Waste Connections, Inc. (NYSE:WCN), a leading provider of non-hazardous waste collection, transfer, disposal, and recycling services, has reported its second-quarter results for 2023, showcasing strong operational execution and financial performance. The company's revenue for the quarter reached $2.248 billion, up 11.2% year-over-year, while its net income attributable to Waste Connections for the first six months of 2023 stood at $505.5 million.

The company's impressive results were driven by a combination of factors, including price-led organic solid waste growth, contributions from recent acquisitions, and increased commodity values. Waste Connections' revenue for the full year 2023 is now expected to be approximately $8.85 billion, up from the initial outlook, while adjusted EBITDA is projected to reach around $2.9 billion, representing a 32.8% adjusted EBITDA margin and a 130-basis-point improvement compared to the prior year.

Business Overview

Waste Connections is an integrated solid waste services company that provides non-hazardous waste collection, transfer, and disposal services, including by rail, along with resource recovery primarily through recycling and renewable fuels generation. The company operates in mostly exclusive and secondary markets across 46 states in the U.S. and six provinces in Canada. Waste Connections also provides non-hazardous oil and natural gas exploration and production (E&P) waste treatment, recovery, and disposal services in several basins across the U.S. and Canada, as well as intermodal services for the movement of cargo and solid waste containers in the Pacific Northwest.

The company generally seeks to avoid highly competitive, large urban markets and instead targets markets where it can attain high market share either through exclusive contracts, vertical integration, or asset positioning. In markets where waste collection services are provided under exclusive arrangements, or where waste disposal is municipally owned or funded or available at multiple municipal sources, Waste Connections believes that controlling the waste stream by providing collection services under exclusive arrangements is often more important to its growth and profitability than owning or operating landfills.

Financials

For the second quarter of 2023, Waste Connections reported revenue of $2.248 billion, up 11.2% from the same period in the prior year. This increase was driven primarily by core solid waste pricing of 7%, which ranged from over 5% in the company's mostly exclusive market Western region to over 8% in its competitive market regions. Reported solid waste volumes were down 2.8% in the quarter, an improvement of 100 basis points from the first quarter, reflecting the ongoing purposeful shedding and price-volume trade-offs.

Beyond solid waste, revenues also played out slightly better than expected in the second quarter, with recycled commodities, landfill gas, and renewable energy credits (RENs) collectively up about 40% year-over-year. Recycled commodity values were up around 20% from earlier this year, with prices for old corrugated containers (OCC) averaging about $140 per ton in the second quarter. RENs averaged slightly above $3, helping to mitigate the impacts from additional costs and delays in the commissioning and start-up of the three renewable natural gas plants previously expected to commence operations in the second quarter.

Adjusted EBITDA for the second quarter was $731.8 million, up 16.4% year-over-year and about $10 million above the high end of the company's outlook. At 32.6% of revenue, Waste Connections' adjusted EBITDA margin was 10 basis points above the outlook and up 150 basis points year-over-year, including about a 20-basis-point drag from the decline in special waste tons.

For the first six months of 2023, Waste Connections reported revenue of $4.321 billion and net income attributable to Waste Connections of $505.5 million. The company's operating cash flow for the first half of 2023 was $1.102 billion, while its free cash flow reached $727.4 million, representing 16.8% of revenue and a 15% year-over-year increase.

Segment Performance

Waste Connections manages its operations through six geographic solid waste operating segments: Western, Southern, Eastern, Central, Canada, and MidSouth. The company's six geographic solid waste operating segments comprise its reportable segments.

In the second quarter of 2023, the Western segment reported revenue of $454.0 million and EBITDA of $134.4 million, representing a 29.6% EBITDA margin. The Southern segment generated revenue of $439.3 million and EBITDA of $138.5 million, with a 31.5% EBITDA margin. The Eastern segment reported revenue of $386.1 million and EBITDA of $103.1 million, translating to a 26.7% EBITDA margin. The Central segment achieved revenue of $386.0 million and EBITDA of $138.8 million, with a 36.0% EBITDA margin. The Canada segment generated revenue of $319.2 million and EBITDA of $136.1 million, representing a 42.7% EBITDA margin. Lastly, the MidSouth segment reported revenue of $263.6 million and EBITDA of $74.7 million, with a 28.4% EBITDA margin.

Acquisitions and Growth Initiatives

Waste Connections continues to execute on its growth strategy, having completed 18 acquisitions in the first half of 2023, with over $500 million in annualized revenue. The acquisitions during the second quarter included multiple tuck-ins to existing markets, as well as the strategic acquisition of state-of-the-art recycling facilities in the Pacific Northwest, furthering the company's sustainability-related efforts and internalizing its recyclables in that market.

In addition to the deals already closed this year, Waste Connections has over $150 million in annualized revenue from solid waste acquisitions in franchise markets, spread across multiple geographies, that are under definitive agreement and expected to close later this year. The company is positioned for a record year of private company acquisition activity in 2023, with a robust pipeline of solid waste opportunities across its footprint, positioning it for over $700 million in acquired revenue by the end of the year.

Waste Connections is also making investments in technology to drive both growth and value creation. The company is a leading user of robotics and AI in its material recovery facilities (MRFs), with recent MRF rebuilds significantly reducing headcount while increasing productivity and material quality. The company is also leveraging new camera technology to measure commercial overloads and create automatic billing, as well as implementing dynamic routing technology to improve efficiency.

Outlook

For the full year 2023, Waste Connections has increased its revenue outlook to approximately $8.85 billion, up from the initial outlook, and its adjusted EBITDA outlook to approximately $2.9 billion, or a 32.8% adjusted EBITDA margin, representing a 130-basis-point improvement compared to the prior year.

For the third quarter of 2023, the company expects revenue in the range of $2.275 billion to $2.3 billion and an adjusted EBITDA margin of approximately 33.7%, up 120 basis points year-over-year. Depreciation and amortization expense for the third quarter is estimated at approximately 12.7% of revenue, including amortization of intangibles of about $44 million or $0.13 per diluted share net of taxes. Interest expense net of interest income is estimated at approximately $82 million, and the effective tax rate is estimated at about 23.5% for the third quarter.

Waste Connections' strong financial performance, strategic acquisitions, and investments in technology position the company well for continued growth and margin expansion in the coming years. The company's disciplined approach to pricing, cost management, and capital allocation has allowed it to navigate the current economic environment effectively and deliver consistent results for its shareholders.