Solid Waste Quarterly Recap—Q4/23 Our Conclusion
Our quarterly recap on the North American solid waste sector (CWST, GFL,
RSG, WCN, WM) provides an update on key internal drivers and financial
metrics of the industry. The main themes from the Q4/23 earnings season
were: 1) outsized solid waste margin expansion in the fourth quarter; 2) 2024
outlooks were provided and solid waste fundamentals remain strong (on
balance, consensus 2024E EBITDA rose 1.3% post earnings season);
3) continued ramp-up of sustainability investments; and, 4) 2024 is setting up
as another outsized year of M&A. Broadly speaking, the waste names
posted a good set of results this quarter, although we call out RSG as the
‘winner’ of this reporting season as it had the biggest positive variance
against expectations in quarterly results and 2024 outlook.
Key Points
Q4/23 Recap—Waste Names Had Another Quarter Of Good Results:
The publicly traded waste companies we track reported Q4/23 results that
were slightly above Street expectations. On average, revenue surprised to
the upside at 1% and adjusted EBITDA beat by 3%. RSG posted the biggest
EBITDA beat (7.8% above consensus) while EBITDA results from CWST
and GFL were in line. The group’s adjusted EBITDA was up 21.6% Y/Y and
down 3.3% Q/Q, on average. CWST posted the biggest EBITDA growth (up
46.2% Y/Y, reflecting acquisition activity) followed by RSG (up 18.7% Y/Y).
GFL was a laggard with adjusted EBITDA growth of 11.9%, reflecting asset
divestitures. EBITDA margins surprised to the upside (a 48 bps beat, on
average), with the group posting an adjusted EBITDA margin of 28.2% and
223 bps of annual margin expansion. WCN was a margin leader at 32.2%
and CWST lagged the group at 22.9% in the quarter. RSG saw the biggest
margin beat (143 bps ahead of expectations) and the largest margin
expansion (up 255 bps Y/Y). The group posted full-year FCF that was
generally in line with expectations (on average 1% above consensus
expectations). Leverage ratios ticked down Y/Y (0.15 points) and down Q/Q
(0.10 points); the group average leverage ratio exited the year at 3.1x.
Q4/23 Solid Waste Pricing Remained Resilient; Guiding To Healthy
Pricing In 2024: The solid waste companies we track saw another quarter of
resilient pricing. On average, pricing + fuel surcharges were up 6.4% Y/Y.
While this is down 390 bps Y/Y, we would note that the drag came from
lower fuel surcharges (down 314 bps Y/Y, on average). In Q3/23, pricing +
fuel surcharges were up 5.6% Y/Y. The waste names continue to see a
healthy pricing spread over costs as inflationary pressures continue to ease.
WCN led the pack with pricing of 8.7% Y/Y followed by GFL at 7.9% Y/Y.
The waste companies are guiding to another year of healthy pricing in 2024.
GFL expects 2024 core pricing of 6.0%-6.5%. WM expects core pricing of
6%-6.5% with a collection and disposal yield approaching 5.0%. WCN
expects pricing of 6.0%-7.0%. RSG expects average yield growth in the
range of 5.5%-6.0%, and CWST is guiding to solid waste pricing growth of
5.0%-6.0%. The sector continues to benefit from pricing-led organic growth.
Volumes Continued To Decline On Purposeful Shedding; 2024 Volumes Flattish To
Down Y/Y: On average, volumes for waste companies we track were down 1.16% Y/Y in the
quarter, down 86 bps from a year ago, when volumes were up 0.30% Y/Y. Volumes were up
16 bps Q/Q. The waste names are guiding to 2024 volumes that are flattish or down Y/Y.
GFL is guiding to volumes that are down 1%-1.25% Y/Y, WM for volumes to approach up 1%
Y/Y, WCN for volumes to be down 1.5% Y/Y, RSG for volumes to be flat to up 0.5% Y/Y, and
CWST for volumes to be flat to down 1% Y/Y. This downward trend in volumes reflects the
purposeful shedding of low-margin businesses by the waste companies and a low-growth
economic outlook for the Canadian/U.S. economies.
Outsized Margin Expansion In The Quarter; 2024 Looks Like Another Year Of Margin
Growth: The waste names we track recorded another quarter of outsized margin expansion
driven by a widening spread between solid waste pricing and inflationary pressures. For
reference, RSG noted that open pricing was 10.6% Y/Y in the quarter versus U.S. CPI, which
was up 3.2% Y/Y in comparison. Recall that the waste names expected a step-function
change in margin in H2/23 as they worked through pricing increases in the system, paired
with easing cost pressures. We saw the business model at work in Q4/23 with average
margin expansion of 223 bps Y/Y. The group posted an average 82 bps of margin expansion
in 2023, as seen in the right-hand bar chart in Exhibit 1.
2024 looks set to be another year of margin expansion for the group. GFL and WCN are
guiding to 100 bps+ of margin expansion in 2024 while the rest of the names are guiding to
30 bps-40 bps. We believe this guidance reflects GFL’s ability to work through its self-help
levers and WCN benefitting from the acquisition of the Tervita assets from Secure, which is
~30 bps margin-accretive though this still points to the underlying base business margin
expansion of ~60+ bps. WM’s guidance infers 30 bps of margin expansion at the mid-point.
WCN is guiding to margin expansion of 120 bps. RSG’s adjusted EBITDA margin range
infers expansion of 30 bps-40 bps. Lastly, CWST’s margin guidance infers expansion of
40 bps Y/Y. Headwinds to WM’s margins related to fuel surcharges and to RSG’s margins
stemmed from the mix of business and the rollover impact of acquisitions. Net-net, underlying
solid waste margins continue to reflect outsized expansion. For reference, we consider the
normal range of margin expansion for the waste names would be 20 bps-40 bps.