Waste Management’s recycling revenue continues to decline in second quarter

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Waste Management Inc. (WM), Houston, has announced financial results for its quarter ended June 30. Revenues for the second quarter of 2018 were $3.74 billion, compared with $3.68 billion for the same 2017 period. Net income for the quarter was $499 million, or $1.15 per diluted share, compared with $362 million, or 81 cents per diluted share, for the second quarter of 2017. On an as-adjusted basis, excluding certain items, net income was $438 million, or $1.01 per diluted share, in the second quarter of 2018.

The company’s as-adjusted second quarter 2018 results exclude a 7 cent per diluted share tax benefit related to income tax audit settlements and a net 7 cent per diluted share benefit primarily related to the gain on divestiture of an ancillary business.

Jim Fish, president and CEO of WM, says, “Our traditional solid waste business continued to perform exceptionally well in the second quarter, underpinning our strong financial results. Given the outstanding performance in our traditional solid waste business and a lower than anticipated tax rate, we are increasing our 2018 adjusted earnings per diluted share guidance to a range of $4.05 to $4.10, from $3.97 to $4.05. We also are reaffirming our adjusted operating EBITDA (earnings before interest, taxes, depreciation, and amortization) guidance of $4.20 to $4.25 billion and free cash flow guidance of $1.95 to $2.05 billion.”

Revenue growth:

• In the second quarter, revenue growth was driven by strong yield and volume growth in the company’s collection and disposal business, which contributed $135 million of incremental revenue. This was partially offset by a decline in revenue from the company’s recycling line of business, which fell by $85 million on a year-over-year basis in the second quarter of 2018.
• Core price, which consists of price increases net of rollbacks and fees, excluding the company’s fuel surcharge, was 5.3 percent, compared to 4.7 percent in the second quarter of 2017.
• Internal revenue growth from yield for collection and disposal operations was 2.3 percent for the second quarter of 2018 versus 1.9 percent in the second quarter of 2017.
• Traditional solid waste internal revenue growth from volume was 2.3 percent in the second quarter of 2018. Total company internal revenue growth from volume, which includes its recycling and other ancillary businesses, was 1.8 percent in the second quarter.

Recycling:

• Average recycling commodity prices at the company’s facilities were approximately 43 percent lower in the second quarter of 2018 compared to the prior year period. Results for the company’s recycling line of business declined by 7 cents per diluted share when compared to the second quarter of 2017. The full-year impact from recycling is now expected to be a negative 17 cents to 20 cents per diluted share.

  Cost management and profitability:

• As a percentage of revenue, total company operating expenses were 61.9 percent in the second quarter of 2018 compared to 62.3 percent in the second quarter of 2017.
• As a percentage of revenue, selling, general and administrative (SG&A) expenses were 9.8 percent in the second quarter of 2018 compared to 9.6 percent in the second quarter of 2017. Current quarter SG&A costs include $9 million of expense related to litigation accruals, which increased SG&A as a percentage of revenue by 30 basis points and decreased earnings by 2 cents per diluted share.
• Operating EBITDA was $1.10 billion for the second quarter. Adjusted operating EBITDA was $1.06 billion for the second quarter of 2018, an increase of $32 million, or 3.1 percent, from the second quarter of 2017.
• Operating EBITDA in the company’s traditional solid waste business increased 6.9 percent.

Free cash flow and capital allocation:

• Net cash provided by operating activities was $975 million in the second quarter of 2018, an increase of $162 million, or 19.9 percent, when compared to the second quarter of 2017.
• Capital expenditures were $436 million in the second quarter of 2018, a $137 million increase from the second quarter of 2017, because of acceleration and disciplined execution of the company’s fleet strategy and investment in the company’s landfills.
• Free cash flow was $621 million in the second quarter of 2018, an increase of $101 million, or 19.4 percent, when compared to the second quarter of 2017.
• The company paid $200 million in dividends to shareholders and spent $300 million to repurchase shares in the second quarter of 2018.

The company spent $21 million on acquisitions of traditional solid waste businesses during the second quarter of 2018. Its effective tax rate for the second quarter of 2018 was approximately 18.1 percent. Adjusting for items excluded from the company’s as-adjusted results, the tax rate was 23.2 percent. Favorable tax planning lowered taxes by $7 million in the second quarter of 2018, providing a 2 cent per diluted share benefit over 2017. The company now expects its 2018 full-year adjusted tax rate to be approximately 24 percent.

“Our solid waste business outperformed even our own high expectations,” Fish says. “This gives us confidence to raise our full-year adjusted earnings per diluted share guidance. At the halfway mark for the year, we are also well on our way to meeting or exceeding all of our other operating and financial goals for the year.”