Over the past two weeks, publicly traded solid waste companies reported their third quarter 2022 results and held follow-up conference calls. in this version of business reportWe highlight common topics, and touch on differences in the report and management commentary.
Strong pricing generally up and to the right
Across the board, pricing was very strong, exceeded expectations, and was up sequentially in almost all respects. WM and Republic Services (RSG) reported yields that rose 90 basis points and 60 basis points sequentially to hit record highs, respectively. Similarly, core pricing on Waste Connection (WCN) and GFL Environment (GFL) was up 8.3% and 8.6%, respectively, an increase of 110 and 130 basis points, respectively. Casela West (CWST) reported pricing that dipped sequentially, with less help from the Consumer Price Index (CPI) than its bigger brethren on CPI-indexed contracts. Notably, customer receptivity was also positive, with retention and churn rates remaining stable.
The CPI reset on the indexed contract portion of the business was pegged at around 450-550 basis point price rollovers in 2023 by several management teams, leading to predictions for continued strong pricing in 2023 – only “locked in” by value With fixation, coupled with current open market pricing, often and consistently pegged between 5%-6%, 2023 pricing potentially becomes even higher with more open market actions. WCN noted that it expects its exclusive (franchise) market cap to grow from 5.5% to 7% in 2023, with overall pricing in the 8%-9% range. GFL echoed that it saw 2023 pricing in the same range.
Volumes strong despite expected bearish fears
Volumes were also generally quite strong and above expectations. CWST and RSG reported volumes of 2% and 2.2%, respectively, while WM’s collection and settlement volumes increased by 1.7%, even taking into account the loss of the three large unprofitable contracts. Volume strength was characterized by a broad base geographically and across all business lines. Management teams saw no signs of economic weakness (yet) in their businesses, although this was not particularly surprising given that solid waste is considered a concurrent indicator, if not a backward one. Also of note, special waste, often considered economically sensitive or economically sensitive, was 15% for WM and 13% for RSG. WCN was the exception here with volume (1.5%), but this was attributed to company specific factors, not macroeconomic factors, and management noted positive C&D volumes. Importantly, the key metrics for volume—net service gap and net new business—remained positive. While the management team was certainly aware of the economic risks to volumes, they were fairly optimistic about the outlook.
Recycled commodity prices fall sharply, becoming a big Fourth Quarter headwind
The major new negative in the third quarter, not surprisingly, was a drop in the prices of recycled items (primarily in the “baskets” of recycled items), which became a headwind in the third quarter after being a positive contributor in the first half. But the sharp drop in old corrugated cardboard (OCC) in October, as reported by RISI, forced companies to take down recycled commodity price sentiments more dramatically in the fourth quarter than previously indicated. done, usually placed at the bottom around 45%. Third quarter average. The resulting expected fourth quarter recycling headwind was also somewhat larger than analysts generally expected. Although OCC was the main recent driver, and many industry experts fear that the bottom has not yet been reached, plastics were also a significant drag year-over-year, although the price of recycled plastics stabilized in October reporting.
Pricing Tops Inflation, Affected Margins
Although aided by operational efficiencies, pricing was generally described by management teams as exceeding inflation. RSG’s 5.6 per cent return was higher than their internal cost of inflation, which was kept at around 5%. CWST’s solid waste value of 6.6% is higher than its inflationary cost, which was estimated at around 5.9%. As a result, the underlying solid waste margin expanded to anywhere between 40 basis points to 120 basis points, and generally the overall company EBITDA margin also increased, despite its recycling headwinds. The exception to overall company margin growth was RSG, where overall company margins were impacted by the acquisition of lower margin US Ecology.
Although issues of labor availability, turnover, and wage inflation have peaked in at least many companies, overall internal cost inflation levels remain high, if more stable, according to consistent management commentary. And, although most expressed hope (or hope) that inflation will ease as we enter the next year, apparently no one has really seen it yet!
Guidance confirmed or raised
In the second quarter, all companies gathered guidance. In the third quarter, WM and RSG generally reaffirmed full year 2022 guidance. The sudden and sharp decline in recycling was characterized as offset by higher organic growth in the core solid waste business, primarily value driven. The younger three players typically picked up elements of their guidance. CWST and WCN raised 2022 revenue and EBITDA guidance, and both companies reaffirmed their free cash flow (FCF) guidance. GFL raised its revenue guidance and reaffirmed its EBITDA and FCF guidance.
Outlook for 2023 Margins “Bump” More Cloudy
During the second quarter conference calls, there was considerable discussion about the potential for an outside margin “bump” in 2023 given the potential for a much higher CPI reset on the indexed business, the cost of inflation, particularly wage costs. combined with reducing. Given the extremely high internal inflation costs, which are now viewed as materials recycling headwinds, there was now more hedging on this potential margin bump, unsurprisingly, as companies (and analysts) were “reducing” their 2023 recycling assumptions from the fourth quarter. basic”. The level, as mentioned earlier, has come down dramatically. That said, most management teams continue to target margin improvement of 30-50 basis points in 2023. GFL was the standout here, still looking at 100 basis points potential for margin improvement in 2023, including recycling headwinds!
More headwinds developing on the free cash flow front
Given the increase in interest rates, interest expense is expected to increase significantly in 2023, while cash taxes are also expected to be higher due to generally lower bonus depreciation. In addition, and with the prospect of a gloomy economic picture again, there were calls for higher expected capex spending by many companies on growth and sustainability investments. CWST raised expectations of higher inflation and capital expenditure on settlement infrastructure, while RSG is expected to spend more on polymer centres. WM was the standout here, as management indicated that 2023 would mark the heaviest investment year for both recycling and renewable natural gas (RNG) – the company is targeting $1 billion in sustainable investments in 2023, compared with 2022. It is expected to cost $550 million.
M&A Rocks at an Elevated Pace
After all companies indicated massive acquisition opportunities at the start of the year, third-quarter results essentially gave all companies the momentum to achieve those lofty goals. WM completed the acquisition of more than $200 million in the third quarter, bringing it in line with its $300-$400 million target. Excluding US ecology, RSG spent $400 million. Year-to-date, CWST has already completed 13 acquisitions with $48 million in acquired revenue, with another $30 million under letters of intent (LOI), while WCN generated approximately $570 million of total annual revenue. have signed or closed the acquisition with. M&A pipelines were still characterized as strong, with many high-quality private players eager to sell.
Signpost for 2023
All companies give more specific and formal guidance in their fourth-quarter reports in February, but typically some signposts for 2023 are put in place in the third quarter, and RSG typically provides some higher-level EPS and FCF ranges. Huh. Management teams were more cautious in the third quarter due to economic and recycling uncertainty. RSG notes that it expects high single-digit growth in revenue, EBITDA and FCF, while managing low double-digit growth in the second quarter is considered possible. CWST indicated an outlook for high-single-digit revenue growth, low-double-digit EBITDA growth and FCF growth of 10%-15%. WCN essentially reaffirmed that it still saw double-digit growth in revenue and FCF in 2023, while it still expects an average underlying solid waste margin improvement, which will offset recycling headwinds. Lastly, GFL forecast high single-digit organic growth, high teeny growth in EBITDA and double-digit growth in FCF, given the higher interest costs.