Waste Connections reported a stronger-than-anticipated set of third quarter results this week, with executives saying in a Thursday earnings call that acquisition contributions and pricing strategies could more than offset broader economic pressures.
Through the third quarter, the company closed more than a dozen acquisitions worth an estimated $240 million in annualized revenue. Looking ahead, CEO Worthing Jackman said he sees the potential to close deals worth another $100 million to $150 million and says ample opportunities remain going into 2022.
- As the economy rebounds, Waste Connections saw volumes grow by 2.2% with positive trends in all regions. In New York City, one of the company's markets worst affected by the pandemic, commercial volumes were up by 11%. Overall landfills volumes were also up 5%.
- Total price increased by 5.1%, with the expectation for that figure to reach the 5.5% to 6% range heading into 2022. Jackman said the "tradeoff of price over volume is more important than ever in an inflationary, labor-constrained environment" and noted a willingness to walk away from unprofitable business as needed.
- Worker recruitment and retention are key challenges, with overall cost inflation up by double digits and overtime spending also high. Jackman said wage increases and new recruitment efforts were showing success, but added that "engagement and retention are critical" to mitigate voluntary turnover as well.
Like Waste Management, which also reported earnings this week, Waste Connections is seeing clear signs of ongoing economic recovery among its customers. Net new business is up, volumes are growing and those trends show no indication of reversing. Any further recovery will be additive and is not part of revenue projections.
Labor and inflation trends are a serious factor, but Jackman is confident Waste Connections' approach would win out versus some private operators that may try to compete on price through paying lower wages. "This is not an environment that provides a lifeline or oxygen to those companies," he said.
Like other large solid waste peers, he also defended the current pricing strategy as mild compared with other rates of inflation that are "rampant" across various sectors. "Talking 5.5 or 6% price is nothing compared to the 8, the 10, the 20% increases you see all around you in consumer products, construction materials, utility bills."
While the company is optimistic its labor strategy is on track, Jackman did note a potential federal vaccine mandate would be a headwind. Unlike Waste Management, which noted it saw many hundreds of employees out for coronavirus-related reasons recently, Waste Connections didn't specify how the pandemic was affecting its staffing levels.
"You can’t call frontline employees essential and heroes one year, and then try to chase them off and force them to do things another year," he said, adding the company's vaccination rate is similar to the broader workforce. "This is not a time when the government needs to exert additional pressures in an already constrained environment."
- Despite supply chain constraints reported in the industry, Waste Connections is on track to exceed its prior capital expenditure guidance by $75 million and spend $700 million this year. One area that remains affected is electric trucks, with expected deliveries delayed for various reasons and most beta testing likely pushed back until 2022.
- Recycling revenue more than doubled year over year, reaching $54.4 million, due in part to higher commodity prices. Waste Connections' business profile hasn't allowed for as much repricing as some others, but Chief Financial Officer Mary Anne Whitney cited internalizing more tons through acquiring companies with MRFs, buying distressed assets to revamp and pursuing multiple greenfield projects in existing markets as accretive.
- E&P revenue saw year-over-year growth to $35 million for the quarter, despite Hurricane Ida's impacts on drilling operations in the Gulf of Mexico. Jackman said rig counts remain well below prior peaks, but added the company would be ready to ramp up operations and build out further capacity as needed.
- Waste Connections raised its annual outlook again, based on acquisition contributions and economic recovery trends. The company now estimates it could see 2021 revenue of $6.11 billion, net income of $633 million and adjusted free cash flow of $1.025 billion.
- As 2021 wraps up, the company expects M&A will contribute 2.5% in growth and that may reach 4% to 5% by the turn of the year. Jackman said the company currently has 15 outstanding letters of intent signed with prospective sellers from "coast to coast," in the U.S. and Canada, with "a lot of runway ahead of us."
- Unlike some peers that have growing environmental services divisions, Jackman said Waste Connections has no current interest in such deals because he views the margins as too low and seller expectations as too high. "Solid waste is a much better return profile," he said. "We’ll stay the company that you know and continue to do what’s driven our past success.”