockout punch."

Recycling & Sustainability

• Like its publicly-traded competitors, Waste Connections reported yet another quarter of low recycling revenue. Third quarter revenue was $21 million, down nearly $20 million YoY. 
• Mittelstaedt estimated average processing costs have gone from $75-100 per ton to $125-150 or more, now that markets have tightened.
• Efforts are ongoing to shift that increase to customers, but prices may not stay this high forever. "As we get glass, as we get junk mail, as we get magazines, as we get certain plastics back out of the negotiation with these municipalities, and that is happening, that will bring that cost structure back down over time," he said.

While it didn't come up during the call, Waste Connections also released a new sustainability report earlier this month that offered a slightly different perspective on its recycling efforts. The company processed a notably higher volume of recyclable commodities in 2017 versus 2016 (1.5 million tons, up from 1.2 million) and boasted diversion rates of 50-70% in certain markets. The report also includes a mention of the company's support for "zero waste" initiatives and work with food waste.

As discussed in an August interview with Waste Dive, Waste Connections doesn't usually make recycling a centerpiece of its brand, but is willing to offer new services for the right price when required or requested. At the time, Mittelstaedt cast doubt on the efficacy of high diversion rate targets or "zero waste" goals — which would seem to be at odds with the report's language — but did say he could envision recycling making up a higher portion of the company's revenue in the future. The early stages of this cost restructuring show a potential path toward that scenario, though it's clear that demand will still need to come from customers rather than the company regardless of its sustainability marketing.

Looking Ahead

• Volume growth was down for the quarter, due in part to purposeful loss of some existing Progressive Waste Solutions business and lost tonnage from New York's Department of Sanitation. Mittelstaedt estimated that 75% or more of the Progressive shedding was complete. As for New York, it wasn't specified during this call, but Waste Connections is potentially set to make out well from recently passed transfer station capacity legislation as well as a pending franchise system.
• Asked about exposure to the housing market — a running theme among analysts this quarter — Mittelstaedt said because housing starts are only around half of what they were in the 2005-2008 period this represents a smaller volume and thus a smaller risk.
• Waste Connections estimates Q4 revenue will be approximately $1.225 billion, with price growth of around 4.5% and another small dip in volume. As for preliminary 2019 outlook, Mittelstaedt said the company is "setting up for above-average revenue growth and margin expansion" for a variety of reasons.