Q3 2022 Waste Connections Inc Earnings Call
Good morning, and welcome to the waste connections Q3, 2022 earnings conference call.
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I'd like to turn the call sooner Worthing Jackman President and CEO . Please go ahead.
Thank you operator and good morning.
And congrats to the ask Jos after I don't know last night.
Yes, Jason Kraft you can pay me now.
I would like to welcome everyone to this conference call to discuss our third quarter results and to provide a detailed outlook for the fourth quarter and updated outlook for 2022 as well as some early thoughts about 2023.
I'm joined this morning by Mary Anne Whitney our CFO .
As noted in our earnings release strong execution once again provide for better than expected results driven in the third quarter by continued acceleration of solid waste pricing and higher E&P waste activity along with acquisitions closed during the period.
Most notably we overcame 50 basis points of incremental headwinds primarily from the precipitous decline in recycled commodity values in September to beat our outlook and expand adjusted EBITDA margin, both sequentially and on a year over year basis, excluding the dilutive impact from acquisitions completed since the year ago Gary.
Our outperformance through the third quarter and acquisitions closed year to date enhance our visibility for expected double digit revenue and adjusted free cash flow growth in 2023.
Led by pricing expected to remain at elevated levels plus contribution from acquisitions already signed or closed year to date in.
In addition, we expect underlying margin expansion to overcome headwinds from recent decreases in recycle commodity values.
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.
Thanks, and good morning.
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 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 discussed both in the cautionary statement included in our November 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.
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.
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 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 where they think.
Mary Anne.
We're extremely pleased by the strength of our results in Q3 as continued pricing acceleration and strong execution.
Abled us overcome both the precipitous decline in recycled commodity values during the quarter and continued inflationary pressures.
We delivered total Q3 price of 10, 1% led by core pricing of eight 3% plus 180 basis points of fuel immaterial surcharges.
Pricing ranged from five 5% and are mostly exclusive market Western region.
Between 10, and 13% in our competitive regions. The 130 basis point sequential increase in total pricing growth from Q2 was almost entirely attributable to core pricing, which is expected to increase further in Q4.
As noted last quarter, the continued acceleration of core pricing through the back half of 2022 positions us well for 'twenty three.
Visibility for continued elevated pricing, including in our exclusive markets, where pricing is now expected to approach 7%.
Volumes in Q3 were down 70 basis points, excluding the impact from the purposeful non renewal of two municipal contracts noted in earlier periods and continue to reflect tough comparisons following last year's reopening activity.
More importantly, however volumes reflect continued discipline around quality of revenue.
Looking year over year at Q3 by line of business <unk>.
Commercial collection revenue was up about 15% due mostly to price.
Roll off revenue was up about 11% on revenue per pull up about 9% and daily pulls up about 2%.
Landfill rates per ton were also up over 9% on revenue are up about 3% and tons down 6% primarily.
Primarily due to continued tough comparisons for special waste.
Special waste tons were down 16% in the period, but related revenue was up nominally year over year.
MSW tons were down 4% C&D tons were up 3%.
Moving next to revenues from recycled commodities, excluding acquisitions recycled commodity revenues were down almost 35% year over year, reflecting a sequential decline from Q2 of 30% or about twice the magnitude anticipated given the precipitous decline in recycled commodity values in September .
Looking at year over year landfill gas sales from renewable energy credits or Rins landfill.
Landfill gas sales were up nominally in Q3 on slightly higher RIN values.
And higher volumes.
And finally looking at E&P waste activity, we reported.
At another sequential increase in E&P waste revenue to $53 million in the third quarter.
Up 52% year over year.
Moving to acquisition activity as anticipated acquisition activity continues to run well above historical levels.
$535 million in annualized revenue closed year to date plus.
Plus an additional $35 million under definitive agreement.
Got it to close by year end or early in 2023.
As such we are already set up for over 4% and rollover acquisition contribution in 'twenty three from signed or closed deals.
Dividends are 12th consecutive double digit percentage increase.
Since the initiation of our dividend in 2010.
This followed our August announcement of the annual renewal of our normal course issuer bid authorizing the repurchase of up to five per cent of our outstanding shares which will continue to approach opportunistically as we did earlier this year.
While executing our growth strategy, we maintain focus on our most important asset are people is highlighted in a recently released 2022 sustainability report.
Which details the efforts of over 20000 employees, who embody our values culture and share view of sustainability.
<unk> to our strategy for long term value creation.
Are updated report highlights significant advancement towards are aspirational ESP targets and the addition of a target for emissions reduction.
It also provides expanded ESG related disclosure with the introduction of task force on climate related financial disclosures or T. C. F D.
Ah continued progress expanded targets enhanced disclosure and ongoing investments and sustainability related projects are all emblematic of our commitment to the environment.
Our employees and the communities we are privileged to serve.
Now I'd like to pass the call the Marianne to review more in depth.
Financial highlights of the third quarter and our increased Catholic for 2022 and to provide a detailed outlet for Q4, Alvin wrap up with some preliminary thoughts about 2023 before heading into Q&A.
Thank you for anything.
And the third quarter revenue with 1.88 billion up 283 million or 17.7% year over year about $15 million at that hour outlook acquisitions completed since a year ago period contributed about $154 million for avenue in the quarter or about $151 million.
<unk> <unk>.
Gestured EBITDA for Q3 is reconciled in our earnings release with $588 million up about $82 million or 16.3% year over year and about $7 million about our outlook. This was in spite of an incremental 10 million dollar dragged from the precipitous drop in recycled traumatic Italians primarily in September .
Which essentially double the sequential decline as compared to our expectations in early August .
Looking at margins first in a sequential basis at 31.3% adjusted EBITDA margin was up 10 basis points as compared to Q too in spite of a 20 million dollar quarterly step down and recycled commodity revenues.
As compared to our expectations.
More than overcame 50 basis points, an incremental headwinds during the forward it to be our outlook by 30 basis points, excluding acquisition <unk>.
Incremental headwinds included 40 basis points from the further deterioration in commodity values and 10 basis points from impacts related to hurricane EM.
And finally looking year over year adjusted EBITDA margin was up 20 basis points you over here, excluding 60 basis points margin dilutive impact from acquisition.
Other T margin drivers for his followers.
Underlying solid waste margins expanded by 120 basis points.
<unk> double digit price for us provided margin expansion to offset continued cost pressures.
In addition increased E&P waste activity provided 40 basis points margin expansion in higher <unk> values and gas generation added another 10 basis points.
These increases were upset by 150 basis points combined margin drag from lower recycled commodity values of 90 basis points and an additional 60 basis points headwind from higher fuel costs.
<unk> of the C N G tax credit catch up through two three of about $3 million.
Depreciation and amortization expense for the third quarter was 12.3% of revenue down 70 basis points Euro per year. Adjusted EBITDA margin of 18.7 per cent was 10 basis points above our outlook and up 20 basis points, a year over year, even including the margin diluted impacted acquisition.
Interest expense in the quarter increased by $10.7 million over the prior year period to $51.2 million due primarily to higher total borrowings, resulting from acquisition outlays as compared to the prior year period include.
Including higher interest income from invested cash balances net interest expense in Q3 increased by $9.5 million a year over year to $49.4 million.
That outstanding a quarter and was about 6.2 billion over 90% of which was sixth grade and are weighted average cost of that was approximately 3.2%.
Our leverage ratio as defined in our credit agreement net of cash balances increased nominally in the quarter to about 2.7 times net debt to EBITDA.
Jackson adjusted net income.
Looted sure, we're 92 cents and $1.10 respectively in the third quarter, both of which include about a six cent after tax benefit primarily resulting from the impact.
Uncertain desk from changes in foreign currency exchange rates in the period that is the decline in the value of the Canadian dollar during the corner. This unrealized benefit is reflected in both other income and and the tax provision.
While changes in foreign exchange rates and the corresponding translational impact operating results are not factors that we call out the extreme currency volatility in recent months and the resulting outside it's two three benefit mostly related to unrealized gains uncertain depth warranted some additional commentary.
Moving on to free cash flow year to date, we've delivered adjusted free cash flow of $929 million or 17.4% of revenue up 12.5% year over year in spite of capital expenditures up $139 million or 29% year over year.
As such we are well positioned to achieve our full year free cash flow outlook in spite of the incremental headwinds from lower recycled commodity values and the continued inflationary pressures impacting both operating expenses and capex.
I will now review our updated outlook for the full year and provide our outlook for the fourth 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 silence, we'd made with the SEC and the Securities Commission or similar regulatory authorities in cat.
We encourage investors to review these factors carefully.
<unk> no significant change in underlying economic trends. It also excludes any impact from additional acquisitions that may closed 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 in reconciled in our earnings release.
Revenue for 2022 is now estimated to be approximately $7.19 billion or 65 million above or previously updated outlook due primarily to the following.
$85 million in contributions from acquisitions completed since our previous update in August .
Higher pricing, partially offset by lower recycled commodity values.
Adjusted EBITDA for the full year is estimated at approximately $2.21 billion up $20 million from our previously updated outlook.
At 37% of revenue our adjusted EBITDA margin outlook is in line with our previous update in spite of the high Decrementals from lower recycled commodity values. Similarly, there's no changed your outlook for adjusted free cash flow or capex of $1.16 billion and $850 million respectively.
Turning next door outlook for Q4.
Revenue in queue for is estimated to be approximately $1.845 billion we.
We expect price plus volume growth for solid waste of 7.5% to 8% led by total price remaining around 10% with core price expected to pick up sequentially from Q3.
Reported volumes will continue to reflect the 80 basis point impact from expired contract.
N P waste revenue is expected at about $50 million and recovered commodity values are expected to remain largely in line with current levels <unk>. During the 250 to 260 range and recycled commodities are down about 60% sequentially from Q3, which average prices with average prices for OCC or old card <unk>.
<unk> at about $50 per ton.
Adjusted EBITDA G. Four is estimated at approximately 30% of revenue or about $553 million, which includes unexpected 30 basis point margin diluted impact from acquisitions already completed.
Continued underlying margin expansion, primarily from price, let organic growth is expected to mostly off that both inflationary pressures and assume the outsides headwinds of over 150 basis points from recycled commodity values at current levels.
Upside would come from any improvements in commodity related revenues hiring M. P waste activity acquisitions completed prior to order and clean up clean up activity related to hurricane Ian for easing of cost pressures given the magnitude of core focused price increases already in place.
Depreciation and amortization expense for the fourth quarter is estimated at about 12.9% of revenue, including amortization of intangibles of about $42 million for about 12 cents per diluted share another tax.
Interest expense net interest income is estimated at approximately $62 million up from Q3, an hour higher outstanding balances is acquisition outlays continue and assuming the recent and continued to expect it interest rate increases.
And finally, our effective tax rate in Q4 is estimated at about 21.5% subject to some variability.
Now, let me turn the call back over to <unk> for some final remarks before Q&A.
Thank you again.
Again, we were extremely please.
Great performance and our positioning for both two four and 2023, particularly given inflationary pressures and ongoing labor constraints.
The reset precipitous decline of resources.
From the face of these challenges pricing.
<unk> remain ability levels.
Simply we believe we're well positioned looking at.
We will wait until February to provide our formula look for 23.
Spam on the preliminary thoughts we shared in August based on the current economic environment.
We continue to have visibility for double digit revenue and adjusted free cash flow growth in 2023, but.
While I continued celebrating 12 of which policy levels plus over 4% from a physician designer clothes, but for this year.
The potential for that a milk to grow to more than five per cent or early next year based on our current acquisition quite blood.
Moreover, we expect above average underlying margin expansion to overcome headwinds from recent decrease would receive recycled commodity values.
To the extent that we see any improvement recycle commodity values for easing of inflationary pressures during the year those impacts along with additional acquisitions completed throughout the upcoming year.
<unk> sorry for these preliminary thoughts.
We look forward to having better visibility you on the phone will be calling me the pace of acquisitions and expect a commodity driven actually will be providing a formal outlook in February .
We appreciate your time today.
They'll they'll turn the call over to the operator to open up the lines for your questions operator.
We will now begin the question and answer session.
To ask a question you <unk> on your telephone keypad.
Using a speaker phone please pick up your handset before pressing the keys.
To withdraw your question. Please press Darling two.
<unk> paused momentarily assembler roster.
Our first question will <unk> mortgage family you may not go ahead.
Thanks, so much and and congratulations on the corner Uhm.
Ask about you mentioned the double digit free cashflow gross expectation into next year, maybe help us with some of the potential pluses and minuses I know you just talked about the a few of them, but trying to trying to think about <unk> interested in tax next year work.
And capital incentive calm things that that that we might not have all the answers for right now thanks.
Sure happy to do so Chinese so as as worthy described expecting double digit top line growth in overcoming the that the headwinds from recycled commodities at current levels and so you start with that as your EBITDA expectation and then in terms of the puts and takes I'd think of Capex of it.
10.5% kind of in line with with what we're doing this year.
Interest expense you know.
I think of it in terms of the kind of book ending you you think of the rates from Q3 and Q4 I described the step up sequentially from incremental outlays and higher rates, if that kinda figured arrange depending on our ability to pay down that with you over $1 billion in free cash flow after the dividend that we'd be looking at uhm there'd be some movement there.
And then finally on cash taxes as compared to book I'll be thinking and arrange a probably the 70 per cent to 80% type of range.
Terrific.
And just as a follow up wanted to ask about pricing I know you mentioned a few times on the cough, you're expecting the core price to increase further in and four Q and and there's sort of strength in the pricing line that that way.
<unk>. It just wanted to ask about when you think about the trajectory next year. What did you think you know first half still has this momentum because of the restrictive pricing, but maybe a week or in the second half or it just wanted to understand anything around.
Timing of when we might see a pricing peak thanks.
Sure It was reached.
Consistently you know our pricing is merely a response to the environment we operate in.
Obviously exiting the second half of this year 10 per cent price means will be entering next year at those elevated levels.
You know a lot of.
A lot of economists predict that inflationary pressures will begin to a page and maybe you know peak early in the year and move lowers removed part of the year if that happens so I wouldn't be surprised if.
Pricing starts around 10 per cent you know.
Did you say peaks early in the year, but was still average 8% to 9% for the full year.
No.
Replace my Pressure's, you made out within the next year pricing will remain you know look at that 10 per cent or more as we move through here and so again, it's in response to the vehicle.
But what we know is what I saw.
8% to 9%, 8% to 9% is really the minimum I think companies need to deliver when you look at the commodity pressures when you look.
<unk>.
Mary pressures wage pressures you talked about higher interest rates, we talked about cash taxes. When you look at inflationary pressures on capex.
So if you're gonna run the gamut from top to bottom on what what needs to be price then recovered.
8% to 9% is is the ZIP code, we're looking out for the full year, assuming things a bit a little bit next year <unk> will do will do better than that.
Super Congratulations again really really good job.
Our next question will come from Jerry Ravitch with Goldman Sachs.
Yes, hi, good morning, everyone.
I'm wondering if you could just expand on the levers that you folks were able to pull for.
For the fourth quarter, given just a steep drop in recycled cardboard prices that you've been able to more than off set here with better performance.
Clearly.
The pricing outlook for 23 is corner I was just some pressure we're able to pull levers so quickly for the fall.
<unk> can you just give us a feel for moving pieces that allows you to off set the appointment have headwinds before too. Thanks.
Sure. So I'd say, it's a continuation of the execution and the initiative on the part of our fields as as we've recognized consistently throughout the year the need to continue to push on pricing and deliver on execution. So certainly managing the cough, but starting with the top line of continued pricing acceleration and as we met.
<unk> that the increase the sequential increase in core pricing that you saw in Q3 that will continue into Q4 and so that's how we're addressing the continued need is worthy and described for pushing price.
That's that's fundamentally where it starts because to your observation what the guidance implies for Q4 is you'll be talked about 120 basis points underlying margin. The improvement in Q3 that has to expand right. So it's even greater than that in queue for to overcome mostly.
That incremental pressure from the additional sequential decline in commodity values.
Got four.
Earlier this year [laughter], we're just going to wake up in September or October and say, hey, let's pull a lever and in fact you for these things have to be predictive may start they started two one.
So it wasn't incremental pricing here at <unk>.
Was just unfolding of interesting project.
The vast majority of it is based on what we begin.
Begin in Q1.
Super <unk> and what are they.
Just a moment ago, you mentioned the industry has to put up a command per cent core price in one of the items that you mentioned is higher interest costs, which is really interesting because that implies EBITDA margin expansion right. So I'm wondering if you could just expand on that and I I know, it's early relative to your <unk>.
Thousand three framework or are you.
Sharing that with the price of your insurance, we could see the margin expansion, even when accounting for the O C. C headwind as we think about the planning assumptions for 23.
Well, that's that's our belief right now.
We we use the word overcome that all set.
He was overcome for a reason.
But no it's it's.
It is our belief because like you can't stop again at EBITDA I tried I could try to compare to a dollar basis because there's so many items getting you blow which is why I mentioned interest taxes and cutbacks mm.
And so our folks are folks at a local level understand the challenges. This only happens based on the success of our folks locally executing other playbook this isn't corporate driven.
No how to predict these challenges we know how to communicate discuss some without that'd be accountable to overcome them.
Can I get pricing is only successful with it.
Originates from a local level, so that's where it's gotta be executed.
Super appreciate the discussion.
Our next question will come from Kyle White with Deutsche Bank you.
You may not go ahead.
Okay. Good morning, Thanks for taking my question I wanted to just follow up on the recycling it and see if we can.
Current OCC prices, where they are what do you expect the head would it be for for 2023, and then just one metre I'm curious how you were thinking about your exposure to those recycling commodities and if there's anything that you can do to maybe better protected in case it gives the volatility there.
Sure so starting with the the expected impact next year at current pricing depending on the ultimate flow through to the bottom line for me. These declines you can see that it's anywhere from call at 70, or 80 basis points margin head to 100 basis points and that's how we're thinking about what needs to be overcome everything described for me.
Think about overall reported margins.
With respect to Derisking that aspect of the business. So just a reminder, that that's what we have been doing you know we think about that from first of all starting at the curb pricing accordingly, as we have through these downturns and recycled commodity values to make sure on the hauling side, we're getting compensated for that secondly, the projects we have an <unk>.
Element right now will where we are internalizing more of our recycled commodities, meaning handling the processing ourselves. So that we're not exposed to paying processing fees to third parties, which is where you can get hit incrementally in times like this where when the values go down and part of building those new facilities is also the updated technology.
<unk>, which provides for better quality coming out the back end, which is another way you D risk it and you work to maximize the value by marketing your materials and taking advantage of your bulk which is another thing we do so I'd say, we're always thinking about that Kyle and we thank our mild model, while we still have that piece that moves with with commodity values.
What we try to do mostly is communicated to you. So you can understand those dynamics.
Got it and we really appreciate that and then on the Lemonade front I think you mentioned will increase from potential sellers coming to market.
What is that a more one off on some specific assets are broadly are you seeing more and more sellers from the market and what do you think is causing that.
<unk> have you seen any you know fluctuation or decline in probably a valuation as a result.
Yeah, I'll tell you the the interest Cisco geographically broad you know, we mentioned that the west coast remains quite strong Canada. As we said before as is that of and frankly, no. The competitor burgers I've always remained active across the U S as well.
So it will be safer to robust pipeline, it's not any one particular transaction.
For US Yeah, we have a lot of what I would call 20 to 40 million five revenue transactions are in the pipeline and that's that's our bread and butter right I mean, that's what we what.
What were known for a couple of these are integrated collection transfer recycling landfill companies.
Those are those are quite attractive to awesome from solar standpoint, what gets an interesting time to have a dialogue because.
The the strong management teams that these does that are at these companies when they see a decline in commodities like this we know they're out there putting out another two to 400 basis points of price because they're running their business.
As you would hope they'd be running their business. That's why we call. These go play the companies and so.
Interesting time to have that dialogue, obviously, there's been a lot of folks that are broke up more C. N D oriented that you know we've.
That are coming to market, hoping for 21 valuations that's not that's not happening in this environment in this outlook for the economy and construction potentially and so you know.
It's it's it's it's it's a mix of basketball, obviously, we've <unk>.
Remain vigilant on on how we diligent someone how we value them.
But I'll get I'd say, it's coast-to-coast stolen and both U S and Canada.
Sounds good I appreciate all the details.
Our next question comes from.
Sean Eastern with Keybanc capital markets you.
You may not go ahead.
Hi, James Great corner, So I just wanted to come back to the the back and forth with Jerry on on the potential for margin expansion next year.
Just just for clarity I assume you guys are saying kind of underlying.
You.
Underlying margins can see expansion year on year, and then we kind of walk back an M&A drag given that revenue growth is going to be outside is that correct.
Right now what you have in a drag for next year's per is predicted to be your estimated to be about 20 basis points for me that's not a material number got it and you know if you think about our normal margin cadence, we talked about a 20 to 40 basis points.
<unk> expansion, obviously going into next year with a good book is much higher than that offset the commodities, but it also gives us a chance to offset the what was the current acquisition drag it for 20 basis points.
Okay. That's that's very helpful and and then maybe just help us think about the different moving parts and the internal inflation and I think there was some kind of hope that we'd see a plateau ang and some declining coming out of the second quarter. There was some encouraging signs on the labor front.
It seems like the message now is more persistence, which which is not particularly surprising, but but just some color on those moving pieces would be would be great.
Yeah, we really haven't seen much change you know.
What I would call that the pace of underlying inflation as well as labor I mean, as we look ahead, we see it on the horizon that coming.
You know until that's there.
Still gonna if someone's said before pull the levers needed to to address the realities of what what room right now.
We are seeing some improvement obviously is is on the hiring front, we continue to make progress month to month on hiring more people than new openings and so that that's you know maybe a sign up.
There was some you know why at the end of the tunnel on on that side turnover has has continued to remain stable and retention increase has been increasing a little bit on new hires and so the other signs that the.
No.
The trends are starting to suggest that you know the the.
Break is coming from.
We're not gonna believe it gets on us until we actually see it.
Okay helpful I'll turn it over thanks a lot.
Our next question will get some medical Hoffman with Stifel.
You may not go ahead.
So I want to know what the pet was for a second game.
Oh.
Just to be alone call, Michael Okay, [laughter] I have to be rooting for the Phillies, that's where I went to college, so I want to move back into price for a quick could we could you share with us what you're restricted free to change was versus you are open market in three Q and then the assumptions for that and.
<unk>.
Sure so in our our exclusive markets. It was about 5.5% and an hour competitive regents that range from about 10% to 13%.
And you know again, what we describe for Q4 is not materially different from from two three so that's about the right way to think about it except that yeah.
Okay.
Yeah Yeah.
Say the last part again, what will pick up and checked out.
A coors picking up a little bit as we described right. So we said we stay around 10%, but more of it would come from core yeah. We hope that people that that's what they appreciate right. The corps continues to accelerate which is part of the setup for next year and the conviction that Edward describe the continued elevated levels of pricing, we're not relying on <unk>.
Surcharges to get there and then as we look ahead Edward mentioned and those restricted market is closer to 7% is that we're thinking about next year got it. That's that's very helpful. Then can you talk a little bit about.
What happens with price that's a rate of change as well as a unit price as we.
Couple of things one inflation does find oh, settling down point and two we may slow down economically help everybody understand the durability of us.
What would you and will do.
As you know we already have a a large percent of.
Pricing rollover into 23 based on the actions in the levers we pull this year just like we did in 21, which gave US a lot of visibility price on the 22 before you even started will.
We'll do the vast majority of our price increases early in the year and again that Oughta set us up for you know the type of a pricing on a macro basis that I have suggested before which is you know.
Eight 9% at a minimum is look at next year <unk> again, if things remain elevated as we get into Q3 or Q4, we'll make another assessment, but yeah I think the feds doing a pretty good job of trying to attempt the brakes here and again once you start anniversary in the high rate.
Change your saying this year.
The map should should suggest.
You know.
Mid single digit inflation levels ought to be hit by Midland next year, and maybe come off that a little bit more as you as you exit twenty-three.
Okay, but the important thing is getting the pricing done early having having strong little over and doing the pricing early in Q1 looks like we always do and of course. The reminder, that about 40 per cent of the book of businesses and those restricted markets and so when you said when we say, we're expecting 7% that number doesn't change based on what happened translation next year.
Here that of course impacts 24, not twenty-three cause it's a look back right right.
And then from a volume standpoint are you still saying that positive service intervals and that new business formation versus losses.
Yeah I'd say.
We track the the sales results in these competitive markets, where you can track. The again, we're we're still running better than plan, a net new business as well as on on that new price.
And then on the M&A side.
Are you seeing any easing evaluation given the debt markets of kind of locked out the non strategic buyer is that helping valuation and second.
Do you think the above average pace pauses, if the sellers or if we're in a recession sellers back off and wait.
Well again.
She will get what four years of transactions done.
We'll probably have next to your bank.
Tell him we got him a recall in February with 10 more months left to go.
But so no it's.
The the disconnect. It obviously is you know it was such a rush folks and you for you with free money and cheap money and everyone was running around talking about multiples without any regard to what type of business. There there they have what type of cash flow diversion they have.
The mucus those days are gone I mean, it's it's it's I think there's a reality check the ability for lower margin low cash flow generators to to think that they can just go get what they thought they could have gotten the 20 or 21.
So clearly, there's a reset and on those types of businesses.
Like our our approach evaluation hasn't changed I mean, we've we've always said above market inputs on our on our return expectations Uhm. We've always do this on the cash on cash basis.
You know that some of the companies, we're seeing now of 30 plus percent margins.
So the cash on cash generation is <unk> should warn our valuation as we said before.
Real estate in some of these markets is very expensive and know that can be a multiple little bit as well and so it's it's nothing's changed on our view, but clearly I think some sellers who were who were.
Coming to the table with folks pitching them multiples without the quality of assets or cash flow to support it.
Will create a disconnect for those sellers and and those folks might be starting a process that will disappoint them.
Okay, and then Marianne for capital spending next year, you said 10, and a half but that doesn't include.
Sustainability spending so that would be on top of that.
No Michael when we describe Capex, we talk about the total Capex, we don't give it up that way until at 10.5% of revenue that would be everything okay.
It's a pretty good dip from this year cause you're running closer to 12% this year.
Well, we've been very successful and if you don't put it that way and spending money. These past few years [laughter] alright, and the last one for me has the paternal customer inflation at least peaked it's not rising still or is it still rising I just wasn't sure about that message.
It stopped rising I'd say, you know four five months ago, which has been your remaining of these elevated and as I said I was accused of being Donald Rumsfeld last call again, the important things that you know.
The unknowns are known and there's been no more unknown set of surprise person. So we've again, we've we've shaped the price of the required pricing consistent with the the environment and environment to remain fairly stable now for them.
Last four five months.
Alright, great. Thanks.
Our next question will come from now Okay with Oppenheimer you.
Email address.
Great. Thanks for taking the question you know interesting.
From the sustainability report to see incident rates come down again in 2021, and that's really despite the increased activity right from reopening healthy amount of M&A that you did and I'm. Just curious if you talk a little bit about.
As you're gonna rebuild you know rabbits and activity from you know Covid you know what.
What you did and what you're doing to drive continued you know safety improvements in the business.
Yeah, well obviously those.
Reporting that when we say an incident right it could be a beef thing it could be hitting a mailbox. We tried to track everything that's impacting our people or the community right and that includes not preventable as many folks that hate us.
Especially with proliferation of cell phones, and distracted driving and other things. It always amazes me, how many people hit garbage trucks, but so there's a lot in that number that you reference but look at them.
But from our standpoint, we always <unk> you know safety is is is behavioral based you know it's not in a binder, it's it's not a department.
And each individual person to own it.
The individual has to come fit for duty each.
Each individual has to remain aware and want to come home safe and look what are you putting you know over 10000 Ralph's on a street or 11000 routes on the street.
You know we can have some incidents, but you gotta remember, there's probably almost 11000 <unk> that are having any incidents.
Southern region, which is a large loft.
Texas across to Florida, and zero incidents yesterday, we celebrate those days, we should expect those days, but we still celebrate them.
So no. It's it's a relentless focus on on a daily basis and our folks are are willing to be held accountable. Please a professional drivers driving around in a dangerous environment.
And hats off to them each and every day for the number of the <unk>.
Go through.
Everyday.
And years without any incidents.
Okay. Thanks, and then I've been sticking with the theme of of of people in Labor you know to Michael's question earlier about internal rate of you know cost inflation can you characterize what you're seeing in the labor market now obviously, we're we're kind of heading into.
Seasonally softer period, but you know we're starting to see any easing in the labor market does it remain.
You know type broadly any sort of geographic easing that you may call out.
Yeah, I mean, it's it's always you know geographic specific right I mean, you can have some.
Some cases, you know wage rates running about 3% to 5% range and in some areas you might have market adjustments.
Push your higher than that.
And so I mean overall I'd say you you know obviously is we're assuming kind of mid single digits or or a little bit higher but it varies by market and we try to be proactive and responsive to <unk>.
Big reason niche market.
Yeah.
I mean, it gets to tie that back to kind of the margin expectations right. I mean, if you're overcoming 7900, pips recycling headwind and 20 bib Seminate dilution next year and you're doing that with eight to nine per cent price and what does that assume for.
Internal cost inflation next year.
Yeah, you know obviously it would work with your budget right now, but you know as I cancel it out I wouldn't be surprised if it averages around 6%.
And if I'm wrong, maybe seven which is why you gotta make sure you're you're covering it.
Look at the <unk>.
A lot of economists out there expect inflation to be abating at least reported basis, you should move out of of this year and so maybe it kind of starts oscillating that a payment of five per cent. So those days.
Nine or 10, hopefully you're behind us.
Both of the month to month tractor show, our expectations of 4% to 6% all the time you get your next year with little softening of luck with the latter part of the year.
Super helpful. Thank you.
Our next question will come from Stephanie Moore.
Jeffries you May now go ahead.
Hi, good morning. Thank.
Good morning.
Okay, continuing on the topic I'm price, but more so on the competitive landscape I wanted to know if you were seeing any kind of changes in pricing activity Martha on a local level from some of your smaller competitors. If they are kind of have their their spot on the gas and as much as the larger names in terms of just continuing to.
<unk> price uhm any color there would be helpful.
Yeah, I mean, it's a good question I mean, there there you know being impacted by the same challenges that the rest of us are.
And so it's really the pricing environment is no different on the smaller private and then the road than on the publics Uhm. So I think you've seen.
March in Lockstep, I mean, especially if companies that have lower margins I mean.
You get into a deflationary environment, 100% margin might get wiped out unless you've got a price right and so in some cases.
No pricing and that 8% to 12% is what we see on the street.
Now that the needs to recover the commodity specific.
Four windows, many private set or put in two to four per cent out there higher than they expected probably back in the middle of this year is it look at the upcoming year again it continues to show that.
The the the umbrella for pricing is there because it's needed to cover the cost and you're back on the commodity side.
And just to add to that Stephanie we continue to see the the reality of that and competitive bidding for instance on municipal contracts for small players in many cases can't even participate because they don't have the equipment or the people or such a large price increases necessary to hold onto the business.
Great. That's helpful and then kind of switching gears.
This year is shaping up to be another record M&A ear. After <unk> last year can you talk about maybe as you think about the last.
Two years of M&A activity and improvements to to route density and and kind of building out some concentration in key markets and how that's driving any margin improvement here this year.
Yeah, we don't look at it is driving margin improvement I mean, obviously you know it helps on the fringes, but these are in need of Louvers.
As soon as we always say that acquisitions that come on board.
You know, we typically expect a modest amount of margin improvement, but again many of these could be structurally lower than.
Based business because obviously they may not have the full <unk>.
Collection of assets meeting might not have.
Renewable fuels landfills et cetera, So E M. P waves to me some of the some of the higher margin sides of the business and so those are structurally dilutive, but no.
No, it's a little tuck into a a half a million dollars here to two or 3 million there doing 15 or 20 of those a year, that's not really going to move the needle for for for what you're asking about.
Understood. Thanks, so much.
Our next question will come from Walter Spratlin RBC capital markets.
You may not go ahead.
Yeah, Thanks, very much good morning, everyone.
So so so what are the you you you have called out West coast exclusive markets as a particular opportunity in in on your M&A hard just curious what what prompted you to to flag that is it because there's larger deals that are coming up there or is it because you're a lining a little bit more.
With that and focus just curious as to why you what why you called out that particular area.
Well I think we've been calling it out throughout last year and this year you know it's.
Seems like every decade, or so there's a wave of of west coast sellers, it's kind of generational shifts and and and whether the routine or or or sell a business.
And the dialogue is quite strong you've seen us again, we talked about doing seven close many acquisitions in Oregon, and California. This year.
You know when the ear plays out I wouldn't be surprised if over $200 million of of of acquired revenue <unk> on the west coast. That's a very active ear and there's dialogue that continues on the west coast, So again, which.
We we call it out in the periods when it's quite active because those it's not always that right.
Think.
West Coast activity is something that that really leads to above average.
Amount of transactions are quite revenue in any one year.
That's great.
And then when you look at your pipeline I know you've got a big number out there for the potential acquisition pipeline arguably with the fast pace, you're you're doing these perhaps the most attractive go first <unk> at what point do you think.
You know when you look at the annual guide you always give it then you you know you hit the number that you actually do it's quite a disconnect.
Sounds to me like you think 2023 is gonna be another road size Euro how how long do you think we're gonna be in these outsized years before we see it kind of slowed down to what you would you've been typically flagging as a normal year for acquisitions.
Well as you know, we all have to remind people don't want us for what we haven't done yet.
So in love us even more than a year, we don't do any transactions right cause I missed the past I'll have a lot of things because we we should.
But no it's <unk>, they're still visibility on on twenty-three I mean, obviously as I said before we may get an average amount of of annual revenue completed.
By the time, we were sitting on this call of February right with a lot of time left to go look we.
We still you know easily turned down you know seven or eight transactions for every one or two that that we actually do pursue many of the deals were doing but based on relationship dialogue. That's been going on for 2030 plus years right. I mean this is it's the.
The owners are finally, saying now now I'm ready.
So it's hard to predict <unk>.
<unk> owners of quality companies will sell they control the timing that us we just have to be ready to you know to to to move when they say they're ready to go.
Got it.
The last question here is on your guide for next year and double digit.
At least one of your peers had that out there and backed off it and not not comparing you to that are asking to speak to that but what do you think gives you. The best support when you go to see prices coming down you use the word overcome what what area do you would you say has been the most successful in overcoming that.
The degradation is it is it higher than that of the acquisitions. You mentioned is it your better markets or you tube and better.
Pricing you what would you characterize in order.
Magnitude will be the most important offset to OCC price declines notices you're pregnant.
Well. Thank you see you saw it in Q3 and you're seeing in queue for right. I mean, it's the fact that pricing is running around 10 per cent.
And you know if you're if you're not if you're not able to get the price necessary then.
I understand why some people may not want to give you know.
I dunno more insight into twenty-three cause it went away [laughter] reality is is that we're executing it it's.
That's in place.
And we know how to do it and we'll do it again next year, but the good news is.
Cause we're only have what maybe eight months of four eight months of headwinds have to stay at this level and it's easy to calculate [laughter] report thing also to know is it's one thing to to know what the prices of O C. C. It's another thing to move the product.
And you know our our folks have.
Done a remarkable job so moving products in this environment you know it's versus just having a stack up.
And our facilities.
Okay, Great I appreciate the time and congrats on a great order.
Okay.
Again, if you have a question. Please press start in one.
Our next question will come from Stephanie E J P. Morgan.
I'll go ahead.
Hi, good morning, very great corner I, just wanted to ask about the volumes I know you provided a lot details by different pieces earlier.
And I know a lot of those are facing task you have in your comps, but could you just comment on whether you're seen any slowdown from your customers and maybe some projects or what level of visibility you have for any signs of swelling, assuming you know we might go into economic slowdown in coming months.
Without a doubt you know we talk even last call last two calls on special ways. We noted that some special ways was a sliding a little bit with regards to the timing of those projects war because the you know the.
The budgets that were put in place by those developers.
Did not extend to incorporate the dramatic rise a logistics costs as you consumers budgets are put in place a while ago before they pull the trigger and the escalation and logistics cause just wiped out the economics of of those projects.
As as more trucking capacity gets on the marketplace says logistics costs are beginning to slip a little bit from those long haul providers.
You're seeing those projects.
Start coming back on me, but as I look at Q for at least so far in queue for you know you know the C.
<unk>, I mean, especially funds you know or.
Well down just a little bit yeah.
They're nowhere near down as much as you saw him in Q3 and so other than that is you know this is more of a fixed date system.
It's one of the camps hassle third for three quarters full of totally full.
You know we know what we're charging when it comes to to most of our customers and so.
It's.
C N D. We're seeing continued to try and give you saw the Q3 numbers and revenue per pull up high single digit number both per day is still up sandy volume in queue for landfills remain slightly up.
And so we're still seeing strong activity around that what I would add to that Stephanie is just that what what I would notice just have a remarkably steady that the pieces that I look at landfill volumes for instance, and and so what you're seeing really are those com lumpiness of special waste vanilla geographically actually our strongest regional.
With our central region, and they were highly impacted on special weight. So that's an interesting interesting observation a reminder of how lumpy again and what are we weakness or the lowest signs with Canada, which by the way we had highlighted all throughout last year the observation that their value in recovery had really outpace the reopening.
Activity and while other people were saying Hey, there's a tale sell to come in and we said now we think they're really back and you're seeing that in the <unk>. This year.
Okay, Great that is super helpful color. Thank you if I can just ask one more I. Appreciate the color you provided on Rodney crowd kind of <unk> be March in headwinds and then capital to get some cash flow and twenty-three expected 23, I guess in regards to.
Free Cashwell conversion are you expecting it to be relatively steady versus 22, even with kindness that punished appreciation and pack and hitting kind of stepping down in 23.
Yeah, It should stay above 50%, whether that's 55 or 51 or 51 five.
Too early to tell but it'll stay about 50 per cent.
Okay, great. Thank you.
This concludes our question and answer session.
I'd like to turn the conference back over to working Jackman turn your closing remarks.
But there are no further questions on behalf of our entire management team. We appreciate your listening to and interested in the call today.
<unk> and Joe boxer available today to answer any direct questions that we do not cover that we're allowed to answer on the rug, if the break G and applicable securities laws.
Mr say I've already been called out internally by the Philly fans that we have in Pennsylvania, and so you know hanging there folks it's best to three now. Thank you again, we look forward to seeing your upcoming investor conferences or hearing from you at our next door.
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