Waste Management, Houston, has announced the financial results for the third quarter, ended Sept. 30. Revenues for the third quarter of 2019 were $3.97 billion, compared with $3.82 billion for the same 2018 period. Net income for the quarter was $495 million, compared with $499 million for the third quarter of 2018.
Company President and CEO Jim Fish (JF), Executive Vice President and Chief Operating Officer John Morris (JM), and Senior Vice President and Chief Financial Officer Devina Rankin (DR) recently held an investors call to discuss the company’s third-quarter performance. Here are some highlights.
On overall third quarter results
JF: “In the third quarter, the fundamental strength of our collection and disposal business continue to drive positive results for the company, confirming that focusing on our employees and customers and leveraging our asset network is the right strategy. In the third quarter, we generated more than 5 percent organic revenue in our collection and disposal business with yield of 2.6 percent and volume of 2.7 percent. ...
“Overall, we're pleased with our performance in the first three quarters of the year, which positions us to achieve our full-year goals. The general macro economy seems to be stable as indicated by our strong price and volume growth with consumer spending steady, while the industrial segment seems to be taking more of a wait and see approach.”
On hauling and collection
JF: “Our results across the solid waste business have been strong through the first nine months of the year. But they've been particularly strong in our lines of business that are driven by the consumer portion of the economy, commercial collection and MSW [municipal solid waste] landfill volumes.
“We have good visibility into these segments of our business and all indicators are pointing to continued strength. When we look at the portion of our business driven by the industrial segment of the economy, namely special waste, we continue to see growth, however, the pace of growth is starting to moderate.”
On waste volumes
JM: “The headline here is [that] landfill MSW yield in the third quarter was 3.7 percent, a 250 basis-point improvement over last year. And if you look at the monthly trend of MSW yield, the highest month in the quarter was September, indicating continued momentum in this area. This has been a focus area for us, and we've made good progress in 2019, with year-to-date MSW yield of 3.6 percent compared to 2.2 percent for the full-year 2018.
“This step change increase in pricing helps to overcome rising operating costs and generate appropriate returns on our high quality capital intensive post collection assets. We saw commercial volume growth of 3.2 percent for the quarter and continued MSW volume growth of 1.9 percent. We also continue to see service increases outpace service decreases in the third quarter and net new business remained positive, all evidence of a healthy consumer economy.
“We've heard from some of our industrial customers that they lack visibility to commit to some event work, however, special waste volume growth of 4 percent in the third quarter is still healthy growth, especially given the tough comparisons from last year. C&D [construction and demolition] volume growth of 13.6 percent was largely driven by fire cleanup activities in California, which wrapped up in August.”
JM: “Looking at the recycling business, our blended average commodity price in the third quarter was just under $40 per ton, a decline of 40 percent compared to last year and a further 8 percent decline from the 10-year low reached in the second quarter, which led to an $86 million decline in our recycling revenue.
“Despite this precipitous drop, the steps we're taking to improve the recycling business held year-over-year decline to operating EBITDA to $7 million and EPS decline to about $0.01. In past years, an $86 million decline in revenue would have represented about an $0.08 to $0.10 decline in EPS. Mitigating this larger impact demonstrates the success we're having in restructuring contracts and assessing fees for contamination.
“Given our outlook for continued depressed prices in the fourth quarter, we continue to expect that full-year results for recycling will be a $0.01 to $0.02 EPS headwind in 2019 compared to 2018.”
On compressed natural gas (CNG) fleet
JF: “We've seen a negative $18 million impact in our operating EBITDA plan through the first nine months of the year related to renewable and natural gas credits.
“We remain convinced that our strategy to close the loop between our landfill gas and CNG fleet is the right strategy and is an important piece of our commitment to drive sustainability within our operations. The good news is that the steps we're taking to transform the recycling business with restructured fee-based contracts and investments in technology will insulate the business from commodity price swings, and we're starting to see results. We saw a 320-basis point improvement in contamination rates at our single-stream MRFs in the third quarter.
JF: “On the technology front, we began running test material through our MRF [material recovery facility] of the Future [in Chicago] and are encouraged by the results. At multiple other facilities, we're testing robotics, advanced optical sorting technology and improving the screening processes. We continue to expect a meaningful operating cost savings from these advancements in technology, while also creating the best quality material for sale through positive sorting processes.
On other investments
DR: “In 2019, we are benefiting from lower cash taxes for three reasons: First, our recently closed investment in low-income housing properties and resulting federal credits; second, benefits related to financing activities we completed last quarter; and third, additional benefits resulting from the filing of our federal income tax return. We are very intentionally investing these cash tax savings in our landfills, fleet and recycling business. We accelerated capital spending in the first nine months of the year to position our landfills to respond to the higher-than-anticipated volume growth we have been seeing.
“We also made deliberate investments in our fleet, bringing the percentage of garbage trucks running on natural gas to about 60 percent and increasing the number of automated side-loaders in the fleet by about 9 percent. In addition, as we completed design and construction of our MRF of the Future, we've invested capital in a facility that we think will become the gold standard for sorting and processing technology. As a result of these intentional capital investments, we now expect full-year capital expenditures to be above our guidance of $1.75 billion.
“As Jim mentioned, we've invested in our renewable energy business to close the loop between our landfill gas and CNG fleet. Our capital expenditure guidance excluded the potential increase in renewable energy capital given the uncertain timing of the potential investments. Because pricing for RINs [renewable identification numbers for the Renewable Fuel Standard Program] declined significantly in 2019, we didn't make as large as an investment as we might have otherwise. Full-year capital spending for renewable energy plants is expected to be between $35 million and $40 million for the year.”
On Advanced Disposal acquisition
JF: “We continue to make progress toward closing this transaction, and we remain on track to complete the acquisition during the first quarter of 2020. As you might imagine, we received a high level of interest from other companies inquiring any potential businesses we might be required to divest. Our integration team continues to position us to successfully integrate ADS [Advanced Disposal, based in Ponte Vedra, Florida] upon close.”