2018 Earnings

Q4 Earnings

Advanced Disposal Services achieved a "solid" 2018, according to the company's 2018 earnings report, with adjusted free cash flow improving by 10% to $145.6 million. While volume fell slightly in Q4, service increases continued to outpace decreases, with "positive momentum" on the residential line of business.

"We did all this in an environment that saw commodity prices fall 42% on average in 2018 and diesel fuel cost per gallon increased 21%, which had a net drag on a stand-alone basis of $14 million to adjusted EBITDA and adjusted free cash flow," CEO Richard Burke said during the company's fourth quarter earnings call. "In short, our core business remains positive, anchored by price-led growth, a favorable acquisition market and strong cash flow generation."

M&A Uptick

• Advanced completed 12 acquisitions worth a total of $30 million in 2018, including a $15 million purchase of Alabama Waste Disposal Solutions from EC Waste in December, as reported by Waste Dive. The deal comes with a MSW landfill (within export distance of the Atlanta market) that has an estimated 50 years of remaining airspace.
• M&A activity is expected to ramp up in the coming year — according to Burke, Advanced plans to spend $50-$75 million (versus its typical $30-$50 million) on deals that prioritize "profitable existing markets where we can internalize waste and improve density, new vertically integrated markets where we can expand our operating footprint and disposal-neutral markets."
• This boost in potential tuck-in acquisitions, said Burke, isn't indicative of a change in strategic direction. "It's really about timing. The deal pipeline is very full for us right now, so we feel comfortable raising that guidance saying that we're going to do more. But strategically it's no different than we did last year. It's just more deals on the board and the deals are a little bit bigger than last year."

At the end of the day, maintained Burke, the company will continue to prioritize both M&A and leverage. However, he also struck a slightly different tone than some other companies , which have characterized this current period as a prime time for acquisitions due to the corporate tax cut and other regional pressures.

"If we have deals that are accretive that help us get there, then that's the best use of our free cash flow — so we'll look at it. I don't feel the need to race out and do hundreds of millions of dollars of deals," Burke said. "Deals will be there. This industry — I've been at it 31 years, we've been consolidating 31 years. There'll be deals."

Capital Investments

• Spending on capital expenditures totaled $188.6 million in 2018, or 12.1% of total revenue. This included $140.5 million for replacement maintenance, $17.2 million on acquisition expenses and $30.9 million for infrastructure.
• More than half of infrastructure spending went toward landfill development — $11.3 million for gas projections and $5.5 million for on-site leachate treatment — due to the company's relatively young network of 41 sites. Burke expects to continue raising prices to cover these costs.
• "We think these are good investments long-term for the business," said CFO Steve Carn, "And because of where we are in the lifecycle of developing our landfills, that's where we were an outlier a little bit compared to our peers."
• Advanced expects to remain in the 11%-12% range through at least 2021 and projects a spend of $191-201 million for 2019. This includes $21-26 million for closure and post-closure expenses.

Looking Ahead

• Advanced Disposal's primary operational focus in 2019 will be on recruitment and retention of drivers and mechanics. "It is at the heart of every key metric we have, whether it be safety, service, productivity, customer satisfaction or bottom line financial results," said Burke. "We recognize we will need to continue to price above inflation to be able to invest in programs that enhance our recruiting and retention efforts while at the same time improving margins."
• The company expects recycling revenues to stay at their current low levels, even with mid-term pricing concessions from nearly 20% of municipal customers. In fact, Burke expects further increases as more contracts come up for renewal. "...We'll be back in with [customers] asking for some help around recycling. So as they get closer to their expiration date, they get a lot more reasonable at the negotiating table."
• For 2019, Advanced is projecting revenue of $1.60-1.63 billion, with pricing in the 3-3.6% range and adjusted EBITDA around $440-452 million. Free cash flow is expected to be $140-152 million, with much of it directed toward new acquisitions or debt repayment.