Q1 2022 Waste Connections Inc Earnings Call

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Yeah.

Okay.

Greetings and welcome to the waste connections first quarter 2022 earnings conference call.

During the presentation, all participants will be in a listen only mode. Afterwards, we'll conduct a question and answer session. At the time, we have a question. Please press star one by the four on your telephone if a new time to Congress to reach Carpenter me across the start but is here.

I would remind this conference is being recorded today Wednesday may 4th 2022.

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

Thank you operator and good morning.

I'd like to welcome everyone to this conference call to discuss first quarter results and to provide a detailed outlook for the second quarter.

Joining me this morning is Mary Anne Whitney our CFO .

As noted in our earnings release, we're extremely pleased by our strong start to the year with record solid waste pricing growth driving underlying margin expansion in spite of inflationary pressures.

Our 50 basis points year over year decline in adjusted EBITDA margin in the quarter included 90 basis points combined margin impact as expected from $10 million of Covid related frontline support in January and acquisitions completed since the prior year period.

Looking ahead further sequential improvement in solid waste pricing growth, increasing E&P waste activity and strong operational execution should continue to differentiate our performance.

We are on track to meet or exceed our full year adjusted free cash flow outlook of 1.15 billion.

Elevated cadence of solid waste back acquisition activity has continued.

Approximately $175 million in annualized revenues closed year to date, confirming our expectations for another outsized year of such activity.

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.

And good morning, the discussion during today's call includes forward looking statements made pursuant to the safe Harbor provisions of the U S. Private Securities Litigation Reform Act of 1095, including forward looking information within the meaning of applicable Canadian Securities laws.

Actual results could differ materially from those maintenance such forward looking statements due to various risks and uncertainties factors that could cause actual results to differ are discussed both in the cautionary statement included in our May 3rd earnings release and in greater detail in waste connections filings with the U S Securities and exchange.

<unk> 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.

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 Worthing.

Thank you Mary Anne.

In the first quarter, we delivered solid waste price plus volume growth totaling seven 6%.

All in price of seven 1%, including about 80 basis points and fuel and material surcharges Mark.

<unk> is our highest reported price and range from about 4% and are mostly exclusive market western region to between seven five and eight 5% in our competitive markets.

Up 140 basis points sequentially from Q4, or Q1 pricing was 60 basis points above our outlook and ramp during the quarter as we continue to address the accelerating inflationary headwinds during the period.

Looking ahead of Q2, we expect another sequential increase in both core price and surcharges with all in price growth exceeding 8%.

Our pricing strength continues to reflect our purposeful approach to addressing the headwinds of inflation.

And the resilience of our market model.

Both of which are hallmarks of our strategy.

Moreover, the differentiated level of price is a testament to the execution of accountability of local leadership in our decentralized operating structure and the visibility on costs, which informs our approach to pricing.

Reported volume growth a positive 50 basis points also exceeded our outlook.

As noted last quarter reported volumes reflect about 80 basis points impact from the expiration of two poor quality municipal contracts, thus, implying underlying volumes up about one 3%.

On a normalized basis.

Volumes were up in all regions and continue to be strongest in our western region, which was up two 6% for the period.

Looking at year over year results in the first quarter on a same store basis commercial collection revenue was up 12% year over year.

Roll off pulls per day were up 5% on revenue per pull up 7%.

And landfill tons were up 4%.

Led by a 12% increase in special ways with MSW tons up 2% and C&D tons up 1%.

<unk> waste activity was broad based in both Canada and in several U S markets, including Colorado, Illinois, and Minnesota.

Some markets were favorable weather may have accelerated the timing of subject some jobs otherwise planned for Q2.

Looking at Q1 revenues from resource recovery.

It is recycled commodities landfill gas and renewable energy credits or Rins.

Excluding acquisitions collectively they were up about 35% year over year due to higher values for both recycled commodities and risks.

Resulting in a margin tailwind in the period of about 60 basis points.

Prices for OCC or old corrugated containers averaged.

Average to about $163 per ton in Q1 as expected.

And <unk>, mostly stayed in the range of $3 to $3 25.

Slightly below the levels, we were seeing earlier in the year.

And finally on E&P waste activity, we reported $40 8 million of E&P waste revenue in the first quarter up 65% year over year and up 19% sequentially from Q4 on a pickup in activity during the quarter from increased drilling as well as remediation jobs pri.

Marilee in the Permian Basin.

Given the backdrop of higher rig counts in elevated crude pricing levels. We are encouraged by the improving trends. We saw during Q1, and which continued into April bringing the quarterly run rate to about $45 million.

We are similarly encouraged by the cadence of acquisition activity year to date, we've closed approximately $175 million in annualized revenues all in solid waste and in both the U S and Canada through four months, we've already completed what we would consider an above average year for us.

And the pipeline remains robust as always we remain selective about the markets, we enter and the multiples we pay as we maintain our focus on long term value creation.

To that end, we continue to take an opportunistic approach to share repurchases, we repurchased $425 million outstanding shares in early Q1, we also accessed the capital markets early this year to lock in more long term debt at an attractive rate and free up capacity on our bank facility.

The strength of our balance sheet with leverage about two six times on a net debt to EBITDA basis, we remained well positioned to capitalize on this period of outsized acquisition activity with Optionality around our continued return of capital to shareholders.

In addition to share repurchases, we would expect to maintain our established practice of increasing our annual per share dividend, while we undertake our typical review in October .

Now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the first quarter and provide a detailed outlook for Q2.

Then wrap up before heading into Q&A.

Thank you where I think in.

In the first quarter revenue was 164 6 billion about $36 million above our outlook and up $250 million or 17, 9% year over year.

Organic growth was 10% in the quarter and acquisitions completed since the year ago period contributed about $112 million of revenue or about $110 million net of divestitures.

Adjusted EBITDA for Q1 as reconciled in our earnings release, with $502 1 million and 35% of revenue.

As a reminder, this reflects 60 basis points impact from the $10 million in Covid related support that we provided in January plus 30 basis points drag from acquisitions.

Normalizing for this unique supplemental expense and the margin dilutive impact of acquisitions adjusted EBITDA margin would be 31, 4% up 40 basis points year over year.

Reported margins also reflect the impact of higher diesel costs during the quarter.

<unk> expense in Q1 was about 4.0% of revenue.

Up about 70 basis points year over year, including the benefit from hedges on about half of our fuel purchases mitigating the impact of higher prices.

We averaged approximately $3 30 per gallon for diesel in the quarter up about 30% from the year ago period, and up about 12% sequentially from Q4 <unk>.

Margin impacts reflect the quick run up in fuel prices during late February and into March which drove incremental costs of about $4 million for a drag of about 30 basis points beyond our expectations in February .

Looking on a reported basis Q1 year over year margin drivers.

This 60 basis point benefit from higher commodity different revenues described earlier was more than offset by the 70 basis point fuel headwinds also noted resulting in a net drag of about 10 basis points.

Higher E&P waste revenues accounted for about 40 basis points margin expansion.

As expected and noted acquisitions resulted in a drag of about 30 basis points and the $10 million in Covid support from January accounted for a 60 basis point drag.

And underlying solid waste margins expanded by 10 basis points demonstrating.

Demonstrating the power price and the importance of a proactive approach to reiterate in the face of record levels of inflation, which not only persisted but accelerated during the quarter, we achieved underlying margin expansion in solid waste hauling transfer and disposal.

Finally, we delivered adjusted free cash flow of approximately $320 million or 19, 5% of revenue in Q1.

Up 10, 6% year over year in spite of capital expenditures up over 55%.

As such we are well positioned to meet or exceed our full year adjusted free cash flow outlook of $1. One 5 billion provided in February .

I will now review our outlook for the second quarter of 2022 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 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 in Opex includes any impact from additional acquisitions that may close during the remainder of the year and expensing of transaction related items during the period.

Revenue in Q2 is estimated to be approximately one $7 85 billion.

This includes solid waste price plus volume growth of seven 5% to eight 5% as worthy noted we expect pricing growth to increase sequentially to a range of 8% to eight 5% and reported volumes are flat to down half a point.

Similar to Q1, our reported volumes will reflect about 80 basis points drag from expired contract.

Thats, implying continued positive underlying volume trends.

E&P waste revenue is estimated at approximately $45 million and recovered commodity values are expected to remain largely in line with current levels.

Adjusted EBITDA in Q2 is estimated at 31, 2% of revenue or approximately $557 million.

This reflects an expected 40 basis point margin dilutive impact from acquisitions completed since the prior year period, implying margins to be flat year over year, excluding such impact.

Depreciation and amortization expense for the second quarter is estimated at about 12, 8% of revenue, including amortization of intangibles of about $37 5 million or <unk> 11.

Per diluted share net of taxes.

Interest expense net of interest income is estimated at approximately $45 million and finally, our effective tax rate in Q2 is estimated at about 22, 5% subject to some variability.

And now let me turn the call back over to worthy for some final remarks before Q&A.

Thank you Marianne.

We're extremely pleased with our start to the year, particularly given the challenges of record levels of inflation magnified by geopolitical events ongoing supply chain disruptions and labor constraints as well as the overhang from Covid related variant impacts.

As has been our focus throughout the pandemic. We have continued to provide outsized levels of support for the health and welfare of our employees and their families.

And to that end, we're also getting back to a regular cadence of in person training and other opportunities be together for shared celebrations recognition and collaboration.

We believe we are well positioned for the remainder of 2022 with record solid waste pricing underlying volume growth.

Further growth in E&P waste and easing cost comparisons.

In addition acquisitions completed year to date, coupled with a robust pipeline suggests we are solidly on track to meet or exceed our full year 2022 hours.

That said, we will stick to our typical approach and wait until our Q2 earnings release to update our outlook for the full year.

Q1 is a fitting start to our 20 <unk> anniversary year, a year in which we remind ourselves that our intentional culture intentional strategy and potential value creation have driven our success through the years. We appreciate your time today I'll now turn the call back over to the operator to open up lines for your questions operator.

Thank you very much.

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Once again, another fostering the questions or comments you may have it is tier one four on your telephone keypad one moment. Please our first question.

And we'll get to our first question on the line from Toni Kaplan with Morgan Stanley .

I have with your question.

Thanks, so much.

Wanted to ask about if you could talk about attrition trends versus history, obviously you're in.

Really exclusive secondary markets and attractive.

Our strategy for attrition. So just wanted to understand if pricing has had any impact on it or not really because of basically the strategy that you have.

Yes.

Good morning, Tony with respect to attrition or pricing retention.

Said another way as we've observed really for the past several quarters throughout.

Throughout last year and into this year the retention rates have really been at historic highs.

I think the fact that we keep continuing to deliver price in excess of the way. We guide reflects that as well as the fact that we did incremental price increases and some people have asked if we see a difference across geographies in terms of the receptivity to price increases and the short answer is now we have seen a very broad based highly receptive.

The environment for price increases.

Okay.

That's super and.

Separately on recycling.

Harriss just long term.

Do you see recycling sort of growing to as a percent of revenue what would be the main objective there that you have.

Okay.

Move too much as a percentage of revenue to what you see currently.

Obviously, the commodity values drive a portion of that but as you may know we have two more facilities that are under construction now that should come online before the end of next year.

That will add nominally two to total recycling revenue, but again the pace of acquisition activity will continue to keep that in check as a percent of the total.

That's great.

One last one for me just sort of a broad question around volume I know you've had more of a price focused strategy I know volumes being impacted by the expiring contracts this year, but just long term.

Should we think about your volume growth in line with the market or is there something about the selectivity of your markets that should lead to.

Lower volume level than the market. Thanks.

Well.

Through the year as we've always said that we think of this industry as being 1% to 2% volume growth industry. Obviously, there are periods, where it exceeds 2% and some periods where it might be below 1%.

But.

The thing you've got to remember here is especially.

Our model given the geographies, we do cover so much of our business is a fixed pay system.

And so the.

Actual calculation of the volume growth is likely.

Likely closer to being impacted by 15% to 20% of our revenue, but for new contracts will might be one episodically.

So to be reporting.

1% to 2% volume growth.

You're reporting between 10, and 15% growth on that 15% to 20% of revenue that's really impacted that's really impacting reported volumes and that's really meeting roll off activity and third party tons across our scales.

Super Thank you.

Thank you very much we'll go to our next question on the line.

From Walter <unk> with RBC capital markets go ahead.

Thanks, very much operator, and good morning, everyone.

I wanted to turn to.

<unk> is here and.

And I know.

Kind of touch on this before but just wanted to double check here that.

Your competitors are starting to look into adjacent markets.

Highlighting the lower capital intensity, but the strong returns it's a compelling case.

<unk> and widens the purview of potential acquisitions at a time, when perhaps deals are getting either either less attractive for us.

In terms of valuation or in terms of availability. So just curious where then your your view on <unk>.

Propensity to go into adjacent markets on on on the merits of that.

Of that thesis there that it is still high return and still consistent with with somewhat consistent with the markets Youre in right now.

So again this would be the third call the road to get the question.

And so we the third call in a row that were consistent with the answer and that is.

Look we have a long runway for within the solid waste space.

Many of the deals we're getting done or transactions that we've been chasing for a.

Couple of decades, and again as you know in our model most of the deals were getting done.

If sellers that are determining when it's right to sell right and the relationship. It's creates a sole negotiated transaction we can't pick the timing if the seller picking the timing so we need to be ready to execute on that.

And again the pipeline that you see us.

Thats actionable as a multiple of the 175 soybean closed year to date.

And so the runway is long for us and obviously.

Many of our transactions that you see here are these new market entries anything of size and so.

There is less of an issue with regards to Doj concerns that maybe some of the larger nationals might have.

As it relates to to returns the return profile is still very attractive again, you've got to remember we do cash on cash analysis here and we're buying businesses with great cash flow and resilient cash flow I mean, a lot of adjacencies and this to.

This industry are lower margin lower barrier to entry.

<unk> and <unk> seen the volatility of those businesses through the ups and downs of economic cycles.

And so we see no reason to change our stripes and who we are and on our March to $10 billion.

That's great to hear and the repeat a question, though I guess always wanting to make sure that nothing's changed in it and it's great to hear.

In terms of staying on that theme of acquisitions here, obviously, you when an acquisition opportunity comes about.

It's there and then it's gone unless unless you transact on it and therefore does it ever look are you ever attempted to or would you consider in this environment, where we're deals come up and once they're gone they're gone that perhaps you look at.

Being a little bit more aggressive I know there is.

There are peers out there is at least one that's willing to go.

Red line at a little bit more to get to get those those deals done.

You've come through a pandemic you've gone through recessions you have proven your resiliency would you consider going.

Above three times.

<unk> for example on leverage in order to take advantage of these kind of.

Unique and short term short term opportunities or temporary opportunities that go go away pretty quickly.

To be able to grow a little faster faster through the M&A front.

Well first off.

Again with.

Over $900 million of free cash flow after the dividend.

<unk>.

The first 900 million, we spent a delevering event right.

Because thats, adding EBITDA too.

To the equation.

So it takes it takes a lot of acquisition activity to move the needle to three times or higher right.

And so when we're doing a lot of transactions, where remember $20 to $40 million of revenues are considered still a big acquisition and our model now we've got a handful that are that are larger than that but it's rare that you crossed 100 Logan revenue.

Per transaction within our model and so it takes a lot to move the needle.

Got to spend close to $2 billion.

Move the needle appreciably on leverage and even try to approach three times.

I say, what's important from a transaction standpoint is.

Look it's.

We need to be.

We're very mindful I can't speak about everyone else's approach, but I'm sure they are as well.

When you see labor.

Labour Spiking the last two years as we've seen what we've now seen fuel spike in third party logistics costs Spike.

Anyone that whereby we need to make sure that the plant is already executed are implemented to overcome the current realities of inflation or that the plan is actionable in the very near term to do it.

The lesson, we want to be doing is valuing somewhere around 2021 results in the face of an underlying 8% to 10% cost pressures. So it's.

The folks we're we're transacting on we need to make sure we can check the box on that because to your point, we don't want to see the multiples move up.

Yes.

Great and just a final one for me here for Maryann margin expansion, a little more muted than what we had seen in the past I know you flagged the employee comp on 60 basis points in the acquisitions on 30 is that pretty much it.

Would we see you get back to more of the 50 50 to call.

Call. It 75 to 80 basis point improvement that you would normally get now that you are passing some of at least the employee.

Comp aspect.

Or could we see that carry through to the year that may put a little bit more pressure on margins than what you would otherwise.

Reported a normal normal period.

Sure well well well certainly I appreciate you acknowledging the 90 basis points, which is as we've tried to make the point you think about our reported margins would have been 31, four but for the discretionary.

Decisions to add those costs and then of course the opportunity to do deals. Yes, certainly the other thing that stands out would be the impact of fuel and the 70 basis point headwind and then the fact that we still drove underlying margin expansion in solid waste in spite of the fact that we have a headwind like that so.

Sure if their warranties kind of pressures wood margin expansion have been greater absolutely that being said, we wouldn't have needed as much price and I think as you look ahead to Q2, the observation could be that underlying margin expansion based on what we're seeing now it should be greater in Q2 than it was in Q.

But also you got to remember.

Looking at.

And about 8% inflationary environment, if all the company does is recover the dollar impact of that.

That's about 140 basis points dilutive to margins.

Fact that as we are guiding in Q2 net of acquisition activity that were flat year over year.

To me Thats up 140 on.

To get that back right.

So the fact is that I would say right now in this environment, we're doing much better than the <unk>.

30 to 50 basis point margin expansion just to be running flat year over year and this is it.

Place generic pressures ease.

No.

The starting point of down 140 <unk>.

Arrows and you start seeing reported margin expansion.

In future periods, Okay makes a lot of sense. Thank you very much I appreciate the time.

Thank you we'll get to our next question on the line from Jerry Revich from Goldman Sachs Go right ahead with your question.

Yes, hi, good morning.

Good morning, Eric I'm wondering if I'm.

I'm wondering if you could talk about.

The leading edge inflation indicators that you look for in your business and how are they trending we're going to be coming up on comps, where we started to see pretty high inflation in the back half of last year and I'm. Just wondering are those comps at a point, where we might see.

Percent inflation slowing.

In the business potentially in the back half of the year can you just talk about what Youre seeing since you folks were among the first to see inflation.

Accelerating to the upside.

Sure that's a good question because.

Look just like the use of the word transitory last year that wasn't.

Our view is inflation, you've got to be prepared for inflation to be sticking around at these levels for four.

A couple more quarters.

And run the business assuming that now if we're wrong because we.

We start Anniversarying.

Higher levels in the prior year and it does these a little bit as we've always said that's upside for us.

Our expectation that it could be running at more elevated levels for longer meaning through this year and most of this year.

Is that some people relate to realizing.

Inflationary pressures last year, I believe it or not I mean, we will look at vendors. Even this year that are trying to play catch up for what they didn't do last year.

They are just waking up to the realities of GE higher labor and wages that theyre paying wasn't transitory right and so we're still seeing.

Price increases, especially with certain vendors that even today, a raging up to upwards of low teens.

And so we're going to run our business assuming that that is the environment until it's not.

With regards to wages, our wages were up about 8% year over year. In Q1, Q1 was our toughest comp because we really started pushing wages heavily.

In Q2 of last year, and so are our kind of wage wage pressures, we'll start easing, but with regards to inflationary pressures on from third party vendors and stuff, we're still seeing that in the macro look fuels should fuel should be unknown right. Now. So when you when you say labor and is mostly known and.

And fuel is known then it should start to ease, but we're going to again run our business.

Assuming it is not until the dose.

Okay Super and then can we just talk about in your recycling business, we're seeing strong interest from chemicals companies on procuring recycled plastics wondering.

Wondering if you can comment on what the.

Pricing point is for recycled plastic for you versus Virgin plastic and whats the potential that we might CEO and meaningful premium develop in that market over time.

Sure so.

Let's start with sort of.

Framing where the value of recycled commodities desk.

It's really been primarily in the fiber so when we talk about that basket, it's really been 50% to 70% of the value sits in fiber, it's moving up towards the higher end of that range as OCC has come back and you're at this 160, 165% type of level for FCC I mentioned that because yes plastics are part of the equation, but they're a small piece of the equate.

And the reality is that it's not as though there is a price at which our interest changes.

This is the basket of commodities and to the extent, there's greater value in a piece of it will do better now have we seen some differentiation among different grades of plastic yes, there is greater demand for some than others and so that's a good thing it just increases the value of the basket and frankly, if it increases the interest in doing more recycling.

From a consumer standpoint, or a manufacturing standpoint, that's all additive and good timing since we're adding recycling capacity.

So as you know, let me look at the refiners want to get in the plastic business, we applaud them just to be clear, we're not going to get in the refinery business.

Okay.

Are you seeing an improvement in what you're selling the plastic versus.

What Virgin Plaza, it looks like as that startup.

That happened yet because obviously in the past it used to be a discount I'm just wondering.

You're starting to see that.

Narrow at all or is that something that certainly narrow question.

Yes, it certainly narrowing it as I said.

Thats certain grades about performance.

As a general lift in plastic values overall.

Okay, great. Thanks.

Thank you.

Okay turn next question on the line from Michael Hoffman with Stifel. Great ahead.

Thank you good morning worthy maryanne.

I'd like to come back to the volume to ask it from a different perspective.

It does.

Data that Youre looking at support a thesis that new business formation, so thats small container.

Service interval trends are being positive neither of those have peaked.

That's one of the factors that.

You alluded to that market growth, one to two but things that contribute to why it can be higher.

What's your data telling you about the underlying business activity.

Let's see Q1.

Net new business for us doubled year over year.

And that's that's measuring what's happening through our sales force, which obviously sits in competitive markets.

Right. Okay. So that's a good positive statements then.

So we hear equipment is on allocation.

Alright, we know labor is tight.

So are you seeing potentially less competition for.

Is that right.

Piece of growth somebody puts them with store and a new business and it needs a garbage service because the competitors sitting are going where do I get the equipment, where do I get the labor.

I don't think of it as much on that type of business.

I think youre seeing some municipalities.

Maybe trying to rebid their contracts.

Sure.

Because they are end of term.

In the old days. They may have had six month lead times are eight months lead times on the bid.

It's.

If it's large enough bid.

They are finding it's tough for people to come to beat because.

It's hard to go get 40 trucks to show up in six months right.

And so in those cases, you are seeing some municipalities oftentimes just trying to extend the existing contract year and put more time on the on the RFP process.

So if you have the business renewal rates are up a little bit and thats. Good for you.

Renewal renewal pricing is up dramatically.

As well okay.

And then I know you were asked this inflation question them from one perspective, I was going to ask it slightly differently do you think the components underlying.

Inflation has peaked and leveled off or not continuing to rise again, we have an anniversarying cycle, but.

Sort of settled in to where they are.

Yes, I think.

It feels like they're they're peaking.

We're getting.

We're getting fewer and fewer double digit increases from vendors I would say that.

So to that end it seems like theyre, peaking but obviously, we're going to be prepared for them to persist until they don't.

Okay and last one for me is the E&P improvement narrow its Texas and Gulf of Mexico or is that a $100 or are we starting to see other basins reactivate.

I mean, it's mostly it's mostly the Permian, where we're seeing things pick up the haynesville is up a little bit Eagle Ford and the good news is we are finally seeing some rigs returned to the golf I mean, the Gulf has been.

Impacted or wasn't backend heavily from the hurricane season last year and we are following to probably seeing some of those negative impacts abate.

Alright terrific look forward to seeing you next week in Las Vegas.

Great. Thank you.

Thank you very much we'll get to our next question on the line.

Hum from Missouri with Jefferies go right ahead with your question.

Hi, This is Mario <unk> on for Hamzah.

You just comment on how Youre thinking about your U S northeast exposure, particularly in light of the larger deals you've done there in Massachusetts. Just can you just remind us what your long term strategy is there.

Well again it's.

It's just replicating what we've always done when going into such markets, which as you've seen us do it in other markets in the northeast you've seen us do in the Midwest.

In other geographies as well.

We had a strategy to go in and.

Try to build a nice to $300 million business.

In new England.

And obviously you've seen us.

Work on the integration and some internalization benefits that we have with some of our sites also in the northeast whether they'd be in New York and Pennsylvania.

And so it's just us executing our playbook.

We entered Massachusetts last year late last year.

We've done another handful of acquisitions, just given the fact that we had the beachhead of Harvey.

And so its just look its just the same playbook you've seen again another markets in new England is no different.

Well look we know there are certain areas in new England that make no sense for us that do not fit our model.

So.

We're not going to disclose where there doesn't mean, we go everywhere.

Understood and then just for my follow up.

It looks like the energy business is finally kind of coming back a little more.

Rig counts up and I guess, just could you give us a sense for whether the revenue base for that business can get back to its prior peak and what would you need to see for that to happen and then also could you just remind us of what your exposure is to various basins and what the margins are within.

Within the energy business.

So starting with the second piece, if you think of that when you say exposure in terms of the percentage of revenue that comes from each of these basins. The largest is the Permian call that 50% to 60% of our revenue next at Louisiana onshore offshore, which is 20% to 25% of revenue very much.

Generally flat onshore offshore after that you then get it quickly jumped down kind of between five and 10% of revenue in a smattering of other basins, including the Eagle Ford.

<unk>.

In terms of getting back to prior peaks I'd say similar recent peak of kind of a run rate of about $65 million per quarter would be the right comparison, because the prior peak beyond that including the Bakken, which really is not a factor so.

We said at $45 million, you can do the math, but it would take to get up there.

I would say the biggest change since prior peaks is although there is more activity in the Permian, there's more competition as well so I'd factor that into any expectations about how quickly we grow into it.

And as you know the macro environment from the drilling standpoint is different now right you don't have.

You got what so about half the rigs from a rig count standpoint versus the peak.

10 years ago.

And so.

The amount of drilling activity has changed dramatically.

Steve for a lot of drillers to spend like drunken sailors of the prior years that's changed right.

Theres different pressures external pressures on the drillers.

And so it's.

Never say never on the prior peak, but it's hard to see us getting back to almost twice the.

The amount of revenue.

That we're doing right now.

Got it and then just on the margins.

Right well overall against the landfill base business again this is a.

Landfill type margins, which is in that 50% to 60% range with the incremental costs.

Awesome. Thank you very much.

Yeah.

Thank you.

Next question on the line from Carla White with Deutsche Bank go right ahead.

May have lost connection we will get to our next question on the line from Sean Eastman with Keybanc capital markets go right ahead.

Hi, guys. Thanks for taking my question.

Could you just could we could we address the inflation topic from a capital spending perspective I'm wondering.

How would you characterize where we're running.

Versus budget on Capex, just with maybe inflation potentially offset offset by.

Delayed deliveries et cetera could you walk us through that.

Sure I mean, you've got to your point I think you spelled it out I mean in some cases.

Some pricing points for for whether it be construction.

For certain units that werent already locked in from pricing standpoint.

Are up this year.

Above original expectations.

But also you've got some delays likely.

Number of units as you look back later on this year that will likely happen.

In some cases, you've got delays.

That basically create an air pocket to backfill.

Inflation that we're putting more capital in.

Because again I think it's important.

To try to get our hands on as much fleet as possible in this environment, but also to have surplus fleet that we can wield around for certain contracts as they come up and so we're we're back filling some of the delays with trying to excess fleet earlier in the year.

But to your point I mean look.

Capex as inflation to you just don't recover inflation within the P&L as we've always said you got a you've got to focus on margins to make sure youre covering it in the capital side as well.

To that end for us to be indicating.

Indicating that we're going to still plan on meeting or exceeding our cash flow guidance for the year. It means as we come around in July and update our guidance there'll be more revenue and more EBITDA.

Accomplish that.

Okay very helpful.

I'm just trying to think about.

The impact of fuel on margins over the balance of the year I mean, it sounds like the whole 30 basis point shortfall versus the guidance in the first quarter was fuel.

Part of that was maybe a catch up dynamic part of that is sort of.

Higher pass through revenue dynamics. So if youll just stayed here over the balance of the year how much dilution.

Would there be on a full year margin expectation.

Sure Q1's, a pretty good indicator of what that full year with D. A.

The incremental 30 basis point.

Looking ahead to Q2 at similar a little worse in terms of what the headwind appears to be in it as worthy data until we see it otherwise we're going to assume things stay the same.

Comps get a little easier, but again, yes.

Yes.

High level, I think that 30 basis point drag it is a fair indication of what we're looking at right now.

The drag in Q1 was more about the timing given the fact that the spike happened. So late in February and throughout March and and the pricing was already on the street. So that's why you see some of the step up in Q2 was us.

Recapturing that as well as adjusting for a full quarter impact of that.

Okay helpful. And then one last quick one so the underlying core solid waste margins were essentially up 10 basis points in <unk>.

What is that number and the <unk> margin guidance.

That number is north of that the way, we think about it you know, maybe it's 20 or 30 basis points, something like that but directionally higher.

Okay excellent thanks, I'll turn it over there.

Yes.

Thank you very much what got her next question on the line is from car right.

From Deutsche Bank go ahead.

Hey, Thank you appreciate it I'm not sure what happened there before I actually wanted to follow up on the fuel question I'm still a little confused so 30 basis headwind relative to your expectation maybe can you just remind us your strategy on fuel relative to others using our full surcharge how much was hedged going into this year and then how are you recovering those costs given the acceleration we saw in diesel prices.

Late in the quarter I.

I guess my confusion is it a 30 basis headwind for the remainder of the year or is it going to be this kind of a 70 basis point headwind.

Headwind for the balance of the year and this quarters.

Sure. So I guess, what we're talking about are two different things one is relative to original expectations right. Because of course, we gave guidance in February and so what I was referring to is probably a fair way to think about the incremental headwind associated with what we've seen thus far and what we're expecting to see in Q2, and assuming that percentage in terms of the level.

Fuel costs that we're seeing with respect to our strategy, we had about 50% of our COO hedged and so the numbers, we're giving you reflect the impact of the mitigating impact of hedging below market rates. So the $3 30 that you saw in Q1 for instance would have been about $1 higher for instance had we not put these hedges in place.

<unk> X purchase contract with respect to how we recover it is there.

Aries in our model in some markets, we do get fuel surcharges, which is why you saw that step up until surcharges and as we look ahead to Q2, the number of steps up from the 80 basis points. We got in Q1. It goes higher in addition to core going higher which is the other part of the strategy since we use higher core to recover.

All different cost pressures, including fuel in some markets.

And then of course, we have our CPI linked markets, where we're not able to make additional adjustments and so we would look to see some recovery next year in the form of higher CPI linked price increases.

Got it that's very helpful. And then I wanted to go back to inflation.

Clearly, it's on the Opex side, but curious.

On the Capex side, what Youre seeing on inflation and how you guys are managing this in order to kind of maintain or increase the returns on invested capital, especially in the context of your more decentralized model.

Sure I mean, it starts with margins right.

I mean, thats south of margins, we're keeping up.

So the rois.

It's when it's when you see folks that are that are down.

Yes.

Margins year over year from a same store basis, that's where you start having the impact of higher capex.

Diluting.

The year over year returns.

So we're not we're not seeing that here.

Got it thank you I'll hand it over.

Thank you very much.

Next question on the line from Noah Kaye from Oppenheimer go right ahead.

Thanks for taking the questions. So last year in <unk>, you started adding back discretionary and medical costs that was stripped out during during the 2020 are those discretionary costs would you say fully back are they any incremental headwind this year.

Well, yes.

Taking a step back there is certainly where different buckets that both discretionary costs in it as you said the things like medical cost, which I'd say, we're at a more normalized run rate generally speaking with respect to things like travel meeting.

Yes.

That has stepped up and as we said we're as Worthing said in his in his prepared remarks.

And to be back together and and we are spending money on those things we didn't call them out in Q1, but they are part of what we've already reported and what we will report the way we are guiding Q2.

Yes, this year, where we're all in on discretionary costs.

So we're happy to we're happy to be back obviously, there are a lot of celebrations going on throughout our company for our 25th.

And said there.

A handful of training sessions throughout the company every week.

And so no.

It's great to be together again and.

This is a year of.

It may be a tailwind for next year, who knows.

Well, let's say, we'll see but that's good to hear and then just on the labor situation, where swears turnover retention at currently or are you still would you describe kind of short staffed on any of your key regions of route.

Give us an update if you can on the retention rates.

Sure I mean look I think every every company.

I don't care what industry, you're in you're probably you wish you had more labor right.

So I say that because we've typically run about 4% to 5%.

And any any any environment, 4% to 5% down.

I would call full employment that's fairly common.

This environment, we're probably running a 100 basis points higher than that so 5% to 6%.

And again it plays you distribute an extra 1% or so of employees.

Throughout so many locations.

If its concentrated in one location is very impactful, but it was distributed across obviously, we're getting by on that.

Well, we've had a huge focus on.

How we hire.

How we onboard.

Retention stay interviews how are we doing on 30, 60, 90 120 days.

To get our newest employees kind of over that hump right.

And so I'm pleased that we're seeing in roads in that.

Turnover for newer employees.

It was improving.

But from an overall turnover standpoint.

We're back slightly above pre pandemic levels.

To be to just be there in this environment of the great resignation.

Our society that we're living in right now I think.

I can only imagine what it could have been had we not been leaning into this these past.

Three or four years.

That's great color thanks for that.

Thank you very much our next question on the line.

Chris Murray from ATB capital markets go right ahead.

Yes, thanks folks good morning.

Just maybe going back to free cash flow.

And your conversion in the quarter looked pretty strong just just trying to think about all the moving parts as we kind of go through the year, when we're talking about kind of hitting hitting or exceeding guidance.

A few pieces of this anything to think about in terms of working capital.

And then the other piece is capex looks like it was a little bit lower than at least what you're run rating now to Q4.

Should we be expecting that youll, probably have some catch up I mean, I think you alluded to the fact that you're having some trouble maybe getting equipment.

But if you can just give us an idea of some of the moving parts into your free cash flow thoughts right now that would be great.

Okay.

First off Capex, obviously were up over 55% year over year, So Lord knows really having problem spending money.

Look we purposely frontloaded.

A lot on the chassis side.

Both in Q4 and Q1 to stay ahead on the on the fleet deliveries right and so but the.

The biggest component of that increase year over year as the timing of chassis deliveries, but I'd say, where we're at our expectation for the spend rate on capex.

And obviously.

Working capital shifts you got buried within working capital we had an acquisition related item that we had to settle so that gives you the optics of of a use of working capital.

But it's just related to an acquisition right there and so that's just the ins and outs from a timing standpoint, and again as you know Q1, typically the lowest tax payment quarter that we have in the year and so that can influence the.

The flow quarter to quarter, as well, yes, and I would just echo that and add that.

Yes.

Conversion rate that you referred to in Q1 is probably a little outsized in Q1, that's pretty typical and the other observation I'd make just with respect to working capital. It's a reminder, that we'd like to come in with a cushion. We did this year as we had in the prior year the outside cushion. So we like the Optionality that gives us what we certainly intend to end the year.

With some cushion as well so.

I'd say the comments, where they made about having more revenue to drive more EBITDA dollars to then drive the free cash flow certainly when we update our kit reconsider updating in July will address that yes.

Yeah, Okay, but we shouldnt be just flatlining, 20% across the board for the rest of the quarters and I guess my question.

Yes.

With respect to <unk> as a percentage of revenue have.

Revenue now.

It changes for those reasons that were then describe the timing of interest and taxes and other outlets and construction projects can be heavier.

Sure.

Spring and summer seasons right than you have in the winter season. So there are all sorts of ins and outs.

No that's great and then just thinking about your guidance for Q2 can you just give us an idea of what you think the cadence of the contribution from acquisitions and divestitures might be over the over the remaining part of the year.

Sure.

Did it was the $110 million in Q1, I would expect that to step up to about $140 million in Q2 back down to probably around 110 in Q3, and then stepping down from there to maybe 65 or 70 in Q1 and with any deals we closed.

Now and year end to be additive to that.

It's Anthony.

That's fine and I am sure we will get to that as we get there okay. Great. Thanks, So much that's all my questions.

Thank you. Thank you very much and once again on the voluntary if you'd like to ask a question either tier one four on your telephone keypad.

We'll go to our next question on line from Kevin Chiang with CIBC go right ahead.

Hey, Thanks, Thanks for taking my question.

Following up on an earlier question you got just on the M&A strategy and maybe what some of your peers are looking to do.

Just wondering if youre seeing any impact.

On valuation multiples of some of your larger competitors are looking outside of solid waste and you mentioned Doj concerns as well.

Maybe smaller players are also facing a more challenging operating environment is that creating any deflation.

And the valuation multiples youre seeing out there.

Yes, I would say from an underlying on an underlying standpoint, obviously, they're down 21 2021 last year into this year.

Say geography can can influence that as well because in.

A handful, but what I would call the larger acquisitions, we've been doing both on the West Coast East Coast and in Canada.

Whats unique in some of these transactions as the underlying real estate value the underlying real estate value in many cases can be north of 25% of the consideration.

And that's unusual right.

In some cases.

<unk> may want to hold onto the real estate and you that's not in the deal and so you've got a rent payment right.

And our view is you know.

Some of these geographies owning the real estate is also a key component of our market presence.

So in those cases.

The underlying multiples may have come down a little bit.

The step back look at the multiples they really havent changed too much because again in those geographies that real estate is worth so much.

Okay, No that's fair.

That's interesting color.

Last one for me obviously.

With pricing in the first quarter sequentially Youre going to continue to grind higher here.

You have this decentralized model.

Quite a lot of a lot of us haven't seen inflation at these levels.

A decade.

Wondering if that's a change the feedback loop between corporate and the regions to make sure. They stay ahead of inflation.

Because I suspect the things that we're tracking.

Five years ago to figure out where costs were going.

Probably a little bit different today is that true.

<unk> at all in terms of how you how you interact with the region to make sure there is.

The full inflationary picture or.

Or does the decentralized model.

They are staying on top of that.

Pretty good here.

Look I think a hallmark of our strategy has been the decentralized model with the feedback loop. We've always said I mean, we were we were early last year.

And communicating this we're early in moving wages up last year, you've seen us been moving moving price proactively throughout this period and a lot of it is because of this decentralized nature.

And again the constant look at at where were at currently in the constant look ahead 123 months.

Beyond now looking at continuing rolling updates on a full year basis to make sure the magnitude and the weight of inflationary pressures as understood beyond just one day, one week, one month or three months right and so.

That hasnt changed for four for who we are and what again, what how we've run the business over time.

Pricing is.

Financials our commitment.

Our local folks.

Are willing to be held accountable too right.

Recovering wage pressures recovering cost pressures et cetera.

It's what we do I mean, how do you how do you run a business no one ever said this is easy.

And our folks do a terrific job.

And how they priced the business recover the realities of costs, both in the P&L and capital.

And how we measure value creation, and so again, we mentioned that because again we.

We said, it's been a hallmark of our strategy since day, one and that's proven to be effective in a pandemic and high inflationary environments in the great recession.

Through really through good times and bad so nothing's really changed.

Our visibility on price I mean, we're still though we still have come to give quarterly guidance.

We've done that since we went public at $30 million in revenue and now here, we are run rate of 7 billion or more.

Good.

So again, it's been a hallmark through the years.

Again.

Pricing never surprises us.

When it comes to our ability to know what's what's on the horizon and what's happening in.

In our business.

That's great color. Thank you very much I'll leave it there.

Thank you. Thank you.

I forget what placebo next question on the line from Stephanie <unk> with J P. Morgan go right ahead.

Hi, Good morning, I, just wanted to ask about pricing as we kind of look beyond this year I know this year, we're expecting inflation to colleagues stay elevated.

Who knows what next year is going to bring but let's assume some of the pressures easing little should we see some of the pricing kind of roll back either from there was a comp issue year over year comp issue, but also just the prices that you've been pushing for its customers, which you kind of.

Yes.

Some of that back.

Just to give the customers a break as long as we're seeing some of these pressures ease across the board.

Sure so.

Certainly we think about the two different types of markets Stephanie.

So first in the contract.

Exclusive markets, where where CPI linked you should expect that the 4%. We're getting this year steps up next year as I mentioned earlier since there's typically look back to the midpoint of the prior year, so whether that numbers, 5% or north of that next year remains to be seen but it's certainly directionally.

Fire and provides a boost to the overall reported pricing. The other thing that will keep in mind it depends on where we exit the year right because the rollover impact of price increases we do this year will impact next year and then we'll consider the environment as we make our plans for the balance of 'twenty three and to your point to the extent there is not as great.

And you need to push as hard we consider that as we make our plans.

Okay. Okay, great. Thank you.

Thank you very much.

Mr. Jackman, we have no further questions on the line I'll turn the call back to you.

Terrific well if there are no further questions on behalf of our entire management team. We appreciate your listening to and interest in the call. Today Maryanne is available today to answer any direct questions that we did not cover that we're allowed to answer under Reg FD Reg G and applicable securities laws in Canada.

Thank you again, we look forward to seeing you at upcoming Investor conferences or on our next earnings call.

Thank you very much for everyone.

Thank you and that does conclude the conference call for today, we thank you for your participation and ask you disconnect. Your lines have a great day one.

Thank you.

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