Waste Connections: Recycling downturn could help M&A
Waste Connections executives reported another positive quarter and were all-around confident about what lies ahead during the company's second quarter call. While there were fewer new deals to report than last quarter, CEO Ron Mittelstaedt said the year had already been more active than expected.
- Waste Connections has acquired companies with approximately $175 million of annualized revenue to date, up $10 million from Q1. This includes three new market entries in Arizona, Rhode Island and Virginia worth $45-60 million each, along with multiple tuck-ins. Mittelstaedt confirmed more deals worth a collective $175 million are currently active.
- The recycling downturn has also created new opportunities. Though Mittelstaedt is mainly looking at companies with smaller commodity exposure or none at all, as opposed to a third category. "There's those that it's brought to the table because they're at their knees and they've become virtually worthless because their entire EBITDA was built on commodities. We're not too interested in any of those unless we can materially change the model."
- When asked why Waste Connections hadn't repurchased any shares in Q2, Mittelstaedt said it would be "opportunistic" in that area but the company has a different agenda than others. "We still believe that the first and best use of our capital is appropriately priced, strategic transactions. We remain in what I would argue is the best environment for that in perhaps, 20-plus years."
Recently ranked 83rd on the Forbes Growth Champions list, Waste Connections continues to steadily expand after multiple big deals in recent years. As described at Waste Expo in April, the company's "think big, but act small" approach has helped it remain more nimble — and also keep a lower profile — than others approaching $5 billion in revenue might be otherwise.
Mittelstaedt has long predicted that the buying environment would become more favorable after a corporate tax cut. Now, other factors such as rising interest rates, a "very full economy" and a potential political shift in D.C. are helping that become even more true.
"I think if you’re looking at selling your company potentially over the next two, three, four years, you’re probably truncating into this window of now 'til the end of 2019. That was what we believed would occur, and that’s what we’re seeing happen."
Waste Connections already derived a smaller share of its revenue from recycling than others, and that has now shrunk to 2% or less. Still, because the company has plenty of West Coast business and Mittelstaedt has been vocal about needing to change the fundamental economics involved, the topic received new attention.
- Second quarter recycling revenues were around $21 million, down 48% YoY. Based on this, the company now projects that recycling could be down by about $60 million in revenue and up to $50 million in EBITDA for 2018.
- Mittelstaedt welcomed talk of an outright scrap ban in China. "That puts a financial stake in the ground that forces us as an industry, public and private and municipal, to relocate this whole recycling model and create a model that is sustainable on its own," he said, adding it would be "human nature and certainly American nature" to get complacent if China eases up.
- Waste Connections is no longer exporting any material to China and keeping about 70-75% of it domestic. The rest is going to various markets, including Europe for the first time during Q2.
Among other future news that piqued analysts' interest — such as a $55 million increase in 2018 revenue expectations and four new E&P projects — the call also featured multiple intriguing details on New York.
Waste Connections is the only major national company with trucks on the street in this hotly contested market and has made at least one local acquisition since entering the city via its Progressive Waste Solutions deal in 2016. Waste Management has key transfer stations in the city, but no immediate interest in restarting collection routes even in a potential franchise system.
- As the city ramps up its new marine transfer stations — via contracts with Waste Management and Covanta — that means lost business at Waste Connections' own sites. Local volumes dropped by nearly 25 basis points in Q2.
- Mittelstaedt didn't address a question about recently passed legislation to reduce transfer station capacity, which a city assessment indicates won't have notable affects on its sites and may in fact drive more tonnage to them. Though he said franchising "does make a lot of sense relative to the existing system today for a host of reasons."
- This view runs counter to just about all of the city's other players, who dispute the potential merits of a zone system. While Mittelstaedt clarified his comments, he also left room to bid if such a system does come to pass. "We're neutral. We plan to be there either way. But if they do go to it, we believe we certainly have a strong asset positioning to be very competitive."
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