Q4 2020 Waste Connections Inc Earnings Call

February 18, 2021

Okay.

<unk> and welcome to the waste connections fourth quarter 2020 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 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 18th 2021.

I would now like to turn the conference over to Worthing, Jackman President and CEO. Please go ahead.

Thank you operator, and good morning, everyone.

Like to welcome everyone to this conference call to discuss our fourth quarter results and outlook for both the first quarter and full year 2021 and.

Im joined this morning by Mary Anne Whitney our CFO.

As noted in our earnings release Q4 capped off a remarkable year for waste connections.

Culminating in a solid beat in the period and providing a higher entry point into 2021.

More than 250 basis points higher than expected improvement in solid waste volumes and increased values for recycled commodities or renewable fuels drove adjusted EBITDA margins 50 basis points above expectations for the quarter.

Moreover, we converted over 50% of adjusted EBITDA to adjusted free cash flow in the year, while positioning ourselves for double digit percentage growth in adjusted free cash flow to at least $950 million in 2021.

With expected solid waste pricing plus volume growth of 5% and increasing recycle recycling and renewable fuels values 2021 is already positioned for continued top line growth and 50 basis points margin expansion with additional upside from any further reopening activity.

Recovery in the economy or acquisitions completed during the year.

Although our outlook for the year does not include any benefit from further reopening activity. We are pleased to note that last week was the first weekly increase in revenue we've seen from Covid impacted customers in several weeks.

Before we get into much more detail, let me turn the call over to Mary Anne for our forward looking disclaimer and other housekeeping items.

Thank you Worthing and good morning.

The 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 1095, 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 are discussed both in the cautionary statement included in our February 17th the earnings release and in greater detail in waste connections filings with the U S Securities and Exchange Commission and the Securities.

<unk> or similar regulatory authorities in Canada, you should not place undue reliance on forward looking statements 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 in order to reflect events there.

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 a 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 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 differently.

I will now turn the call back over to worthy.

Thank you Mary Anne.

We're extremely pleased with our strong operating and financial performance in Q4 and throughout 2020 in spite of the impacts from the COVID-19 pandemic.

We often note our belief that culture values and human capital Alright greatest assets and instrumental in delivering differentiated results.

This belief guided our response early on to the to the pandemic, which focused on reducing employee concerns regarding income health care and family obligations in order to provide continuity of service and a bit of normalcy for our customers reduce voluntary turnover and further improved safety performance.

We spent over $35 million in 2020 for discretionary employee support primarily from supplemental wages to all of our frontline employees, whether union or nonunion remote or in person that including temporary employees as well as the thank you bonus late in the year.

Voluntary turnover ultimately declined 18% in 2020 safety related incident rates decreased 12% with over 60% of our operating locations either posting zero safety related incidents or driving year over year improvements in our total recordable injury rate ended at less than half the industry average.

Yeah.

Looking at solid waste organic growth price of four 3% played out as expected in 2020 with combined price plus volume growth turning positive in Q4 for the first quarterly period since the onset of the pandemic on continued pricing strength, plus a higher than expected 260 basis points.

Sequential volume improvement.

As a reminder, from the Q2 lows of about negative 10% solid waste volumes recover to about negative 6% in Q3 and further improve to about negative 3% in Q4.

This progression reflected the continuous recovery in activity, we have seen since the depths of the pandemic and sets us up for positive reported volumes in 2021, beginning in Q2, even without the benefit of any further economic recovery.

In a continued reopening activity or improvements to the economy related to COVID-19 or other factors.

We expect it to drive higher than expected overall volumes in 2021.

Underlying solid waste margin performance in 2020 demonstrated the consistency of our focus on quality of revenue and managing costs.

We exceeded each of our updated outlooks to deliver adjusted EBITDA margins of 35% in the year. Despite an 80 basis points drag from the high decrementals associated with lower E&P waste activity.

Plus an additional 70 basis points impact from the discretionary COVID-19 related employee support costs.

Not that we would adjust for such Covid related cost, but it's worth noting that these discretionary cost alone accounted for more than 60% more than the 60 basis points year over year margin decline in 2020.

As underlying solid waste margin expansion more than overcame the drag from lower E&P waste activity.

Moreover, we converted over 50% of adjusted EBITDA to adjusted free cash flow in 2020 and are positioned for an almost 53% conversion and double digit dollar growth in 2021.

2020 was also noteworthy for the pace of acquisition activity, which accelerated at year end to drive another outsized year.

We acquired approximately $115 million in annualized revenue in Q4, including new market entries in Delaware, and Minnesota, and large tuck ins in Colorado and Nebraska.

Along with other acquisitions completed earlier in the year. This brings our total acquired annualized revenue in 2020 to approximately $180 million.

It provides rollover acquisition contribution of about $120 million or over 2% in 2021.

In spite of the limitations of the COVID-19 pandemic.

We closed 21 transactions in 2020 and continue to be selective about the types of markets. We pursue the risk profiles, we accept and the valuations we determined to be appropriate.

Acquisition dialogue remains elevated with seller interest driven by many of the same factors as in recent years, including uncertainty regarding the outlook for taxes.

2020 marked our 17th consecutive year of positive total shareholder returns up 13, 9% in the year.

We returned over $305 million to shareholders through dividends and opportunistic share repurchases in 2020.

With our dividend increase in October marking a decade of continuous double digit annual percentage increases since initiating the dividend.

Given the strength of our balance sheet and over $600 million in cash at year end, we remain well positioned to fund additional acquisitions and increase our dividend and share repurchases.

As we have consistently communicated we prefer to maintain flexibility to capitalize on stock market dislocations.

This year, we've already repurchased over $65 million of shares year to date and expect such activity to continue throughout the year.

Now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the fourth quarter and provide a detailed outlook for Q1 and the full year 2021, I'll, then wrap up before heading into Q&A.

Thank you.

In the fourth quarter revenue was $1 398 billion about $63 million above our outlook due to higher than expected solid waste volumes and recycling and renewable fuel values as well as about $12 million from acquisitions closed during the quarter.

Revenue on a reported basis was up $36 million or two 7% year over year in spite of E&P waste activity down $37 million year over year.

Acquisitions completed since a year ago period contributed about $56 $5 million of revenue in the quarter or about $52 7 million net of divestitures.

Core price in Q4 up four 3% less about 50 basis points from fuel and material surcharges was in line with our expectations pricing range from about two 7% and our mostly exclusive market western region to between three 9% and four 3% and our competitive markets.

Its worthy noted solid waste volumes improved by 260 basis points sequentially in Q4 to negative three 1% volume improved in all of our regions led by our mostly exclusive western region, where volumes were positive three 7% on strong underlying activity in many markets improve.

Landfill tons and roll off activity.

Elsewhere in the U S volumes range from about negative 2% in our southern region to down about 8% and our most impacted north East U S markets, which were hardest hit by the pandemic and remains low as to reopen as.

As we have noted throughout the pandemic, our volume largely reflect the pace and shape of shutdown and reopening activity across our markets.

Relative weakness has generally persisted in those markets hardest hit by COVID-19, and related restrictions that said candidates recovery has thus far outpaced its reopening activity with volume losses cut from about 9%, Inc. Q3 to about four 5% in Q4 on strong disposal volume.

Looking at year over year results from the fourth quarter on a same store basis. We once again saw sequential improvements in all lines of business from the prior quarter commercial collection revenue improved by 150 basis points to down 1% year over year.

Excluding the most impacted markets in the North Eastern Canada commercial collection revenue was up one three percentage in.

In the aggregate through Q4 of about 65% of solid waste commercial customers and 56% of associated revenue in competitive markets. We track that had suspended or reduced service had reached out to a resumption of service or increase in frequency. These levels are largely in line with the rates we saw through Q3 in <unk>.

<unk>, a renewed COVID-19 driven restrictions in certain markets.

Roll off pulls per day increased sequentially by about 300 basis points to down 4% year over year with revenue per pulp up 1%.

Candidates recovery continued in Q4 to down less than 1% year over year U S market is still lagged those levels that drove the sequential improvement in the quarter to down less than 5% led by West coast markets.

Handful tons improved sequentially by 100 basis points to down about 5% year over year due to the strength of MSW tons, which were up 2% year over year with price per ton up 3%.

Widespread year over year increases in many markets with led by landfills in California, and Oregon Special.

Special waste and C&D tons were both down 14% to 15%.

Looking at Q4 revenues from recovered commodity that is recycled commodities landfill gas and renewable energy credits or rins, excluding acquisitions in the aggregate they were up about 50% year over year due to both higher rins and higher recycled commodity revenue due to strong fiber values, resulting in a margin.

<unk> in the period of about 70 basis points.

Prices for OCC or old corrugated containers averaged about $85 per ton in Q4 ended the year at about 90 and have since been in the range from 100 to $105 per ton.

Renewable fuels are also trading higher after averaging about $1 80 in Q4 and ending the year at 210 wins have been in the range of $2 25 to $2 50, bolstered by a supportive political and regulatory environment.

Moving next to E&P waste activity, we reported $25 5 million of E&P waste revenue in the fourth quarter up sequentially from Q3 as activity firmed up on higher rig counts and increased remediation work.

Adjusted EBITDA for Q4 as reconciled in our earnings release was $426 6 million about $27 million and 50 basis points above our outlook at 35% of revenue.

A 100 basis point year over year improvement in solid waste, plus 70 basis points benefit from recycling and renewable fuels was more than offset by drag of 100 basis points from lower E&P waste activity and 50 basis points from the prior year CMG credits along with another 50.

Basis point impact primarily from discretionary COVID-19 related and incentive comp cost and the margin dilutive impact of acquisitions completed since the year ago period.

Full year adjusted free cash flow of $841 9 million or 15, 5% of revenue exceeded the high end of our guidance and reflects the conversion of 57% of adjusted EBITDA in spite of capital expenditures about $25 million above expectations as we capitalize.

On opportunities for fleet and equipment at year end.

Even more important is the free cash flow, we didn't deliver in 2020, including from the deferral of payroll taxes as provided by the for the cares Act and from the benefits of working capital, which provides a strong cushion going into 2021.

I will now review our outlook for the first quarter and full year 2021, 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 with the SEC and the securities commissions or similar regulatory authorities in Canada, we incur.

Investors to review these factors carefully.

Our outlook assumes no significant change in underlying economic trends. It also excludes any impact from additional acquisitions that may close during the remainder of the year and expensing of transaction related items during the period.

Looking first at the full year 2021 revenue in 2021 is estimated at $5 8 billion.

For solid waste we accept.

Specced price plus volume growth of 5% with E&P waste revenue and the values for recycled commodities and renewable fuels assumed about in line with current levels.

Adjusted EBITDA in 2021 as reconciled in our earnings release is expected to be approximately $1 8 billion or 31% of revenue up 50 basis points year over year.

Underlying margin expansion in the year for solid waste collection transfer and disposal is estimated at approximately 60 basis points with an additional 60 basis point benefit from higher values for recycled commodities and renewable fuels.

This combined 120 basis points improvement is projected to be partially offset by an approximate 30 basis points margin diluted impact from lower E&P waste activity at current rates.

Projected 10 basis point drag from acquisitions already in place for the year.

And an additional 30 basis point drag from certain discretionary COVID-19 related costs, which we have assumed may continue in 2021.

To the extent that COVID-19 infection rates and other related employee impacts abate during the year such costs would be expected to abate as well.

And as noted earlier, our initial 2021 outlook does not include any benefit from reopening activity or an improving economy driving higher solid waste volume beyond the levels recovered through Q4 any pick up in E&P waste activity or additional acquisitions closed during the year that.

Would provide upside to our initial 2021 outlook.

Regarding tax rates, our effective tax rate for 2021 is expected to be approximately 20% with some quarter to quarter variability.

Adjusted free cash flow in 2021 as reconciled in our earnings release is expected to be at least $950 million or approximately 16, 4% of revenue on 600 $625 million and capital expenditures.

Turning now to our outlook for Q1 2021.

Revenue in Q1 is estimated to be approximately 137 billion.

We expect price growth for solid waste of approximately 4% in Q1 with volume of about negative 4%.

Excluding the impact of the severe winter weather, we are experiencing across many states and provinces volume trends remain consistent to slightly improving since Q4.

Year over year comparisons for Q1 also reflects the estimated 50 basis point benefit in the 2020 period from the extra day due to leap year as well as the strong start to last year that we observed prior to the onset of the COVID-19 pandemic.

E&P waste revenue in recovered commodity values are expected to remain in line with current levels.

Adjusted EBITDA in Q1 is estimated to be approximately $415 million or 33% of revenue up 10 basis points year over year. In spite of the continued margin headwinds expected from one final quarter of tough comparisons for solid waste volume and E&P.

Waste activity.

Similar to the full year outlook underlying margin expansion in solid waste hauling transfer and disposal is projected at 60 basis points in Q1.

Depreciation and amortization expense for the first quarter is estimated to be about 13, 8% of revenue, including amortization of intangibles of about $32 6 million or nine cents per diluted.

Sure net of taxes.

Interest expense net of interest income is estimated at approximately $42 million and finally, our effective tax rate in Q1 is estimated to be about 19% subject to some variability and below the expected full year rate due to tax benefits associated with vesting of equity based compensation.

And now let me turn the call back over towards Inc. For some final remarks before Q&A. Thank.

Thank you Mary Anne.

The strength of our results in 2020 and expectations for 2021.

Select a purposeful culture and differentiated strategy.

Moreover, there are testament to the tireless efforts of our dedicated essential workers.

We are extremely grateful for our employees efforts to drive not only outsized financial performance during this challenging period.

Operational excellence as well as Aon, our commitments to our customers communities and each other.

Operational excellence is also evident in our progress towards achieving our ESG targets, including as noted earlier further improvements in safety and employee retention.

We also see it in employee engagement through improving servant leadership scores.

We see it in the thousands of expressions of gratitude from our customers and the communities we are privileged to serve.

I want to once again express my personal gratitude.

To support of our customers the partnerships, we share with our communities and especially for the commitment and vigilance of our 19000 employees, who have made 2020.

Success by any measure.

And positioned us for continued growth and success in 2021 and beyond.

We appreciate your time today I'll now turn this call over to the operator to open up the lines for your questions.

Operator, thank you.

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One moment please for the first question.

Our first question comes from the line of Walter <unk> with RBC capital markets. Please go ahead.

Yeah, Thanks, very much good morning, everyone.

Hey, good morning Walter.

I wanted to start with the volume guide here.

Obviously youre, assuming the conditions stay in place so thats I hope that's conservative for all of us.

But when you look at your first quarter here I look at what you guided to for your fourth quarter. When you were trending kind of five.

<unk>, 5.58% you indicated negative $5 eight you were indicating was improving but you guided to six down.

Here, if I hear you correctly you are now guiding you did $3. One you say it's improving.

But youre guiding to.

Negative four.

Im just trying to get a sense of whether.

There is some inherent conservatism.

Built in as early as the first quarter I would have thought that your conservatism was mainly on the H two expectations, but it does.

Look like there is there is a little bit of a expectation built into your guidance for perhaps a deterioration here in the first quarter just wanted to square that off.

Thank you Walter I'll start and hand, it over to Maryann.

As Rick pointed out in the script and I may have been lost.

When you look at just the impact of leap year last year compared to this year right. We said that was that was also about a 50 basis point impact to volumes the weather impact alone. We've assumed as 50 to 70 basis points of impact to volumes in the period as well and so if you just look at the weather impact and.

Leap year, that's over 100 basis points impact to the 4%.

Another way of saying, we probably would've guided between 2.5% to 3% down had it not been for the weather This week as.

As well as obviously normalizing from the leap year.

Okay.

It's really relating to those those and nothing else, okay moving on to the mix.

In the script that the trends continued to improve since since year end.

Right right.

In terms of.

Your guidance for full year revenue I was wondering if you could give us a little bit of color.

On particularly around mix and how that's playing out for the year.

And disaggregated between volume and price within that your core price.

And volume, but particularly around what you expect.

The magnitude of the mix impact for the year built into your guidance.

Sure. So we said, 5% price plus volume, but you've seen us delivering around 4% price. So you could easily break that down to be about four and about one.

Could be could be a little more than that on price right.

Out of the gate, what I can say is the stickiness has been good we've been pleased with what we're seeing and feel as with other years, we're set up to do a little to deliver a little better than what we.

Expected or talked about so I'd say, that's a fair way to think about it Walter is for everyone.

So no impact from mix there that's embedded in your 4% guide.

Yes, that's correct, okay, and so that obviously been Walter the bigger upside than if you're trying to look forward, while it might be modest above the 4% of price is probably more so on the volume side right.

More COVID-19 impacted revenue comes back.

<unk> really gets 5%.

Washington passed one nine trillion stimulus package I mean, there's so many variables that can drive the 1%, notably higher.

But let's see how this thing plays out before we commit to that.

Makes sense I appreciate the time.

Sure.

Our next question comes from the line of Tyler Brown with Raymond James. Please go ahead, Hey.

Good morning, everyone.

Hey, good morning color.

Hey, worthiness I want to come at the volume guide a little bit different so I just want to make sure. It's clear so you're taking basically a snapshot of today and simply rolling that forward right.

That's correct.

So you talked about 40% of the commercial customers that have pause haven't returned so if I just played around with the scenarios. So we don't have all the numbers, but at a high level if stages half of those eventually came back what would that maybe add to volume would that be something like 100 basis points just alone.

Yeah, that's absolutely right I mean, it's about 100 million or so revenue in the markets that we track that have not come back due to the COVID-19 impact and so half of that came back that 50 million again, thats about 1% increase in volume activity and the flow through from that is somewhere in that 40% to 50% range given.

The attractive incrementals as that comes back.

Right right and that doesn't even include if roll off pulls or even new resi subscriptions anything else kind of comes back in.

Yes, the explosive expectations around GDP for the year are again whenever the stimulus.

That's coming off the sideline et cetera from consumers that's right.

Perfect. That's very very helpful. So maryann. So thank you so much for unpacking, the 50 basis points of overall expansion, but I've got to say I'm, a little unclear on COVID-19 costs, specifically, so I think you said the COVID-19 costs will be a 30 basis point headwind.

Year over year in 2021.

That is that did I hear that correctly.

So what I mean.

We are trying to make Tyler was that there'll be ongoing COVID-19 costs, which amount to about 30 basis points of an impact so expenses that continue while lower year over year as compared to what we put into <unk> and 'twenty. The point is we're going to continue supporting our employees and we've assumed that there is a 30 basis point impact.

<unk> related to that and again to the extent that that's not necessary because of these other things happened the reopening the reduction in cases.

Those costs would abate.

Okay. Okay. Thank you for clearing that up for me and then just my last one here.

To be you talked a little bit about the weather in Q1 so.

Maybe you've already answered this question a little bit, but you are expecting some volume and you're kind of baking in the volume and the cost that could come from this.

<unk> kind of winter blast, if you will.

That is basically in the Q1, okay. Okay.

I know it will be a long call someone go ahead and pass it on thank you.

Okay. Thank you.

Our next question comes from the line of Jeff Goldstein with Morgan Stanley. Please go ahead.

Hey, good morning.

So it sounds like special waste and C&D still providing a meaningful drag I think you mentioned down mid teens on both in the quarter. So I'm just curious what you're hearing and seeing from customers in these markets and how you're thinking about growth there in 'twenty one.

Well right now it's just a question of anniversary ing the depth of the pandemic. This will be the last quarter, where we would see these kind of declines in those two and those two streams look some geographies, we still see quite a bit of strength in special waste.

But in others.

It can be episodic and so I think again getting through the Q1 print and Anniversarying the pandemic will change those percentage yes.

Yes, worthiness point I'd remind folks if you look back to last year in Q1 in spite of the fact that the pandemic ultimately impacted numbers in March special waste was up 17% year over year. So you just put the comp in and of itself was going to be difficult and then layer of pandemic on top of it.

Okay Fair enough and then.

Excuse me I just wanted to ask an ESG question, specifically around the $500 million of investment you called out in your sustainability report towards meeting your 15 year target just how will this $500 million flow through the model over the long term does it cap margins in any way and how much is incremental to what you were investing prior to this announcement.

And just overall, how should we think about the financial impact of the investment sure, but if you take that 500 million for instance, and just divide it by that 15 year period or so.

You get to a number of about $35 million or so a year, which on a 625 million spend right now thats just part of our normal ongoing courses, making the making prudent investments.

Driving the returns and everything we've always thought is that consistent with these with our ESG priorities and targets. It's just that we haven't really packaged it.

From a communication standpoint, which is what we're doing now maybe if you look at it from a margin standpoint.

We will deploy over the next.

Three to five years.

We will likely have a $25 million or more benefit incremental benefit to.

The EBITDA alone and so again these are the right investments consistent with what we've done in the past.

Again everything we also do have an element of returns based analysis with it.

Understood. Thanks for the color.

Okay.

Our next question comes from the line of Kyle White with Deutsche Bank. Please go ahead.

Hey, good morning, hope everyone's doing well.

On the service assumptions are on service resumption or increases in frequency on commercial collection.

That had previously been introduced service can you give a bit more color as to why you think thats an improved much from from <unk> and do you have a sense of how many commercial customers might be permanently closed.

Sure so with respect to your observation that it didn't improve Q3 to Q4.

We would say is that we were kind of brace for the possibility that there would be deterioration because if you've kind of wind back to October when we are looking at that we are on the verge of some surges re emerging and some renewed locked down activity, which of course, we all saw in Q4 and so our observation is.

In spite of those renewed restrictions, particularly interestingly on the West coast in Canada, you've seen the business holds up the recovery, Steve basically in line with where it was in Q3 and I would say the other thing to remember is I think that tells part of the story and in addition to that you have.

The markets with which arent competitive markets. So the exclusive markets as I mentioned, the West coast, but also you have the other lines of business like roll off polls and landfill tons and we made the observation that you saw municipal solid waste tons, which as you know account for $55, 60% of the landfill tons that improved.

By 500 basis points Q3 to Q4, so I think you have these other drivers which show up.

Central volume improvement.

And then to your question regarding customers, who are permanently out of the equation as we've said in prior periods.

What's interesting is if I look at cancellation rates Theres no discernible difference this year versus prior years, which leads us to believe that that's not the full story, which is why we think it's appropriate to view things. The way, we have which is to say hey, we'll give you guidance that assumes that gets no better from here and we will communicate.

What those numbers are as worthy described getting a point back from exiting the year down 3% some.

Some percentage will come back and we were not in a position to guess what doesn't come back.

I mean, you're talking restaurant us office buildings staffing up again tourism increasing schools reopening.

Arena is refilling I mean, there's a whole element of revenue.

Missing right now that.

It will be dependent upon how the economy reopens and the timing of that.

Got it that makes sense and then on return to shareholders you seem to suggest that repurchases will be kind of a bigger portion.

Which makes sense considering your leverage do you have a target for how much in buybacks do you want to complete this year or maybe perhaps a minimum leverage target that you don't want to go below that you view as kind of suboptimal from a capital structure standpoint.

Yes.

We're very comfortable where we sit we liked the flexibility that leverage in that two and a half to three times gives us and we'd be less about having it being driven by that but we just want to continue to be opportunistic which is what we demonstrated we've already done thus far this year and again, we look for those opportunities to present.

Themselves throughout the years, so theres not a specific target, but as we said the expectation is from the intent is to increase that year over year.

Okay that makes sense good luck in the year.

Thank you.

Our next question comes from the line of Hamzah <unk> with Jefferies. Please go ahead.

Good morning, Thank you.

My question is on M&A, both both sort of short term and long term, maybe 'twenty 'twenty. One do you sort of expect this year to be like lost share.

Are there any LOI signed sort of so far.

I know last year was sort of above average, but below average relative to what you were doing in the sector and then just long term.

Your overlap is pretty low with others do you foresee another mega merger in this space as it relates to you.

You've obviously integrated assets that are large like progressive waste pretty well. So just any color around short term and then much longer term M&A would be helpful.

Sure the short term Hamzah as we said the dialogue continues to be elevated but we think an average year is 125 to $1 50 and acquired revenue.

We're positioned to meet or exceed that timing.

Timing of that might be a little different given that some of the stuff that we thought may have closed in Q1 of this year. It got done prior to the end of last year, and so you'll likely see more activity in the second half of this year versus the first half of this year with regards to that number.

But again, what's been driving sellers in the past continues to drive solid dialog right now.

Say the majority there are a couple of acquisitions.

Were above that $50 million or $75 million range that we're looking at.

The predominant of the deals we look at as you know historically has some kind of that $10 million to $30 million range with a few a few higher than that on average, but that pace of activity the profile of what we find attractive and value creative.

It Hasnt changed with regards to <unk>.

Larger deals never say never but clearly when you look at the experience that.

Waste management, and advance had with Doj and again going through that protracted period. When you looked at other companies that have been hung up in second reviews for what you would think can be even smaller transactions.

Never say never about large combinations, but we all recognize that.

You better be making prudent assumptions with regards to what you're going to what youre going to get all the way out of those things right.

But.

Again, there's nothing on the horizon right now as we look at it.

Needle moving like that.

Got it and just my follow up question.

Just on Canada.

Did the strong disposal activity that you saw that you know you referenced sort of outpacing reopening activity there.

What's the sustainability of that disposal activity as you look into 2021. Thank you.

We've seen that trend continue into into 'twenty one answer.

And in fact, as Mary Ann talked about reopening activity in some of the Covid impacted markets.

Calgary, Montreal, where two of those top three with New York City being being number one in that recovery and so yes.

Despite the veracity of the Lockdowns in Canada, we still see the business holding up very well and as the Lockdowns unwind, we will see that.

That rebound even further.

Great. Thanks, so much.

Our next question comes from the line of Kevin Chiang with CIBC. Please go ahead.

Thanks, Thanks for taking my questions here, hopefully everyone staying are staying warm.

Given the storm.

Maybe in our houses are flooded with first device in our sheet rocks on the floor, but other than that.

Your strength, a little bit of a Canadian winter I guess down.

<unk>.

Hum.

Maybe if I can ask about how you think about.

The longer term cost of risk for four.

Waste connections.

He's had a competitive advantage there but.

When I look at your turnover this year a voluntary turnover that is you saw pretty significant decline.

You've done some stuff on the on the on the hourly wage rate introducing new technology into the into the fleet.

I guess you have a longer term target of a lower incident weighted I think of 25% is in your sustainability reported just wondering if I roll that all together what does that mean for the cost of risk for you as you look out maybe five to 10 years from now.

Yes.

I'd just be crystal balling, it and swagger again, I say that because what you find is when you get to <unk>.

Low level as we are right now meaning frequency of incidents in our TRA or like some companies have long term targets.

To get to a <unk>, that's 35% higher than where we're at right now.

So I say that because when you get to certain low levels of <unk>.

Frequency of others that includes people hitting us to write.

It gets harder and harder on a frequency standpoint, too to continue to move the needle as notably as we've done over the past.

15, plus years right.

So, yes, we hold ourselves accountable to further improvement.

We are making the investments on the capital side, obviously, we've always said, it's more about human behavior than it is about technology right. It's how you how humans use that technology and coach for improvement for instance.

Without a doubt look Rob jumping off point now is probably around that one two to one 4% of cost right now.

From a risk standpoint.

We will drive frequency down lower that'll help severity as well, but I think the cost push against that to be honest with you. Kevin as you know as you may know the insurance industry continues to drive our premiums for whatever rescue asked them to take.

Bob retention levels.

And obviously.

Always the risk of Av.

Wanted to.

Incidents over time that might be severe.

And expose yourself to litigation litigate.

Litigation in the U S but.

A long way of saying look we got to continue to drive improvement, we're making the investments holding ourselves accountable, but if we just look at it alone I think five percentage of our locations last year had over 25% of the incidents.

So, making a focused effort on those 5%.

Of the locations that are that much above average.

<unk>.

Risks.

That's where we really see the greatest improvements on a year over year basis is getting everyone from where we want them to be especially getting the outliers to show that kind of dramatic improvement that we expect.

That's helpful.

Maybe just a clarification question maybe on the back of Hamzah is question on Canada.

Maybe I'm.

I was surprised to hear that it sounds like the recovery in Canada is outpacing maybe what youre seeing in the U S. U S North east when I, when I think of both regions being kind of at the more severe end of in terms of lockdown measures that the governments have imposed.

Just compare those two markets is there something happening in Canada specific maybe something happening or not happening in the U S northeast.

Thus, resulting in outperformance in Canada, I guess looking over the past quarter or two.

Yes, it's likely because the lower jumping off point, where on a comparative expenses just slower.

But we look at the dollar improvement just last week growth.

A dollar basis on a weekly improvement.

I think the Calgary was probably.

70% of what the dollar improvement was up in New York in Montreal was probably close to 50% of the dollar improvement up in New York and so just the comparative jumping off once the other observation I would make is that we saw the improvement in ROE along which started in Q3, so there could be that construction driven element pre pandemic.

<unk> in certain markets like in Quebec for instance, we had noted that and we saw that kick right back in once restrictions were lifted so I'd say the other aspect is maybe some of the restrictions are a little different market to market.

That makes sense that makes sense. That's it from these day stay safe and warm everybody.

Thank you.

Our next question comes from the line of Noah Kaye with Oppenheimer. Please go ahead.

Okay. Thanks, and first just want to echo what others have said I hope everyone's families and customers are safe during the polar vortex.

And then you come out of this as painless as possible.

First question just around the free cash flow trajectory you see outperformed.

The guide this year and you did so despite building what appears to be a really outsized.

Working capital question heading into 2021 that kind of blip the $9 50.

Free cash flow bogie unchanged for 'twenty, one so can you call out any free cash flow headwinds or one time items that we might want to think about in 2021 anything that might lap or reset in 2022, and if you want to touch on cares act or any other considerations, we should be thinking about.

Sure. Thanks, Noam and I can appreciate your observation that it feels like we left ourselves the opportunity to do better than 950 and of course, the guidance at least $950 million and to your point as we've communicated throughout 2020 and again today.

We did position ourselves that way you saw the reduction in payables for instance, as we exited the year and the fact that we said capex is about $25 million higher than than we'd anticipated and we still delivered the free cash flow better than the high end of our range to your point regarding things that are unique to 'twenty one vs. Two.

<unk> you are right the observation that the cares act benefit right that we all enjoyed in 'twenty. You then have payroll taxes kick back in in 'twenty, one and you'll repay 50% of what you were able to defer to the math for us that was a little over $40 million is what the day.

<unk> was and so that returns in 'twenty, one plus half of the routine so about $20 million and of course, that's already factored into the at least $950 million that we indicated.

Yes, I know you're looking at the decline in payables, but.

Look we typically roll into every year with the cushion. So if you just take Marianne 60 or $65 million.

The reversal of cares and personal payroll taxes paying it this year and.

Net debt against that 140, or so that gives you what about net of $80 billion of Cushing, it's not uncommon for us to have.

Were between 60 and $100 million of Christian.

Going into any one year.

Yep.

Great I'm going to yield before thanks very much.

Thanks.

Our next question comes from the line of Michael Hoffman with Stifel. Please go ahead.

Hey, where are they maryann thanks for the questions.

We're now having your weather up here you can have it back.

Oh.

I wanted to go back to service intervals for a second so you clarified the progression of <unk> into <unk>. How are you thinking about service intervals. When I look at the guidance is the assumption is it just.

No headwind either good or bad it's a net neutral and.

And therefore that it's also offers an opportunity.

So without answering your question for you.

Got it that's right.

Okay. So therefore housing has always.

Helped create new business formation, when its above a certain level and we're running at 300000 starts above a five year average.

So.

There is a potential for you built enough houses.

You exhaust the infrastructure I need another drugstore and things like that it backfill the empty storefront, that's all upside potentially.

That's right because that's what we've said is that.

Look we're not going to predict the timing or the magnitude of the improvement in the economy or the timing or the inflection point of the recovery from Covid.

And so what we communicated 5% combined price plus volume what were saying is that thats a business. We know we have today.

Okay.

So so we have a backdrop of maybe this housing cycle could be a benefit into the year as well and then incremental margins.

Yeah.

Classically them in my tenure and we've always talked about sort of 40% and it's been just a kind of a statement of 40% is it fair. We're entering this year with a little bit of juice, there because you were able to.

But use the pandemic.

No that's laser focused.

Drive a little incremental productivity the combination of time weighted and come out of it with just a slightly better incremental it feels like that in your solid waste margins. When I look at what you did in <unk> that the incremental was slightly better than our long term trend.

Yes, I mean, if it's primarily resulting from recovery in commercial air.

And recovery and disposal tons Youre absolutely right. Those are the two highest incrementals with regards to solid waste and so thats why <unk> seen above average incrementals.

On the returning revenue from Covid.

And some of it's structural too because you've lowered the absolute cost when all of the model.

Well that's okay.

Mark.

Let me start spending bar tabs again.

That clock back in yeah.

Okay.

You have to remember this is a drinking company that has a garbage problem.

Inflation can you remind us why garbage loves inflation.

Sorry, we had trouble hearing day end of your question. So can you remind us why the garbage industry loves inflation.

Well.

Well look as you know.

It's about this argument I just want them to hear it from you why you love inflation.

Oh, okay.

But we don't like runaway inflation right, that's not good for anyone but if you look over time.

We'll typically average.

150 basis points or more over CPI.

And so as CPI comes back up that will help pricing. Obviously, you look at the cost structure, you've got leverage going through the cost structure, because not everything in place at that rate within within the P&L. Obviously, some things like labor have been moving higher than net recently meeting recently over the past few years.

So that will I don't see that stopping.

But obviously labor being about 20% of cost as a percentage of revenue, obviously getting that spread to CPI on top on the topline from.

A lot more coverage moves through the middle and creates higher opportunities from margin expansion through the P&L now what you also see obviously is the cost of Capex goes up to right, let's not let's not lose sight of that.

Just this year alone youre seeing against the cost of steel increases in the cost of.

Kind of resin increases that are hitting total prices.

And so yes, you can get benefits from the P&L, but also understand that there is some unit cost inflation within capex as well.

And so it doesn't all flow through to cash flow, but a good chunk of that dose.

And the one thing I would add to that Michael of course is the reminder, that inflation helps on pricing what matters at the end of the day is if youre pricing right and so you want a market model that allows you to retain the price and deliver that 150 basis point spread to CPI that worthy described which we demonstrated.

Through the recession, the great recession through expansion, we've demonstrated we've done that.

Okay. Thank you very much.

Thank you.

Our next question comes from the line of Stephanie <unk> with J P. Morgan. Please go ahead.

Hi.

I wanted to ask about kind of your longer term margins, whether you think there's room for it to.

Maybe like the mid thirties and talk to you about EBITDA margins because.

Because we saw solid waste underlying margins expanded 90 basis points in 2020, and then Youre, assuming 60 basis points in 2021, I guess, how much of that do you think is a lower cost structure that you are able to operate at because some of the cost efficiencies that you gain during the pandemic or GP.

We need some of those recycling prices or E&P to pick up to really move towards kind of higher 30 east type of margins.

Sure you've got a handful of things as you know that influence it.

Maryann pointed out already this just a 35% we reported in 2020.

A total of 150 basis points rate just from the change in E&P waste activity and the discretionary cost we put in for Covid.

Now assuming the pandemic wanes.

Quick March back up to recover that.

It gets you back to the 32 as a jumping off point for last year, and then you put the 50 basis point expansion on this year. Obviously the March is already there to the mid 30 twos as you as you do the work over time.

We always talk about a 20 to 40 basis points assumed.

Expansion of our margins given that spreads the CPI and <unk>.

So you can see a multiyear work assuming E&P comes back to the levels, we had last year.

Yes.

You got it.

Year to year margin improvements and obviously to the extent that recover commodity values move higher with any inflation expectation. That's also has very high incrementals and the flow through and so to get to get anywhere near like the 34% plus or minus range everything has got to be working for you both price.

The tons in our landfills from E&P waste activity coming back.

Well as recover commodity values are moving it forward, which you don't see much anymore.

Is the the kind of margin dilutive impact from acquisitions because again.

The denominator so big for the base business that we have.

Even if we're doing a $150 million to $200 million of acquired revenue per year.

Net neutral impact on reported margins so that drag is there's less notable.

Okay, great. Thanks for painting that picture for us.

And also this is kind of a bigger picture question as well.

If we were to get an infrastructure bill passed.

Can you just talk about qualitatively how that might impact your business.

Sure so to the extent there were to be an infrastructure bill that would be expected to impact volumes of course, right. So you'd see it in development projects things like special waste and C&D activity and you'll see it in overall economic growth that would be fuelled by that infrastructure Bill.

And so we would benefit also on the hauling side so.

Certainly would be a boost for the industry and including ourselves on volumes.

Okay, great. Thank you.

Sure.

As a reminder, if you wish to register for a question. Please press one for.

Our next question comes from the line of Sean Eastman with Keybanc. Please go ahead.

Hi team compliments on closing out the year strong.

I just wanted to thank you.

To dig in on the COVID-19 related costs I mean, the magnitudes, both in 2020 and and what you've included in the 2021 guidance.

Really stands out and.

I guess the question is one does the does the nature of those costs change going into 2021.

And two I mean, there has to be.

Our payback around.

What you guys are spending there. So if you could just talk about how that percolates through and what that does for the business that'd be helpful.

Sure I mean look we don't do this because of the payback we do it because it's the right thing to do right.

Yep.

What we did last year early on and recognizing our folks is essential work is that the show up every day vs.

<unk> is included.

And that warrant supplemental wages right that warrant that warranted.

Basically unlimited wage support for folks that couldnt work because of.

We had a loved one that was impacted or if they contact traced or if they test positive it wasn't their fault.

And so last year, we had people that got several weeks.

Based on the sequencing of issues.

You have to fill them.

And that was millions of dollars right and just what I called wage support on top of it just because the impact of the pandemic.

As the year wore on we put a thank you bonus in the fall because once again as they power through it we knew that the infection rates.

This time in the pandemic would be December January.

And so we got ahead of that mentally with folks and put it. Thank you bonus out there before Thanksgiving heading into the holidays.

Really the steel to steal them mentally.

To be prepared for what was about to hit them and we were right. I mean as you guys everyone knows that that third wave that hit.

Holiday season was unprecedented.

In the span of the pandemic.

With many case, many times infection rates five to six times.

Our folks power through it.

So we look at again wage support that continues obviously you look in January.

Probably spending 250000, a week on wage support for folks that were.

Isolator for one reason or another.

Important again.

Most of these most of our people have spouses that may have lost a job or had hours cut back and so that incremental supporters and valuable so.

Obviously, we do a number of things like that and those support programs.

<unk>.

The weekly wages, we give now for folks that are out that continues to the extent needed to Mary Anne's point as infection rates come down I think the need for that will abate, but nonetheless the program. The policy is still there obviously.

It's an easy reminder, how hard our people work on a daily basis.

And so we've made sure that we put a 15 dollar wage.

$50 per hour minimum wage target out there.

We found we had about 4% of our employees below that amount and I think it's.

Look.

Our employees shouldn't have to go work two jobs.

To make ends meet right.

And so it was important to put that out there as well again all these things are just the right thing to do.

The payback is not what we consider.

Now we can look at the evidence and see what's happening out there.

And I'm glad we did it I mean I think this whole industry can do better as you look around this industry with with how it how it pays its people, especially at the lower levels.

Okay, Great. That's helpful I'll leave it there thanks, thanks very much.

Sure.

Our next question comes from the line of Mark Neville with Scotiabank. Please proceed.

Hey, good morning, Thanks for taking the questions and hope you're staying safe as well.

Maybe just a couple of points of clarification purchased on.

The recycled commodity values and the Rins.

What's baked into the guide.

When you say, it's a student at current levels.

Q4 sort of where we're trending in Q1.

No its the current levels share basically where we've been trending in Q1.

As we mentioned.

Pick up tick up over the course of the quarter and we're around 100 $105 per ton on OCC and you've seen rents in that 225 to $2 50 range.

Okay, Okay, and then I guess on the on the E&P.

Q4 2020 Waste Connections Inc Earnings Call

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