Q2 2022 Waste Connections Inc Earnings Call
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Okay.
Yeah.
Greetings and welcome to the waste connections second quarter 2022 earnings conference call.
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Afterwards, we will conduct a question and answer session.
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As a reminder, this conference is being recorded Wednesday August 3rd 2022.
I would now like to turn the conference over to worthy Jackman, President and Chief Executive Officer. Please go ahead.
Terrific. Thank you operator and good morning.
I'd like to welcome everyone to this conference call to discuss our second quarter results and increased outlook for 2022.
To provide a detailed outlook for the third quarter.
I'm joined this morning by Mary Anne Whitney our CFO .
As noted in our earnings release, accelerating solid waste pricing and E&P waste activity drove a top to bottom beat in the second quarter.
Solid waste pricing growth of eight 8% in Q2 enabled us to overcome increased inflationary pressures during the period and deliver adjusted EBITDA margin in line with our outlook and flat year over year, excluding the margin dilutive impact from acquisitions completed since the prior year period.
Our outperformance in the first half of 2022.
Specced at further sequential increases in solid waste pricing growth continuing.
Continuing strength in E&P waste activity and acquisitions closed year to date position us to increase our full year outlook for revenue adjusted EBITDA and adjusted free cash flow.
And provide another reflection of our culture of accountability and a.
Challenging operating environment.
As anticipated acquisition activity is pacing well above average.
We have signed or closed approximately $470 million in annualized revenue. So far this year and our pipeline remains quite robust.
As such we believe we are well positioned for double digit revenue growth in 2023, along with margin expansion from continuing solid waste pricing strength and rollover contribution from acquisitions already signed or closed year to date.
Additional acquisitions expected to close later this year and early next will provide further growth.
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.
Discussions during today's call includes forward looking statements made pursuant to the safe Harbor provisions of the U S. Private Securities Litigation Reform Act of 1995, including forward looking information within the meaning of applicable Canadian Securities laws actual results could differ materially from those made in such forward looking statements due to various risks and uncertainties.
Factors that could cause actual results to differ are discussed both in the cautionary statement included in our August 2nd 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.
Should not place undue reliance on forward looking statements that may be additional risks, 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.
Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measures.
Management uses certain non-GAAP measures to evaluate and monitor ongoing financial performance of our operations.
Other companies May calculate these non-GAAP measures differently.
I will now turn the call back over to Burton.
Thank you Mary Anne.
We are extremely pleased with our performance in the first half of the year led by strong execution and continued pricing implementation to address macro challenges.
In the second quarter as cost prep cost pressures persisted, we once again delivered pricing above our outlook and we positioned ourselves for another sequential increase in Q3 to drive higher pricing in the second half of the year.
Total Q2 price of eight 8% from seven 2% and core price plus a 160 basis points and fuel and material surcharges.
Was 30 basis points above the high end of our outlook.
Total pricing range from almost 5% and are mostly exclusive markets Western region.
To between 95, and 10, 5% and our competitive regions.
Up 170 basis points sequentially from Q1, or Q2 pricing reflected a 90 basis point sequential increase in core pricing along with an 80 basis point uptick in fuel and material surcharges.
Moreover, where we're set up for a 100 basis points sequential increase in pricing growth in Q3 to almost 10% primarily from higher core pricing as we recognize the full quarterly impact of increases already put in place during Q2 and early Q3.
The advantage of continued acceleration of core pricing through the back half of 2022 is not only the potential for margin improvement to the extent that cost pressures abate.
Also the setup for 2023, given our higher focus on core pricing, which we retain versus surcharges.
Underlying volumes were up slightly in Q2 about as expected on reported volumes down about 70 basis points with a year over year decrease attributable to the expiration of two poor quality municipal contracts noted in earlier periods.
Looking at year over year results in the second quarter on a same store basis.
Commercial collection revenue was up about 14%, mostly due to price.
Roll off revenue was up about 11% on revenue per pull up about eight 5%.
And daily pulls up about two 5% on increases in all regions, most notably our central region up about 5%.
The landfill revenue was up two 5% with average rates per ton up six 5% and tons down about three 8% on the toughest quarterly comparison from 2021.
Year to date tons or about flat year.
Year over year as we maintain our focus on quality of revenue across all lines of business.
Looking at Q2 revenues from recovered commodities that is recycled commodities landfill gas or renewable energy credits or rins.
Excluding acquisitions collectively they were up about 14% year over year.
Due to higher values for both recycled commodities and rins, resulting in a margin tailwind in the period of about 20 basis points.
Commodity values were slightly below Q1 with average prices for OCC or old corrugated containers of about $158 per ton and rents averaging about $3 20 in Q2.
Rens and recycled commodity values showed some weakening late in the quarter and into July with a drop in values taken the current overall commodity basket down about 20% compared sequentially to Q2.
Rents have actually picked up a bit from recent lows and are currently about $2 85.
Looking at a few of our sustainability related projects under development as noted last quarter, we have two greenfield recycling facilities and two renewable gas facilities under development all of which are progressing and on track for completion by late 2023.
Two recycling facilities will enable us to internalize a processing recyclables that we're already collecting what's happening on attractive payback, because we avoid third party processing fees.
And the R&D projects provide for beneficial reuse of landfill gas already being captured.
Also with compelling returns.
Finally, looking at E&P waste activity.
We reported $54 million of E&P waste revenue in the second quarter up 24% sequentially from Q1 and up 62% year over year.
Margin tailwind of about 40 basis points in the quarter.
Increases in drilling activity in multiple basins led by the Permian.
Driven a step up in quarterly E&P waste revenue of over 40% since year end 2021 from about $35 million of revenue to our current quarterly run rate of about $50 million of revenue.
Moving to acquisition activity as noted earlier, we have already closed 12 acquisitions year to date with annualized revenue of approximately $245 million about two times the level of what we would consider average for full year. Please.
These transactions are all in solid waste and include West coast franchises as well as new market entries in tuck ins spread across competitive markets in the U S and in Canada.
With another $225 million in annualized revenues at both franchise and competitive market is expected to close during the third quarter subject to customary closing conditions, our activity already exceeds last year's outsized levels.
Sets us up for over 3% enrolled rollover acquisition contribution next year.
And as we also noted our pipeline remains quite robust for additional acquisitions expected to close later this year early next driven by continued above average levels of interest from high quality private company sellers.
The strength of our balance sheet with leverage of about two five times on a net debt to EBITDA basis provides for continued flexibility during periods of outsized acquisition activity like the ones we've been experiencing.
Along with Optionality around the return of capital to shareholders, which we've already demonstrated through share repurchases completed year to date.
Along with another expected double digit percentage annual increase in our cash dividend later this year.
Our focus remains as always on value creation at replicating replicating the success achieved over 25 years through disciplined capital allocation market selection and an intentional culture to drive differentiated projected <unk> results.
We believe that the challenges of the current environment highlights the importance of this approach more than ever as we continue to execute through varying economic cycles.
Now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the second quarter and our increased outlook for 2022 and to provide a detailed outlook for Q3.
Then wrap up before heading into Q&A.
Thank you Worthing.
In the second quarter revenue was $1 816 billion about $30 million above our outlook and up $282 million or 18, 4% year over year.
Organic growth was over 9% in the quarter and acquisitions completed since the year ago period contributed about $144 million of revenue in the quarter or about $141 million net of divestitures.
Adjusted EBITDA for Q2 as reconciled in our earnings release, with 560 $567 million about $10 million above our outlook and up about $82 million or 16, 9% year over year.
Adjusted EBITDA margin of 31, 2% of revenue was in line with the margin outlook. We provided for the period as we successfully overcame the continued escalation of cost pressures during the quarter. This included an incremental impact of 60 basis points from higher rates for fuel and third party logistics.
As compared to our Q2 outlook.
<unk> and a year over year margin impact of 170 basis points combined from those two items.
Look at the other margin drivers in Q2, the strength of solid waste pricing, which exceeded the high end of the range. We provided in may drove underlying solid waste collection transfer and disposal margin expansion of 110 basis points, excluding fuel on third party logistics. This was bolstered by a 60 basis point combined margin benefit.
From higher E&P waste recycled commodity values and rins.
Excluding the margin dilutive impact from acquisitions completed since a year ago period, adjusted EBITDA margin was flat year over year as expected.
To reiterate normalizing for acquisitions, we delivered flat year over year margins in the face of inflationary pressures, which accelerated during the quarter to 40 year high.
Moreover year to date, we've delivered adjusted free cash flow of over $638 million or 18, 4% of revenue.
9% year over year in spite of capital expenditures up $100 million.
Or 36% year over year.
As such we are well positioned to increase our full year outlook for adjusted free cash flow to up almost 15% year over year.
I will now review our updated outlook for the full year and provide our outlook for the third 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 the securities commissions or similar regulatory authorities in.
We encourage investors to review these factors carefully our outlook assumes no significant change in underlying economic trends without 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 our updated outlook for the full year as provided for and reconciled in our earnings release.
Revenue for 2022 is now estimated at approximately seven <unk> 5 billion or $250 million above our initial outlook.
The primary drivers, including higher solid waste price driven organic growth plus about $100 million from acquisitions completed since our initial outlook in February .
Adjusted EBITDA for the full year is now estimated at approximately $2 $1 9 billion or about 37% of revenue.
Down about 50 basis points from our initial outlook as follows.
40 basis points reflects the impact of incremental price increases to overcome higher inflationary pressures, including over 100 basis points from higher fuel and third party logistics as compared to our original outlook.
And what and 10 basis points is from the margin dilutive impact of acquisitions completed since February .
We are increasing our outlook for adjusted free cash flow to $1 6 billion with capex unchanged at $850 million.
Turning next to our outlook for Q3.
Revenue in Q3 is estimated to be approximately one $865 million.
We expect price plus volume growth for solid waste of about 9%, including total price of nine 5% to 10% with core price of over 8%.
Reported volumes will continue to reflect the 80 basis point impact from expiring contracts.
E&P waste revenue as expected in line with Q2 levels.
And recovered commodity values are expected to remain largely in line with current levels, which as worthy noted are down 15% to 20% from Q2.
Adjusted EBITDA in Q3 is estimated at approximately $581 million with 31, 2% of revenue.
This reflects an expected 40 basis point margin dilutive impact from acquisitions already completed.
<unk> underlying solid waste margin expansion from price led organic growth.
Long with headwinds from fuel and third party logistics similar to Q2.
Upside would come from any improvements in commodity related revenues higher E&P waste activity acquisitions completed prior to quarter end or easing of cost pressures given the magnitude of core focus price increases already in place.
Yes.
Depreciation and amortization expense for the third quarter is estimated at about 12, 3% of revenue, including amortization of intangibles of about $38 5 million or about <unk> 11 per diluted share net of tax.
Interest expense net of interest income is estimated at approximately $47 5 million.
And finally, our effective tax rate in Q3 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.
Again, we are extremely pleased to raise our outlook for the full year, particularly given the challenging macro environment and inflationary impacts that have continued to rise to raise the bar.
Our pricing and execution.
We're set up for increasing underlying solid waste margin expansion through the second half of 2022.
Escalating price increases offset inflationary pressures and are already well positioned for expected double digit revenue growth in 2023, along with margin expansion from continuing solid waste pricing strength and rollover contribution from acquisitions already signed or closed year to date.
As noted earlier additional acquisitions expected to close later this year and early next year, we will provide further growth when we provide our formal outlook in February and given our focus on core pricing the potential for outsized underlying margin expansion should cost pressures abate.
We are grateful for and especially proud of our over 20000 employees as they effectively manage through the complexities of ongoing labor constraints increased core pricing and supply chain challenges.
While delivering on commitments to our customers and communities. We appreciate your time today and with that I'll now turn this call over to the operator to open up the lines for your questions.
Operator, thank you.
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One moment please for the first question.
Our first question comes from Noah Kaye with Oppenheimer. Please proceed with your question.
Good morning, Thanks for taking the questions and I think the story really is to start here with price in terms of your commentary for next year.
Digital revenue growth.
Obviously that implies that core price will continue to be elevated into next year. So can you just help us get some confidence around that at this point how much of that is really coming from the restricted side how much of it from some of these incremental pricing initiatives.
Do we unpack that.
Sure. That's a great question, because as you know in restricted markets Theres a lag.
And the catch up and Youll see that next year.
We already looked at 2023, we're already positioned for at least 5% pricing without any other pricing actions to be taken and that breaks down to at least 6% as we see it in our franchise markets.
That along with the rollover pricing and competitive markets that's already been implemented.
Again has us positioned for 5% priced at a minimum next year before any of the actions taken in competitive markets.
So if.
Our expectations as we look ahead, we do think that inflationary pressures have peaked.
Moderate made it may average closer to 5% or so next year I don't think we'll know until now the 12 months if it breaks below 5%.
But again, even if it averages 5% next year without any other pricing actions were already set up to recover that and obviously I would expect us if deflationary environments of 5% that youll see us do total pricing of at least 7% next year and again as you've seen this year.
Vast majority of that will be core pricing.
Okay very helpful Worthing.
And then as you talk about potential for expansion margin expansion next year.
To understand what Youre seeing in terms of the trends right now and the cost structure. We can set fuel aside for a second and talk about some of the other components of solid waste.
Where do you have a sense that those cost pressures may have been peak and starting to decelerate.
How do we think about.
The real leverage potential in the business heading into next year.
Well.
What I think about I think about cost pressures two ways. One is the actual cost pressure and the other one is when do you know it.
And as we move through the first half of this year obviously the.
Anything fuel related we've mentioned third party logistics as other companies have as well.
While companies like ours, and others may have had those under contractual limitations on on pricing from our vendors.
<unk> is in this environment. It was do you want the service or not.
And so.
So I would say is I hate to sound like Donald Rumsfeld for those that know remember who he is but the unknowns are now known.
And the peak of those of the pressures of those are behind us.
And we've already implemented pricing to recover it.
And so unless those gap up another 25%, which I highly doubt because youre seeing a rollover and with the third party logistics costs or other things.
That again, having the cost structure known and having the pricing already implemented to address it now what we're looking at is primarily just the regular rate of inflation, whether it be in wages again, which has already peaked back in Q1.
And so we're on the other side of the curve as we see it.
Again, unless there's some exogenous shock.
Shock to the system and just to elaborate on that just to add to where things point what have we seen peak we've talked about that same employee increase that stepped up last year from <unk>, 4% to end the year at seven started this year to date, it's moderated a little come back to that six or six 5% type of.
Level and so thats encouraging what you of course in the second quarter, what offset that was the increases in fuel and anything driven by fuel, which is why we highlighted highlighted the 60 basis point incremental drag from just fuel and third party logistics that we saw in Q2. So overall when we think about it.
<unk> pressures in the business, it's still that high single digits that we talked about in Q1 may be moderating a little bit off those ties.
Thanks, Larry.
<unk> seen other companies that are focused in this fuel environment on surcharges, where almost half of their total prices surcharges.
And so obviously those have come on exponentially higher fuel increased.
And there'll be via Brussel happened as fuel starts rolling over as we've seen currently.
Okay. That's very helpful. Thanks for filling in some of the known unknowns and I guess, we'll go worry about the unknown unknowns.
Yes.
Okay.
Okay.
Our next question comes from Hamzah <unk> with Jefferies. Please proceed.
Hey, good morning, Thank you.
Just wanted to follow up again, just on pricing and the question is more around.
Your view when inflation moderates what type of pricing is sustainable.
And.
And as part of that maybe you can also just comment on <unk>.
When you are increasing price how are you.
What's the internal cart process do you report that in the surcharge backyard, you reported and core price I know you mentioned oil prices stickier. So just anything you are doing.
Finally to make pricing more sustainable as inflation moderates and I realized part of your book of business is franchise, which has its own sort of reset where maybe you have less control.
Sure.
To start with to your question regarding how do we decide which bucket to put it in work core price focused company, yes, we have some markets which for legacy reasons.
Steel surcharges fuel materials surcharges as part of the overall mix, but you see it in our numbers Hamzah, we're 85% of the price. We're reporting is core and yes. There is that small small element that is steel and materials surcharges. So the way we think about it is focusing on core and we look to recover.
Not just the fuel and logistics that we highlighted.
But to use us as an example of what's been outside but we're looking to recover the cost pressures, we're seeing in the business and I think that's why when you look back over the 15 years last 15 years and you see that our pricing is generally average the spread the CPI of about 150 basis points. So when you say, where do you think ultimately pricing ends up I think.
We would expect that over time, we get back to that normalized spread versus inflation and that's certainly what we endeavored to do every year coming into the year and this year, we would consider unique because you had that rapid escalation of cost pressures during the year, but again, what that does for us in that 40% of the business for you.
Yet the lagging CPI increase we see that benefit in the subsequent year. So just to be clear were still doing 455% priced in for instance, our west Coast region.
And next year to worthiness part of what gives us visibility on our pricing as we already know that those increases will step up sequentially 23 over 'twenty two because of the inflationary impacts over the prior year.
Got it got it very helpful and just my follow up question.
Just could you remind us how much unionized labor you have in <unk>.
Assuming you have less unionized labor than some of your larger peers.
And is that kind of a headwind for you today I guess it feels like your labor inflation is running higher than most.
And is that because you just have less unionized labor does that reverse the other way.
When inflation does moderate just unionized labor exposure and whether that's a headwind for you.
Well I don't see it as a headwind for us because we have kind of a lowest percent of annualized labor among the big three I mean, we're about 20% overall, but in the U S.
We're much less of that because Canada is much higher percentage of unionized labor just endemic to the market.
But.
I would say.
As the other companies face.
Resets on their unique contracts there headwinds are in front of them.
Number one number two I would say on the non union side.
And on the Union side put simply our employees deserve favorites.
They're operating and living.
In a high inflationary environment, if we have very high expectations on their daily performance, especially around safety and risk than they deserve to be paid and rewarded.
So it's not about let's just constrained what are people people makes our people get paid a lot of money for doing a difficult job.
In this environment and again, we see savings as I mentioned risk for example, I mean, we are.
80 to 100 basis points below on total cost of risk and so wages can be higher.
But if youre getting quality people youll see the payback.
In other areas of the P&L.
I hope our garage anything our folks are getting from wage increase.
Got it.
Thank you so much.
Okay.
Yes.
Our next question comes from Jerry Revich with Goldman Sachs. Please proceed.
Yes, hi, good morning, everyone.
Hi, good morning.
I'm wondering if you could just expand on the third quarter margin outlook. So excellent operating momentum exiting the quarter normal seasonality is for margins to be up.
Call It 40 basis points <unk> versus <unk> and based on the outlook. We're looking for flat margin sequentially can you just expand on that I think half of that headwind is the recycled price impact, but I'm wondering if you could just unpack the other moving pieces there sequentially. Thank you.
Sure.
So great question, Jerry and Youre right.
That does that sequentially it looks a little different and that really is driven by the step down in recycled commodity values and rents.
First and foremost the other aspect of it is that not only was do we see them stepping down but that exacerbates tougher comps in the prior year, which is why on a comparative basis and recall last year, we continued to deliver and had nice margin expansion.
Q3 in spite of the cost pressures escalating.
And so I think the comps have something to do with it and the fact that recycled commodity values stepped up over the course of last year, which as I said exacerbates the step down in values in Q3 of this year as we've noted I mean, there are handful of items.
Would be additive to that margin to the extent that play out we're already starting to see.
You're correct a little bit.
As we move through Q3, we've seen rins now click click up a little bit over the last two weeks.
So anyway, there is a basket of items that would be additive to that depending upon how the quarter plays out.
Just think about it more broadly second half of this year versus first half and similar year over year margin guidance implied in all those quarters whats different is in the first half of the year. There was the assessed from recycled commodities in Rins and it tells you that we're getting better underlying solid waste margin expansion.
In the back half of the year, that's what we're guiding to and you'd expect that as we've layered in more price.
Super and then just to follow the bread crumbs on 2023 that you folks have laid out.
Cost tailwind of about two points versus one behalf.
Normal year, or so just to tease that out it sounds like that would suggest.
Margin expansion opportunity of about 80 basis points versus the.
<unk> 40, or so that you have done historically is that how you folks are thinking about 2003 from a planning standpoint, as we sit here today.
If if that's how we think about it from a planning standpoint, we're obviously wouldn't guide that high.
So no you should see obviously the opportunity for margin expansion increases as inflationary pressures decrease right.
As you see the greatest opportunity for margin expansion when inflation is running in that 2% to 3% range.
And so, let's let's see how our inflation pressures abate.
Let's see the impact on margins from acquisitions before we we started assigning our leading margins to everything we acquire let's let's wait to see how much revenue contributor from that but obviously from an internal.
Expectation, that's probably not too far off.
Okay Super and then lastly.
Utility deals for landfill gas it really accelerated since your last quarters call.
Kinder Morgan has acquired an asset.
Longer term off take agreements are being struck there can you just update us on how youre seeing the offtake market evolving as you get ready to bring online. The two additional landfill gas plants are you seeing pricing.
Call it mid twenties for longer term agreements are playing out at this point.
Sure. So just just the update more broadly on how active we are in R&D facilities. I think that's indicative of how encouraged we are about the underlying fundamentals of those projects. So to give you an update in addition to the two that we've already talked about that worthy said, we're on track we have the total.
For including those two.
Which are either under construction or equipment's been ordered and then an additional six in development for a total of 10 projects at various stages of development, including under construction that we think will come online in the next two to five years.
And just from those projects alone it really puts us on track to achieve the targets, we laid out of increasing that beneficially used by about 40%. So yes.
These projects as we've said have strong fundamentals really over a broad range of outcomes on on <unk> and we just think that longer term. It is a nice opportunity and we will continue to add those projects then as opportunities present themselves.
Okay.
Can you comment on the I'll take market is that developing.
As I said, we're encouraged by the levels of demand and interest out there and I think that's what's driving so much. So many projects across the space is that the fundamentals are sound for that business.
Super I'll leave it there thank you.
Okay.
Our next question from Michael Hoffman with Stifel. Please proceed.
Alright, Thank you very much for taking the questions.
Maryann you came into the year with if I remember correctly, nearly 50% of your fuel hedge.
Is the plan at this point going into 'twenty, three and how are the hedges helped buffer some of this pressure.
Sure. So you're right we have about 50% hedged in 2002, and we've got about 25% hedged in 2003.
We certainly look for opportunities to increase that just to get better visibility, but also like to be opportunistic.
When opportunities present themselves.
And again as we think about the need for continuing to get price part of it is the fact that fuel will be an incremental pressure as those hedges roll off which benefited us this year.
Okay and then.
Specifically to the timing of when your CPI resets is there a mix issue around the calendar year or is it pretty much way to July one.
But just to be clear when we talk about those those reset it refers to the 12 months, leading up to that date. So you've really got the impact that the midpoint of 22 from <unk> for the prior 12 months and so is there some variability if theres a reset that's a slightly different metric sure.
We try to give you overall types of levels because like when we say, they're all CPI linked and we know there is some actual differences in how price increases are calculated market by market. It's a good proxy for how to think about it and I wouldn't try to get much more granular than that at this point.
I asked the question poorly clearly.
The timing of when it happens, it's not I get the lagging 12 month aspect and pick any number it's predominantly weighted to that portion of the revenues that would be on July one predominantly.
So now the majority of our price increase is actually get put in in January .
Some are in July and we have visibility on them. So that's why when we are communicating when as Youll recall, when we give our guidance in February at that point, we've already done the largest bulk of the price increases and by April we have very good visibility. We typically have about 80% done or known at that point I wouldn't expect next year to be any different.
Okay.
And then what.
On the pay for them and that is an exceptional clearly.
Is it holding up or is it are we starting to reach a peak I mean, we've all been talking about that this would start settling into something back to a normal level and it kept going strong with what's the outlook as far as the pace.
The pipeline the conversation.
Sure I mean every year, our fruit myself wrong, because the pace and the pipeline continues to be quite high as we as we pointed out on this call.
We thought 400 last year would be a hard number to beat and here we are already through that.
Months.
So no the dialog remains quite robust as we said.
I think the important thing is to note it's not.
Not one geography or another it's still coast to coast and Thats across the U S and Canada.
So it's.
Clearly.
Pace remains elevated.
<unk>.
Again, we're fortunate to have the balance sheet to take advantage of that.
And expectation that whether it's 400 or 425 going into next year, it's not slowing down as far as the level of.
<unk>.
Activity.
No again, the pace remains the same that whether we transact on at all.
Whether they all survived diligence.
<unk>.
That's a different issue but no.
Again were still turning down probably seven or eight deals for every one or two that we are pursuing.
And and have valuations come in with some of the macro pressures that are happening in the market or are we still sort of asked about the same valuation parameters.
Let's say the valuations for gold plated companies.
Companies.
Really hasnt changed much over the years, but maybe one or two turns over the years because again, our assumed long term cost of capital inputs Hasnt changed much over the past 25 years I mean, we don't we.
We don't change our inputs just because money was free over the past three or four years.
And so when Youre looking at gold plated companies with solid cash flows.
That that's driving the valuation obviously when you get to coastal deals whether it be on the east coast and northeast or whether it be on the west coast when real estate is involved.
As I pointed out on a couple of other calls.
The real estate component of it can be uniquely high and drive on appearances the multiple a little bit higher because in some cases real estate is 25% to 35% of the purchase price on those.
That should lead to a couple of geographies.
Okay, and then lastly, just to follow through on the underlying cost of inflation within the business.
It's peaked and it's trending down gradually as the message and we've come off a high in the first quarter and it's slightly adding its way down.
Yes, that's what it feels like and.
Again, we haven't baked that in to our outlook because I'd rather.
Note in the rearview mirror versus anticipating is continuing.
As you know their appointments on both sides of it.
The argument on recession or not recession et cetera, that's out there.
We my view is always wait 18 months and they can look back with better clarity.
Right well the fundamentals of your business would suggest that with there is one of your business is doing fine regardless.
Oh, absolutely because again this is.
An industry Thats.
Very resilient, especially in in difficult economies and again. The fact is with the vast majority of our of our revenue under fixed based systems.
Price is always more important than volume and I think this industry has shown itself in the great recession recession before that.
Again, if there is some weak times on the horizon. This industry will do quite well.
And then last one for me the supply chain issues have they started to ease at all or is it still just tight per trucks predominantly.
We haven't seen an easing of them.
We still expect a number of our units too to get pushed into next year, obviously, but keeping our capex the same yes.
Found a way to backfill in source some other capex to replace it.
Yellow wire and in some cases, we've already been put on notice that could be 12 to 18 month lead times and so.
We're well past when we've already placed their orders for yellow warning for next year, because it's critical to get ahead of that.
Okay.
Thanks very much.
Our next question comes from Sean Eastman with Keybanc capital markets. Please proceed.
Hi, everyone.
Great update here.
Great update here I don't and I don't mean to take the wind out of your sales at all with this question but.
But as we look across the space here.
Bodies getting outsized price most have great price visibility into 2023 as well so just in light of that in this unique operating environment.
What would be the key points of differentiation you would highlight to investors here in the W and the WCS model.
Sure first of all I think the model has remained unchanged which is.
Leading price leading margin leading free cash flow conversion.
And so that's remained consistent throughout the years.
But again as we pointed out earlier on the call I mean, we're clearly differentiates us from the others is also our approach to price I mean to have.
We have 85% of our price this year core versus 50% as some others have.
That's.
That makes a hell of a lot of difference as you play the sell of a multi year basis right.
And again as you see cost pressures abate as we've talked about.
Core sticks.
But thats not easy I mean, this isn't a push the button type business, where where we can sit here and essentially.
Control of price pricing is a local market by market.
Implementation, it's not easy.
Take salespeople it takes us.
Performing.
It's an account by account analysis, and so that continues culturally to be a huge differentiation in how we approach pricing, where we think it's most important to drive it and again thats locally.
It takes a lot of training and development.
To support and defend it it takes a lot of investment and business acumen to understand the need for price and why that's important.
And so again I just think when you when you wrap up to.
The overall market model that we that we approach the financial results that go with the investment in human capital.
And more importantly, a recognition of the importance of core price versus just letting a computer attract.
Index.
Put pricing under funded on an invoice.
That compounded itself on a year over year basis.
That's really helpful perspective, Berthing I appreciate that.
And maybe just one for maryann clarification on the updated guidance. So EBITDA guidance is up nicely free cash flow guidance is up but maybe it feels like there is a cushion in there and as the operating cash flow guidance actually a little bit lower.
Just noticed that and wanted to get a little bit of clarity.
Sure so to your point, our free cash flow guidance is up about $10 million and that represents a 15% increase year over year, which we.
We think it's a pretty remarkable outcome.
With respect to that so yes, as you point out because of the adjustments, which impacted <unk> in the first half of the year that of course, we disclose as part of that reconciliation of GAAP measure for CFO looks optically a little bit lower but of course, the reason that they are those adjustments because they impact.
Whats reported in CFO and Theyre things like for instance, the largest pieces related to the acquisition acquisition and an accrued liability that we discharge right. After close to closing so impacted cash flow overall, but of course shouldn't impact.
On an adjusted basis that CSF, though so the way I would encourage you to think about it as both DSO and free cash flow stepped up nominally from our original guidance with no change to Capex.
Got it perfect I'll leave it there thanks guys.
Sure.
Our next question comes from Kevin Chiang with CIBC. Please proceed with your question.
Thank you operator.
And Jessica just.
The one question. So I guess, when we look back over the past 10 years. So it does sound like the waste sector has come out of challenging period in a stronger position.
I think the financial crisis, we saw greater focus on pricing discipline.
And as you look at the impact of the pandemic and now headwinds from inflation I was wondering if you see any structural positive changes occurring within the broader sector I guess simplistically. What you guys are seeing.
So I think the.
You broke up a little bit of a question but.
Look I think <unk> seen a structural change in the waste industry.
And it's really just more so the the rest of the industry catching up.
Really saw that in the kind of the heading.
Heading into the great recession.
Where again the focus was on the.
Across the board on price retention.
With an acceptance that volumes may come and go based on the kind of.
<unk> followed the economic tide.
Knowing that by retaining price as volumes come back will intersect at higher price points.
And again mean, good things longer term.
We didn't see that going back 20 years ago.
In a recession, we had kind of three or four.
And so you look at how that's played out since the great recession that pricing discipline across the industry has remained.
Been necessary because of added operating cost inputs and capital investments needed in our post collection and ryzen capex costs.
The discipline has been needed.
Pricing increases have been have been necessary.
But again I think the industry learned the broader lesson that was reaffirming in the great recession.
And that discipline continues today.
So again as the sector sees cost pressures abate.
The margin expansion opportunity for the sector expands as inflation comes down.
Okay.
Perfect. Thank you so much.
That's all for me thank you.
Thank you.
Our next question comes from Kyle White with Deutsche Bank. Please proceed with your question.
Hey, good morning. Thanks for taking my question, you kind of want to follow up a little bit on that and also on the pricing story, obviously, that's deposit story across all all the majors in waste, but curious if youre seeing any kind of potential slippage on pricing at that local level from some of the smaller competitors just given the uncertainties in or a potential slow.
Any cough the economy going forward.
Any kind of slippage there as maybe some of those smaller players look to keep volumes.
Yes.
That's a market by market obviously.
Some markets. There is always are there can be someone who's trying to play a low price strategy, but understand those that have played a low price strategy.
As we saw those folks get burned win win recycling rollover.
Five years ago in that hole.
The impact reset private hauler.
Low price players to have to move pricing up to recover it.
Go into the Covid impacts you go into high inflationary environment, you go into labor constraints.
Folks that have been caught with low pricing going into the last two years of this environment.
They're getting good at in some cases, they are just walking away from business and shutting their doors because you can't have you.
You can have low priced work.
In an environment where wages.
It needs to be moving up the way they have been moving up over the past couple of years you can't.
Being a low price environment and sucked down the cost of fuel increases because again.
If someone was trying to live on a high single digit margin.
We got a negative over the past two years given all these pressures and so again, it's just another reminder.
This can be.
This can be an easier business to run or it can be an extremely difficult and exhausting business to run.
And I think this period of time, right now mixed especially challenging for folks.
Low price competitors, especially not knowing where the costs are.
Okay.
While those folks might have thought.
Some of the folks who are probably down 30% and drivers because they can't.
Haven't woken up to the realities of what it takes to pay to get get drivers in the seats.
Yeah.
Right and I assume that also leads into the M&A environment in terms of bringing more sellers market just given the overall fatigue, but my other questions, though I wanted to focus on the E&P business I guess, you've got it you had another nice step up year over year.
Why shouldn't we expect continued increases on a sequential basis here going into the back half just given where oil is and rig counts increasing.
Sure well, what I would say Kyle is we're certainly encouraged by the cadence of activity and we did see as you pointed out we saw the sequential increase Q2.
Over Q1, and maybe that that means that there's more to come in Q3, we'd rather let that be upside. So we guided to basically in line with Q2.
But to your point I mean, it's all good.
The majors increase their capex budgets as we move into next year and if there is an expectation that they will.
We are continuing to see sequential movement in that as we move through 'twenty three.
Thank you I'll turn it over.
Okay.
As a reminder to register for a question. Please press the one followed by the four.
And our next question comes from Toni Kaplan with Morgan Stanley . Please proceed with your question.
Hi, This is hillary for Tony.
So we've talked to earlier about weather.
Debate over in a recession or not so I guess have you seen any change in client behavior or activity like.
What kind of activity or behavior or are you seeing the most from depending on the segment.
So things have been again as I said before are fairly stable.
This year I mean, if you look on the commercial side, our numbers are up nicely year over year.
Some of that might frankly.
B market share taking from some folks that haven't been able to service their own commercial accounts and we've been able to step in and do that but.
No nothing notable both up and down.
Yes, I would say on special waste.
We've talked about that was down in Q2, obviously, we had a nice strong start to the year in Q1, but we've seen some of those special waste jobs be pushed as as logistics budgets.
Logistics costs have blown the budget that they originally had for those jobs and so as those logistics costs come back down.
We ought to see the special waste side of it start picking up again as it relates to jobs.
In our market areas, but no it's.
It's been fairly steady as you go what I would add to that would just be that if you. If you think about the most cyclical component of the business, we talked about roll off for instance, being being pretty pretty steadily up a couple of points really across all of our regions and so we really haven't seen a material change.
And in that level of activity and to put it in perspective for you that piece of the business. The construction driven piece of the business between roll off in construction and demolition debris at our landfills represents less than 10% of the overall mix of revenue just to give you some perspective and again, we haven't seen.
Any material change there.
Got it thanks, and I guess, just as a follow up.
Could you guys talk anything about your M&A activity regarding.
Is there any more targets or anything around recycling.
Businesses.
Obviously with some companies that we buy.
They may be collection and transfer and recycling so recycling facilities may come with acquisitions, but when it comes to green.
Greenfield sites, obviously, we've talked about the two that where we're constructing right now one in Illinois and one in Colorado.
Obviously away from that.
You know there are many up multiple upgrades happening from an automation standpoint, and optical sorting standpoint.
Across all of their facilities, but.
No we're not looking at any particular single recycling focused type company.
But again recycling it does come with the assets that we're buying.
Great. Thank you great quarter.
Thank you.
Mr. Jackman there are no further questions at this time I'll turn the call back to you for closing remarks.
Perfect well if there are no further questions on behalf of our entire management team.
And over 21000 employees, we appreciate your listening to and interest in the call today.
Mariana Dropbox are 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.
So again, we look forward to seeing you at upcoming Investor conferences or hearing from you on our next earnings call.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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Yes.
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Okay.
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