Q2 Earnings

Advanced Disposal Services reaffirmed its full-year guidance during the second quarter earnings release, reporting success in pushing open market pricing on average of 4% or more as well as strong yields for both commercial and roll-off business.

CEO Richard Burke repeatedly described his 2018 outlook as "bullish" during the earnings call, despite the expected recycling and fuel headwinds, and outlined ongoing plans to improve profitability.

Tech Talk:

• Burke framed technology plans on multiple fronts in his opening remarks, saying, "We're piloting next generation safety technology to help reduce in-cab distractions, while at the same time increasing service verification for our customers."
• He previewed a new digital service platform, coming "late this year or early next year," that will allow 24-hour access for service requests and help compete with smaller regional companies. "We think this can be a real disrupter in those markets if these customers have access to us 24/7," said Burke.
• Advanced is also expanding its share of automated residential collection vehicles from 58% of the fleet to "the low 60s" over the next two years. This is expected to expand the pool of candidates, lead to a 10% increase in productivity and lower comp claims.

While the industry has gained a reputation for being slightly behind the curve when it comes to technology adoption, more and more companies are now pursuing projects for both customers and employees.

From a customer standpoint, Burke said this investment is worthwhile because in the secondary markets that comprise about 65% of the company's revenue "our competition is more the mom-and-pops." Unless those smaller service providers have already teamed up with a newer technology company, they likely won't be able to offer a more modern customer experience.

Burke has also spoken about the need to balance in-cab demands in terms of driver safety, though has said technology is a net positive for employees overall when factoring in advances such as lane change alerts or automated collection. With a turnover rate that has previously been reported in the 20% range, Advanced is looking for any way to get good talent and keep it — just like everyone else in the industry right now.

Headwind Headaches:

On the whole, business is good for Advanced and analysts had fewer questions than any of the quarterly calls yet. Though like others, the company is also experiencing a few expensive trends and reported a $5 million EBITDA headwind due to recycling and fuel costs.

• Recyclable sales accounted for $4.4 million of revenue in Q2 — down by more than 50% YoY — and Burke expects that category will be down by about $14 million for the year. He reiterated ongoing comments about needing to change the business model and said even though this now only accounts for 1.1% of total revenue, "it still has a fairly significant impact on our bottom line."
• Fuel prices are up more than expected and, aside from working surcharges into open market contracts, the company said it can't do much to mitigate the trend near-term. Burke said operations teams have been "very aggressive about constantly rerouting" and "working diligently to take miles out of the equation." Advanced also expects to have 20% of its fleet running on CNG by the end of the year.
• While these challenges do come at a cost, Burke also put them in context of what he views as a strong economy, saying that "...In the whole scheme of things of managing our company and managing our businesses, I'll take this positive macroeconomic backdrop versus some of the short term cost issues that we’re faced with."

Looking Ahead:

• Advanced reported a 2.5% price yield for the first six months of 2018, as compared to 1.6% for its residential business. The company expects that could change as 62% of its residential contracts are up for renewal in the back half of the year.
• The company reported $86.5 million in capital expenditures to date, higher than in 2017, but that is expected to slow down in the remaining quarters. Advanced is currently working on 19 landfill projects, and the biggest ones are in colder states where the construction season is shorter so they're all happening now.
• ​Conversely, the company's M&A spending has been low at $6 million for a handful of collection tuck-ins. Annual spending is currently expected to be on the low end of expectations too at around $30 million. When asked whether future expansions could some day include Canada, Burke didn't rule it out. "I mean, we can get anywhere. So, it's not about geography, it's really about fitting the market strategy that we've been executing on now for a few years."