Q4 2018

Q4 2018

@MarkFord
em 23/02/2019 10:25
Worthing F. Jackman -- President

Okay. Thank you, operator, and good morning. I'd like to welcome everyone to this conference call to discuss our fourth quarter 2018 results and provide a detailed outlook for both the first quarter and full year 2019.

I'm joined this morning by Mary Anne Whitney, our CFO and several other members of our senior management team. Unfortunately, Ron Mittelstaedt, our CEO and Chairman of the Board is unable to participate on this morning's call due to an immediate family member's medical matter. Ron appreciates everyone's concerns and sends his best.

As noted in our earnings release, 2018 finished on a high note, as financial results for the fourth quarter exceeded expectations on better-than-expected solid waste organic growth, E&P waste activity and acquisition contribution. We are also extremely pleased with our results for the full year as adjusted EBITDA as a percentage of revenue expanded 30 basis points, and adjusted free cash flow increased 15.2%. Increases in both solid waste pricing growth, which was up 130 basis points year-over-year to 4.5% and E&P waste activity enabled us to overcome the precipitous decline in recycled commodity values and certain cost pressures during the year. The strength of these results continues to reflect the benefits of our purposeful culture, differentiated strategy and disciplined execution.

2018 was also noteworthy for the continuing elevated pace of acquisition activity. Our acquisition of American Disposal in the fourth quarter brought total annualized acquired revenue to more than $360 million for the year, with rollover revenue contribution of approximately $200 million in 2019. Along with continued strong pricing growth, this already positions us for high-single digit revenue growth and another 30 basis points adjusted EBITDA margin expansion in 2019, with any growth in solid waste volumes, E&P waste activity or additional acquisitions providing further upside.

We have increased adjusted free cash flow per share at a compounded rate of more than 15% per year over the past several years, and expect continuing double-digit adjusted free cash flow per share growth in the upcoming year. Our strong financial profile continues to afford the flexibility to fund outsized acquisition activity, an increasing cash dividend and opportunistic share repurchases.

Before we get into much more detail, let me turn the call over to Mary Anne for our forward-looking disclaimer and other housekeeping items.

Mary Anne Whitney -- Senior Vice President and Chief Financial Officer

Thank you, Worthing, and good morning. The discussion during today's call includes forward-looking statements made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward-looking information within the meaning of applicable Canadian securities laws.

Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement on Page 3 of our February 13 earnings release and in greater detail on Waste Connections' filings with the U.S. Securities and Exchange Commission and the Securities Commissions or similar regulatory authorities in Canada.

You should not place undue reliance on forward-looking statements and information, as there may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements and information in order to reflect the events or circumstances that may change after today's date.

On the call, we will discuss non-GAAP measures, such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently.

I'll now turn the call back over to Worthing.

Worthing F. Jackman -- President

Thank you, Mary Anne. In the fourth quarter, solid waste price plus volume growth was 4.9%, exceeding the high end of our outlook for the period by almost 100 basis points and volumes turned positive for the first time in 2018. In the fourth quarter, solid waste pricing growth was our highest reported price in a decade at 4.8%, up 30 basis points sequentially and up 120 basis points year-over-year.

As noted in prior quarters, our pricing strength reflects the differentiation of our market model and intense focus on execution as we implemented and more importantly, retained additional price increases during 2018 to address recycling headwinds and certain cost pressures, including third-party logistics and fuel. Once again in Q4, our pricing range from approximately 3% in our more exclusive markets in the Western region to an average of about 5.5% in our more competitive regions.

Reported volume growth in Q4 turned positive for the first time since we began intentional shedding of lower quality revenue and unsafe to service accounts acquired in the Progressive Waste transaction. Volumes were up 10 basis points and well above the high end of our expected range for the period. We continue to believe, yet prudent to be cautious on volume growth in this environment, with anything positive being upside. Looking across our regions, volumes were driven most notably by our Western region, which was up over 3% in the quarter, while Canada and our Southern region though showing some improvement sequentially were both down year-over-year between 0.5% and 1.5%, as we continue to anniversary the mostly completed intentional shedding in those regions.

Looking at 2019. We expect pricing growth to continue to average about 4.5% likely starting higher than that on a reported basis early in the year and we expect reported volumes to be down about 50 basis points due to the remaining purposeful shedding of poor quality revenue with underlying volumes about flat year-over-year. We believe that our 2018 results are indicative of the effectiveness of a price-led organic growth strategy. And as noted earlier, we will continue to view any increases in underlying volumes as upside.

Looking at year-over-year results in the fourth quarter by line of business on a same-store basis, commercial collection revenue increased approximately 6.5%, mostly due to price increases, roll-off revenue increased approximately 3.5% on higher revenue per pull. In the U.S. pulls per day decreased about 1% and revenue per pull was up 3%. In Canada, pulls per day decreased about 1.5% and revenue per pull increased about 7.5%.

Solid waste landfill tonnage increased about 1% on increases in MSW tons, up about 3% led by increases in the Northeast and California and C&D tons, up about 4% on increases across several markets led by the Northeast and Texas. Special waste tons were down about 4% in Q4, a smaller year-over-year decrease than in prior quarters as tough comps began to ease a bit.

Recycling revenue, excluding acquisitions, was about $20 million in the fourth quarter, down $8 million or almost 30%. The smallest year-over-year decrease in 2018 due to easier comparisons on prices for OCC or old corrugated containers and a slight increase sequentially. OCC prices in Q4 averaged about $93 per ton, which was down 23% from the year-ago period, and up 6% sequentially from Q3. Mixed paper revenue, ex-acquisitions declined approximately 45% year-over-year as values remain between zero and $5 per ton.

We believe that the flow-through from changes in recycling revenue was similar to prior quarters, with detrimental margins of approximately 95% due to the combination of lower fiber values and higher recycling processing costs, resulting in an impact of about $7.5 million in EBITDA and about $0.02 per share of EPS in Q4. OCC prices currently average about $85 per ton, reflecting some recent weakness, which is down about 10% from Q4 and down about 15% from last year's average of $102 in the first quarter. We expect recycled commodity values to remain around these levels for the full year.

Looking at E&P waste activity, we reported $64 million of E&P waste revenue in the fourth quarter, up 20% year-over-year, and down slightly sequentially from Q3, reflecting a lower seasonal decline than typically seen. We have not experienced a notable impact in activity levels resulting from weakening crude prices in late 2018. That said, we remain cautious in our outlook for E&P waste activity and will let any increases in activity or ramping of newly constructed locations be upside in the year.

Looking at acquisition activity. As noted earlier, we closed the previously announced acquisition of American Disposal in December, which along with other acquisitions completed earlier in 2018, provides rollover acquisition contribution of about $200 million in 2019. Coming off of two years of outsized activity during which we essentially completed four years worth of acquisitions, we continue to believe that the factors that were viewed favorably by sellers are still relevant. That is sellers continue to note the strength of their underlying businesses, the clarity around taxes as a result of tax reform and higher reinvestment rates as drivers for transactions.

Dialog remains active and the pipeline continues to be robust. In short, we believe 2019 could be another year for outsized acquisition activity. In 2018, we deployed over $1 billion in acquisitions and returned over $210 million to shareholders, including opportunistically buying back stock during December sell-off. And we remain well positioned for potential continued outsized capital deployment in the upcoming year.

Now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the fourth quarter and provide a detailed outlook for Q1 and full year 2019. I will then wrap up before heading into Q&A.
Waste Connections Inc (WCN) Q4 2018 Earnings Conference Call Transcript -- The Motley Fool
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