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A Note From The Editor:
As we previewed last month, the publicly-traded solid waste companies generally report fourth quarter earnings and provide guidance for the year during February. In this month's issue of the Circular File, we review the 2011 guidance that was provided, what was a surprise and what was not.
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Pricing Guidance At, Or Below, 2010 Levels
Pricing guidance was expected to range between 1.5% and 2.5%, which on average proved to be correct, but the range turned out to be a bit wider, and guidance was generally slightly below 2010 levels. Republic Services guided to 1%-1.5%, citing continued pressure from its franchise CPI-linked contracts, which are only anticipated to see 1% pricing, maybe a little less, although the company maintains its goal of pricing 50-100 basis points above CPI in its open competitive markets. Pricing was 1.6% in 2010. Waste Connections was the outlier to the upside, anticipating pricing of around ~3%, with the aid of expected surcharges. Core pricing was forecast to be in the range of 2.7%-2.8%, in line with 2010 levels. Waste Management was right in the middle, with 2% price guidance, versus pricing of 2.3% in 2010. Although the low CPI was consistently labeled the culprit in lower pricing expectations, we suspect a more competitive pricing environment is also a factor. As discussed in more detail in the November Circular File, in the current low growth environment, several of the larger regional independents are growing more aggressively, in part through municipal contract awards and market share gains. Additionally, we believe the majors are now more concerned about holding on to current volumes, and reducing churn, in order to be in a position to benefit from any upcoming volume recovery. All that said, industry pricing discipline remains largely intact, and a far cry from the price wars that characterized previous economic downturns—particularly on the landfill side, where pricing was up between 2.0%-3.0% in the fourth quarter, and is expected to remain at least at similar levels, or above corporate averages, in 2011.
Volume Guidance Even More Muted Than Expected
Volume growth was generally anticipated to range between zero to 1%, but actual guidance fell slightly shy—generally categorized as flat to slightly positive, or zero to 0.5%, with remarkable consistency. Although landfill volume growth in the fourth quarter of 2010 was more positive, ranging from 3%-8%, it was largely driven by special waste volumes, which continued to surge in the fourth quarter, albeit at a slower growth rate than in the third quarter. Although the expectations for continued special waste activity and resulting landfill volumes were generally positive; bottom line, underlying MSW landfill trends remain
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Industry Resources
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stubbornly sluggish and disappointing, and in fact, were still negative year over year for the larger players in the fourth quarter, declining, on a rough average, in the mid-single digits. There are certainly legitimate cyclical reasons for this—besides the inherent lag in the commercial side of the business, the commercial business is also more consumer demand (consumption) driven, a piece of the economic recovery that has unquestionably trailed the industrial recovery. That said, the proliferation of waste reduction/zero waste initiatives has to be impacting on the margin, such that the secular, “normalized” rate of overall volume growth remains clouded, but certainly below the 2.3% historical average volume growth that characterized MSW volume before the most recent downturn.
Conservatism or Reality Check?
Although the price and volume guidance ranges were generally modestly below Wall Street analysts’ expectations, the reaction was fairly benign, as the guidance (for both price and volume) was considered conservative, with a stronger economy, higher inflation (thus CPI-linked pricing), higher recycled commodity prices, better landfill pricing, and a return of C&D volumes all variously cited as sources of potential upside. Although the industry certainly tries to give out guidance that it believes it can meet, and hopefully exceed, current guidance does not seem to be “sandbagging”. Only time will tell if the economy will provide stronger underpinnings to the general forecast, or the companies are providing a reality check, given the current somewhat more competitive environment and negative secular volume forces.
Margins Still Expected to Expand, but Recycled Commodity Price Expectations Differ
Just as anticipated, despite a muted top-line revenue growth outlook, margins are expected to expand by roughly 30-50 basis points, supported by pricing that in most cases is expected to exceed CPI, and in Republic’s case, likely by further cost savings that can be wrung out of the Allied Waste merger, though the bulk of the synergies are now behind it. Unsurprisingly, given the fourth quarter spike, particularly in OCC pricing, recycled commodity pricing guidance showed the most variation of the guidance parameters. As Republic Services generally models off December levels, management projected recycled commodity prices to be a tailwind and overall benefit in 2011, while Waste Connections is modeling a decline of 15%-20% in OCC pricing after the first quarter, unsure whether current levels can be sustained.
Cash Flows Boosted by Bonus Depreciation
Although underlying cash flows are expected to be basically flat to modestly up, as expected, bonus depreciation was meaningful and significantly incremental, boosting free cash flow growth into the double digits. As a result, capex budgets were generally projected to be flat to modestly up, as opposed to being down on an absolute basis, in the absence of bonus depreciation. Waste Management was the outlier here, as the company expects capex in the range of $1.35-$1.45 billion, up from $1.1 billion spent in 2010. Again, unsurprisingly, CNG-fueled trucks and single-stream recycling investments were most frequently cited as an expected use of cash for investment.
Acquisitions Now Part of Everyone’s Playbook
Given expectations for sluggish top-line growth from price and volume drivers, it is no surprise that acquisitions figure even more prominently in company sights. Even Republic Services, which generally returns excess cash to shareholders (and we note this is still the primary anticipated use of its free cash flow), signaled that it intends to be more aggressive on the acquisition front. Waste Connections will either have a normal year ($40-$60 million in acquired revenues) or a big year, contingent on whether several larger deals it is working on come to fruition. All of the above, combined with the continued acquisitiveness of several large regional independents (and some new ones entering the fray), more private equity players looking at the space, and lastly easier credit, reinforce our belief that there will be a shift to more of a seller’s market in 2011. |
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We Want to Hear From You
We would like your feedback, thoughts, suggestions, etc., as we create future issues of The Circular File. Please send questions or comments to rita.ugianskis@penton.com or lyoung74@comcast.net. Your input will be invaluable.
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