Q4 2019 Earnings Call
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[noise] greetings and welcome to the waste connections fourth quarter 2019 earnings conference call. During the presentation. All participants will be in a 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 you need to reach an operator. Please press star Zero as a reminder, this conference is being recorded Thursday February 13th 2020.
I'd now like to turn the conference over to where they Jackman President and CEO. Please go ahead.
Like the reader and good morning, everyone.
Well look to welcome everyone to this conference call to discuss our fourth quarter 2019 result, and provided detailed outlook for both the first quarter and full year 2020.
I'm joined this morning by Marietta, Whitney our CFO and several other members of our senior management team.
As noted on our earnings release.
Thousand 19 ended on a high note as financial results for the fourth quarter it exceeded expectations on better than expected solid waste price growth BNP waste activity and acquisition contribution.
We're also extremely pleased with our results for the full year as underlying adjusted EBITDA margins and solid waste collection transfer and disposal expanded by 50 basis points, excluding CNG credit.
Moreover, our ability to deliver full year adjusted free cash flow of 916.8 million or 17% of revenue and 54.8% of adjusted EBITDA on a 16.2% increase and capital expenditures as we reinvested in and expanded our business.
He is indicative of our disciplined focus on quality of revenue and free cash flow generation.
Acquisition activity also accelerated into year end, as we announced an additional $130 million acquired annualized revenue in December.
Acquisitions completed in 2019 provide rollover revenue growth of approximately 170 million in 2020, and the pace of acquisition activity remains elevated.
Along with strong pricing growth is already sets us up for high single digit growth in revenue and adjusted free cash flow.
Positive solid waste volumes any increases in value, so recycled commodities or renewable energy credits since year end or additional acquisitions closed during the year will provide upside to our initial 2020 outlook.
Before we get into much more detail, let me turn the call over to Marianne.
Forward looking disclaimer and other housekeeping items.
Thank you Worthing and good morning.
Discussion during today's call includes forward looking statements made pursuant to the safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward looking information within the meaning of applicable Canadian Securities laws 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 February 12 earnings release and in greater detail in waste connections filings with the U.S. Securities and Exchange Commission and the securities commissions or similar regulatory authorities in Canada, you should not place undue reliance on forward looking state.
Ms and information as there may be additional risks of which we are 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 will 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.
Hello.
Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measures.
Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures.
I will now turn the call back over to working.
Thank you Mary and in the fourth quarter solid waste price plus volume growth was 4%.
In line with the upper end of our outlook for the period.
Pricing growth of 5.4% exceeded our outlook for the quarter up 60 basis points year over year 30 basis points sequentially, primarily reflecting the additional price increases implemented in prior periods to address cost pressures and to recover through collection pricing a portion of the impact from lower recycled commodity values.
Pricing in Q4 ranged from about 3.5% and our western region exclusive markets.
Were 5.5% in our more competitive markets.
Reported revenue growth in Q4 was negative two volume growth in Q4 was negative 1.4% consistent with our assessment coming out of Q3 that we had seen some pull forward of volumes from Q4 into Q3, and therefore expected to see a decline in volumes in Q4.
Volumes tend to swing period to period as evidenced by our expectation for positive volume growth in Q1 2020.
Looking further at 2020, we expect pricing growth to continue to averaged about 5% starting higher at approximately 5.5% early in the year due to the rollover impact of higher price increases implemented during 2019, and exiting 2020 between 4% and 4.5% as that roll of.
Recent wins during the year.
We expect reported volumes to be about flat for the full year again, starting positive in Q1 with some variability by quarter.
Looking at year over year results in the fourth quarter by line of business on the same store basis.
Commercial collection revenue increased approximately 5%, mostly due to price increases.
Roll off revenue increased approximately 4.5% on a combined on a combination of higher pools and higher revenue for Paul.
In the us pulls per day increased about 2%.
And revenue per pull was also up about 2%.
In Canada pulls per day increased about 2% and revenue for pull increased about 3%.
Solid waste landfill tonnage increased about 1% on higher MSW tons up about 1% led by increases in Florida and on the West Coast.
And higher CND tons up 7% with the largest increases in the northeast.
Special waste tons were down about 2% in Q4, primarily due to certain markets, where outsized activity in Q3 as noted earlier, what special waste was up 10% year over year, but increases in all regions.
On a combined basis commodity related revenues from recycled commodities have renewable energy credits or Rins from landfill gas sales were largely in line with Q3 as expected was slightly weaker recycled commodity values offset by stronger rins.
First recycling recycling revenue, excluding acquisitions was about 12 million in the fourth quarter down $10 million or approximately 46% year over year.
Let's see prices in Q4 averaged about $41 per tonne, which was down 56% from the year ago period, and down about 5% or $2 per tonne from Q3.
The estimated flow through from changes in recycling revenue was similar to earlier quarters with decremental margins of approximately 140% due to the combination of lower fiber values and higher recycling processing cost paid at third party facilities.
The resulting impact was about 14 million dollar impact to EBITDA or drag on reported margins of about 80 basis points and about four cents per share of EPS in Q4.
Let's see prices currently averaged approximately $45 per ton and have largely stabilized in the 40 to $45 range for the past six months.
2019, those cc pricing averaged $52 per tonne.
Peaking at $77 in Q1.
Therefore, we will be the toughest quarterly comparison in 2020.
Current pricing the $45 per ton is down about 42% year over year for the quarter.
We continue to believe that pricing stability and ultimately some amount of improvement are reasonable expectations. As a result of higher demand for recycled feedstock by both new bills and domestic mills expected to convert to accepting recovered fiber.
We've also seen indications of higher international demand for ULCC, which could also support higher domestic fiber pricing for us.
Next renewable energy credits or Rins.
Landfill gas revenue was approximately $12 million in the quarter down about $4 million at 25% year over year.
Rins, which account for about 40% to 45% of landfill gas revenue.
Averaged approximately 82 cents in Q4 up 19% from Q3, but down 59% year over year, resulting in a drag of about 20 basis points to reported margins in the period and about one cents per share vps.
Throughout January RIN prices remain mostly in line with Q4 levels, but recently have jumped as high as $1.60.
It is too soon to note these levels will persist throughout the quarter and full year. So while we are encouraged by recent increases we have not break this into our outlook for the year or for that matter Q1.
Moving next the MP waste activity, we reported 62, and a half million to BNP waste revenue in the fourth quarter above the high end of our outlook in spite of further rig count declines during the period.
PMP waste revenue in Q4 was down about 2.3% year over year and down about 5.8% sequentially from Q3, which was our strongest quarter and over two years. Despite the weakening macro last year.
As noted throughout 2019, our activity held up better than expected as overall MP waste revenue increased 4.5% year over year in spite of a 20 plus percent decline in rig count.
There's also noted throughout 2019, we benefited from our asset positioning and diversity of basins as well as contribution from new or expanded facilities.
That said, particularly given the recent decline in crude or concerns about global demand, we remain cautious and our outlook for MP waste activity.
Looking at acquisition activity as noted earlier, we closed approximately 130 million in annualized acquired revenue in Q4.
Including the new market entry in Pennsylvania.
Tuck ins in Illinois, and Tennessee.
These acquisitions include pen waste in South Central, Pennsylvania, which provide solid waste collection that state of the art recycling services.
Additionally, we acquired a recycling facility in Illinois, which complements our existing operations and allows us to internalize additional recycled commodities in that market.
We also expanded our existing market positioning the Tennessee through the acquisition of collection and transfer assets, enabling us to internalize additional disposal volumes in that market.
Along with other acquisitions completed earlier in the year. This brings our total acquired annualized revenue in 2019 to approximately 300 million and provides rollover acquisition contribution of about 170 million in 2020.
Three years ago, we had suggested that there may be a four year window of outsized acquisition activity.
Our experience over the past three years has been consistent with expectations as we have essentially completed six years worth of transactions over that three year period.
As we enter 2020, we continue to believe that the factors that have been viewed favorably by sellers are still relevant.
They continue to note the strength of their underlying businesses and the clarity, resulting from tax reform under the current administration with the potential for uncertainty being introduced as a result of any change to the status quo.
Given those concerns in the current amount of dialogue, we believe 2020 could be another year about size acquisition activity.
In 2018, we deployed approximately $835 million acquisitions with leverage decreasing to about 2.4 times debt to EBITDA and finished the year with over $325 million in cash on the balance sheet.
As such we remain well positioned for potential continued outsized capital deployment.
Now I'd like to pass the call to Marianne to review more in depth the financial highlights of the fourth quarter and provide a detailed outlook for Q1 and full year 2020.
I will then wrap up before heading into Q in Asia.
Thank you were hitting.
In the fourth quarter revenue was 1.36 billion up 100.2 million over the prior year period, and about $17 million above the high end of our outlook due to higher solid waste pricing any in key waste activity as well as contribution from acquisitions closed during the quarter.
In total acquisitions completed since a year ago period contributed about 70.4 million of revenue in the quarter or about 68.5 million net of divestitures.
Adjusted EBITDA for Q4 as reconciled in our earnings release with 419 million about $14 million above our outlook for the period on higher than expected revenue and the benefit of the compressed natural gas tax credits, which was applied retrospectively for 2018 in 2019 in December and totaled approximately.
7.5 million.
EBITDA was up 21.8 million year over year. Despite an estimated 18 million dollar hit to EBITDA from recycled commodity Andrea.
Adjusted EBITDA as a percentage of revenue in Q4 was 30.8% down 70 basis points year over year, but exceeding our expectations.
And estimated 50 basis point increase in underlying solid waste collection transfer and disposal margins.
And a 50 basis point increase due to CMG credits.
We're more than offset by an estimated 100 basis point impact from lower recycled commodity values and Rins as noted earlier and any estimate is 70 basis point impact from lower margin acquisitions completed since the year ago period.
Fuel expense in Q4 was about 3.9% of revenue are essentially flat year over year, we averaged approximately 269 per gallon for diesel in the quarter, which was up about four cents from a year ago period end up about eight cents sequentially from Q3.
Depreciation and amortization expense for the fourth quarter as expected was 13.8% of revenue down 20 basis points year over year.
Interest expense net of interest earnings in the quarter increased by 1.8 million over the prior year period to 33.5 million due to a combination of higher total borrowings as compared to the prior year period and lower interest earnings from invested cash balances.
Debt outstanding at quarter end with about 4.35 billion and our leverage ratio as defined in our credit agreement ended the year at approximately 2.4 times debt to EBITDA with cash balances of approximately 327 million.
At year end, approximately 85% of our debt was at fixed rate and our weighted average cost of debt was approximately 3.4%.
Since year end, we've increased the portion of our debt that is fixed almost 100% as we completed a 600 million dollar public offering of 2.6% 10 year senior notes in January which lowered our all in average cost of debt to approximately 3.3%.
Our effective tax rate for the fourth quarter was 17.7% slightly lower than expected. There was no impact to the rate from the proposed regulations previously expected to be finalized in 2019 as such regulation still have yet to be finalized.
GAAP and adjusted net income per diluted share in Q4 were 50 cents to 69 cents respectively.
Adjusted net income in Q4, primarily excludes the impact of intangibles amortization and other acquisition related items and impairments.
As noted earlier the impact to our adjusted net income per diluted share for recycling and wins with a drag of about five cents in Q4.
Adjusted free cash flow in 2019 was 916.8 million or 17% of revenue and above our $915 million outlook for the year in spite of higher capex.
Capital expenditures in 2019 were 634.4 million up 16.2% year over year, and approximately $20 million higher than anticipated due primarily to a high number of fleet deliveries received in December.
I will now review our outlook for the first quarter on full year 2020, 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 on the securities commissions are similar regulatory authorities in Canada, we encourage investors trick to review this back.
This carefully.
Our outlook assumes no change in the current economic and operating environment, unless otherwise indicated it also excludes any impact from additional acquisitions or divestitures that may close during the remainder of the year and expensing of transaction related items during the period.
Looking first at full year 2020.
Revenue in 2020 is estimated to be in the range of 5.7 to 5 billion to 5.775 billion.
For solid waste, we expect pricing growth of approximately 5.0% with volumes about flat.
Adjusted EBITDA in 2020 as reconciled in our earnings release is expected to be in the range of approximately 1.76 billion to 1.785 billion or a range of 30.7% to 30.9% of revenue.
Down 20 to 40 basis points year over year as underlying margin expansion in solid waste collection transfer and disposal is expected to be more than offset by a combined estimated 65 basis point impact from the following.
An estimated 25 basis points impact from recycle commodities and Rins, assuming year end 2019 values.
Approximately 20 basis points impact from an assumed 10% decline in MP waste activity and an additional estimated 20 basis points of margin dilution from approximately 170 million in rollover acquisition contribution already in place for the year.
Positive solid waste volumes any increases in values for south of commodities or renewable energy credits since year end or additional acquisitions closed during the year would provide upside to our initial 2020 outlook for instance to the extent that higher RIN pricing were to persist at the recent elevated levels described earlier.
Earlier, the annualized incremental EBITDA benefit could be $15 million to $20 million.
Regarding tax rate.
Our effective tax rate for 2020 is expected to be approximately 21.5% with some quarter to quarter variability.
Adjusted free cash flow in 2020 as reconciled in our earnings release is expected to be in the range of 975 million to $1 billion or between 17% and 17.3% of revenue.
Turning now to our outlook for Q1 2020.
Revenue in Q1 is estimated to be approximately 1.36 billion.
We expect price growth for solid waste to be approximately 5.5% in Q1 with volume in the range of flat to up 50 basis points.
NP waste revenue is estimated in the range of 55 million to 16 million and ran revenue does not reflect the recent run up in pricing described earlier.
Adjusted EBITDA in Q1 is estimated to be approximately 405 million or 29.8% of revenue down 120 basis points year over year.
The margin headwinds expected from lower year over year commodity related revenues lower MP waste revenues and acquisition contributions are most pronounced in Q1 totaling over 100 basis points.
And therefore mask our underlying improvements.
One additional headwinds specific to Q1 is the impact of one extra day in the quarter due to leap year, which is expected to result in a drag of about 50 basis points to reported margins.
The drags on reported margins are expected to abate as you're progressing as we anniversary the toughest comp for recycling and Rins in the first half of the year.
And of course leap year only impacts Q1.
Depreciation and amortization expense for the first quarter is estimated to be about 13.7% of revenue about amount amortization of intangibles in the quarter is estimated to be about 31.5 million one nine cents per diluted share net of taxes.
Interest expense net of interest income in Q1 is estimated to be approximately 35 million and finally, our effective tax rate in Q1 is estimated to be about 19.5% subject to some variability.
Similar to Q1 2019, the effective rate for the period includes a slight benefit to the provisions related to excess tax benefits associated with equity based compensation.
And now let me turn the call back over to working for some final remarks before QNX.
Okay. Thank you Marianne.
Once again, we're extremely pleased with our results for 2019, driving our 16th consecutive year of positive shareholder returns.
We expanded underlying margins and solid waste collection transfer and disposal by 50 basis points in the year, excluding CNG credits.
Completed another year of outsized acquisition activity and converted almost 55% of EBITDA the free cash flow.
Most importantly in spite of continued labor constraints, we maintained our focus on safety as evidenced by the over 55% of our operating locations, but other posted zero safety related incidents in 2019 or drove further year over year improvements.
We will like to recognize the tireless efforts of our more than 18000 employees for our continuing success.
Given the headwinds in 2018 in 2019, we appreciate the greater visibility we have as we enter this new year.
If you will excuse the already over used upon a 2020 vision.
Thats Maryann will fund.
From a credit for that one.
That vision starts with our financial outlook high single digit revenue growth from price increases and acquisition contribution already largely in place continued underlying solid waste collection transfer and disposal margin expansion and maintaining our industry, leading free cash flow conversion to drive up to $1 billion in adjusted free cash flow.
And again positive solid waste volumes any increases in value to recycle commodities or renewable energy credits since year end or additional acquisitions closed during the year will provide upside to our initial 2020 outlook.
Our 2020 vision is also focused on engagement with our employees our customers in our communities.
Engagement means continuing investment in training and development for our local leaders in frontline employees and building on our technology offerings to increase connectivity, both inside and outside the company.
Hey gauge Midrise culture increases retention and further improve safety.
In addition, our 2020 vision is focused on sustainability waste.
As we recognize the importance to our stakeholders of our continuing efforts to minimize or impact on the environment, but also to measure the positive impacts we have in the communities, we serve for development and welfare of our employees.
The financial health of our company and the returns to our shareholders.
We hold ourselves accountable to deliver on these commitments.
We appreciate your time today ill now turn the call over to the operator to open up the lines for your questions operator.
Thank you if you'd like to register a question. Please press the one followed by the four on your telephone.
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Our first question comes from the line of Brian Maguire from Goldman Sachs. Please proceed with your question.
Hi, good morning.
Hey, good morning, Congrats congrats on being the only company that cover the actually waited till 2020 together vision 2020.
Yes, I would now you might be.
The only one that actually hits it so let's see.
I wanted to get the underlying margin improvement that's in the guidance because there's a lot of moving pieces and I think you gave a lot of detail there but.
It seems to me like the underlying margin to 2020 are going to be up 50, Bips. If I break out. The I guess is a 25 from recycling 25 from BNP waste 20 from M&A, probably another 10 or so from the leap day.
But just kind of trying to separate on all the noise and.
5% price increase that's kind of embedded in the guidance I assume begin to get pretty good underlying margin expansion on that.
Sure I think Brian you just.
Identified the moving parts of course, there's there's a little drag from CNG because of course, we got two years worth of credits and the end of 19.
Little drag there too so yes, you're right with the guide suggest is underlying margin expansion in solid waste similar to what we saw this year and of course, our guidance, we'd like to leave ourselves some room to to do better. So, yes, you're right coming into the year with 5% price, we would hope to meet or beat.
Okay, and I guess, the DMP volume and sales came in better than you thought.
And for Q seems like the outlook for 2020, only down 10% is maybe a little bit better or or more optimistic than I would guess given the rig count moves and how wells perform here to date, so just going to tented. How conservative you think that is and what factors drove your volumes to be better than the overall im just trying to you guys additive capacity it.
Earlier in the year, just maybe that's a factor but.
As what would allow you to kind of outperformed the overall market.
I will walk you can you can't respond to that question was recognized in the efforts of our group and.
And how talented they are in this current environment.
But obviously, we've said throughout the year, but the Permian is was down in 2019 year over year.
But the diversity of basins allowed us to benefit from increases in Louisiana onshore and offshore obviously, we had opened the additional landfill up into Wyoming up into powder.
We've talked about investments, we're making also in the Permian during the year last year.
Those will start to come online this year will start to see some benefit from those modestly but but still.
You know.
Coming off a zero base from those assets last year that'll help us little but this year look I'll say that January exceeded our expectations internally for GMP waste.
And so one month down 11 months left to go our view as it has to come down.
And and so while we havent seen anything.
That is worse than our expectation so far obviously, we'd rather be cautious at this time of years. We look out ahead, because if we had not assume down 10% and assumes current environment you bid asking us why didn't we assume the appeal would be down 10% or at least in the year and so let's throw 10% number out there obviously, if we're doing well.
Early in the year that means we've got that cushion above 10% as you move through the year, Okay things.
Do we can later in the year as you know we've been expecting a weakening amount of activity for the past almost 12 or 14 months.
Again, our hats off to our folks and execution of our business plan there.
Okay, I'll I'll turn it over thanks.
Thank you. Our next question comes from the line of Tyler Brown from Raymond James. Please proceed with your question.
Hey, good morning, guys, Hey, good morning.
Hey, worthy and just wanted to start with volumes. So I appreciate the flat guidance, but in 29 team did you guys spend on a couple of new contracts that I thought would give you around a 50 basis point tailwind in 2020, and if so does that imply that you're guiding effectively to kind of down core volumes.
Well I say the two answers to that one is obviously early in the year you want to give yourself cushion.
To exceed right.
And what we talked about the contracts last year, we said that was about a 50 basis point benefit too.
To to volume for the year and so if all that plays out of underlying is flat and we benefit from the new contracts that would mean, there's about a $25 million buys to the upside for volume growth if things play out like they might.
25 million is not a big needle mover and from a top line or EBITDA standpoint, but we left that its cushion on the upside.
Look at total volumes last year in 2019 full year basis, we were down about 20 basis points. So were essentially flat if that repeated this year in that 20 basis points cut gets approved by the 50 basis points from new contracts that means we're up about 30 basis points in volume. So again, a number that starting to get pretty small here.
Sure.
Rather leave that for upside versus doing it all in guide at this point.
Okay. Okay Conservative I think that is maybe a good way to put it but in the same vein.
Im a little surprise you see capex remain somewhat heightened in 2020 I thought you would've had again some reprieve from those contracts spending that presumably doesn't repeat you just talked about NPV down core volumes aren't exactly doing a whole lot at least under the current assumptions. So any any thoughts there on the capex in is that something that.
We might see stepped down to 21.
We put some cushion in the guide because we find is that as you move through the year. It was acquisitions come in people stay focused on incremental EBITDA and incremental free cash flow from it and forget them up about increased capex that results from acquisitions too so.
Obviously, there is some cushion in that guide.
Yes, I'd also tell you as you look at the just one month playing out the landfill volumes in January alone were up saying mid single digits.
So that persist obviously, we're we're also assuming that there might be additional landfill capex above and beyond we currently anticipate.
Okay, and then on the landfill site I missed it but did you give MSW landfill pricing.
We didn't break that out specifically Tyler as you know, we think about reporting pricing in the aggregate and of course talked about EUR, 5.4% core pricing in the year, you've seen through the course of the year. They we've talked before and that you know 2.5% to 3% type of range of the type of increase since we've seen on average across our network of landfills, but is it.
Through the year last year, and if we needed again this year, we will as well and it last year, we saw escalating costs with certain sites.
For leaching handling.
Obviously capex at landfill getting less for your dollar these days right and so it's not just PML pressure at landfills is increasing cost of Buildout.
Landfills overtime.
So landfill pricing overall will be moving higher.
It's justin's question of kind of what sites and what regions you see the most movement and something some locations, we move pricing as much as five or 6% last year.
Okay. Okay. That's helpful. And then maybe going back on the core margin improvement side. What are you guys see in on the labor inflation side have you have you seen that begins to abate at all.
We have Tyler and that was encouraging in Q4 that was really the first time, we saw step down in past few quarters. We've talked about the fact that same employee increases have been around 4.85% and this was the first quarter was on the low fours dropped by about 50 basis points, which is encouraging and all.
That makes sense, because our feeling art was that we had been through the worst of those market adjustments, we had don really over the past two years, which drove outsized wage increases in those markets. So where we are beginning to see signs that our optimism about the abating of those those cost pressures was well placed.
Okay. Good down the mainline molasses your modeling question, Marianne, but any color on cash tax rate or as a percentage of the book.
Sure Yeah, we talked about a 21.5% effective tax rate for the year in cash taxes, I would think about them as a percentage of buttons being up slightly from 2019, I think in 65% to 70% range little higher than we talked about last year of course, what changes that is that to the extent, we do continue to get deals.
When we get incremental benefits from acquisitions, you could see that come down.
Right, Okay very good thank you.
[music].
Thank you. Our next question comes from the line of Hamzah Mazari from Jefferies. Please proceed with your question.
Hi, This is merial quarter Lachey on for Hamzah, how are you hey, good morning.
Just quick question on landfill pricing you already mentioned that that you seem pretty.
Pretty good increases so far last year, just wondering how long you think thats sustainable for and then maybe you can just comment on or discuss what the catalyst has been the sector has been pretty consolidate it for awhile and you've been relatively disciplined just curious to know if there was any any other catalysts in there that's causing these to rise.
Longer term.
Show I think its first if you look back longer term over the past the 10 or 15 years for us.
Overall, the company, we've averaged about Cpis, plus 150 basis points.
Kind of as a portfolio of market pricing.
That's been more elevated than that last couple of years as you know last couple of years industries faced the impact from lower recycled commodity values and the need to to push the cost of recycling to the generators.
You've also seen some episodic spikes in certain cost items Marianne already talked about labor last couple of years, you've seen higher third party logistics cost the other will and those mostly validated we've talked about those you know getting good line of sight on those and kind of the surprise a stop Q2 or so last year on those.
Ones that will persist.
Or more focused on the landfill side I mean, the that those that will persist will be leachate costs, we as a company you're looking longer term, we try to controller on destiny and bring the leaching handling treatment in house versus having to rely in some cases on third party deal tw plants.
Landfills generate a lot of let's say, they're big rain collectors right and so as those costs move up that's a needle mover for this industry, if you've already talked about rising capex cost and for that matter rising litigation costs.
The us is very litigious society.
Anybody would check book will get sued and landfills or or have a target on their back in some markets and so look the persistence of those cost items will not abate anytime soon.
So I wouldn't be surprised if you see disposal pricing continue to click up.
Despite other pressures having abated.
Great one more and I'll turn it over.
Your your leverage sits around 2.4 times right now and.
Just given your free cash flow Im sorry, your free cash flow profile.
And if you guys get sub two times do you think your balance sheet gets a little inefficient and if thats. The case do you have any larger deals in the pipeline or do you guys. Just go straight to buying back a lot of stock, yes, well, we agree with it as an efficient I forgot that low which is why the all in time, where we've got that low is episodic Lee in.
Opening in early 2009, while we waited to deploy.
Almost half a billion dollars and acquisitions, we haven't seen US go below two times since then.
You have to closer to 2.2 times.
In Q3 of last year, and we we've increased back to 2.4 times, but well. These are high class problems to have because leverage is coming down despite spending about $1 billion, a year and acquisitions and returning capital to shareholders above and beyond that so I don't expect to see our balance sheet.
Fall below two times, obviously is the return on capital increases the shareholders.
That will keep the leverage probably longer term between two and a half in three times when you combine that with acquisitions versus seeing a strip closer to two times.
Great. Thanks, so much.
Okay.
Thank you. Our next question comes from the line of Michael Hoffman from Stifel. Please proceed with your question.
Hi, Thank you very much high.
Worthing and Mary Anne.
To follow through on sort of commentary around.
The business trends and sure everybody keeps focusing on volume can we talk a little bit and remind everybody. How the volume calculation works that landfills clearly, it's a straightforward, but vast majority of the business the service space and therefore price is really the motivator and so flat volumes against a strong price.
On inflation at 2.5%.
Is exceptionally powerful.
Well, yes.
I think you're you're leading to witness what the answer.
Which is okay, but this business is more about.
In many cases, a fixed pay system right fixed fixed pay service.
And so when you look at kind of units of increase.
It really narrows down the amount of revenue that's exposed to that.
And that being third party volumes at the landfill, which obviously gets Wade.
When you can look at volumes for that but third party disposal revenue and most companies is anywhere from kind of 12% to 15% of total revenue. So even if landfill volumes go up 4% you looking out a whopping 50 basis point contribution to.
Overall volume growth away from that you've got to point to point business in roll off for construction related activity as we said for that that's up 2% in poles, and so that businesses all in 8% to 10% of total now you're talking about another 20 basis points or so and so it's really difficult.
To move the needle in this industry on volume on a sustained basis, meaning volume at 234% unless you've got when those things happened those episodic large special waste jobs. Those are the start of large new contracts that one would have to call out.
This industry is not about a volume.
I mean, it is a it as a.
An industry, where where price retention is most important.
And we like that.
Of our fixed pay approach.
In the economies and bad.
Okay that helps thank you and then where are we as a company on.
Infrastructure related spending too as you get bigger and bigger seems like ERP is moving from servers to clouds, and and I'm, assuming you're doing that and all those investments is now of course of business.
We don't need any particular carve outs form.
No, we've we've never called out or add it back.
Any sort of IP.
Related that's just a cost of doing business and.
Look it depends what you're talking about I mean, it's a amazons got a very powerful product out there on the cloud and obviously, we've we've moved.
Certain components of our business up to the cloud.
You know things that we're doing right now looking at new technology deployment also pulls in the cloud.
New connectivity that we talked about with regards to employee engagement and customer connectivity. These are things that we just are part of running the business and so I don't.
We're making all the right investments we have a lot going on like most companies IP is probably our biggest growth department.
The company.
And that's that's a good thing given all the benefits that will will realize about overtime.
Okay and then.
Because cash flow. So important one should really tried to do a multiyear model and just think about sort of trend lines. So if I take this economy and all of your.
Headwind related issues recycling rins everything stays constant from this point forward.
Is the right way to think about price is something in the low fours consistently zero to a little bit of positive volume and then inflations now to chew and a half and therefore I can you can model through how you want to think about operating leverage if you're taking on a sustained long view about how to think about the model.
Absolutely I mean, we've always talked about this being kind of 4% to 6% price plus volume growth business, especially in that 2.5% type underlying cpis.
Obviously, we're on the low ended at 4% to 6% range in Q4 will be on the high end or better of that in Q1.
And so it kind of can move around quarter to quarter.
And that kind of 4% to 6% organic growth if its price led audit drive EBITDA growth in free cash flow growth on a dollar basis slightly above that acquisitions are additive to that and obviously on a per share basis. As we start returning more capital to show through buybacks are per share basis.
Good growth accelerate faster than that as the denominator starts to shrink.
Got it and last question just to make sure that nobody else is confuse you would never overpay for a deal to keep your about your leverage at two and a half or better.
Well the capital allocation will still be strictly done on good returns based metrics.
Because we could have been doing that last points of years. If you want I mean, when you see cash building up a three 400 500 million dollar cliffs specialist goes.
We were saving it for the better deals versus blowing it on deals that have gotten done and Michael we've tried to be very clear about the fact that were not chasing and growth rate and that position expect more returned to shareholders over time to the extent that deal activity slows down.
Got it thank you so much.
Thank you. Our next question comes from the line of Noah Kaye of Oppenheimer. Please proceed with your question.
Thanks. Good morning, So you called out the improving employee engagement, obviously, the strong safety performance and improvement there as well as the lower labor cost pressure.
Could you tell US where are you currently with the labor turnover rate and can you remind us of the historical benchmark.
Sure.
Well, let's say the our historical low as the company was coming out of the great recession, where we bottomed out at about 11% to 12% all in.
We it as the economy improves total turnover total turnover for us is voluntary and involuntary.
Involuntary for US runs about one third of our total turnover just to make sure you're framing it correctly because again, we still believe it's important we don't make our lives easier. If we then.
Having voluntary turnover, but again, if you risk based scoring your employees you want to make sure you mindful of.
What the right thing to do is here, but.
Turnover clicked up to about 16%.
By 2015 or so.
Combination with progressive waste, which had turned over north of 40% in 2016 that combination obviously pull the total company turnover up into the low 30% range following that transaction and we've trended that now back down towards the mid Twentys on a total basis Thats voluntary plus.
Voluntary.
And our goal is to continue to move that closer to 20%.
The fact that throughs between 16 and 19, we've been able to bring it down from.
The 30% plus range down into the mid Twentys.
In the face of you know the tightening labor environment.
Just shows you how much effort, we're spending and lean into this.
In and bring that lower.
And we've got additional things lined up this year to hope would benefit from that we started last year.
But I hope, we'll continue to see improving trends within that direction.
Great helpful. Thank you and then on M&A I mean.
Mentioned potential during the prepared remarks for another year of outsized activity in the past you've provided some metrics around say the amount of allies out. There. So just anything you can do to characterize pipeline in terms of Ela wise or other sort of sense of quantity and then the mix of tuck ins versus new markets.
I'll, just say that the theres nothing needle moving in of itself right I mean, there's.
Half dozen or more in that kind of $10 million to $50 million range that collectively.
If we just execute embed our averages I would think that by our July call, we've probably signed or close what I would call a full full year's worth meeting, but our $25 million to $150 million revenue, we're still half a year left so really playing out no different than other last three years. It played out with regard with regard to that.
People have asked us overtime pay Fisher pipeline, including from potential waste and advanced combination and the answer is always been though.
We don't think of that is something what including any pipeline, obviously, we've been very cautious.
Dialogue around that.
And you know it's way too early to tell whether or not will benefit from any of that.
Great. Thank you very much.
Thank you.
Our next question comes from the line of Sean Eastman of Keybanc Capital markets. Please proceed with your question.
Hi, Tim Thanks for taking my questions.
I guess just continuing on this leverage discussion and.
The deal pipeline, just curious to feel you add on.
Where are your AD on maybe considering some more noncore M&A, we've seen some of your peers.
Look at somewhere environmental services type stuff.
Just curious on where you guys are at their relative to what you have in the pipeline on the traditional solid waste side.
Yes, I know, it's been our belief that our runway is long enough and solid waste you know last I checked are still almost $18 billion of private company revenue in the sector.
And you know three and have the $4 billion that fits our model that we closed all four billing of that during this year, which we well.
Then you can ask that question, but now we remain focused on on solid waste.
Services.
Obviously, there's a lot that comes through year because people know we.
That was to be the buyer choice for lot of low local unrelated are closely related businesses and we pass.
Again, it's our view is that shareholders ought to go by the stocks are those other companies and they want to play those sectors.
Okay. Thanks Thats helpful. Andy you guys highlighted a 15% 20 million number can you just remind me exactly what that was I guess, what I'm trying to understand is.
That's what this dollarssixty RIN price today translates into for 2020 EBITDA if that holds.
Sure sure Sean So so what I said in the prepared remarks is that there could be as much as $15 million to $20 million, an annualized EBITDA impact if the rins were to stay at the elevated levels that we reference so in essence, if you at year end numbers around 80 cents and they've hit as high as 160, what that saying is a doubling of ran.
Equates to 15 to 20 million on a full year basis of benefit yes.
Okay got it and then and then can I, just ask where the recycled commodity basket today relative to the exit 2019 level that's reflected in the outlook.
Right is as we've said, we feel really been sitting in that low to mid $40 range for RCC, which is a good indication of where the basket is as a whole what we've seen recently is that that they.
Indications of higher pricing in February and that's the basis for some of the optimism in the short term and as we've said before longer term throughout the course of the year. The optimism came from the additional mills expected to come online and you're also seeing some dynamics internationally, where the spread between those CCM next paper is widening as demand increases.
Cc, So I'd say in the near term we are seeing some improvement.
Couple of dollars up from from where we exited the year or we think longer term, it's where there's more benefit.
Frankly, if we continue to benefit from higher Rins and higher recycling it'd be nice so that the following become a tailwind after fighting two years of headwinds.
Specialty around recycling.
Got it then last quick one for me I'm kind of ducking for cover from Michael asking in volume question, but just.
Just curious on.
Those lumpy special waste type opportunities are there things like that potentially in the pipeline this year and at what point in the year will you have line of sight around.
That type of upside driver on the volume side.
Sure. So certainly schon every year you have just between really two and 3% of our revenue is special waste activity and it is lumpy, which is why we talked about it in Q3 and does potentially impacting Q4, and that's exactly what happened the line of sight.
Typically around 90 days now sometimes you have indications longer term, if there is infrastructure projects or something going on specific to an individual market because it all becomes about asset positioning.
We typically as logistics driven and so we're in the market, we're likely to get the job and then the question is when does it start and how long does it left that's for the uncertainty comes in so certainly there was that potential out there again, we think the prudent way to guide at the beginning of the years to say volumes are flattening, we'll let you know if we do better.
Got it very helpful. Thanks for the time.
Sure.
Thank you. Our next question comes from the line of Chris Murray from Altacorp Capital. Please proceed with your question.
Thanks folks good morning.
Just thinking about and thinking about the guidance for 2020, it's interesting a lot of the a lot of the headwinds you guys talk about in terms of the EBITDA pressures are probably ones I would've thought it would have had an outside impact on free cash flow.
And your we're looking at Capex being fairly flat year over year. So I guess my question is.
Even with all those pressures how are you actually kind of growing free cash on couple of things I'm looking at your working capital seems to be year over year, even in a growing business positive.
Any thoughts around how we should be thinking about you're getting hit those operating cash flow numbers.
Well certainly coming into every year, we try to position ourselves to have some flexibility and as you know we guided to 915 million in free cash flow did an extra 20 in capex and still achieve that number and didn't deliver more than that us as we did last year. If you think about it last year, we exited the year.
Well, we actually delivered about 20 million higher than expected. So on that line 15 or 917, we delivered this year arguably that base is even higher so we don't see the that being as much of a stretch year over year as it might indicate otherwise so we try to come in with working capital cushion and the plan accordingly.
And so that's really the basis for our expectation that we can achieve those numbers.
On a percentage growth basis is fairly consistent with percentage growth in EBITDA and so its a.
You know I think the other way you could ask the question is is could it have been good we've guided higher yes, but through early in the year.
Okay fair enough.
Then just thinking back about acquisitions, and maybe kind of factor to Michael's questions were thinking longer term.
Good even going back your comment about we're kind of hit in the fourth your four.
So let's assume.
Argument sake that this will be another call 300 400 million of acquired revenue type of year that we've seen last few years historically, you've always sort of said, 3% to 4% of revenues the normalized run rate and.
It was something that as we go through an election cycle that is this sort of the last year at the party or is it something that longer term.
You think could actually extend but it but it depends on a couple of different different actions I'm sure.
Well as I said earlier, I mean, there's but $18 billion a private company revenue up there.
Fall, we're doing it.
Knocking down 300 million or so in an outsized year, that's effectively the growth rate of that so thats basket.
So.
There is.
There's a long runway here as we've always said what sellers of owners a good businesses pick the time to sell.
Let's drive the timing.
And so while there has been in kind of heightened amount of activities last three years unexpected again this year theres still a large revenue basket out there that will continue to.
To come to the market over time and now this meter itself out over long period of time Thats why I talk about kind of a long runway for for M&A growth and.
Again, if you think about the the capital outlay dollars as we grow the business kind of in this third decade of our existence I mean, you've got.
Lastly, the organic growth is now 75% to 80% of topline growth on an average year.
That has let lot less capex dollar for dollar capital dollar outlay than if you looked at first decade of existence, where M&A growth was at 70, 580% of topline growth and so.
You just tack to for the realities of how you evolving as a company forced the growth you don't overpay.
And again, you have sellers drive a timing for M&A and M&A will continue well beyond this year.
Okay. Thanks very much for.
Sure.
Thank you. Our next question comes from the line of Kyle Light from Deutsche Bank. Please proceed with your question.
Hello, Good morning, Thanks for taking my question.
Following up on the recovered paper discussion with LCC $10 per ton on average here in February relative to the into 2019, what kind of benefit is this provide on annualized basis similar to the similar fashion to what you've been providing for rents are you able to provide that for whatever paper.
Sure and again, what I said it was pricing was you know a couple of dollars higher than where it had ended the year. If you look at our overall numbers for the full year, a 10% movement in the recycled commodity works out to about $6.5 million and so thats the way to think about the benefit on revenue and EBITDA.
And would be a good indication of what that movement would be.
Yes, and then where are you seeing has increased demand internationally on the recovered paper and do you believe it is it's something that short lived or do you see that something that is a little bit more sustainable.
And just to be clear most of what we handle it we handle it domestically what would I mentioned was that there is an international effects, which could have ripple impact on the domestic market that could impact our pricing and what we're referring to with India for instance, where they pushed out mixed paper and therefore the dish.
Man for RCC, the higher quality paper has gone up and that's spread has widened between NCCN mix paper.
Gotcha and then just last question just quick thoughts on Us DNA for 2020, you've made good progress on this line item.
Do you see more progress at this coming year or is 10% of revenue had a good target.
Yes look you can see any you see us overtime drive as percentage of revenue down as we grow the topline business and.
We're probably right now and that you know, 10% plus or minus 20 or 30 basis points around that.
That's it thank you and good luck in the court or the here.
Thank you thanks.
Thank you as a reminder to register for your question or comment. Please press the one for on your telephones now.
Next question comes from the line of Mark level from Scotiabank. Please proceed with your question.
Hi, good morning.
Just trying to just want to understand I guess fully again, the the sensitivities around the rins in the and the recycle commodity.
15, 20 million ran the six half million for RCC. That's that's an annual number on the 10%.
Yes, it's okay.
While recycled commodity.
Okay, and then I guess, it's effectively 100% contribution margin I can just trying to understand this thats essentially sensitivity.
Yeah, I mean, that's how we're thinking about the very helpful.
Yes, okay. Okay.
Maybe just on a the margin guide.
Again lots of lots of color and again I apologize for getting maybe too granular.
But I think there was a 20 basis point benefit from the absence of the for a one game match.
Does that in the the 50 basis points of underlying or is that I guess something separate.
No we didn't break that out separate what would I tried to call out are the things that that where the headwinds and then arguably there I'm moving parts within the saw underlying solid gross margins.
Said there are couple of drags from from leap year, and the CNG tax credit not repeating two years' worth, but just one and then yes. There is some pickup from something like four one case there at the other been other puts and takes during the year whether it was.
Some some stock market, moving which impacted deferred comp and things like that I, just hadn't gotten that granular on the underlying solid waste margin expansion, what I would encourage you to do think about as being similar to 2019.
Okay. Okay.
It's helpful and maybe just one last one I think were then you made some comments just on the Capex and I missed them.
I thought something around building some cushion into the number.
Sort of Miss what you said as you can repeat that.
Yes, I think what we're talking about it what we it's not atypical for us as we budget one year and as you move through the year things come up right.
And.
Yes, that's our view is as you layout capital for the year Capex expectations make sure you've increased it to allow for some cushion for the unknown and to make sure you have people focused on a higher number because frankly as we closed acquisitions during the year. The capex that goes along with those newly acquired sites people always seem to depend the model in revenue and EBITDA from acquisitions.
And don't look below a PNM oil and get to the Capex line and so we're trying to be anticipatory of some of that as well.
Okay got it. Thank you that's helpful. I think I'll just leave it there thanks a lot.
Sure. Thanks.
Thank you Mr. Jackman there are no further questions at this time I will now turn the call back to you. Please continue with your presentation or closing remarks.
Thank you if there are no further questions on behalf of our entire management team. We appreciate your listening to an interest in the call today.
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