In this edition of Activity Reportwe briefly address the fourth quarter 2021 results released by all publicly traded solid waste companies in February and summarize the guidance for 2022, as well as discuss significant new actions taken by several of the companies and detailed at the follow-up conference calls.

The fourth quarter of 2021 was mixed

WM (WM) and Republic Services (RSG) reported EBITDA results that were broadly in line with a touch light. GFL Environmental (GFL), Waste Connections (WCN) and Casella Waste (CWST) announced EBITDA results slightly above expectations. All companies reported strong organic growth above expectations, especially prices, which increased sequentially for all players. However, margins were below expectations, largely across the board. Cost inflation was certainly a factor, but the individual components of the business, most often dilution from recent acquisitions and higher incentive compensation, were usually additional factors.

2022 Outlook—Price Expected to Accelerate; Volume largely without surprise

In light of lingering inflationary pressures, almost all companies forecast prices to rise between 50 and 150 basis points from 2021 levels, with WCN’s forecast of 6.5+% price at the high end and RSG yield projections of 3.4% at the lower end. , flat with 2021 levels, and frankly probably conservative.

Volume forecasts were generally in the 1% to 2% range, as expected, but remain well above longer-term volume growth expectations for the industry of around 1%. WM forecast 2%, which was the high end, while WCN came in below, roughly flat at 50bps, but management noted an impact of eighty bps from the loss of several large municipal contracts inherited from Progressive Waste, which were low return. In general, corporate management noted an improving and supportive economy, some reopening juice, and generally strong special waste pipelines.

2022 Outlook – Commodity-Based Companies Look Neutral

After proving to be substantially positive tailwinds in 2021, recycled raw materials and renewable energy (RIN) prices were expected to be largely neutral in 2022 and were almost an afterthought on conference calls, in light of the new developments which will be discussed later. The projected prices for baskets of recycled products and RINs are expected to be stable or slightly higher. Expectations for energy waste were also moderate, which was considered prudent given current oil prices.

2022 projections in line, with moderate margin increases, although price should cover inflation

Despite very strong and above-expected organic growth guidance, overall EBITDA and free cash flow (FCF) projections for 2022 were rated as in line, or in WCN’s case, “strong” was l most common adjective. Generally, the company’s margin expectations were mildly or mildly disappointing, but again, analyzing the company’s individual call and put options, the underlying operating margin expectations solid waste were generally characterized as up 20 to 40 basis points, although GFL expects an overall EBITDA recovery margin of more than 50 basis points.

One of the main concerns of the investment community is whether the industry can accommodate cost inflation, and based on feedback from corporate management, so far the answer appears to be yes. with just a few caveats. WCN noted that its price forecast of 6.5% would exceed underlying cost inflation which it has set at 6%, with the potential to push prices towards 7%, if inflation continues to rise. . GFL also noted that the lower end of its forecast price increase of 4.5% to 5.0% covered underlying cost inflation of around 4%, underpinning its expectation of a higher increase. substantial margin of more than 50 basis points. Similarly, RSG saw prices above inflation net of its costs. Comments from WM and CWST were slightly more nuanced, noting that price growth would cover underlying cost inflation, but operational efficiency improvements and other technology improvements would provide the upside or increase. margins. CWST noted that 70% of its business is not tied to longer-term contracts and therefore potentially flexible to be priced higher if necessary.

Capex 2022 is high on green investments

Very consistently for WCN, GFL and RSG, incremental capital expenditures (capex) above previous normalized levels will be spent on Materials Recovery Facilities (MRFs) and Renewable Natural Gas (RNGs) facilities in 2022, with typically 1-2 MRF projects and 2-4 RNG installations planned for 2022. WCN noted an additional planned investment of $100 million, and GFL also plans additional growth capital. All of these actors will generally continue to work with 3^rd partners or form joint ventures for their RNG plants.

But what to do with the money? Industry players begin to diverge

In an industry generally characterized as fairly homogeneous with similar playbooks, several major new moves have been announced for the use of the prodigious cash flow that this industry reliably generates, and industry players are now moving in decidedly different. Perhaps most surprisingly to the investment community, WM has announced that it is focusing on green investments – it intends to spend an additional $550 million on recycling automation and possibly new MRF investments and RNG plants in 2022 alone, with an additional $1 billion to be spent from 2023 to 2025. The company has demonstrated short payback periods and very high returns (even with very conservative RINs and pricing assumptions natural gas) that management believed were superior to returns from solid waste acquisitions. In 2026, the company expects an additional annual EBITDA of $580 million, which will be passed on to FCF as growth. WM also noted that it is ideally positioned in the industry to take full ownership and all of the potential benefits of its RNG projects, given that it has the largest CNG fleet in North America and the amount of gas landfill held in its landfill network.

Although RSG has gradually grown its environmental services business over the past few years, it made a major decision just before publishing its report, announcing its intention to acquire US Ecology (ECOL), a leading environmental services company. vertically integrated hazardous waste. RSG sees an opportunity to consolidate the hazardous waste industry, similar to the path of the solid waste industry, but also noted that this decision was also customer-driven – its customers seek and demand a one-stop-shop to handle all their environmental needs. RSG is expected to pay $1.5 billion and assume net debt of $700 million for a total enterprise value of $2.2 billion, which equates to approximately 12 times ECOL’s projected EBITDA.

The decisions made by WM and RSG have raised questions and concerns about diminishing solid waste consolidation opportunities, although RSG noted that solid waste acquisitions will continue to be part of its capital allocation strategy. However, the three smaller waste players quickly disillusioned with this notion. GFL has announced its intention to divest its infrastructure business, although it will retain a stake in order to participate in what it sees as potentially significant benefits to those businesses over time. Part of the rationale for this decision (apart from simplifying the business) is to focus its cash flow on growing its solid waste business. Likewise, WCN and CWST are sticking to their traditional knitting, targeting new solid waste acquisitions.

M&A—Another robust year expected

Regardless of individual company decisions, overall mergers and acquisitions (M&A) activity in the industry is expected to have another exceptional and robust year. Technological demands, labor shortages and pandemic fatigue have all been cited as reasons why vendors still seem to be flocking to the table. WCN thinks it could spend an additional $1 billion on acquisitions this year and estimates the available addressable market is still between $3.5 billion and $4 billion. CWST established a new three-year plan and increased its acquisition target to more than $30 million in earned revenue per year, from a previous range of $20 million to $40 million. GFL has noted the possibility of a larger deal in the near term, and management sees the likelihood of another 25-30 side deals this year, with potential revenue of $250-300 million. RSG also talked about rolling out an additional $500 million this year, excluding the ECOL deal. All acquisition pipelines were rated as robust.