Waste Connections reported continued pandemic recovery during its fourth quarter on an earnings call Thursday, setting a hopeful tone for continued improvement and growth in 2021.
CEO Worthing Jackman credited a higher-than-expected improvement in solid waste volumes, as well as increased values for recycled commodities and renewable fuels. He also highlighted the “accelerated pace” of acquisitions for the quarter, with new market entries in Delaware and Minnesota, as well as tuck-in deals in Colorado and Nebraska. In 2020, Waste Connections completed 21 acquisitions valued at $481.6 million. Total acquired annualized revenue for the full year was about $180 million.
Jackman said essential workers drove the company’s fourth quarter successes. “We are extremely grateful for our employees' efforts to drive not only outsized financial performance during this challenging period but operational excellence as well, as they honor commitments to our customers, communities and each other."
COVID-19 impacts continue
- Landfill tons were down about 5% year-over-year, but the company sees improvement from MSW tons being up 2% during that period. Canada has seen notable recovery, with volume losses cut from about 9% in the third quarter to 4.3% by the end of the fourth quarter, said Chief Financial Officer Mary Anne Whitney.
- Revenue associated with commercial customers that suspended or reduced service due to the COVID-19 pandemic continues to recover. An estimated 56% of revenue lost when customers stopped or suspended service at the outset of the pandemic came back by year's end, up from the 42% recovery measured in the second quarter.
- Waste Connections incurred over $35 million in incremental COVID-19-related costs during 2020, mostly for supplemental pay for frontline employees. That included what Jackson called a pre-Thanksgiving "thank you" bonus. As of January, the company was spending about $250,000 per week on wage support for employees who are ill or must stay home to take care of a family member.
The pandemic continues to affect revenue from solid waste, commercial collection, and transfer and disposal, but Whitney said these areas have shown incremental improvement since the second quarter. The company's Northeast markets remain hardest hit by the pandemic and "slowest to reopen,” while the West Coast markets are more stable, Whitney said.
Jackman said improvements in the overall economy will drive improvements in the waste markets. Many customers that may help fuel revenue recovery down the line are still missing from the equation, he said. “You’re talking restaurants, office buildings staffing up again, tourism, increasing schools reopening, arenas refilling.”
The company also continues to monitor commercial customers that have suspended or reduced service, saying its 2021 outlook does not include any further reopening activity from COVID-19 shutdowns. Waste Connections also plans to continue wage support spending and other COVID-19-related costs, though Whitney predicts spending will decrease as more people gain access to the vaccine and the economy further improves.
Areas of potential
- Solid waste volumes improved from -9.6% in the second quarter to -3.1% in the fourth quarter. Jackman anticipates this will be a continued trend “that sets us up for positive reported volumes in 2021, without the benefit of any further economic recovery activity.” The company predicts 5% volume growth in 2021.
- Whitney highlighted improved recycling-related revenue as part of an ongoing trend in recent quarters, in part because of improved commodity prices and higher residential recycling volumes. Whitney noted the rising price for cardboard, which was about $85 per ton in the fourth quarter but ended the year at about $90 a ton. Recycling revenue for 2020 was $86.4 million.
- A possible infrastructure bill in Congress could create new opportunities for the waste industry, particularly in development projects, special waste, construction and demolition activity, and overall volume, Whitney predicted. "It would certainly be a boost for the industry, including ourselves,” she said.
- Jackman said the annual acquired revenue target for 2021 M&A is about $125 million to 150 million, with the majority of the deals staying in the $10 to $30 million range. While previewing possible activity, Jackman said a couple of deals may be in the $50 million to $75 million range.
- Asked about the possibility of Waste Connections ever doing another major acquisition itself, Jackman was noncommittal based on recent industry trends. “We look at the experience Waste Management and Advanced had with the DOJ in going through that protracted period, and we look at other companies that have been hung up in second reviews, for what you would think would be even smaller transactions… Never say never about large combinations, but we all recognize that you've got to be making prudent assumptions with regards to what you're going to get on the way out of those.”
- Waste Connections did not factor in the potential for future acquisitions when it announced its financial outlook for 2021, which Whitney said also assumes no change in the current economic environment. Revenue for 2021 is anticipated to be about $5.8 billion, with an estimated net income of $669 million.