Q3 2019 Earnings Call
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Welcome to the waste connections third quarter 2019 earnings conference call. During the presentation, all participants will be to listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one that followed by the four on your telephone if at any time during the conference in each region.
Operator, Please press star zero.
As a reminder, this conference is being recorded Tuesday October 29 2019.
Now I'll turn it over to Worthing Jackman President and CEO . Please go ahead.
Okay. Thank you operator, and good morning, everyone.
I'd like to Wattenberg, one of this conference call to discuss our third quarter 2019 results and provided detailed outlook for the fourth quarter as well as some early thoughts on 2020.
I'm joined this morning, the morning of game six go Astros.
At Merian Whitney our CFO and several other members of our senior management team.
As noted earnings release strong organic growth and solid waste had a sequential increase in <unk> waste activity enabled us to deliver better than expected results in the period.
Continued price lift solid waste growth and a slight pull forward of special waste activity drove underlying margin expansion in solid waste collection transferring disposal of an estimated 60 basis points in the quarter.
More importantly, adjusted free cash flow of 763 million year to date.
18.9% of revenue went up almost 13% year over year puts us firmly on track to meet or exceed the adjusted free cash flow outlook for the full year that we communicated in July .
[noise] relatively consistent solid waste organic growth plus the contribution from acquisitions close yesterday already sets us up for overall revenue growth in the mid to high single digits and underlying margin expansion and solid waste collection transfer and disposal in the upcoming here.
Additional expect to continue the above average acquisition activity and any potential improvement commodity related activities, providing further growth.
Well go to much more detail, let me turn the call over to Marianne for our forward looking disclaimer and other housekeeping [noise].
Thank you would think and good morning.
A discussion during today's call include forward looking statements made pursuant to the safe Harbor provisions of the U.S. Private Securities Litigation Reform Act 1995.
Putting forward looking information within the meaning of applicable applicable Canadian securities lot [noise].
Actual results could differ materially from those made in such forward looking statements due to various risks and uncertainties.
Factors that could cause actual results to differ or discussed both in the cautionary statement on page three of our October 28 earnings release [noise].
And in greater detail in waste connections filings with the U.S. Securities and Exchange Commission and the Securities Commission or similar regulatory authorities in Canada.
You should not place undue reliance on forward looking statements and information as there maybe additional risks, which we're not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business.
We make no commitment to revise or update any forward looking statements and information in order to reflect reflect events or circumstances that may change after today's date.
On the call, we'll discuss non-GAAP measures such as adjusted EBITDA adjusted net income attributable to waste connections on both the dollar basis and per diluted share and adjusted free cash flow.
Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measure management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operation.
Their companies May calculate these non-GAAP measures differently I.
Well now turn the call back over to working.
Thank you Marianne.
In the third quarter solid waste price plus volume growth was 6.1%.
Total price of 5.2% slightly exceeded our outlook for the quarter with the strength with the strength once again, reflecting additional price increases implemented in 2018 at 2019 to address accelerating cost pressures and provide through collection pricing.
Further recovery of the much discuss seismic change in the recycling market.
Pricing in Q3 range from about 3% to 5% in our more exclusive markets western region to over 5% and I'm more competitive market regions.
We reported our strongest quarterly volume results in over two years in Q3 with volume growth better than expected positive 90 basis points due primarily to an outsize quarter special waste activity.
Well the Atlanta collectivity had been expected to incur in Q4, what comparisons are tougher.
For doesn't change our outlook with respect to full year volumes.
Looking at year over year results by line of business on a same store basis in the third quarter.
Commercial collection revenue increased approximately 6% with the majority related to price increase some price increases a portion of which were due to structural changes in recycling market.
Looking at scheduled commercial business, which includes small and large container activity net new business has increased in each quarter year to date.
Addition service increases if outstrip service decreases in each quarter this year.
Roll off revenue increased approximately 7%.
In the U.S. pulls per day increased 2.3% revenue purple was up 2.9%.
Got it pulls per day increased by about 4%.
Avenue Purple increased about 2.5%.
Solid waste landfill tonnage increased about 5% on increases in both MSW up about 6%.
And special waste up 10%, well CND tons were down 4% year over year.
MSW tons were up in most regions led by markets and our western and southern regions special waste volumes were up across all of our saw the waste regions in the U.S. with notable notable activity in several states, including California, Florida, Illinois, Missouri in Minnesota.
C and D tons by way of contrast.
Were down in every region, except our southern region due in some markets to tough year over year comparisons.
Recycling revenue, excluding acquisitions was almost $13 million, the third quarter down nine and half million dollars year over year, or approximately 43% and down about 15% sequentially from Q2.
Old corrugated containers or LCC prices in Q3 averaged about $43 per tonne slightly lower than expected down to 51% from a year ago period.
We believe that the flow through from changes in recycling revenue. The third quarter was slightly worse than in Q2, with decremental margins or possibly 150% due to the combination of lower fiber values and higher third party processing costs, which increased sequentially in the quarter, resulting in the impact of approximately $14 million anyway.
ER or 80 basis points to reported margins and four cents per share of EPS for Q3.
Oh Cc and mix paper prices appear to have stabilized for the time being which we had expected given increased demand from certain domestic mills converted to allow for the use of recovered fiber as feedstock.
Given capacity additions year to date and looking ahead into 2020.
There are number of additional mills and conversion scheduled to come online, which could increase demand for recycled fiber feedstock by over 1 billion tons.
Landfill gas revenue decreased approximately $7 million or 40% year over year due primarily to the lower value of renewable energy credits or rins for what certain gas sales qualified.
The average RIN price in Q3 was about 69 cents down 47% sequentially from Q2 and down 68% year over year with the high flow through on the decline in revenue, resulting in a 35 basis point impact to reported EBITDA margins at approximately two cents per share of vps.
Looking at S&P waste activity.
Third quarter, we reported 66.4 million of BNP waste revenue, our highest such quarterly revenue with over two years.
Up 4% sequentially in spite of continued declines in rig count during the quarter, which are now down 23%.
Since year end 2018.
Our quarterly results have held up year to date in spite of those declines due to our asset positioning and diversity of basins, including the Louisiana Gulf of Mexico, where the rig count decline has not been as pronounced.
That said, we believe near term <unk> waste activity peaked in August .
As it a sense moderated to a run rate of approximately $60 million per quarter.
Given the typical seasonal decline in the MP activity in Q4 and moderation in the pace of activity, we have seen over the past two months, we're cautious and our outlook and continue to be selective on new project development.
In fact, we made a determination in Q3 to forgo any future development efforts associated with a landfill in the Bakken for which we held the permit.
Regarding the two remaining landfill projects in the Permian that we have discussed on previous calls we continue to move forward with construction on one of them at are holding off on the other for now.
Regarding the materials processing and recovery technology expansion at an existing Permian facility as noted in prior updates we continue to expect that to be online by yearend.
Looking at acquisition activity, we've already close what we would consider an above average amount of acquired revenue in 2019 and acquisition dialogue has continued to increase over the past few months.
Since our earnings call in July we've extended offers totaling over $600 million and outlays, a portion of which could be completed by year end.
In fact, we could potentially double our already completed 160 million in annualize acquired revenue by year end or early next year.
Starting 2020 off with above average contribution from acquisitions, along with the continuing robust pipeline for further activity.
In addition, we closed on the acquisition of a Greenfield solid waste landfill project in the period for which the final permit was received by the sellers.
This landfill should be operational by early 2021, it proves our asset positioning in a legacy progressive waste collection only market, where we currently utilized third party disposal site.
Finally, as announced yesterday, our board of directors authorized at 15.6% increase in our regularly quarterly cash dividends, our ninth consecutive double digit percentage increase since commencing the dividend in 2010.
In spite of these increases our dividend remains at about 20% of our expected annual adjusted free cash flow, providing tremendous flexibility to fund expected above average acquisition activity the near term and increases in return of capital to shareholders over the long term, including opportunistic share repurchases.
To that end in August we announced the annual renewal of our normal course, issuer bid, which authorizes the repurchase of up to 5% of our outstanding shares.
Now I'd like to pass the call the Marianne to review more in depth the financial highlights of the third quarter and provided detailed outlook for Q4.
Ill, then wrap up with a few early thoughts on 2020 before heading into Q1 day.
Thank you waiting.
In the third quarter revenue was 1.412 billion up 131.3 million, 10.3% over the prior year period, and about $7 million above our outlook for the quarter acquisitions completed since a year ago period contributed 82.8 million of revenue in the quarter or 77.1.
Million net of divestitures.
Adjusted EBITDA for Q3 as reconciled in our earnings release was 443.6 million or 1.6 million above our outlook for the period and up 26.8 million year over year.
Adjusted EBITDA as a percentage of revenue was 31.4% in Q3 down 110 basis points year over year due primarily to two factors.
An estimated 115 basis points impact, resulting from the year over year decrease in commodity related recycling and landfill gas revenues noted earlier.
As an estimated 55 basis point impact from lower margin acquisitions completed since a year ago period.
Underlying adjusted EBITDA margin for solid waste collection transferring disposal revenue was up and estimated 60 basis points year over year.
Moreover, as noted in prior quarters. These results include about a 20 basis point impact from our increased far one can match, which will anniversary at year end.
Fuel expense in Q3 was about 3.8% of revenue and we averaged approximately $2.61 for diesel in the quarter, which was down about 11 cents from the year ago period and down about five cents sequentially from Q2.
Depreciation and amortization expense for the third quarter was 13.4% of revenue down 30 basis points year over year, and about 10 basis points below our outlook on higher than expected revenue in the period.
Interest expense in the quarter increased by 4.7 million over the prior year period to 36.8 million due to the combination of higher total borrowings and higher interest rates as compared to the prior year period.
Including higher interest income from invested cash balances net interest expense increased by 4.1 million in the period to 34.7 million.
Outstanding at quarter end was about four 4 billion about 90% of which was fixed rate and our weighted average cost of debt was approximately 3.5%.
Our leverage ratio as defined in our credit agreement decline nominally in the quarter to less than 2.3 times debt to EBITDA.
Our effective tax rate for the third quarter was 21.2% slightly lower than expected as we've noted on previous calls the IRS release proposed regulations late last year associated with the tax act that could impact our current effective tax rate.
Proposed regulation still have yet to be finalized, but could impact our effective tax rate in the period enacted we believe that if enacted in Q4 any impact will be limited to the current year with our effective tax rate returning to about 22% in 2020.
GAAP and adjusted net income per diluted share were 60 cents to 73 cents, respectively in the third quarter.
Adjusted net income in Q3, primarily excludes the impact of intangibles amortization and other acquisition related items.
Adjusted free cash flow in the first nine months of the year was 762.9 million or 18.9% of revenue up 12.9% year over year.
I will now review our outlook for the fourth quarter 2019, before I do we'd like to remind everyone. Once again that actual results may vary significantly based on risks and uncertainties outlined in our safe Harbor statement and filings we've made the FCC and securities commissions are similar regulatory authority in Canada, we encourage investors to review.
These factors carefully.
Our outlook assumes no change in the current economic and operating environment. It also excludes any impact from additional acquisitions or divestitures that may close during the remainder of the year and expense same transaction related items during the period.
Revenue in Q4 is estimated to range from 1.335 billion to 1.34 or 5 billion with the range due primarily to our cautiousness around special waste any MP waste activity.
We expect price growth for solid waste to remain around 5% in Q4 with volume down between 1% and wanted to half percent.
And we expect revenue from BNP waste activity in the range of 55 million to 60 million.
We expected decline in volumes, primarily reflects a reduction in landfill volumes due to lower visibility on special waste job and tougher comp.
Relative to our run rate as of our July call. This outlook reflects an approximately and approximately $5 million decrease in potential special waste volumes.
An approximately five to 10 million dollar reduction in potential NP waste activity.
Adjusted EBITDA in Q4 is estimated at approximately 405 million.
Margin impact from lower margin acquisitions completed since a year ago period is expected to be approximately 45 basis point.
And the commodity driven impacts from recycling and Rins are expected to be similar to Q3.
Hi, Decrementals associated with an anticipated year over year decline in special waste and be in key waste activity also impact.
Depreciation and amortization expense for the fourth quarter is estimated to be about 13.8% of revenue.
That amount amortization of intangibles in the quarter is estimated to be about 32 million or over nine cents per diluted share net of taxes.
Interest expense net of interest income in Q4 is estimated to be approximately 34.5 million.
And finally, our effective tax rate in Q4 is estimated to be about 21.5%. We estimate that the Q4 rate would increase to approximately 35% in the event that the proposed regulations. As originally drafted were to be enacted during the period, which would result in an impact of approximately 10 cents per se.
Share in Q4 with the rate declining back to approximately 22% in 2020.
And now let me turn the call back over to working for some final remarks, the for Q1 day.
Thank you Marianne.
We're extremely pleased with our year to date performance, particularly given the ongoing high margin headwinds from commodity related activities.
With a year to date adjusted free cash flow up almost 13% year over year, we're firmly on track to meet or exceed the updated full year adjusted free cash outlook, we provided in July .
We just announced another double digit percentage increase about regularly quarterly cash dividend and remain well positioned for potential significant increase in acquisition outlays later this quarter or early next year.
Although we won't provide a formal outlook for 2020 until next February we're able to provide some early thoughts assuming no change in the current economic environment.
In summary, we believe that we could enter 2020 in a similar position to the started 2018 when we provided our outlook. This past February at which time, we had approximately 200 million in revenue contribution in place from acquisitions plus the potential for additional contribution from an active pipeline.
Similarly on organic growth, we believe that we remain in a price led solid waste organic growth range of between four and 6%.
Which should continue to drive underlying margin expansion and solid waste collection transfer and disposal in the upcoming year.
Price is expected to remain around 5% and our volumes should reflect underlying trends in the macro.
Economy.
We are mindful of the protracted nature of the economic recovery, which has driven increasingly challenging year over year volume comparisons.
Therefore, we believe it is prudent remain guarded in our outlook for volume growth.
All in this could result in a potential topline growth for 2020 of between 8% and 10% from solid waste organic growth and acquisition contribution that could already be in place early in the new year.
At current recycled commodity landfill gas values.
The 2020 headwinds would be less than half of what we experienced in 2019 with any recovery in such values reducing that effect.
We expect better visibility on the tone of the economy and expected acquisition contribution DMP waste activity and commodity driven revenue in February when we provide a formal outlook for the upcoming year.
We appreciate your time today I'll now turn this call over to the operator to open up the lines for your questions operator.
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And our first question comes line of Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning, everyone.
Hey, good morning Teller.
Hey, Worthington so I appreciate the color on the landfill tonnage.
But I was wondering how pricing has been trending at the landfill, specifically MSW landfill pricing just feels like there's some industry wide momentum there.
Yes, obviously, the pricing varies by region in the country right.
Some reasons are seeing what I'll call two X. The average our average right now is running about 3% and.
And in some parts of the country, you see that running as high as five or 6%.
Okay Thats, great and then just I'm a little unclear on the landfill purchase so will there be some capex associated with that landfill build out in 2020, and then would it be an EBITDA contributor in 21 is that's right way to think about it.
Yeah first I agree with confusing about around it because the old days.
That was treated as an acquisition outlay, but get changed.
2018 to require us to book it as Capex for acquisition, so while the nomenclature is changed.
The purpose of the outlay was to acquire new landfill will commence construction of that and the second half of next year, we'll probably spend about 5 million or so in the calendar year next year and a little bit the following year to get a goal and we expect that to be up and running the first half of 2021.
Okay Thats it Thats very helpful. And then Marianne so I appreciate the color on 2020, but to put a finer point on it just based on the M&A that you've done today, how should we placemark the rollover benefit to revenue next year from M&A.
Sure. So on the M&A done to date, the $160 million acquired revenue in 2019, it's about a 1% rollover into next year. So about 55 million and that's probably not about two thirds of it in Q1 with the balance in Q2, so the drag that the drag to margins is about 10 basis points.
Okay, Great and then I'll just a few baseline the commodities where they are today in the RIN prices would that be maybe a collective $25 million drag to EBITDA next year is that too much or too little.
That's a good way to think about it I'd say about 20 million in revenue and about 25 million EBITDA for the combination of recycling and and Rins that's correct.
Most of any heavily weighted more heavily weighted in the first half of the year.
Right right. Okay. All right appreciate the time thanks.
And our next question comes line of Sean Eastman with Keybanc capital markets. Please proceed with your question.
Hi, Tim Thanks for taking my questions.
For me just on the MP side.
You guys have provided this 55 to 60 million quarterly revenue run rate for the fourth quarter. I believe you said I'm just wondering how are looking into 2020 relative to that run rate.
Yes, I guess, just assuming rig counts down continued to dribble down is that kind of a number that should be sustainable into next year.
Yes, I mean were we may be settling into that 55 to 60 of if crude stays around that 55 to $57 barrel, yes, I've always thought we were one missile away from crude hitting 80, but what two dozen vessels slide a few months ago crude went down so it's hard to call the trajectory of crude oil these days, but we do.
You seem to be in that 55 to 60 million range for the time being.
And then maybe.
The EBITDA implication around.
Moving down into that 55 to 60.
Run rate on the revenue into next year.
Sure well Charlotte as you know very high Incrementals that and therefore decrementals in the into the way to think about it would be about a 70%.
EBITDA impact.
Okay. Thanks.
Okay and then.
Acquisition contribution I think you guys said.
You can get to an 8% to 10% topline all and by the time you give formal guidance in fourq.
I think.
You guys it pretty much got 1% acquisition growth locked in for next year at this point Im just wondering maybe you can parse out that 8% to 10% a little bit between the organic piece and.
Acquisitions, and maybe between price and volume as much color as you get would be great.
Sure.
As we as we said we were in a 5% type of range on price than.
Again absent any other changes we don't see why wouldn't be similar to that and then as you know we are volumes will reflect the tone of the underlying economy and activity levels. As we said so we consider ourselves in the band of call it plus and minus one they're getting the 4% to 6% organic growth.
Rate that we talk about that's what's implied by that on top of that as you said, we have 1% rollover contributions from acquisitions already in place. So that implies as Worthing said, we came into the year similar to last year, we could see another 3% in acquisition contribution contribution potentially as we enter the.
Well certainly no more in February Sean Let me give our formal guidance, but as we also said on the in our prepared remarks.
Hi, a probability that would be in place by the time, we give our guides in February so in any additional acquisition activity for the remainder of the year, which is mostly a year will provide further upside to that.
Okay. Thanks very much appreciate it.
And our next question comes fine of Michael Hoffman with Stifel. Please proceed with your question.
Thank you very much for taking the questions on free cash flow.
Thank you about this correctly, so you're reaffirming the 915, but it includes 35 million for a contract win.
So the base run rate is 950, so I think about your next year is starting on a 950 and then whatever the opportunities.
That's that's the way to do the math on the on the baseline year that's right.
Okay.
And then.
I guess a noise around.
Rins and recycling and the Prudence on MP and technically you gave new guidance beyond 675 for EBITDA and now we're looking at probably a billion 60 is sort of the way to think of the year based on the fourth quarter.
Well if you look at the taken in the context for the entire half of year second half a year.
Yes that would be on on that guided EBITDA. That's one on one of the one and half percent below the guided EBITDA implied by the second half a year and obviously you've seen us be prior quarters. This year and so to the extent we'd be this toning outlook you see us close the gap you refer okay and then.
What does it.
That you can do.
Around pricing that give us confidence the market that 5% as a sustainable number what would now everybody remember why that is you can do about your business and why 5%. It's a good number.
Well first thing I'd point to is the fact that within our exclusive market model there alone were printing 3.5%.
Right and Thats, a market, where you have effectively no churn of 100% stickiness and so just right off the bat right there.
We're report kind of comparatively better pricing than our peers, just an exclusive market portion.
You look at a competitive market portion you have a very high percentage that being rollover contribution from what we've already done year to date in 2019, and so that puts you.
All these 70%, 60% to 70% on the way to delivering all the price between US we serve markets as well as the rollover before the year even starts.
And the majority of the balance of what we do we do early in the year and so that's how we get to a February call.
More likely 80, 85% of what we're going to do for the full years already done.
And with remaining pricing for the year leases scheduled.
Based on contracts.
Rollover or adjust and obviously you've seen us in prior years to the extent that something surprises us we have to go together you've seen our folks with a disciplined.
And the focus on execution to go and get it.
We're not it.
We're not anticipating what sort of a seismic change in pricing to the extent.
You saw us go to 5.2% the most recent quarter.
So we've been holding serve run that 5% now for the past almost two years.
Okay. Thank you on that and then on volume you made a point of drawing out some specific data about trends in commercial which I think are important that if you're getting service interval upgrades. That's an underlying volume driver you pointed out the MSW strength.
So the win when you talk about a negative one to positive ones on fourth quarter or for next year as a range underlying MSW still stable and in line or the economy.
Indicative of what you said in your small container business and the variability is around CND and special waste is what I'm assuming.
I think you just answered your question that's right I mean, that's that's a data shows us and that's what we called out for Q3.
Okay, I just want to make sure the market started grasping ahold of a possible negative I'm going Oh, My gosh, there's an economic indicator here when underlying MSW, which is driven by the consumer stable.
Right, but what we're always cautious look we're cautious about the trajectory of the economy, where we were four and five years into the into the recovery now rigors of the recovery and across this hasn't changed we just we believe it's always prudent.
To run a business not assuming certain growth factors and if we do get those growth factors what that I'll be upside.
Okay. Thanks for taking my questions.
As a reminder to register for question press the one for on your telephone and our next question comes point of Derek Spronck with RBC. Please proceed.
Okay. Thank you for taking my questions.
Pricing than Canada at 6.6%.
I was pretty strong us, 4.8% and any any differences in the two regional dynamics there.
I'd say in Canada.
Through.
What I would call kind of replacing the book that we inherited three years ago.
I was certainly expect the pricing strength in Canada to moderate somewhat as we look at the upcoming year.
Similar to what we see in the competitive markets within the U.S. was.
Move that pricing closer to 5%.
Again hats off to our guys for making the effort over the past three years.
For really getting the quality of revenue went live with the cost structure and the capital needs of the business.
Okay and acquisition multiples.
Are you seeing any movement around seller expectations around the acquisition multiples are they're looking for.
Well I think we've been consistent over the past couple of years, saying without a doubt multiples have moved up.
About a turn the return of happened so.
Hi quality acquisitions.
The franchise a larger integrated.
We're running two and three years ago in that 8.5 times range. When you look at the quality of the assets that are now being up being bought because many purchasers have been invested reinvesting sellers have been reinvesting at a high clip and their business. So the quality of assets as mood.
Oh pulls up for those companies that do have high quality assets about a half a turn I'd say tax law changes probably moved up another turn as well and so that gets you that kind of 10 times plus or minus a half turn for high quality.
Operations.
Tuck ins really no change in that marketplace. Those full run between four and six times. So the overall multiple year that will pay on any kind of portfolio of outweighs really dependent upon the profile of what started the year.
Okay. That's helpful in it.
So it's hard to deliver meaningful value creation.
As you see.
Multiples creep.
Much higher than that and so you guys kind of in different on buying back stock.
Relative to two outlays above those kind of multiples.
Well that's good color. Thanks worthy and just couple of more quickly for me there wasn't a 12 million impairment charge maybe.
Provide a little color on that and then special waste.
Maybe talk a little bit about the visibility you have and why you think it was a bit of a pull forward here and the third quarter. Thanks sure. So starting with the impairment charge as as you note Derrick.
As living said in his prepared remarks, we had we decided to forgo the opportunity to continue pursuing any NP project in the Bakken. So that was the majority of that write off that was a permit we had held for awhile and it made the determination not to move forward on in the quarter. So thats the impairment and then to your question on special waste.
As you know special waste can be lumpy its market dependent we saw several markets in Q3, where you had outsized activity in Q2, we talked about outsized special waste that may have been pent up from earlier in the year. When you come through a few quarters like that where you don't see additional projects Backfilling.
Yeah, that's when you tend to be more cautious and that's what we're facing right now and so when we look at tougher comps year over year in several markets and as I said, just having come through some some.
Increases in activity in those markets that were the mentioned included in the Midwest in Minneapolis than the Colorado market, where we've had strong special waste for several quarters. We're just cautious entering Q4 until we see the additional activity come.
Okay makes sense, thanks, whether it makes me and I'll turn it over.
Sure.
Your next question comes one of Brian Maguire with Goldman Sachs. Please proceed your question.
Hi, good morning, everyone.
Hey, good morning.
Really just hoping to get an update on progress on Onboarding Onboarding. Some of those new contract wins, you talked about last quarter. I know you spent some capex on it.
This year just.
I wondered on how that progress is going and would you still expect that to be I think you talked about a 40 to 50 basis point.
Benefit for volumes next year would that number be additive to the comment you made earlier about kind of the overall volumes next year.
Being in line with the the overall economy is that this new business wins additive to that or is that kind of included and that volume comment.
Yes, Thats first off looking at next year, when we say overall, 4% to 6% and organic growth me a price plus volume with five of that being price. The good news is to your point, you're right. We're already spotted 40 or 50 basis points of volume growth because of those contract wins.
And so I.
Encourages me to think that right at the midpoint of better of that 4% to 6% range, but again, we're not in 2020 yet.
One of the contracts that that's in that we're in the startup period right now on that.
You know again, our folks that marketplace of.
Testing job going from no presence in the market in a cold start to get in the trucks getting the containers onboarding.
Whole, new set of employees and successfully rolling out that contract and.
The first quarters always most challenging quarter of that so we're cautious about that but I'd say.
Yes, I think turned on our guys did a phenomenal job in the marketplace and so you're already seeing the benefit of one of those starting off here in Q4.
Okay great.
And I appreciate the color on on volume and pricing for 2020, any thoughts on where cost deflation mico or or maybe kind of an exit rate is we're leaving 2019 on cost inflation.
We're still seeing.
First I'd say the old in wage escalation in 2020 should not be is as heavy as we're seeing in 2019, because part of the wage escalators received in 2018 as our is a 100% mentioned before one k. right and that was that's been about 20 basis point drag on the overall margins of the company. This year as went to 100% match this year.
On the four one k. contributions, but if you strip that away for a second because that'll be a tailwind in 2020 or the actual wage escalations alone. There are still can be ranging between three and 6% depending upon.
So the profile of a position within the company or the region of the country its operating in.
So barring.
Lets something changes in the macro that.
So on immigration law, which I don't expect next year.
I don't see any foreseeable change in the in the pressures on wages themselves.
Okay, just last one from me.
Based on the comments about the acquisitions being like a 55 basis point drag on margins. It looks like those acquisitions are coming in at about a 23.5% EBITDA margin.
Some of that sounds about right is that sort of representative of what we should expect on on acquisitions in the current environment.
And our the deals youre doing today, any different or better or worse than the deals you've done historically.
Yes really depends on the profile first up you're right on what we bought because the vast majority.
What's in the current numbers is collection oriented and as you know collection can run in that 20% to 25% range, depending upon the conch part of the country in some parts of the country flux and only can run up 30% plus so it also depends on where we're getting those collection deals done.
You know as Mary Anne said, we're already go into the year with about 1% topline growth on deals done today, that's about 10 basis point drag as you look at next year's numbers from a margin standpoint.
The pipeline right now is across the board.
No. There is theres collection only that runs in the low to mid Twentys. There's some integrateds that that run 30, plus there. So collection only that runs 30, plus as well and so.
I guess not uncommon, though as you think about acquisitions in general for acquisitions that come in at margins that are lower than that our integrated profile.
And we generally move those margins up a little bit overtime.
But the entry it's hard to bring a 24% company to a 31% company right, maybe a 24 becomes 26 in two or three years.
But.
Again, the impact on margins next year will depend on a pro follow what we announced in February .
All right. Thanks to the color goes grows.
And our next question comes one of Noah Kaye with Oppenheimer. Please proceed with the question.
Thanks, Hey, where than just a follow up on that last point you get good color on the acquisition pipeline, but just so we understand.
No Super large targets I would imagine in there right in terms of.
Potential acquired revenues I mentioned this is a fairly.
Diversified mix that you have to 600 million and offers out too.
Yes, maybe you've got.
Companies as small as you know 10 to 15 million.
Excluding a couple of small judicial tuck ins you've got some new market entries that are 30 to 40 million.
And.
A couple of them that we're looking at that are potentially larger than that.
But nothing nothing like at American Thats, 200 million 180, or 200 million in revenue that we're looking at right now and again.
Well look and we've talked about things that we're looking at.
Obviously.
We don't control everything that's happening with the advance disposal and so nothing we talked about from a pipeline or from anything else like that whatever include anything around the fans.
Yes.
Thanks for clarifying that for us.
Then that kind of feeds into this question around capital allocation you you mentioned it earlier, but I think you and if you continue to spend this robust level on M&A that you're talking about.
Your leverage is still going to be kind of on the lower end of what it's been historically and I know you're not really constrained are dictated by leverage but at what point do you feel it's going to make sense to at least resume some share buybacks just given your comments earlier.
We've been consistent.
For the past couple of years, noting that we thought 17 through 20 would be periods of outsized M&A activity.
And obviously, it's uncertain how much we layout, but we've been laying out in some cases, a $1 billion a year.
And so we feel fortunate in that we're able to make those outlays and still drive leverage lower number one number two you know it's still not clear to us whether we spend you know half a billion in the next 12 months or spend 1 billion and a half of the next 12 months and so we as we'd like to flexibility we have.
Around deploying our capital for appropriately price and strategically consistent M&A.
Remains no different but obviously, we recognize that stock markets don't always go up into the right.
I mean as even shadow this morning of the old what happens if the fed does it increase or decrease rates this coming week and what does that mean in the stock market and so.
So by the way, it's just put simply it means that.
We like step in and by our stock when those blood on the screen and.
And you know stops dislocate.
And we'll just be patient around that we were the ultimate long term holder of our stock and we can pick our spots around that but we do agree as we say in the press release and in our prepared remarks that you'll see us increase the return of capital shareholders and that will be through opportunistic share repurchases and obviously at our at our leverage we.
These lease spend a billion 1 billion app on acquisitions and still spend 1 billion plus on stock repurchase if we wanted to say comfortably within any leverage targets that we have so we were very fortunate enough flexibility.
Yes.
Thanks, very much the color.
As a reminder to register for question first the one followed by the four on your telephone and our next question comes lift Mark level or Scotia Bank. Please proceed with your question.
Hi, good morning.
I apologize I just as it was a few numbers I'd Miss I mean, I think you hit on a shoe in the prior question but.
In terms of the M&A outlay. There was I think you said 600 million of potential.
Or laser offers made currently.
Which if it hits would be sort of 3% revenue accretive for next year, which I have somebody right.
Right, what we said which was already in place about a 1% rollover contribution from deals that we closed right and we said there's the potential for that much more that's the right way to think about it yes.
Okay, and Thats tied to the 600 million, which again, a diversified mix and none of the advanced in there.
That's correct yeah, okay. Okay.
Maybe just on the margin for next year again, you as you've said.
Underlying expansion, so when thinking about it.
20 basis point sort of bumps in the absence of the for a one match 10 basis points hit from rollover of M&A to start a 10, you added whatever you get sort of pricing volume sort of land swirling. We may last so is that again, that's how to think about it.
Sure that's a fair way to think about it and I'd remind you that for instance in Q3, we said the underlying.
Margins and solid waste collection transfer and disposal were up about 60 basis point.
Then of course, you'd want to layer in whatever your view is on Rins and recycle commodities and what that does at current levels or whether whatever you're forecasting and then of course your GNP expectations would also impact margins, but those are the guys that yes, and the recycling. This quarter was an 80 basis point head.
That's correct remember as we said that it's not only the decrease in the revenue associated with the sale of recycled commodity, but then we exited actually an incremental expenses on top of that associated with third party fees on the cost to get rid of some of the commodities and that's why you saw the decrementals of about 150% on that night.
Million EUR 10 million decrease year over year in recycle commodity and we said that next year. The headwind is less than half of that for the full year, which means it's probably all of that for the first half of the or thereabouts because of the rollover.
And then you know some zero drag in the second half of the year to a slightly slightly positive.
Okay.
I can go back and check my numbers, but like what would be sort of.
Half sort of headwind.
What would be sort of the anticipated full year should this year for from sort of recycling.
So on the Rins.
So if I would just to look at recycling and Rins at current level. The headwind for next year is about 20 to 25 million. So thats revenue and EBITDA again, the EBITDA being a little worse than the revenue as I described and this years had when it was more than twice the that's correct.
Im sorry, I also missed the Q4 adjusted EBITDA Guide.
That's 405 million okay.
All right. Thanks for taking my questions.
Sure.
Mr. Jackman there are no other questions at this time I'll turn the call back over to you.
Terrific well if there are no further questions on behalf of our entire management team. We appreciate your listening to an interest in that in the call today Mariana and I are available today to answer any direct questions that we did not cover that were allowed to answer other Reg FD Reg G and the applicable securities laws in Canada. We thank you again for your interest and we'll look forward to speaking with you.
You at an upcoming Investor conference or on our next earnings call.
Thank you.
Thank you that does conclude the call for today, we thank you for your participation. Natalie. Please disconnect your lines have a great.