In the last week of April, all publicly traded solid waste companies reported first-quarter earnings and held their follow-up conference calls. In this edition of Business reportwe highlight common themes and note differences in numbers and messages.
Organic growth reflects continued pricing strength
Pricing again took center stage, with all companies reporting better than expected prices. GFL Environmental ( GFL ) led the pack with a solid waste base rate of 12.6%, with Waste Connections ( WCN ) and Casella Waste ( CWST ) not far behind at 11% and nearly 9%, respectively. Republic Services ( RSG ) and WM ( WM ) posted very strong returns of 6.5% and 6.2%, respectively. Almost all companies had pricing that consistently accelerated from the fourth quarter to the levels of the first quarter. Price acceptance was universally reported as very high – churn was reported to be around historic lows and retention was often described as a record high. Two commonly cited sources of pricing strength were post-collection pricing, particularly in the landfill business, and not surprisingly, help from CPI-linked pricing, which was cited at levels between 5.5% and 7%-8%.
The volume of comments was more mixed. RSG and WM had relatively strong solid waste volume growth of 1.6% and 0.8%, better than Q4 levels, and GFL and CWST volumes remained positive at 0.7% and 0.3, respectively %. WCN volumes were weaker, down 1.3%, due in part to greater exposure to severe West Coast weather impacting landfill volumes and curtailment. Additionally, WCN stood out as more strongly noting potential economic weakness in its business, particularly in landfill and industrial volumes in March. Other players were more upbeat and generally noted that they remain vigilant but have yet to find any real economic weakness in their numbers. WM posted positive net service intervals and CWST said key operational metrics were stable.
Recycled commodity and RIN prices remain low, but largely in line with expectations
Recycled prices remained in the basement in the first quarter, but largely in line with expectations. While WCN management saw no real improvement, RSG and WM saw Q4 Q1 improvement in recycled feedstock cost per ton values and incremental gains in April. Both companies are currently staying calm with full-year forecasts of $125 per tonne and $70 per tonne respectively. CWST cites a 20% rebound in recycled feedstock prices from the bottom.
Standard renewable fuel credit (RIN) prices also remained stagnant at around $2.00. RINs are generally assumed to reflect the low levels of Renewable Volume Obligations (RVOs) proposed by the EPA in December 2022. The various landfill gas players to RNG have provided comment to the EPA in the current comment process, and many are hopeful that an increase in RVO could be a catalyst for RIN prices. EPA is subject to a June 2023 deadline to finalize the RVO standards.
Margins are expected to improve despite stronger cost inflation and guidance has been reaffirmed
Overall, management teams are finding that cost inflation is higher and stickier than they expected (or hoped). Expectations for domestic expenditure inflation for the year as a whole were held around the mid-single digits, with the first half of the year starting higher. Although most management teams did not make official changes, domestic inflation costs were often characterized as likely to be in the mid-high single-digit range. The most common culprit cited by all was higher repair and maintenance costs stemming from ongoing problems with the parts supply chain and, in particular, continued delays in receiving new trucks. Both WM and WCN finally noted an improvement in truck deliveries, but also noted that it is certainly not back to normal yet! However, the bright spot that seemed to emerge was childbirth, which was the biggest crisis. Pay increases are often cited as being down about 5%-6% from the high single digit, even low double digit increases seen last year. Combined with lower pressure on wage costs, a number of companies cited higher retention and lower turnover.
Combining all of the above, all companies maintained margin guidance for the year, which generally implies year-over-year increases, although the year started in the red given the drop in recycled feedstock prices in particular. In the first quarter, the focus remained on core solid waste margins, which remained positive for all players. CWST and GFL were the notable outperformers here, with core solid waste margins up by 220 and 190 bps respectively.
All companies confirmed full-year guidance on nearly all of their metrics – price, volume, EBITDA and free cash flow. GFL noted most clearly that it is likely to be able to raise guidance after the second quarter, and while more cautious in its dialogue, RSG is also tracking more clearly ahead of expectations based on first-quarter results. Free cash flow guidance was reaffirmed despite a generally slow start to the year, given resistance in recycled feedstock prices and various company-specific factors.
The Future Price/Cost Spread — Are Excessive Margins Still in the Future?
In the conference calls that followed, there was a lot of focus on the cost/cost ratio and its future direction. Pricing was expected to remain stable on a combination of higher CPI-linked pricing support, increasing pressure on disposal costs and better industry discipline overall. And while it’s firmer than expected, as noted earlier, a gradual slowdown in cost inflation is still expected, particularly in the second half of 2023 and into 2024. Ultimately, most management teams still see the potential for margin improvement to be above more typical historical levels of 30-50 basis points as we exit 2023 and into 2024, and this was clearly the main rationale for maintaining full-year margin guidance despite difficult comparisons for the first quarter. The only difference in this bullish outlook between management teams was the varying degree of confidence in timing and potential upside.
Another bumper year for mergers and acquisitions
Apparently, the news of the sale/acquisition of GFL/CWST, announced just before earnings, was the largest merger and acquisition (M&A) event in terms of net size during the quarter. However, GFL noted that it expects to make $300-$500 million in acquisitions during the year, while CWST noted that the GFL transaction would double the potential total addressable market for acquisitions to $1 billion. RSG confirmed expected acquisition activity in excess of $500 million in a combination of solid waste, recycling and environmental services companies. WCN ended with $45 million in acquired revenue in the quarter, which also puts it on pace to have a “better than average” year.
Investments in sustainability remain on track
Investments in sustainability, particularly RNG from landfill gas plants, remain a key focus for investors. Although all companies have already announced official programs and introduced plans – led by WM in terms of size and scale – the first quarter conference calls contained nothing new, and management teams mostly noted that they are on track to complete previously announced projects for 2023.