Q3 2021 Waste Connections Inc Earnings Call
Yeah.
Greetings and welcome to the waste connections third quarter 2021 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.
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 on Thursday October 28 2021.
I would now like to turn the conference over to worthy Jackman President and CEO. Please go ahead.
Thank you operator and good morning.
I'd like to welcome everyone to this conference call to discuss our third quarter 2021 results.
To provide a detailed outlook for the fourth quarter and updated outlook for 2021 as well as some early thoughts about 2022.
I'm joined this morning by Mary Anne Whitney our CFO.
As noted in our earnings release, we delivered another top to bottom in the period on continued strength in solid waste pricing higher recycled commodity values and improving E&P waste activity along with the acquisitions closed during the period.
More importantly quality revenue drove both sequential margin improvement in the period and 60 basis points year over year, adjusted EBITDA margin expansion in the quarter.
Becoming an estimated 40 basis points impact from dilutive margin dilutive acquisitions and hurricanes.
This puts us firmly on track to exceed the increased full year 2021 outlook. We provided in August and delivered year over year margin expansion again in Q4.
Strong execution proactive acceleration to solid waste pricing to address inflationary pressures and outsized contribution from acquisitions already positioned us for double digit growth.
Underlying solid waste margin expansion and strong free cash flow conversion in 2022.
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.
A 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.
Results could differ materially from those made in such forward looking statements due to various risks and uncertainties.
That could cause actual results to differ are discussed both in the cautionary statement included in our October 27th 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 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 measure.
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 Jorge <unk>, Great. Thank you Mary Anne we're extremely pleased by the broad based strength of our business and solid execution in the quarter with better than expected top line growth driven by all lines of business.
Starting with solid waste.
Price plus volume growth of seven 3% reflects our proactive approach to managing through the current environment by implementing additional price increases to address wage and other cost pressures.
Total price was five 1% in Q3 up 20 basis points sequentially and slightly better than expected and range from two 5% and are mostly exclusive market western region to between four 8% and seven 3% in our more competitive regions.
Looking ahead, we are positioned for another sequential increase of pricing growth in Q4 to about five 5% as the full impact of incremental price increases is realized.
Reported volume growth of two 2% in the period was also slightly better than expected.
Positive volumes in all of our regions, except our eastern region, which was essentially flat due to the tough year over year comparison from an outsized special waste job in one market last year.
Of note in the East, though was the improvement that we're seeing in New York City, where volumes were up 11% as commercial activity has picked up along with reopening activity.
Also noteworthy is our western region, which had the strongest volumes going into the COVID-19 pandemic and continues to lead with volumes up 5% in the quarter.
Companywide all lines of business showed year over year improvement looking.
Looking at year over year results in the third quarter on a same store basis commercial collection revenue was up 12%.
Roll off revenue was up 11%.
<unk> increased by about four 5% on increases in all regions on strong pricing.
Driving rates per pull up about six 5% year over year.
Landfill tons were up about 5% and MSW and special waste and <unk> waste.
Moving on E&P waste revenue was also up year over year and stepped up sequentially on higher activity levels in all of our major basins.
We reported $35 million of E&P waste revenue in the third quarter up $11 million year over year and up 12% sequentially from Q2 in spite of the disruption to drilling operations in the Gulf of Mexico as a result of Hurricane Ida.
We are encouraged by increased rig counts in elevated crude pricing levels, which if sustained could set up for increased activity in 2022.
Finally, looking at Q3 revenues from recover commodities that is recycled commodities landfill gas or renewable energy credits or rins.
Excluding acquisitions collectively they were up about 110% year over year, primarily due to higher commodity values.
Old corrugated containers or OCC up 150% year over year.
Prices for OCC averaged about $186 per ton in Q3.
In our wind pricing averaged about $2 70.
As noted earlier all lines of business outperformed our outlook in the period, along with acquisition activity, which as expected picked up in the third quarter.
Year to date, we have closed acquisitions with approximately $240 million in annualized revenues with the potential for that amount to increase by another $100 million to $150 million as we go into next year.
We had anticipated that this will be a big year for acquisition activity for all companies across the solid waste sector, and we continue to be selective and disciplined in our approach to acquisitions as we recognize the importance of market selection and asset positioning as well as value creation.
As anticipated the strength of our operating performance free cash flow generation and balance sheet positions us for another double digit increase in AR.
Quarterly cash dividend.
As announced yesterday, our board of directors authorized a 12, 2% increase in our regularly quarterly cash dividend, our 11th consecutive double digit percentage increase since commencing the dividend in 2010.
We continue to have tremendous flexibility to fund our differentiated growth strategy and outsized acquisition activity along with an increase in return of capital to shareholders over the long term, including opportunistic share repurchases.
We also capitalized on opportunities to invest in our business. It didn't allow for any slowdown in our replacement or growth Capex in spite of supply chain supply chain challenges.
Which has hindered investment from any companies.
In fact, we increased fleet purchases during the year and accelerated our preorder process for 2022 to position ourselves for continued growth.
In addition, as noted earlier, we proactively address labor constraints through wage adjustments covered by incremental price increases.
Moreover throughout 2021, we have maintained and expanded upon our commitment to the health welfare and development of our employees.
Higher metal stewardship, and the support of our local communities as detailed in our updated 2021 sustainability report released earlier this week.
The report outlines the progress we have made on the long term aspirational sustainability targets, we established in 2020 demonstrating year over year improvement in all areas.
An 8% reduction in operational greenhouse gas emissions to further improve our already net negative carbon footprint of over three two times.
We also highlight our investments in renewable fuel facilities and state of the art Greenfield recycling facilities as well as upgraded safety features across our fleet and engagement tools for our employees and customers.
Not only did we demonstrate considerable progress toward all of our objectives.
We also incorporated sustainability metrics into our long term incentive compensation targets to provide increased transparency and accountability.
Moreover, we have maintained our focus on in support of our frontline employees, whose efforts throughout the COVID-19 pandemic had been an inspiration for all of us.
Our outlay of over $40 million since the onset of COVID-19 pandemic, primarily to support frontline employees is indicative of our values priorities and focus as we run our business day to day.
Given our safety focus servant leadership, driven culture at waste connections sustainability initiatives are consistent with our strategy and focus on long term value creation for our shareholders as we grow our business.
Now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the third quarter and to provide a detailed outlook for Q4 and updated full year 2020 outlook 2021 outlook belden.
Ill, then wrap up with a few early thoughts about 2022 before heading into Q&A.
Thank you for anything.
In the third quarter revenue was $1 $5 97 billion about $37 million above our outlook as a result of continued strength in solid waste higher than expected recycled commodity values, increasing E&P waste activity and contribution from acquisitions closed during the quarter.
Revenue on a reported basis was up $207 million or 14, 9% year over year, including organic growth of approximately 11, 3% plus three 6% from acquisitions completed since the year ago period, which in total contributed about $54 $1 million of revenue in the quarter or about 51 four.
Net of divestitures.
Adjusted EBITDA for Q3 as reconciled in our earnings release was $505 6 million about $11 million above our outlook.
Our adjusted EBITDA margin of 31, 7% up sequentially from Q2, and up 60 basis points year over year includes approximately 40 basis points combined margin impact from Hurricane Ivan Ida and margin dilution associated with acquisitions in the quarter exclude.
Excluding these impacts which results in an underlying adjusted EBITDA margin of 32, 1% in the period up 100 basis points year over year.
Looking at margin drivers in the quarter.
Modesty driven impacts accounted for about 160 basis points of margin expansion net of a 30 basis point impact from higher fuel on diesel rates up 19% year over year and increased E&P waste activity drove an additional 40 basis points of margin expansion.
These tailwind buoyed by the incremental price increases we put in place during the quarter more than offset inflationary impacts on the business as well as the return of about 60 basis points in discretionary spending during the period.
As our in person training meetings employee and community focused activities and benefits cost continued to normalize.
We delivered adjusted free cash flow through Q3 of $825 8 million or 18, 2% of revenue putting us on track for another upward revision to our adjusted free cash flow outlook for 2021 in spite of continued increases to capex.
As Worthing mentioned, we've been intentional and proactive about capital expenditures R&D up almost 15% year over year and now projected at $700 million upfront $625 million in our original outlook for the year and with the potential for that number to grow as we continue to pursue opportunities to stay ahead.
On fleet and equipment purchases were possible.
During the quarter, we also refinanced $1 5 billion in legacy privately placed senior notes with higher interest rates and more restrictive covenants to take advantage of the historically low interest rate environment and extend maturities through the issuance of 10 and 30 year registered notes.
Our leverage ratio as defined in our credit agreement remained at about two six times debt to EBITDA with leverage on a net debt to EBITDA basis up about two four times at the end of Q3.
Our current weighted average cost of debt is less than 3% with about 90% of our debt at fixed rates.
I will now review our outlook for the fourth 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 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, including as a result of or related to impacts from the COVID-19 pandemic. 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 Q4.
Revenue in Q4 is estimated to be approximately $1 $5 8 billion.
We expect solid waste price plus volume growth of approximately 6% in Q4 with pricing of about five 5%.
And recovered commodity values and E&P waste revenue are expected to remain about in line with Q3 levels.
Adjusted EBITDA in Q4 is estimated at 38% or approximately $486 million up 50 basis points year over year, excluding the impact of about $70 million and acquisition contribution in the quarter driving over 20 basis points of margin dilution and in spite of tougher comparisons.
Recovered commodity values and E&P waste activity, both of which picked up in late 2020 with the reopening of the economy.
Depreciation and amortization expense for the fourth quarter is estimated at 13, 3% of revenue, including amortization of intangibles of about $38 5 million or about <unk> 11 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 Q4 is estimated at about 21, 5% subject to some variability.
Now looking at the full year.
Revenue for 2021 is now estimated to be approximately $6, one 1 billion up over $130 million from our recently updated outlook with about half of that increase from broad based contributions from the Q3 organic growth drivers in solid waste and recovered commodity values plus about 65.
From acquisitions completed since our last update.
Adjusted EBITDA for the full year is now estimated at approximately $1 91 billion or 31, 3% of revenue up 80 basis points year over year with about a 20 basis point margin drag from acquisition.
This puts us on track for year over year margin expansion in every quarter of 2021 in spite of escalating wage and inflationary pressures in 2021, and the sequential sequential ramp in 2020 driving increasingly difficult comparisons.
Adjusted free cash flow in 2021 is now expected at $1 <unk> 5 billion or about 54% of EBITDA, an increase of $25 million from our previous outlook in spite of a corresponding $25 million increase to Capex. Since then now estimated at $700 million.
And now let me turn the call back over to <unk> for some final remarks before Q&A.
Maryann.
We are extremely pleased with our year to date performance, especially given the pandemic widespread cost pressures labor constraints supply chain disruptions and other challenges.
We've not only navigated through these challenges to deliver strong growth and margin expansion.
We also increased our outlook for the second time this year and are on track for adjusted free cash flow of approximately $1.0 billion to $5 billion in spite of proactively accelerating trucks and equipment purchases.
We've already implemented price increases to address inflationary pressures with pricing growth increasing throughout the year and further accelerating into next year.
We've completed about two times, a typical amount of acquisition activity for the year and expect the pace of activity to remain elevated.
We just announced another double digit percentage increase from a regularly regular quarterly cash dividend and have derisked, our balance sheet, reducing our annual interest expense, while locking in up to 30 year debt at favorable terms.
In short we're already well.
Well positioned for next year, and although we won't provide a formal outlook for 2022 until next February we were able to share. Some early thoughts assuming no change in the current economic environment.
Solid waste pricing growth should ramp to between five five and 6% in 2022.
Acquisition contribution is already at about two 5% growth potentially reaching 4% to 5% by year end or early next year.
Solid waste volume should reflect underlying trends in the macro activity.
Avionics, a tradeoff of price over volume is more important than ever and in an inflationary labor constrained environment.
In addition to potential double digit topline growth. We also expect continuing underlying solid waste margin expansion and strong adjusted free cash flow conversion next year with double digit per share growth.
We expect to have better visibility on the tone of the economy and expected acquisition contribution E&P waste activity and commodity driven revenue in February when we provide our formal outlook for the upcoming year.
We appreciate your time today I will now turn the call over to the operator to open the lines up for your questions operator.
Thank you.
Ladies and gentlemen, if you would like to register a question. Please press the one four on your telephone you will hear a three Tom from technology a request.
Your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three one moment. Please for the first question.
Our first question comes from Jerry Revich with Goldman Sachs. Please proceed.
Hi, This is Adam <unk> on for Jerry today, Thanks for taking my questions.
Was wondering if you could talk about the level of <unk>.
Open market prices that you folks are putting in through October.
And if youre able to put up five 5% core price in Q4, do you see that potentially accelerating above the 6% range in Q1 of next year.
Well look at next year first I mean, as we've said on my closing remarks, we expect pricing next year overall, two to average between five 5% to 6%.
And so we'll see how the macro performs as it moved through next year and respond accordingly, if need be above six yes.
But we don't see the need for that right now.
And as we said also obviously in our open markets, we said before.
Pricing range anywhere between Im rounding, 5% and 7% on average in the competitive markets and.
And again as you look at that just stays like that going into next year and again, we've got about 40% of our business. That's franchise Thats doing with two 5% price. This year that alone will go up but at least 100 basis points next year and so just the 100 basis point incremental contribution from those franchise markets.
And waved at 40% at 40 basis points. It adds to the total pricing so effectively we're already in that five 5% to 6% run rate right now as we look to next year.
Okay, great. Thanks, a lot that's helpful. And then in your sustainability report you talk about opportunities to pursue Greenfield recycling projects. When you think about targets to get to the I think $2 3 million targeted tons by 2033, how much of that ramp is going to be achieved.
<unk> from Greenfield projects versus.
Investments in existing plants.
Yeah, well the biggest capacity jumps would be combination of new facilities, we're in where we're where.
We're targeting new facilities is where we already have the tonnes.
On our own trucks to make the facilities.
Economic to pursue numbers. These aren't just greenfield speculative facilities, where we drove dawn patrol volumes. This isn't a build it and they will come type attitude.
So youll see us build a couple of facilities in existing markets.
That will be one jump in the recycling numbers and obviously as we continue to pursue acquisitions and bring on new facilities and additional markets Youll see those numbers continue to move up again.
Great. Thanks, so much.
Okay.
Our next question comes from Sean Eastman with Keybanc. Please proceed.
Hi team excellent update here, thanks for taking my questions.
<unk>.
Maybe just zoning in on the margins.
Could you just bridge the implied margin expansion for us in the fourth quarter.
Thats pretty notable considering the comps are tougher just just some context there for what you guys have been able to do in the fourth quarter would be helpful to start.
Sure I think that's a great question because a lot does change did changed last year between Q3, and Q4 and if I look at the tailwind.
Of call. It 230 in in Q3, those steps down by about 70 basis points in Q4, and so to your point when you see that we're still increasing margins by 30 basis points. In spite of that it tells you that you're seeing more of the benefits of those incrementals.
Price increases, which are already impacting margins this quarter and that will step up in Q4. So I would say that's the biggest movers, Sean yes, because the underlying is actually 50 basis points or more but then you take the 20 plus basis points dilutive impact from acquisitions, which gets you to the third correct and so it's even more pronounced than.
The cover shows.
Okay. That's really helpful. And then as we look out to 2022, I mean are there any headwinds in that bridge that we need to consider.
We see a normative level of operating leverage in the solid waste business and then maybe a little juice from E&P. If this revenue run rate holds and continues to tick up perhaps is that the right way to think about it.
Sure I'd say of course, it's early days and we will give our formal guidance in February but to worthiness earlier remarks, when we think about the pieces that are already in place for next year. Yes, we think that we would have sort of the typical underlying solid waste margin expansion and then as you know of course that with <unk>.
Acquisition contribution that would have to the extent the layer that exam that would come in at the lower margins and have an impact and then.
To your observation if <unk> were to remain at current levels in recycling and Rins, there would be some tailwind associated with that.
Okay terrific very helpful. Thanks.
Thank you.
Our next question comes from Hamzah, Missouri with Jefferies. Please proceed.
Good morning, Thank you.
My first question is just on the volume side.
I understand the price over volume strategy makes a lot of sense.
But just looking further just into volume.
You may be talk about what was weaker I know you've mentioned in New York was up 11% Western volume leads overall volumes I guess, we're up slightly above two which was better than your expectation, which maybe it was conservative but anything on the volume side that you would call out that was you know.
Below 2% growth and then also as part of that are you actively walking away from low margin business today in this environment.
Sure.
The two the two regions that had sub 2% volume growth are all due to special waste comps in the prior year.
Right.
That's that can be lumpy can move from one period to the next and so that's just a timing issue with regards to comparisons right everything else was two 5% to 5%.
On the volume growth side by region.
When it comes to walking away.
I would say is what we're seeing more is that companies that have pursued a low margin revenue growth strat.
Strategy.
Which because of low margins you basically underpinning people, so you're infected with Hyatt turnover companies like that are failing.
This is not the environment that provides.
Hi.
Scheme of things in the context of things, it's it's not that high.
Would we walk away from from volume at low priced absolutely I mean, we've we've had two rebids lethal legacy contracts that we got with Progressive transaction. We said all along early in the process that we repriced the bulk of those contracts and there were two to three that still have five years left to run on them and guest.
Five years is up.
And in both those cases, we have rebid.
Two acceptable margins.
And.
It's almost comical what people will took him at.
Because they took them at at rates well below us and prior to the inflationary runner.
And so we will see how they perform on those but to your point answer.
We don't feel some practice.
Labour is not plentiful and available so of labor that we have we're going to make sure we pay them well that we get paid a fair rate for them.
Gotcha and then just.
Pricing shorter pricing be higher than 6% because you know in 2008. Your pricing was 5.6 inflation's a lot higher today I know your business makes it a bit different part but.
It shouldn't pricing be higher or are you just being conservative and you're sort of pricing figures.
Well, you've got to remember that 40%.
The business is tied to some kind of local CPI that legs or rate of return.
We're not begrudging that because what we know is that volume almost acts like price right. The incrementals from volume in those exclusive markets because it's coming on at scale.
Is accretive to margins and so so when you're when you're still tag 253, 5% type price.
Look at those markets. This year look ahead next year and put 5% volume on top of that we are still running 7% to 8% price plus volume in the current environment in price and volume is acting as a quasi price and so the elements a little bit different where it gets accounted for is different but the reality is look if.
If everyone's printing, 7% to 8% or so organic growth right now in this environment or price plus volume.
If you are expanding margins.
So forget about the breakdown. If you are expanding margins chances are you're getting more price and that if you are not chances are you are not.
And so that's.
It's not as much the headline but it's.
Opponents of where you're not getting as much price, but that's okay, because what's happening in the volume side.
Guarded last question I'll turn it over just.
On the on the Labour line it looks like your op leverage was better than one of your larger peers, who reported earlier, maybe just talk about what what are you doing on the Labour line to manage through.
Labour availability issues.
Your inflation. It seems like you were ahead of that and adjusting wages, but just walk us through what your strategy is on the Liberal line. That's helping you today relative to you know maybe some of your larger peers and I I realize not everybody's reported yet but she is just any flavor there. Thank you.
Yes look I would say.
Back in and look at the what is it called the spirit the great resignation, great stay home period, where you want to call it.
But the pressures in our markets and no different than other companies I mean, we're all up significantly in overtime year over year are openings are up now openings to stabilize over the past few months.
We're hiring a record number of people every month, we're focused on our retention and making sure. We can keep more of those people longer to get them to their first year anniversary, because that's where the critical hinge point. So I'd say, we're all afflicted by similar.
Similar pressures.
So I think as I said in the script and at least we said.
Formation quality of revenue matters, right and so you've got to focus on you got to accept the reality is that what it takes to try to keep a workforce.
Pay them well have gold plated benefits et cetera care about the hours of service care about the equipment that they are running into driving and that's our office.
But you've got to recognize the reality of that and then price your way through it.
And so I think some of the leverage you might be referring to is the fact that when we see it we respond to it and we talked about this on our last call. We were early to doing that this year.
Early to double down on wage growth and to go out and recovery.
And I would just add that to your observation that other people have have talked more about that cost pressures the numbers aren't different from what we've heard about their company say the double digit impact had the labor line everything with the labor component, which are now relying on third parties to do you have the same kind of increases whether it's broke ranch.
Outside for parents et cetera, I guess the distinction is that because we have more revenue because we went out and among other things did does incremental price increases that math the impact of those outside cost pressures and what's remarkable perhaps is that performance at the underlying solid waste business we.
Recovered so much of what those headwinds translate to if you just take the simple math of a 10% increase in your casket would've suggested you'd be down 200 basis points, which is why we can understand how other people numbers were different and it shows how much we've offset with the underlying performance of the business.
Thank you.
Our next question comes from a Walters Franklin with RBC capital markets. Please proceed.
Thanks, very much operator, and good morning, everyone. Thanks for taking my question. We're not so just the initial question here is.
Just your assumptions underlying the guidance he provided for the fourth quarter and into next year, where they typically you are quite can.
Inserted in terms of how you, how you forecast and and and.
There is a lot of markets that are not entirely reopened yet I think I'm sitting in one of them.
Did you use your guide therefore based on kind of business conditions staying that the way they are or do you do you assume when you look into next year that pretty much everything is back to normal all markets are reopened and your guidance is based on that just to get you to try to get a sense of how conservative the <unk>.
Functions are underlying your guidance for next year.
We don't assume what we don't control and so no. Any addition, additional reopening activity that might be beneficial to two commercial collection in particular, just like you. We referenced what we saw in New York in Q3 that would be additive. So it's really why we haven't really pegged the volume number yet.
And again in February we will have more visibility into that.
Comment on that.
Okay, that's great and then turning to your acquisition strategy.
Any change in approach and how you are looking at companies at all and it's specifically are you looking at.
Or <unk> or focusing more more specifically uncertainty geographies.
And types of a business.
As we as more and more acquisitions happened solid waste becomes.
Less and less opportunities here <unk> how.
How do you look at liquid special waste that kind of thing is that something you just inherit when you do a solid waste acquisition or is this something that you could solid waste opportunities become less prevailing do you start to shift your focus into.
More ancillary areas for on on the way. So I'd just curious on the on the type of acquisition, you're looking at going into next year yeah.
Runway spilled exceed $4 billion in private company revenue core solid waste.
That fits our model again, that's within a context of about 18 or 20 billion private company revenue basket and so we still have a lot of runway ahead of us for.
For the kind of deals we do sellers picked the timing of that.
Right now we have.
Easily over 15 LOI is in place, we will see how much of that converts.
The sign transactions that's coast to coast, that's in the U S and Canada.
And so again, it's it's maintain flexibility.
Be there when those sellers decide now it's time.
Some.
There has been rushed of it to exit this year. There will be continued folks that are looking to sell next year as well.
But when it comes to kind of.
John low margin commoditize.
Poor quality free cash flow.
Type quote environmental services, that's not us.
You know this environment, where there is no near term implications of repercussion overpaying you see companies like that that I. Just described still trying to trade for 10 to 12 times.
And solid waste is a is a much better return profile traditional solid waste than any of that and so now we'll stay will stay at the company that you know and continue to do what's driven our past successes, we look ahead.
Okay. That's a great color appreciate the time and congrats on a good quarter.
Thanks.
Ladies and gentlemen, as a reminder to register a question. Please press one four on your telephone. Our next question comes from Jeff Goldstein with Morgan Stanley. Please proceed.
Hey, good morning, Thanks for taking my questions seem good morning or not.
You mentioned the prepared remarks seem prices ranging from 4.8% to 7.3% in your competitive regions. Some curious and those higher priced regions, where is that exactly occurring is that largely because of the higher rate of it labor inflation those markets or is there. Some other dynamic in play there mainly I'm curious if other regions could take up to that higher law.
Oh as well.
Yeah, it's really hate to use the word mix, but if some of the regions, where you saw a kind of a five ish present percent while their call competitive regions.
What they have in there is a mix of shorter term municipal contracts, we think of that as competitive with those typically go out to rebid and so you've got contracts in place that may be tied to CPI.
Piece of the business within those quote competitive regions and that's what generally averages down the the comparative price. So it's really a mix issue of how much of those municipal contracts or within each of those quote competitive regions. The other thing I would add is it also with respect to mix more heavily commercial markets, where you see the greater proportion of higher pis.
Okay. Okay that makes sense and then with volumes continuing to be positive you every year able to comment on overtime hours, specifically have these hours increased significantly given the uptick we're seeing in volumes or or do you feel you still have that under control just give them the pricing that you've been able to do.
How should we think about the give and take there.
Yeah look at some.
Overtime.
I think you heard company or a appear earlier this we've talked about over time dollars being up 30% year over year, we're no different [laughter].
You got to manage through it went openings or higher our service can go up.
And that will drive that will drive overtime.
Do I wish we could hire more drivers and reduce that absolutely are we trying absolutely every ardmore recruiters to address it absolutely we distributing more recruiters into the field versus regional offices, yes. So now.
This will ask this will naturally.
Correct itself as as again as we make further inroads into the number of openings as we get into.
Upcoming seasonality and the business upcoming season now is a little lighter on the business and so we can we can see improvement in that as you look ahead too.
Okay I appreciate it.
Our next question comes from Pinar Brown with cream and James. Please proceed.
Hey, good morning.
Hi, good morning.
Hey, I just want to go back a little bit to Canada. Holmes's question. So in 22, just based on the CPI mechanics wouldn't the second half pricing accelerate from the first half just on the CPI rollover strengthening through the year and doesn't that actually give you maybe a little bit of line of sight into 2023 already.
Yes, and yes.
But.
[laughter], let's get the February it will give you the exact map, but no you're right I mean look to the average five five to six that means you're starting at the lower end probably of that and exiting the high end or bad.
Right, Okay, and if you look at look at next year. So the entry point into twenty-three is higher.
Okay, and then you you sound very optimistic again on M&A, even as we close out the year, but if we start to think about next year, a little bit and again, you've kind of got this spectre of something that happening on the tax side, which I think is kind of driving all these deals maybe here in 21, I mean, how should we think about deal flow.
22, you think that could be a below normal year or do you think that that is likely not the case.
No again, as we said earlier I mean, we could we could start the year with 4% to 5% contribution already in place right. So that's that's that's a high number going into the year.
Next year, there's no reason why we shouldn't do at least the averages which again is about $150 million of acquired revenue in a year.
People still go through you know lineage transition issues health issues estate planning et cetera, that's a natural.
You know, we won't sit here today and predict an outsized your next year, but let's see out of the year plays out but.
But if there is enough momentum in place and kind of.
Momentum to to to get that to the average size of transactions done next year and so it's just the midpoint of that that's another 75 millimeter contribution of the year, which he has another 1% plus right. So that's potentially a 6% plus contribution in the full year.
Right. Okay. Okay. That's helpful and my last one here. It is impressive on the Capex side I mean, even most of my truckers are struggling to get their full spend in.
So number one can you talk about how you plan for that and the number two Marianne can you just give us any preliminary thoughts on Capex trends next year do you expect them to rise or is there may be a pre by this year just any dynamics there.
Well I'll start Mary.
Look at our planning for 21 sees it for 2020 and 21 started when the pandemic yet [laughter].
Look we knew when when factories shut down or when they cut back staff or.
Distancing.
And capacity was basically cut.
We stepped on the accelerator.
Yeah, we actually some cases offer financial lifelines to some of our vendors to make sure that they.
<unk> would be fine during the pandemic would never.
Was necessary in the end, but we certainly reached early on just out of concern for folks when you think about how dark the dark days, where there's people speculate it early in the pandemic, but look we got ahead on things last year as you know.
This year, we were already expecting.
Fleet for 22 back in early Q1.
Yeah, we had half our unit spect already and what we decided to do was to say look along the way if we could find those units now, let's just put them in the fleet now, let's take let's take maintenance pressure off let's let's get get the age down.
We probably got about 120 to 140 more units this year on.
On the flip side than we had budgeted.
Some of that growth.
A lot of that's getting headstarts twenty-two yellow are in the same thing we put another $10 million to $20 million at work above budget container capital again, given the growth in the area in some markets.
They were out a container capital budget it by by March and so we don't say no to growth and so we were very aggressive one container capital as well some land purchases I mean, it's on all of the above approach to capital.
It's almost like being Santa Claus all year right [laughter].
And whenever whenever someone approach and said Hey, I can get my hands on these 20 units for this or that what do you think you'll get it.
And again these years that fit our specs and we had our interests always anticipated doing it so.
So yeah, Capex is up $75 million or more relative to original guidance and I am sure. Marianne is going to say is that means capex next year ought to be down your ear [laughter].
Was worse in her mouth, and you would be right, where I think.
Yeah of course to your question, what we what we sought to a boy with having an air pocket in 22, olive or anything right observation and that's how we positioned ourselves and so yes, certainly as a percentage of revenue, it's down and and and absolute dollars that should be down and I would say to the extent that we get more.
One as we both mentioned and and prepared remarks between now and year and we think it does it <unk> further pulsar. It's from 22, so that's the way to think about it.
Okay perfect very helpful. As usual thank you.
Mhm.
Our next question comes from Kevin Chang with CIBC. Please proceed.
Thanks for taking my questions Congrats on a good quarter.
<unk>.
I I I I suddenly come across my screen. This morning actually just we'll just the impact of a lot of these vaccination mandate from a lot of.
Local I guess federal government and the impact that's having a labour availability I'm just wondering.
Ah you see any of that I mean, the neighbors already pretty tight is that.
A growing issue for you or not in the sense that you know you might not be under that umbrella of kind of having a vaccination mandate and your labor force.
Well look in handy.
Labour constrained environment anything that might put further pressures on that it's concerning.
Look our our employee base.
Flex the the private vaccination levels.
Similar to the country.
Or the race or ethnicity within the countries.
And and their beliefs.
In positions about.
The vaccines go both ways right.
So look.
You can't call you can't call frontline employees essential and heroes, one year, and then and then chase them off I tried to chase them off and forced him to do things another year right and so look at it as.
Being inclusive means inclusive and everything we do not just what's convenient right and so.
We value the input.
In a different abuse of all employees and that extends to to the vaccine.
And that's what several leadership is is listening to your folks and understanding it and so.
By all means we're watching it.
But I don't think the.
The profile of our employee base is any different than other large frontline organizations and the government. If they want to get this economy back going and get supply chain bottlenecks taken care of and all that kind of stuff.
We'll probably see delays in this kind of stuff as you look ahead, because it's not something that.
This is not a time when the government needs to exert additional.
Pressures within an already constrained environment.
Well that makes sense I think it's a it's a sentiment echoed by.
But by many frontline frontline companies there.
Hold on a second question I know I know, it's early days and just in your sustainability to report again highlighted beta testing electric vehicles, but I kind of just pull up the.
The timeframe here I'm wanting to <unk>. This is have a call at a near term or medium term impact on how you think about well how you see capital intensity, just given the higher upfront cost.
For these vehicles.
Does that materially change kind of how your typical capital intensity run right looks and then just how that flows into margins because you do get the benefit of other thing, obviously, no fuel costs and lower maintenance.
Did you see a point where that structurally starts to impact of margins positively from kind of the range. It's been been at in <unk> in recent years.
I'd say eventually.
Yes, but it's it's we can't even we don't have a lot of flat on that right now because again.
We're now what almost over a year delayed in getting the first two units and that's not our stay at the manufacturing issue right.
An inspection issues and crossing the border issues in a pandemic and so look a year ago, we would've thought we'd have eight units on the road.
Fully electric electric chassis and electric body, we thought would have eight units on the road by the end of this year and we're still waiting for the first two to come later this year early next and so by all means when when to pass first year will beta test them make sure approve them out right.
Eventually when manufacturing capacity escalates, absolutely, you'll you'll be turning opex in the capex.
Which means.
Large operating margins go up.
You know as you said <unk> you can nailed it I mean maintenance ought to be down right.
Fuel ought to be down a host of things ought to be down that that we would hope you know go will give us a six or seven year payback on the incremental capex at most.
And so we need to prove it but you know that's not gonna happen in the foreseeable future.
We're probably five to 10 years away from having enough manufacturing capacity, where you'd see.
A notable change and and this tradeoff of up extra capex.
Okay.
I'm not aware of one, but but but there's so many out there. It's R. A refuse electric vehicles subject to a lot of the glass you see for some other commercial vehicles out there that if that's something you can tap into or was this is this something you'd have to.
Self fund without any real direct government support.
Yeah.
You know don't have the answer for that because we have in fact will get in.
If we if there are available that will help the payback for sure. Okay. That's it for me.
Thanks, again, great quarter there.
Perfect.
Our next question comes from Ah NOLA K with Oppenheimer. Please proceed.
Good morning, and thanks for taking the questions and.
And just thinking about E types within the Labour market I mean, there's been tightness in the labor market for a long time, but just given where it is right now I wanted to ask you about their investment priorities, obviously waste as as the people first business and and the way you run the business reflect that but wondering how you think about technology.
At a leper too.
Some of these labor constraints over time as it is.
A lot of conversation on it's better to call about automation, whether it's at the Mercer or other functions, but I'm Gonna just proposed the question you more broadly where do you see technology, having great potential to help manage the pressures in your business.
Sure and I'll start Marianne chime in.
Look it's it's in all of the above right I mean, there's no one specific thing you do and say that's the the secret solution right.
Across the board are we are we looking to automate.
Manual routes, where possible, yes are we putting robotics in Merced.
Take out on average one to two people.
For a robot per shift yes.
Nothing will have over 42 robots or or so that we would have bought in the past 16 or 18 months as you get to the end of this year. So.
So we do that as well.
Are we looking or have we already deployed engagement tools and technology basically our own Instagram.
House to better engage employees.
Looking gauge men and retention are critical because if you want to if you want to help solve the labor constraints keep the people you got [laughter].
I mean, now there's always gonna be involuntary turnover for photo exhibit risky behavior or other things, but on the voluntary side I mean, if we're if we're stepping up and improving our processes on recruiting if we're stepping up and improving our boarding and training.
And stay interviews and engagement following dialing with the employer with their families.
More people that were hiring lately will stay with us longer and give us a chance. This is a hard industry to work and we recognize that and we have to do all we can to.
Engage are people that make for work life balance for our drivers. So we can do all that.
That that's.
That's the that's our answer to trying to to to solve it because if we look we can we can hire 450 to 500 people a month, that's not the way we got the machine to do that.
You know if we can if we can keep our people more.
And we will need to hire 300, that'd be a whole lot easier right.
But.
Anyway. So it's it's there's no one answer you know we don't spotlight technology, but you know we're doing all all the investment you would expect from not only on the on the employee engagement side, but the digital connectivity with our customers and.
And our ability to improve the customer experience.
What's up with regards to engagement with our csrs Luckily so.
It's.
You never you never rest [laughter].
They're always dozens of initiatives, we have including just clicked order where folks in order online and it goes right to dispatch csrs never touch touch the customer with regards to setting themselves up for service. So.
<unk>.
Against all of the above approach and the only thing I would add is a question of safety standpoint, and as as you may recall, we were working had been working on an upgraded camera technology network patent working through our our whole fleet in passing that out too and again, that's way to focus on our people and our number one priority.
<unk> place.
[noise] Mmm perfect and thanks for that answer and I just wanted to ask a quick clarifying question a commented to expectations for underlying solid waste margin expansion next ear.
I just wanted to make sure that that comment on underlying the.
Have you had there would be dilutive impact of acquisitions or is there any other factor, we should be considering that might.
Contribute to move maintain solid waste Martin's.
No I'll take to your point, we're referring to the margin diluted impact of acquisitions.
Alright, so it's not like for their discretionary cost or anything like that.
No again, we think it's some more normalised environment.
Okay perfect. Thank you so much.
Our next question comes from Michael Hoffman with Stifel. Please proceed.
Hey gang, how ya doing I'll try and be quick.
Good morning.
So I want to talk about the business just in general So are you, saying new business formation or are we getting service animal upgrade so we and that sort of part of the cycle.
Yeah, I mean increases are well in excess of decreases.
We look at our gross or net new business relative the budget on the competitive sales side and that's trending well ahead of budget.
So short answer yes.
Okay and that momentum was building to the second half. So it carries through the first half and I know, we're not talking about absolutely volume guys, but twice as much as you want but we've got some macro things that are favorable around volume.
Well macro things that are favorable and then as a reference for some contracts again that that you know that we rebid, where they should be in and have not renewed that's fine for us because those are those are EBITA dollar and margin accretive for us [laughter] Yep Yep I got that I haven't been out of <unk>.
Couple different trade group meetings and hearing from vendors that they're hearing small market Uni is having so much trouble with labor that they're willing to start privatizing.
Is there a little bit of a small wave of that.
Out there as well.
What was clearly a pressure.
Again, whether it be municipal providers or you know, let's talk before revenue focus low margin private companies.
That look when when wages are are moving as much as they are when external pressures dark all adding up to 10 or 12% pressures in their P&L, that's called 100 per cent of their margin.
And so clearly whether it be private is looking to surrender or municipalities, saying I'm down 40% of my driver's hadaway.
They weren't ready to dynamically respond with regards to required wages too.
To do it and so it's yeah.
Yeah, I wouldn't be surprised to your question that we'll see a little bit of that but that's incremental that's not in the know mover.
Yeah, No I got that and then on the <unk> side can we think of most of the.
Year to date thing primarily tucking so.
As you anniversary integration may have an initial deletion, they're pretty healthy leverage to it.
Well, Yeah, we talk about.
The impact of acquisitions. It's obviously, it's it's it's talking about Standalone sees a a major standalone transactions, where you're keeping a separate P&L.
And you can look at the just the impact of those on the on the business and as you know a heavy collection oriented.
You know it was running into mid twenties to high 20% margin and if you throw something that's got more recycling a resource recovery in this environment, you know to get can approached 30%.
And so to the extent that again, that's in the mix, obviously tuck ins or in the mix as well.
And tuck ins tucking themselves don't move the needle because right. If we just write down 140 $240 million of quite revenue already.
The vast majority of that will stand alone transactions, new market entries versus tuck ins.
Okay. That's what I was trying to get at and then when we think about where the wrens or what are you able to do to protect the downside risk there because.
As part of that you can't control say wake up beside the army has different number next year. So what are you doing to try and help protect the downside.
Well what you saw this year, Michael was to put some hedges and play some locked in place since about 60%, France. Since this year has been locked and so as we look ahead, we will consider doing the same thing going fine.
Okay, and then lastly for me can you frame what the current run rate is on the internal cost of inflation.
Well, what we can look at a specific line items and we can say look at labor for instance, and as as Berthing mentioned.
Think we'd really echo will be tried other people say in our experience is very similar that we're seeing double digit 810% plus increase if I look at all the the labour lines and.
And then as I knew the total cost of labor wages overtime benefits.
Subcontract Webb.
Not just hiring here every year, but the all an increase and then as you know Michael and as I made reference earlier there are several other line item, which captured that it's from a third party standpoint, and so we have several of the buckets, where they are at 10% again, which is why it's so important even if it's just recovering.
Get on a dollar basis on the top line can be getting the incremental price increases in discretionary on top of that I mean, it's.
Were quick to flip the switch last year as many companies were to to pare back on discretionary and a tape of the pandemic, we kept saying we want those cost back in the business. That's an important element of who we are in our culture and as quickly as we turn them off we turned it back on.
So you saw that impact the quarter.
That's on top of those inflationary pressures.
So <unk>.
Off the top of my head that's put you in a four plus something internal cost inflation your pricing at five therefore.
People should be happy.
Again, I mean, so far or are we just have one peer to compare ourselves to and again give us sequential improvement in the business due to to Q3 on margins and what what did year over year.
It's it's a stands in contrast.
Yep, Okay. Thank you.
Our next question comes from Chris Murray with a T V capital markets. Please proceed.
Yeah, Thanks folks good morning.
Going back to thinking about the recycled business today.
Only commodities are moving in your favor and it's making a lot better but we've gone through a couple of cycles now.
And some of the discussion is around just how you price that business or how we structure. It I'm just wondering if maybe improve pricing you start looking at maybe more aggressively restructuring contracts as we go forward or is that something that you may be looking at differently than maybe worth a year ago when when prices were a lot lower.
Sure Good morning, Chris.
I would say that it's important to remember how were setup for recycling and the fact that about 70% of the recyclables that we process come off of our own track and many of them alright and markets for a long duration contracts and so as we frame that it really wasn't an opportunity to derisked the business or re.
Structure contract, but the way we've approached it as worthy mentioned earlier in some cases internalizing the recycling by bringing them to our own facility. We bought up a couple of distress facilities. We're done acquisitions that came with recycling facilities and we're working on some Greenfield project. So we think about making sure that it's a rash.
And on market and we thank the overall the industry has moved in that direction and it's a good thing specific to our customers and and how we're setup. That's how we are in dressing and improving the business on the areas we control.
Okay.
But it but is there any further opportunity maybe getting some more interest in folk you wanted to look at the commodity piece of it.
In this environment and maybe laying off some of that risk.
As I said, given the longer they protracted duration of a lot of the contract where this revenue said can't think west coast and the value of the franchises.
When we look at those contracts in the aggregate, we're very pleased with the way their structure and we wouldn't consider at this time changing that we've considered commodity hedges in the past and we haven't done them and I'm glad because I would've been wrong, 100% of the time.
And then moving on just to be in T business. Just uhm. This business comes on and off like a light switch and with where we're at right now I need to talk about the fact that next year I'm in <unk> business could could really step up can you just remind US you had started making some investments in some landfills.
At one point like some new capacity and I think maybe pause that a little bit as as the commodity price dropped and activity levels dropped where do you really stand today in terms of your capacity.
And one point, we're running call at $50 million a quarter plus type revenue numbers is that something that we should be thinking about would be kind of peak for you guys. At this point or is or maybe a different way to think about the profile.
We do not have capacity constraints and so more it's a function of drilling activity.
And yet groups back above 80, and it's probably heading higher than that but it seems like the the Capex news has been slipped around so many of these drillers to not not drove for fossil fuels that.
There's the there's a dependency right there.
It's crude going up yes, we will continue to go up most likely now you've got to answer the question of what with a capital spending patterns of our customers, but we don't we don't have capacity constraint that says we can only do 50, a quarter or do 70, a quarter et cetera, that's not that's not the issue and and again if if.
I think right now we're still sitting less than 500 rigs are still less than a third of two cyclical peak and when I can get back to that or was still less than half of the most late Lady cycle peak, but.
You know if that if the if the rigs show up Oh by the way they need labor.
There is this issue call getting labor and getting a cruise to do this and that they're constrained as well but.
So your reference to <unk>.
Silly, we mostly built out to the extent the demand is there will finish that facility is pretty quick thing to do and will open it up for for additional capacity, but there's no constraints right now.
Alright, that's helpful. Thanks, a lot.
Mister Jackman there are no further questions at this time, please continue with your presentation or closing remarks.
Well if there are no further questions on behalf of our entire management team. We appreciate your listening to an interest in the call today Maryanne and Joe boxer available today to answer any direct questions that we do not cover that we're allowed to answer on the Reg F D. Reg G and applicable securities laws in Canada. Thank you again, we look forward to speaking with you.
Are you at upcoming Investor conferences zooms, our next earnings call.
Ladies and gentlemen that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line have a great day everyone.
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