Waste Connections: The backbone of an infrastructure economy

Founded in 1997, Waste Connections (WCN) is the 3rd largest solid waste service company in North America. It provides waste collection, transfer, recycling, and disposal services. Additionally, WCN provides oilfield waste treatment (recovery and disposal services) as well as intermodal services for the rail haul movement of cargo and solid waste containers. The firm currently operates in 42 states in the US and 6 provinces in Canada.

Remember: the waste industry is more than just hard-working gentlemen and women collecting trash from your home or business. It is an extensive ecosystem which is the backbone underpinning a growing economy. Waste Connections operations stand to materially benefit from the industrial and residential waste offshoot in light of Biden’s infrastructure plan, which targets growth in transportation and logistics in and to secondary markets (in which WCN dominates):

“The American Jobs Plan will build new rail corridors and transit lines, easing congestion, cutting pollution, slashing commute times, and opening up investment in communities that can be connected to the cities, and cities to the outskirts, where a lot of jobs are these days.  It’ll reduce the bottlenecks of commerce at our ports and our airports.” – Biden speech on American Jobs Plan, March 31 2021

Furthermore, the plan aims for a complete overhaul of critical infrastructure including the replacement of all lead water piping. Biden aims to further jumpstart American manufacturing output by increasing factories in primary and secondary markets. The industrial and residential waste byproduct of Biden’s plan will materially increase collection and processing volumes at municipal an non-municipal solid waste landfills, of which WCN owns and operates 74 in secondary regions.

Before diving into company metrics, let’s dissect the global and North American waste industry in general.

Waste management services are strongly correlated with population growth – as the world population is projected to grow steadily over the next 30 years, so will the demand for waste management. Waste generation is expected to increase by 70% to 3.4B tonnes in 2050. The average waste generation per person/day is 0.74 kg. Westernized nations account for 34% or 683 million tonnes of the world’s waste. Per capita waste generation in first-world countries is projected to increase by 19% by 2050. Waste generation in developing nations is expected to increase by 40%+ by 2050.

High-income countries generate more dry waste such as plastic, paper, and cardboard when compared to food and green waste. Middle and low-income countries generate more food and green waste with organic waste increasing. The outliers are Europe, Central Asia and North America that generate higher portions of dry waste. Many countries are moving away from basic waste management solutions such as open dumping to more innovative solutions that will assist with long-term sustainability. Globally, landfill waste treatments account for 37% of waste disposed. Developed countries depend on controlled landfills while developing countries rely on more rudimentary solutions such as open-dumping.

The waste management industry is divided into two main sectors of municipal waste and industrial waste. The global waste management services industry is expected to grow from $285 B to $435B in 2023 at a CAGR of 6.2%. Developing nations are behind much of the demand for waste management. A rising trend in environmental regulations and the increases in the removal of non-hazardous waste materials is also a driver of growth. Other growth factors include the increased adoption of recycling and government programs aiming to reduce greenhouse gas emissions.

In 2020, M&A activity has heated up in the waste management space despite Covid-19. Operating as essential services has allowed these companies to retain operational capacity in the residential and medical waste spaces without significant disruption to operating cash flows. M&A increased 48% in 2020 with 35% of the makeup in environmental services (waste technologies and equipment).

Now, a look at Waste Connections

WCN focuses on secondary and rural markets as opposed to urban cities, and is able to achieve industry leading margins due to lack of competition resulting in strong pricing power and low customer churn. Over 40% of solid waste revenues are generated under exclusive arrangements (Residential: 7 years or longer for rural; municipal shorter in nature and have competitive bidding process — Commercial, industrial, and E&P service agreements typically range from 1-5 years). WCN vertically integrates its waste collection business with owning and operating landfills and transfer stations in key markets which further serves as a strategic advantage, capping competition.

The graphs and charts speak for themselves: incredible pricing power drives single digit annual increases to recurring revenues; 13.1% CAGR since 2014; and industry leading free cash flow and earnings margins vs. peers.

Geographic and revenue distributions are also diversified, adding a layer of safety in an already resilient industry.

WCN manages it’s operations on a decentralized basis, meaning that each site manager has a high degree of authority which not only aids in meeting customer needs, but also aids in identifying acquisition targets. WCN’s decentralized operating structure can be attractive for sellers that want to continue to lead these businesses after the transaction. A long track record of effective acquisition execution (accounting for nearly 75% of the company’s revenue growth over the past decade) and strong corporate culture increases the probability of continued success.

Forward looking estimated highlight the positive compounding trajectory of WCN’s metrics.

The discussion wouldn’t be complete without mentioning the shift to a green economy. Waste Connections has already implemented some measures to achieve their clean tech and green targets. Solid waste landfills, over time, generate methane – a greenhouse gas which can be converted into a valuable source of clean energy. WCN deploys gas recovery systems to collect methane, which is then used to:

  • generate electricity for local households
  • fuel local industrial plants
  • power alternative fueled vehicles
  • qualify for carbon emission credits

In 2015, they opened a renewable natural gas facility, the largest of its kind in Canada and one of the largest in North America. The facility, located in Terrebonne, Quebec, near Montreal, is converting landfill gas to natural gas which is then delivered to the TransCanada pipeline network, via an injection point adjacent to the landfill site.

You can read more about their innovative recycling and sustainability projects in their 2020 Sustainability Report.

Finally, WCN has significantly outperformed its peers and the broader market.

In sum, WCN is a high-quality, defensive name providing an essential service in an increasingly competitive environment. Given its industry-leading growth profile, robust (and sustainable) FCF generation, and dominance of secondary markets, you should consider the company a core holding and a safe play against volatility. It continues to innovate in the recycling and green energy conversion space, both catalysts to future growth and investment. As economies continue to open and the world resumes full-tilt, expect volumes and earnings growth to catapult.

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