Covanta CEO talks earnings, softening commodity markets and opportunities in medical waste

Covanta Holding Corp. of Morristown, New Jersey, has released its third quarter financial earnings. Here are the highlights:

• Total revenue for the quarter was $465 million, up $9 million from the third quarter of 2018.
• Adjusted EBITDA was $125 million in the quarter, a $3 million increase compared to the third quarter of 2018. 
• The company generated $22 million of free cash flow in the third quarter, down from $85 million in the third quarter of 2018.
• Tip fees were up over 4 percent in the third quarter on a same-store basis.
• The company processed 5.5 million tons of waste during the quarter, a 8-percent increase over the same period for 2018.
• The company confirmed its full year 2019 adjusted EBITDA is now expected to be in the range of $420 million to $445 million, with $120 million to $145 million of free cash flow.

Covanta President and CEO Steve Jones held a conference call with investors Oct. 25 to discuss the quarter. Here are some highlights from the call.

Jones on the company’s financial performance:

“Taking a moment to provide more context around our results, bear in mind that the adjusted EBITDA of $125 million represents 2-percent year-over-year growth even as we've seen a 20-percent-plus decline in the price of many of the commodities we sell. We overcame this headwind because we’re able to drive organic adjusted EBITDA growth of 9 percent in the quarter.”

“These improved operating results are no accident. Over the last several years, we have revamped our operating and supply chain management and instituted Lean Six Sigma techniques to improve the operations and reduce costs.

“Further, we've invested in our plants and those maintenance dollars are paving the way to consistent operating performance. With three quarters of the year complete, we’re right on track from a maintenance perspective and we expect 2019 to be another year of record production.

“Our primary end market is sustainable waste disposal and our ability to capture improving waste prices across our [energy-from-waste] (EFW) fleet has been a key driver of the financial performance.”

On the market for commodities:

“We continue to see a soft environment for many of the commodities we sell, and this has not improved over the last three months. On scrap, steel or ferrous, after a decline in the second quarter, HMS pricing appeared to stabilize in the third quarter in the $220 per ton range.

“In October, prices took another leg down with the Index reaching $192 per ton. At these price levels, we believe that the markets will see a reduction in scrap flows which should then stabilize prices. That’s what these markets do.

“And longer term, we expect to see continued domestic demand growth for ferrous scrap as new mill capacity comes online over the next two years. However, our history tells us that prices should fund market equilibrium again at prices well above current levels, the timing of recovery is difficult to predict.

“On the nonferrous side, the largest product we sell volumetrically is scrap aluminum. For much of the year, pricing has softened as China reduced the volume of this product it will accept and the smelters in the rest of the world have struggled to absorb the excess material.

“This has led to severe price pressure with the Old Cast Index now pricing at $0.37 per pound in October. This is down meaningfully from 2018 when the price averaged just under $0.60 per pound. This is another reason why we’re investing in technology to separate the non-aluminum components of the nonferrous stream, as they often trade at three or more times the price.

“Lastly, on energy, we have recently seen some stability in price, albeit at the historically low levels. As you know, we have a formulaic program to hedge our energy exposure to reduce volatility. This has served us well in this market.”

On the progress of the company’s Total Ash Processing System (TAPS) facility:

“In order to reduce our long-term cost of ash disposal as well to become more sustainable while creating new revenue opportunities, we’ve been developing our first total ash processing system (TAPS). The first TAPS plant is currently under construction at [our] Fairless Hills, Pennsylvania, metal processing facility.

“While we had expected to be fully operational by the fourth quarter this year, we've extended the construction timeline a bit to optimize the equipment. This is the first system of its type and an exciting long-term opportunity for Covanta. So, we want to make sure we get this first one right. We now anticipate beginning to start up some components later this year, before moving into commissioning of the entire system early next year.”

On the company’s growing medical waste segment:

“While profiled waste comes in many forms, a key area of opportunity is regulated medical waste. During the third quarter, we grew regulated medical waste revenue by over 40 percent as we continue to ramp volumes to our three energy-from-waste plants that are permitted to accept this waste.

“While still representing a modest amount of the overall profiled waste revenue, we see very strong growth potential and are working with regulated medical waste collection companies to source more volume. We aspire to be the leading provider of wholesale regulated medical waste disposal services to that industry.”