Q2 2021 Waste Connections Inc Earnings Call
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In strength and recovered commodity values.
These trends drove the year to date adjusted EBITDA margin expansion of 110 basis points and adjusted free cash flow of over $585 million up 18, 5% year over year and given expected continued momentum and margin expansion from these trends.
Positioned us to raise our full year outlook for revenue adjusted EBITDA, adjusted EBITDA margin and adjusted free cash flow.
2021 also has the potential to be another outsized year of acquisition activity.
Year to date, we have signed or closed 14 acquisitions with total annualized revenue of approximately $115 million, including $75 million of franchise operations in California, Nevada, and Oregon and expected to close later this year.
We continue to see record amounts of seller interest driving elevated acquisition dialogue and as communicated throughout the year expect closings related to most of this activity to be more weighted to the second half of the year, which will provide further upsides of our increased outlook for the year and strong rollover growth into 2022.
Before we get too much more in the 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. The pulled forward looking statements made pursuant to the safe Harbor provision of the U S. Private Securities Litigation Reform Act of $19.95.
Including forward looking information within the meaning of the applicable Canadian Securities law.
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 discussed both in the cautionary statement included in our August 4th 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 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 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 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 1 of them. Thank you Mary Ann and.
In the second quarter solid waste price plus volume growth of 11, 4% exceeded our expectations by almost 150 basis points, primarily as a result of heart of an expected volumes as the recovery trends that began in Q1 continued throughout the quarter with landfill tons and roll off pulls returning to levels of about in line with.
Or above pre pandemic levels.
Total price of 4.9% up 70 basis points sequentially was above our outlook on higher core pricing of 4.7% once again, reflecting the strength of price and retention. We noted in Q1, plus about 20 basis points and fuel the material surcharges.
Our Q2 pricing range from 2.6% and our most of that exclusive of Western region to a range of about 4.5% to 7% and our more competitive regions.
Looking ahead, we are positioned for higher sequential pricing growth during the second half of the year as the result of incremental price increases we have already put in place to offset certain cost pressures.
Reported volume growth of 6.5% in Q2 reflected a sequential improvement of approximately 1000 basis points from Q1 and was led by those regions where markets were hardest hit during the pandemic, including the northeast Us and Canada.
All regions showed sequential improvement from Q1, and all reported positive volumes in Q2.
The volumes range from about 4% in our central region, where comparisons to the prior year were tougher as many markets were relatively less impacted by the COVID-19 pandemic.
So almost 10, 5% in Canada, 1 of our most impacted regions, where the volume recovery has been remarkably strong arguably outpacing the reopening activity, particularly when considering the men restrictions of Canada extended through Q2 of this year.
Also noteworthy is our western region, where volumes led our other regions going in to the pandemic and continues to be the strongest in the us at about 8.5% in Q2.
Looking at year over year result from the second quarter on a same store basis, all lines of business increased by double digits.
Commercial collection revenue was up 16% year over year.
Roll off pulls increase by over 11% year over year led by Canada up almost 20% in fact to above pre COVID-19 levels in.
In the US pulls were up about 10% in all regions showed year over year improvement most notably in our more impacted markets included in the northeast.
Landfill tons were up 17% year over year on MSW tons up 11% C&D tons up 20% and special waste tons up 33%.
As a result landfill tons of return to above pre pandemic levels in all of our regions, except the eastern region, which was slightly below prior levels as the result of the delayed reopening activity and markets in the northeast.
Looking more closely our results as noted all waste types were up double digit percentages year over year. However, the outsize the amount of special waste activity was particularly noteworthy as Q2 activity propel tons back the 13% above pre pandemic levels with all regions up year over year.
Apps due to a little pull forward from Q3.
Looking at Q2 revenues from recovery of commodities that is recycle commodities landfill gas and renewable energy credits or Rins excluding.
The acquisitions collectively they were up about 95% year over year, resulting in a combined the margin tailwind of about 130 basis points.
90 basis points of which was from recycling and 40 basis points from landfill gas and Rins.
Recycling revenue increases were driven by both higher commodity values.
Alluding old corrugated containers, or OCC up, 25% and plastics and metals, both up over 100%.
Our volumes also contributed year over year.
Again, reflecting the pandemic impact.
Prices for OCC averaged about $135 per ton in Q2, and our RIN pricing averaged about $2.72.
And finally onto the E&P waste activity, we reported $31.2 million of E&P waste revenue in the second quarter up 26% sequentially from Q1, reflecting increased activity across multiple basins.
Looking at acquisition activity as noted earlier, we have already signed or closed 14 acquisitions with annualized revenue of approximately $115 million approaching what we would consider an average amount of activity for the full year.
These transactions include multiple west coast franchise markets, which are core to our strategy and provide unique opportunities to expand our exclusive contract portfolio.
Moreover, our pipeline still reflects record levels of seller interest.
Having the potential for outsized activity in 2021, primarily given tax related considerations.
That said, we continue to be selective and disciplined in our approach to acquisitions as we recognize the importance of value creation for our shareholders as well as market selection of an asset positioning.
Now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the second quarter and our increased outlook for the year and to provide a detailed outlook for Q3 I will then wrap up before heading in the Q&A.
Thank you Worthing.
In the second quarter revenue was 153.4 billion about $44 million above our outlook due primarily to higher than expected solid waste growth and recovered commodity values.
The revenue on a reported basis was up $228 million or 17, 5% year over year, including acquisitions completed since a year ago period, which contributed about $47.6 million of revenue in the quarter for about $44.1 million net of divestitures.
Adjusted EBITDA for Q2 as reconciled in our earnings release was $484.9 million about $17 million and 20 basis points above our outlook at 31, 6% of revenue up 140 basis points year over year.
Commodity driven impacts of account for about 100 basis points of margin expansion net of of 30 basis point impact from higher fuel on diesel rates up almost 20% year over year.
The fuel solid waste collection transfer collection transfer and disposal of margin expanded by 50 basis points as we more than offset of 60 basis points increase in incentive compensation costs 50 basis points from higher medical and 50 basis points from increased discretionary expenses.
And finally acquisitions completed since the year ago period accounted for about 10 basis points of margin dilution.
Regarding discretionary expenses, we've begun the process of returning to a more normalized operating environment, including in person training meetings and other activities, we considered integral to sustaining our culture and expanding our bench strength ahead of future growth given.
Given the challenging labor environment. We are also proactively implemented the implemented supplemental wage adjustments in many markets as we anticipate our combat labor constraints.
These purposeful wage and discretionary cost additions along with higher incentive medical and other costs, resulting from more typical activity levels largely replaced last year's COVID-19 related frontline support costs, the majority of which did not repeat this year.
As noted earlier, we've already implemented incremental price increases to address these higher costs, resulting in full year 2021 price of approximately 5% up from 4% in our original outlook.
We delivered adjusted free cash flow up 18, 5% year over year through Q2 at 585 million of 20% of revenue putting us on track to achieve our revised adjusted free cash flow outlook of approximately $1 billion.
I will now review our outlook for the third quarter 2021, and our updated outlook for the full year 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 statements and filings we've made for the SEC and the securities commissions or similar regulatory authorities in.
Canada.
We encourage investors to review these factors carefully our outlook assumes no significant change in underlying economic trends, including as a result of our related to impacts from the COVID-19 pandemic or the Delta variant of the coronavirus. It also excludes any impact from additional acquisitions that may close during the remainder of the year and expensing of the.
Transaction related items during the period.
Looking first at Q3.
Revenue in Q3 is estimated to be approximately 156 billion.
We expect solid waste price plus volume growth of about 7% in Q3 with pricing of about 5% for.
The covered commodity values in the E&P waste revenue are expected to remain in line with current levels with rents generally in line with Q2 levels and OCC trending slightly higher.
Adjusted EBITDA in Q3 is estimated to be approximately $495 million or 31, 7% of revenue up 60 basis points year over year and up sequentially from Q2.
Depreciation and amortization expense for the third quarter is estimated to be about 13, 3% of revenue, including amortization of intangibles of about $33.8 million or rounded 10 cents per diluted share net of taxes.
Interest expense net of interest income is estimated at approximately $40 million and finally, our effective tax rate in Q3 is estimated to be about 21, 5% subject to some variability.
Turning now to our updated outlook for the full year as provided and reconciled in our earnings release.
Revenue for 2021 is now estimated to be approximately $5.9.75 billion for $175 million above our initial outlook with the primary drivers being an additional 150 basis points of solid waste price plus volume growth and higher recovered commodity the values as <unk>.
Paired to our initial outlook plus $25 million from acquisitions completed year to date.
Adjusted EBITDA for the full year is now estimated to be approximately 1.875 billion or about 31, 4% of revenue and of about $75 million over our initial outlook.
Moreover, the full year adjusted EBITDA margin guidance is 40 basis points above our initial outlook up 90 basis points year over year at.
At 31, 4%, our adjusted EBITDA margin outlook reflects continued year over year margin expansion in the second half of 2021 in spite of wage and inflationary pressures and tougher year over year comparison.
Adjusted free cash flow in 2021 is now expected to be approximately $1 billion or over 53% of EBITDA and up $15 million from our initial outlook. Despite capex of $50 million from our original outlook.
Last week, we closed our new $2.5 billion credit facility, which increased borrowing capacity by almost $300 million.
Reduced borrowing spreads and enhanced flexibility for continued growth.
Our balance sheet strength together with its increased capacity positions us for potential above average acquisition activity and an increasing return of capital to shareholders. We have already returned over $400 million to shareholders in 2021 through share repurchases and dividends and we are in the process of range.
Moving our normal course issuer bid authorizing the repurchase of up to 5% of our outstanding shares per annum.
We will continue to approach share repurchases opportunistically and anticipate announcing another double digit percentage per share increase in our cash dividend in October.
And now let me turn the call back over to worthy for some final remarks before Q&A.
Thank you Marianne again broad based strength continues to drive results ahead of expectations as we benefit from reopening activity kind of supportive macro environment, including tailwind from recovered commodity values.
Once again demonstrated the importance of being selective about markets and intentional about driving results qual.
Quality of revenue of comparative price retention across markets matter.
We're extremely pleased us being in a position the raise our outlook for the full year.
We're set up for continuing margin expansion for the second half of 2021 as proactive on budget for price increases offset wage and inflationary pressures. We were on track for adjusted free cash flow of approximately $1 billion and adjusted EBITDA margins back above pre COVID-19 levels.
Finally, we expect to announce another double digit percentage increase in our regular quarterly cash dividend in October.
We are well positioned for potential significant increase in acquisition outlays to drive further growth in 2021 and beyond.
We appreciate your time today I'll now turn this call over to the operator to open up lines for your questions operator.
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Our first question is from the line of Walter Spratlin with RBC capital markets. Please proceed with your question.
Yes, thanks, very much good morning, everyone.
Hey, good morning welcome.
Yes, so I would like to.
Zero in on your M&A pipeline.
And my question is what is what is the main driver of your pace of acquisitions, obviously, it's not financial leverage but is it is it just the availability of sellers as the valuations on on offer prices or is it your own kind of acquisition processing and integration capacity in the.
Reason im asking us that the sector is clearly consolidating rapidly here in good companies are being gobbled up by you and your competitors and Im just curious as to whether now is the time the kind of stretch your acquisition activity, even more than you've already done.
And perhaps add leverage or a turn of leverage there to achieve a more rapid pace.
Given the given how fast and how how rapidly good companies are being being acquired in your sector right now.
The Walter that's of Great question the West.
<unk> always said the sellers determine the timing when good businesses of Salt right. These are family driven issues tax driven issues, leaving us transition issues et cetera.
And we've always wanted to maintain the flexibility to be the out of write the checks when they make the decision to sell and that's that's why you've seen us.
For a lot of dry powder of our balance sheet.
Not the real spend all of this but we could theoretically right of $3 billion check right now and still stay around 3 times leverage and I say that because this year you are seeing a lot of folks come to the table.
In the US a lot of that is driven by <unk>.
<unk> tax changes increase the capital gains rates.
When the administration says something like low we might go to 40% of cap gains and you recognize in the state of California that would mean cap gains would be taxed at <unk>.
Over 57%.
These are 3 for generation old companies that all of a sudden of to give most of the proceeds for the government. After all of their 100 years of work and so it's.
These are real considerations for people in the U S.
Yes.
And so we've seen a lot of tax driven conversations we have seen some lineage transition driven conversations we've got people who are from sellers, who are just exhausted having gone through of pandemic haven't gone through the struggles around labor.
The increase.
The increase of investment requirements in the business to keep up with regulations and changes looking ahead of.
The businesses are back above pre pandemic levels and so they know it's a good time to come of the market. So theres a variety of things that drive sellers, but again in our model sellers determined when when the timing is right for them.
Okay I appreciate that color.
My follow up question is on landfill gas energy opportunities a lot of your competitors now we are starting to talk about.
That opportunity could you give us a little bit of a flavor for how many facilities do you see us is poised to or potentially.
Participating in that trend and even if you have some numbers around that in terms of revenue cash flow opportunity.
That would be helpful as well.
Sure and we've been consistent about this conversation obviously, we've said a lot more about it in our sustainability report that we published a year ago.
And.
Frankly, we're pivoting from a position of knowledge because we've got the largest plant right now in North America.
With regards to this look we've said all along that we've got 3 to 5 opportunities for the high Btu plants within our current network, we've been working on for for many years.
2 are further along in the process than others.
We expect to commence construction next year on 2 plants that we have already approved understand at lead times for some of these plants. Once you say go can still be at least 18 months for some critical components again, you think about the some of the delays on the manufacturing side of effects.
<unk> and timetables for for these plants as well and so we've been consistent to say at the earliest we would expect the contribution from these to begin to start in 2023 and hit the full stride sometime second half of that year and into 'twenty for.
The numbers round or a simple I mean between the couple of plants that we're looking at right now and a couple of recycling.
The plants as well that we're looking to build that kind of investment.
The anywhere between $100 million to $125 million collectively.
And you look at that and it means the revenue opportunity of that is probably close to 75% or 80% of that.
And the EBITDA flow through is probably close to 70% of that revenue and so as you can see in today's environment, especially of the payback can be a lot quicker than that.
When you see of EBITDA would be higher than that but we.
As always the payback can be in that 3 year, plus or minus range with the cars. These kind of investments again today, it's quicker than that.
Appreciate the time Worthing on the congrats on the good quarter.
Sure. Thank you.
Thank you.
Our next question is from the line of Hamzah <unk> with Jefferies. Please proceed with your question.
Hey, good morning, Thank you.
I guess my first question is maybe you could help talk about just the interplay between pricing and inflation and what we mean by that is.
How much of the price increases sort of playing catch up to inflation versus sort of flowing to the bottom line, maybe maybe help us think about that and as you answer that.
Maybe you can layer in your incremental margin assumption as sort of demand improves further.
Sure and good morning, Hamzah. Thanks for the question. So first of all with respect to pricing.
As we described we've already implemented price increases that are leading to the higher reported pricing in the back half of the year.
Which is of course of an anomaly right. We would typically reported our highest price earlier in the year and just on a reported basis. It would step down over the course of the year of just mathematically. So that tells you we already had strong pricing retention in Q2, and the pricing is increasing in Q3 and Q4 and as we further describe.
That is offsetting us covering the incremental wage pressure in some cases, where we did market adjustments proactively in other cases, where we've seen those labor constraints and so we feel we have that covered with the central incremental price increases.
So that's 1 aspect of it I'd say.
More broadly when we think about the Incrementals, we've talked about the 40% plus as volumes return.
That's the same way to think about it of course being mindful of the fact that what's come back from US quickly our landfill the patents, which would have higher incrementals than whats really left if we think about what pieces arent back and we said on the call that landfill tons and rollout of calls are really back to pre pandemic levels. So that tells you that.
That last point <unk>, 5% of volume, which isn't in our numbers yet is more commercial and so kind of slightly lower incrementals, but still the right way to think about it.
Great very very helpful. And then just just on M&A.
Do you I know you sort of outlined what you have in the second half maybe just if you could update us on whether you think the pipeline can come in a lot higher than that.
And just as it relates to M&A, how quickly does M&A become accretive for you and us at faster now because you have higher scale than it was historically for you.
Well first of the second.
Point, M&A comes and accretive to free cash flow day 1.
No margin profile is different because of for to the extent as you know we're already running 31 plus percent in EBITDA margins and we're blend of collection operation good.
Good collection operation might be in the mid to high <unk> with regards to margin.
All of prove that a little bit, but we will get us to the 31% of hire us our integrated network of landfills and smaller higher margin things for you do and so.
The it's always pause a little bit talk a little bit of margins you saw in this quarter acquisitions were about 10 basis points dilutive for the overall, but because of the base business is getting so much bigger the dilutive impact of acquisitions of the collection of all interest is getting lesser and lesser.
But obviously on a free cash flow basis, it's accretive as it comes in with regards to the environment look this year as we think of of setup for for acquisitions, If we signed or closed the 115 million of <unk>.
Revenue so far better already provides about 1.5% rollover growth into next year, if we simply double that in the balance of the year for going into next year with 3% from acquisitions, obviously, if we do more of that increases of 3%.
But that 3% plus right now running at around 7% price plus volume growth puts.
<unk> double digit revenue growth going into next year.
Not out of the question and then I would say more things that we get the next year provide further growth from that and so yes.
M&A.
The activity the sheer will increase it will we will do more than the $1.15.
But with double digit revenue growth already in hand, as we kind of entered the year at a minimum.
That plus margin expansion drives great flow through as you note of 2 earnings growth of more importantly, free cash flow per share growth.
That's the.
Very helpful. Just last question I'll turn it over on your Q3 volume estimate of 2%.
Just frame for us how conservative that is are you assuming education towards all.
All comes back.
I dunno, how much exposure you have there and is the special waste a good indicator of what's to come on volume. Thank you.
Sure So with respect to Q3, where the guidance of 7% price plus volume of set about 5 of price and therefore to us volume we <unk>.
Haven't assumes continued reopening activity hamzah so basically.
There's a point in time based on kind of where we were in Q2, how do we think about the rest of the year and so to the extent there is any improvement, particularly in those most impacted markets. As we described on the northeast for instance, which hadn't come back yet or to a much lesser degree that would be incremental that would be upside to what we've communicated.
And to that point similarly on recycled commodities E&P activity ramp.
For the extent there is continued improvement in any of those that would also the upside to what we've got it.
And to your packages of regarding special waste just to close on that the.
The observation there was just how strong it was in Q2 and a reminder, how lumpy special waste can be and the observation is.
You don't know that that level of that piece would continue it might have been some pull forward from Q3, and so we'll watch during the quarter to see where that plays out.
Got it thank you so much.
Thank you.
Volume recovery head of outpaced our expectations by about 100 basis points, a little more than that so from from our per view theres. The.
Probably a point in the half and volume, which isn't back in the numbers, yet as compared to pre pandemic levels and to the observation about the fact that tons are essentially back pools are essentially back. It tells you that it's really the commercial piece, which is lagging which of course would take longer to get back those tons and pulls are good.
Real time indicators of activity and so you know.
For your question and that's where we see the remaining piece and we certainly see that if we look at that 1.5%. There's a large portion of it which is concentrated in the north east of the U S, particularly in New York City and in Canada, both of which were more impacted by the pandemic and slower to reopen and so we'll look forward to seeing that.
And again, it's not in the way we've guided the rest of the year.
Okay understood that was all very helpful. And then with the recycling industry being so strong right now I'm curious if you're doing anything different to take advantage of it of meaning are there any investments to call out or any other initiatives, you're taking a really capitalize on the high commodity prices right now and just the growing appetite for recycling of general rule.
Yeah.
Well I think the overall approach.
Probably not too dissimilar from the way other folks so look at this which is we.
We have shifted over time to more of a domestic.
The customer with regards to moving the commodities.
We've looked at putting the contracts in place to try to consolidate.
Our sales effort to make sure we have the offtake there.
We've invested in more optical sorting and robotics within the facility to 2 improve the quality of the material that's being set for those customers, which drives higher price points per ton as well.
Obviously to the extent, we can continue to take labor out of that it reduces our reliance of dependence on on head count going forward and we've taken that all into account as we've designed these 2 new facilities. We're building to to try to do what I think us of others recall, the the recycling facility of the future which per.
It's all of that together.
And puts us in a position to again take labor out.
Improve the quality of the material.
Improve the overall revenue profile of the facility and as you know the synergy is already the.
The risks that business somewhat by moving to a tip fee structure for third parties of come in the facilities to make sure we are more than covering the opex and capex for returns.
From the tip fees.
And letting some of the commodity values be gravy on top of that and so I think the whole industry us has migrated over the past 3 years or for years.
And of this opportunity obviously, the the increased commodity values and the strong economy backdrop of driving some of that itself makes that look even better.
Alright, Thanks, a lot.
Thank you.
Our next question is from the line of Jerry Revich with Goldman Sachs. Please proceed with your question.
Yes, hi, good morning, everyone.
Good morning, Jerry.
Within the last quarter, we spoke about for years to find potential.
Landfill gas pipeline development off.
<unk> and <unk>.
Earlier on the call you mentioned that the.
What the economics look like for those types of investments I'm wondering if you were to say okay. Today when prices are sustainable.
Is there of next layer of projects that you folks would would consider if you've got confidence in when <unk> prices stay around current levels, what could that mix.
Wave of opportunities look like is it a handful of plants or is it more than that can you just help us understand what the pipeline looks like the behind these top 4 of 5 plants that youre looking at in this way.
Sure well just you know our confidence isn't just because RIN prices are where they are right. Now I mean are we look at these out over a long period of time and assume the prices can fall and understand that if it's the 2 or 3 year payback and if it gets cut in half of that could stretch 2 of 4.6 year payback, that's still a very attractive.
The investment where we have so much already pre existing investment in the in the landfills.
It just it sounds so attractive, but bear with us a lot of other capital that's been invested that people aren't accounted for I would look at this incremental investment just for the high Btu plant.
Look I understand while we talk about both the 3 to 5 or so in the timetables when that stuff of what we're doing the fact that we've got rfps out for construction.
We.
Put deposits down for equipment and stuff.
Always looking at the portfolio right I mean, there is the their existing contracts in place, where we just have gas offtake.
Based on the older model of the project developers coming in of putting.
Electric plants.
Of the facility.
As those contracts are of winding down that gives us opportunities to renegotiate those contracts as more of our landfills mature.
That's increasing the gas production and it brings sites over time that don't have enough production now into the fold. As you look ahead of 5 or 7 years and so the portfolio will continue to expand and obviously, we we kind of laid that out of the ESG report.
The near term actionable as we think about the next 2 to 3 years or what we're just talking about right now.
Okay terrific and then on the.
Pricing conversation nice to see the pricing outlook improving so.
Given the comps.
Are easier in the back half of the year I'm wondering if you could just help us understand how much are you folks planning to raise pricing in the back half of the year versus the first half of this year. It will go to normal seasonality.
Yes, well as Maryann pointed out I mean, we've already put in the supplement of price increases during the second quarter, which of all hit the bills and so the the actions that were that needed to be taken for the second half of already been taken and so we know those numbers and as we guided overall reported of price will be about 5%.
The meeting probably come in a little higher than that as you look at Q3 and in the Q4, but also importantly, as it gives us the higher entry point rollover into next year.
So look this pricing environment.
Part of the 19, what's what what's left to come back there cause that's a big driver of of this I believe.
Sure. It is I said of I've been looking at that remaining piece that you know about half of it I could put in in the buckets of the north East and <unk>.
And Canada and within that there's as much as 30 million in New York City is still to come back.
Okay see the Michael with most of the return of the office folks look in the post Labor day Uhm, that's why the Marines point earlier, we don't assume the any sort of recovery of that and look up the upside in my assumption is that could be more of a queue for events in Q3.
Yeah cause like our shop us talking about backed off of September 7th So that's right.
The quarters over and we'll see what the government oriented us of those expectations and so that's why we looked at the upset.
Right and just to emphasize that prices baked at this point volume could have an upside depending on what happens with what you just referred to the right.
That's the right way to think about it yeah.
On the M&A piece to.
So your comment about 1 more gets closed is it mostly tuck ins or do you have some new market opportunities like you didn't say, Rhode Island in Tucson, or Southern Virginia, a couple of years ago, and then that creates an incremental compound are going forward as you consolidate them.
As you know.
For us to be doing a typical year that means we're doing 2 to 4 new market entries of between 20 and $40 million of <unk> and revenue.
We're doing 15 or 16, or so tuck ins uhm again, the compound or is that you talk about within our network so for for us to.
Bad above the average it means you're right we're looking at.
Many of new markets, what's the provide additional platforms to continue the the strategy.
Okay. So that adds even of greater sort of lengthening of the compounding on the M&A US is the point of that absolutely.
Yep and then.
How do you frame your wage inflation vs you're coming into the year and where we are and then how do you think about that trend into 22.
Sure I mean look we just like we saw.
Kind of of the the last for alcohol labor pinch getting kind of late 18 early 19, we saw wage escalations average.
Upwards of 5 to 5.2 per cent.
In certain periods the back then.
While we had expectations going in of the year.
The 3 to 3 per cent for wage escalations.
You know I'm not surprised that as we got into the queue to we we we find ourselves running 555 for staff because we made the decision the recognition of everything that the field has gone through.
Over the past 15 months or so in the light of the current environment to be proactive and get in front of wage escalations. So we put a couple of hundred more basis points into the system.
Darn cute too.
And I think our folks deserve.
And so knowing that.
The you know as we always do we.
We we look at our P&L in and make sure we we want to recover it.
Look 5 per cent price increases.
Probably half or less of what you're hearing from consumer product companies and another customer facing industries that.
R. R R.
Haven't cost inflation that that they are trying to recover the good news is this industry set up the recovery.
And so you know when when our folks deserve it we need to go out for cover it.
I would think that wage inflation may abate next year. If you. If you think you play through the the the pandemic and the impact of that and folks kind of.
Coming back into the work environment, but.
You know I've always question Jay-paul I'm used the word transitory so I'd hate the tie the word transit towards the wage inflation too. So we'll see what happens next year, and obviously will will be responsive and cover whatever's needed.
And then historically on your land for gas side you of partner.
Am I hearing 3 of the implicitly you're not on the 3 to 5.
You're going to do them, all yourself or is there still of partnering and and tied to that.
Is there a way to.
Try and hedge some of the exposure on the range. So.
We take some of the volatility app of you enjoy the returns economic still.
We are open minded the partnering I mean, we've.
The member lot of the sentences. It's not just the plant you are looking at it's also the marketing of agreement with regards to the.
The monetize and the gas it could be a pipeline involved with it as well and so there are various parties that that around the table when you're developing the sorts of projects and we evaluate alternatives.
Having 1 or 2 of those partner with us or our us taking it all off.
And so we don't have any restrictions are access of capital.
Limitations that don't allow us to do it all but we.
We want to be mindful of looking long term of Hattie of tie how do you for everyone's accountability to the success of the project together.
And yes, you are right, we can we can hedge and day risks.
The the sorts of revenue streams us we look ahead.
And just like right now we've got a portion of our Rent's hedged.
Yeah, we we may look at the same thing as with regards to these plants as well.
Okay, and then on the incremental of 50 million of capital spending what's gonna be the focus of that's fine.
You've seen us uhm.
Really optimistically, Unfortunately I think.
You know have the big increase the the number of units fleet that we've been able to acquire of this year.
We've also been able to buy some some parts of the planned around certain locations to increase.
Our footprint for for the long haul.
But.
We've taken the Capex up.
For others talked about well out of it can't spend that will spend it.
Some of this will give us a nice pre positioning of of 22 and of pull for the 22 capital of this year and so as we look ahead you know it's it doesn't put pressure year over year on Capex out late next year cause of all of what we're doing this year.
Got it and the last 2 for me are the where are the 2 new murph going and what's the 10% swing and recycling commodity book equal of today.
Well the too numerous of going in the us [laughter] if that is the question.
Yeah, and I mean, obviously, we've we've purchased recently another recycling facility.
Yeah of Montreal, what last year. The so we've expanded the footprint, Canada too, but the greenfield ones are in the us in Marietta the tech a set of questions and the 10% of out of 125.
125 million that would suggest the bat from <unk>.
It is $5 million would be of 10% swing and commodity value.
Okay. Thank you so much.
You bet.
Thank you.
Our next question is from the line of Sean East Man with Keybanc. Please proceed with your question.
Hi, guys nice quarter, thanks for taking my questions.
A lot of companies are are talking about sort of having to turn down growth opportunities because of labour availability.
Where where are you guys at their I mean can you stay on the offensive on growth or how would you characterize that.
Alright.
Look I don't think you necessarily will notice the impact of the numbers, but without a doubt.
The markets, where where we are short drivers I mean, that's.
Being short labor US is I think for the statement that most industries are talking about right now and so with regards to some increment of roelof activity of that that could've gotten done in the period vs. It might slip into another period, absolutely, there's there's a little bit of that going on but.
All in all of you don't you won't really seat in the numbers because it is such a such a small amount.
[noise], Okay fair enough and you mentioned you know part of the 115 million and deals that got that are signed or closed represent west coast franchise acquisitions.
Could you just remind us what the significance of that is and as we look at the near term pipeline is a big part of that also west coast franchises.
The remaining pipeline us is really coast to coast.
Yep, So the west coast, we still have.
The opportunities on the West coast.
But it's not particularly concentrated on the west coast, which is what I'm trying to say.
The I think the the unique thing about the west coast to recall is the need for local consent.
These franchises require innovation the actions by local municipalities that adds incremental time 2 of the process.
So while we may have already gone through HSR.
We're still running the traps on getting those consent and that can add in some cases 2 to 4 months to the timeline to get the things across the finish line. So that's the 1 thing that is unique about the west coast and the need to move more quickly and the stock that timeline with regards to local consent.
Okay. Thanks, a lot where I think I'll turn it over.
Thank you.
Our next question is from the line of Tyler Brown with Raymond James. Please proceed with your question.
Hey, good morning.
Good morning.
Marianne so thanks, so much for breaking down the 175 million I think an incremental revenue for the guide I may have missed it but the big picture How's the 75 million of incremental EBITDA breakdown between price and volume of commodities and M&A.
Sure. So the the breakdown would be the incremental solid waste of the way to think about margins us around 40% of course of the $25 million an acquisition contribution would be lower than that around 25 per cent and as commodity effects fuel would work out to be about 50 <unk>.
Contribution.
Okay. Okay. That's very helpful. And then you you called out incentive com.
Oh, sorry, I don't recall, you, calling out of incentive comp last quarter you called it out this quarter is it safe to assume that you guys are over accruing or doing some ketchup accruals. This quarter and then his incentive comp a sizeable margin headwind in the back half of it feels like maybe it is.
And for all that the first thing where he got the recall, we didn't call of that last part of it because of the comparison was really to a lesser pandemic impact of quarter of the prior year.
Right right installed it out really.
Frankly, we wouldn't have called it out but every other company of the support of ahead of US gave us some insight into it. So we wanted to be consistent and give you that insight as well.
Obviously, the weight of that in the in the second half is not as big.
Okay. Okay. That's helpful and then on the 5 per cent pricing and this is just more for modeling purposes, but how much of that is just fuel.
So the 30th.
The pricing.
It's primarily for pricing on our model of as a small amount you saw that 20 basis points of appeal surcharges and cute too kind of of the right way to think about it as we move to the back part of the year. So that tells us at Corinth approaching for 5 on its own.
Okay. Okay. That's helpful and then yeah sorry.
Oh, sorry, but I know, it's early but as you think about next year. Obviously, we have some pretty good CPI prints, but is it is it safe to assume that it maybe pricing of better place holder is still maybe in the for the low for type range and I guess it is it even really matter I mean, the the key.
He is this is all really of spread.
Spread game, if you want to call. It that I mean, it's it's really looking to be out of positive spread over unit cost and it's really going of depending on where unit costs come in.
Yeah. Thank you for like a pricing next year I mean, you got 2 components, where I talked about entering the year of the higher entry point given the more recent price increases would put in place and so the rollover impact of that plus you'll have a step up and are exclusive markets of.
50 to 100 basis points of year over year vs. What we're getting this year again that lagging impact of of price of those marketplaces.
That would mean for and a half the 5% you know us insight for next year.
And again, we're pretty well positioned with the again the entry point being higher in an exclusive contributing more.
Okay that sounds good and then on the E. M. P. The side and I know revenue was up slightly sequentially and it sounds like your baseline in the current rate forward, but the.
Do you think of some of the E M P's hedges kind of roll off that you're gonna see activity maybe pick up there are you just hearing any chatter in the market on on drilling activity.
We've had some indications that drives are coming back of that that'd be a pick up again.
That the wait to see it before we get to that but we are encouraged by some of the dynamics. We have there we think 22 of the better year the 21.
Yeah, Okay, alright, thank you I appreciate it.
Okay.
Thank you.
Our next question is from the line of from there Okay with Oppenheimer. Please proceed with your question.
Thank you maybe I can just pick up on Tyler's question actually around the N. P. You know I think just to get into this little pet it looks like the life that count is the 2013 level alright, I mean, there's been so many more wells completed then drilled over the past year I think in some of the <unk>.
Since that you're in it's particularly stark.
So.
He was on the logical like drilling activity has to pick back up.
If you're hearing 2022, you know more likely for that recovery makes sense, but I I guess, you know do you see anything structurally getting keeping us from getting back to like I took the million dollars per quarter type of business and the second question is how do you think about incremental margins at this point.
Sure I mean, I think you have put more meat on the boat with the guards for our expectation of Wi twenty-two us a better year of the 21, because you're right and obviously, there's more of a waste generated from the drilling activities and just the completion of activity and so that would be a key driver to getting us back the 50 million of quarter.
It'd be nice to get back to that again, but continues the sequential improvement as we move for that business and as you know the incrementals in this market in that business because of the landfill based business.
Or in the 70% to 80% range and so.
As we.
As we kind of continue to see the the the kind of sequential quarterly increase will click back to 50 per cent of better margins at at the lower revenue rate than we needed in the prior upside of upturn and so the business will will easily cross 50 per cent of if we were approaching $2.200 million of Andrew.
A lot of spaces and no. It to that point were encouraged by the fact that in in Q2 already at $31 million in revenue E&P with no longer of drag it in the sense then add the margin bear with in line for slightly above the corporate average.
Mhm.
Okay excellent and then just you know I think the 1 of the things that's happened over the past year is us some companies had the kind of slow the role of technology implementation.
In in kind of of computers and the like just given everything else going on but it's obviously strategically important for you you know to keep doing so and helps you you know target some of the higher risk of market. So you can just sort of update us on where some of the key technology implementation of retire.
Sure and you are right in saying that the.
The wish it was faster, but like you hear many other industries chip delays have slowed down our ability to.
To the rolling out as fast as we like them. So.
Where will be back on schedule.
Before the end of the year on that and again as of talk about the the the new generation.
Cap technologies, the there's a lot of benefits that we get from that.
And so I think the police where we stand on that we've we've already rolled out of our.
Our latest and greatest update of tablets programs and so that's hamlet rollout Uhm is also continuing as we move through this year, but clearly the.
The the 1 delay we saw was was most pronounced in in the camera side just based on some chipped the latest.
Yep Yep alright, Thank you very much and May shop I appreciate it.
Thank you.
As a reminder of she would like to ask a question. Please press the 1 followed by the for on your telephones.
Our next question is from the line of for Michael Spanninger with Bank of America. Please proceed with your question.
Hey, guys. Thanks for taking my my question I know the last time you guys for this project with the price of implementations.
Talking about the late 2018 period, when I think unemployment late without a record low the second 1 was challenged I think when you look back of margin for actually flattened. There. So your yeah. This is of comparable time period, you're saying with wage pressure on the <unk> Yeah. Your margin to spend this quarter and you guys of showing confidence.
In the second half so what are some of the difference is we keep talking about and that was the last time, we saw the type of late Labour pressure you, having the type of success on the margin for anything we get kind of glean from that companion for that last year.
Sure and what particular period are you looking at because I will give us the exact answer.
Yeah, I think it was if I'm not mistaken I think it was in 2018, you guys were talking about the the type of course caught crunch that you guys were kind of feeling in the second half of 8.
Unemployment rate.
Yeah, you Gotta look first and foremost that recycling right I mean, that's the way in China changed stripes on recycling industry and.
We got down what 75 million of EBITDA.
And that was on.
Not much more revenue because it was all commodity driven right and so that was a a huge impact the margins and obviously you have the the downdraft.
The going into a down draft with regards to the E&P as well and so those of the 2 high margin effects, but clearly if you're looking at 18 and the run of right. There obviously, China was the biggest disruptor with regards to come out of of you guys.
And again the name of that right now because China's a ton of update of bold, but obviously the the demand in the U S for recovered commodities is insatiable.
That makes sense and kind of the follow up on I think Tyler's question. I mean, you guys of guiding the second half margin expansion. She guys are already getting ahead of the price cost dynamics and you're exiting this year certainly above 5 per cent or even higher on pricing we had the CPI reset the the second half of 2022, so what are the <unk>.
Not just setting up for a higher than normal market expansion next year, maybe just the puts and takes their of why we wouldn't see higher than normal.
Margin for expansion for 2022.
Yeah, because of the world doesn't normally move up into the right with regards the anything people model right.
Yeah, and so we always know that.
Markets are like a portfolio, there's always something happening somewhere that could be of politics. In some cases of it could be a cost issue of another case and so rather than I'll get ahead of ourselves we'd like the the up into the right without any disruption to be upside and let's assume that you know you've got some issues.
So it makes the hit you all the time with regards to to the looting all the good that would talk about it so.
Not out of the question to your point, but we would suggest that people on us for pure perfection like that.
Okay enough interest lastly, what are the like anything you're seeing at all in in July of recently with some of these hot spots that are popping up out of it maybe it's too early and just curious if there's anything you you're you're hearing.
On the ground from.
These guys recently and hot spots at of impacting volumes or or or anything of on there. Thank you.
The 1 thing I would say because you're right there that some hot spots and I'll get to that but if we look at you lie.
Right now recycling it over $500 million a month in revenue in the month like July and to look at our forecasting for that month the relative to the revenue. We did we came in at around 1 half of 1% above the revenue we had forecast [laughter] and so I say the.
Because you look at the the the command and control and the inside of our people know their business yeah. There's a lot of happening on the ground, but through that kind of.
True that.
What you see here is supposed to still another business center of executing the hell out of their business and so we are quite pleased with with the way July was forecast in the way it came in.
You're right on the labor side of the Delta variant you know I think in our industry are industry replace a lot of data you see in the U S. U of scenes increases again this more of the labor side of the anything else you've seen increase the positives.
That's been regional in nature in some cases in the hot spots and the others that impacts.
Thing that the at the contacts racing quarantine knock knock off on that.
But our posts work through it I mean this is in the industry of of the real people real families that care free Charlie the care of their communities of want to get the job done.
It's a testament to to our folks leaning into it and the and the commitments as best as possible and so it's up it's upon us in these times and like in a year to to pair of people well in the recognize them for the reference.
Great. Thank you.
You bet.
Thank you.
There are no further questions at this time of attacked me for now turn the conference back on for too.
Lots of no further questions on behalf of our entire management team. We appreciate you listening to an interest in the call today.
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Thank you.
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