Q3 2022 Waste Connections Inc Earnings Call
We currently believe are immaterial, which could have an adverse impact on our business, we make no commitment to revise or update any forward looking statements in order to reflect events or circumstances that may change after today's date.
On the call, we will discuss non-GAAP measures such as adjusted EBITDA adjusted net income attributable to waste connections on both a dollar basis and per diluted share and adjusted free cash flow.
Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measure management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently.
I will now turn the call back over to worthy. Thank.
Thank you Mary Anne.
We're extremely pleased by the strength of our results from Q3 as continued pricing acceleration and strong execution enabled us to 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 with fuel and material surcharges.
Pricing range from five 5% and are mostly exclusive market western region to between 10 and 13% in our competitive regions. The 130 basis points 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.
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 up about 3% and tons down 6%.
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% and C&D tons were up 3%.
Moving next to revenues from recycled commodities, excluding acquisitions recycle 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 lands.
Landfill gas sales were up nominally in Q3 on slightly higher rins values.
And higher volumes.
And finally looking at E&P waste activity.
We reported 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.
With $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.
And balance sheet physician desperate another double digit percentage annual increase in our quarterly cash dividend is announced yesterday.
A board of directors authorized the 10.9% increase so irregularly.
[noise] regularly quarterly cash dividend or 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 5% 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 interviewer.
<unk> to our strategy for long term value creation.
Are updated report highlights significant advancement towards are aspirational ESG 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.
All emblematic of our commitment to environment.
Our employees and the communities we are privileged to serve.
Now I'd like to pass the call to <unk> to review more in depth.
Financial highlights of the third quarter and our increased outlook for 2022 and to provide a detailed outlet for Q4.
Within 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 above our outlook acquisitions completed since a year ago period contributed about $154 million of revenue in the quarter or about $151 million net epitaph to chase.
Adjusted 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 drag from the precipitous drop in recycled commodity value primarily in September , which essentially double the sequential decline as compared to our expectation in early August .
Looking at margins first in a sequential basis at 31.3% adjusted EBITDA margin, but up 10 basis points has compared to Q too in spite of a $20 million quarterly step down and recycled commodity revenues next.
As compared to our expectations.
More than overcame 50 basis points, an incremental headwinds during the forwarded to be our outlook by 30 basis points, excluding acquisitions incur.
Incremental headwinds included 40 basis points from the further deterioration in commodity values and 10 basis points on impacts related to hurricane Ian.
And finally looking year over year adjusted EBITDA margin was up 20 basis points you over a year, excluding 60 basis points margin dilutive impact from acquisition.
Other key margin drivers for a follow up under.
Underlying solid waste margins expanded by 120 basis points as.
As leverage from double digit price spreads provided margin expansion to offset continued cost pressure.
In addition increase E&P waste activity provided 40 basis points margin expansion in higher <unk> values and gas generation added another 10 basis points.
Increases were offset by 150 basis points combined margin drag from lower recycled commodity values 90 basis points and an additional 60 basis points headwind from higher fuel costs net of the CMG 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% with 10 basis points above our outlook and up 20 basis points of euro per year, even including the margin diluted impact of 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 <unk>.
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 at quarter end was about six 2 billion over 90% of which was sixth grade and.
Are weighted average cost of debt with 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.
Gap and adjusted net income per diluted share were 92 cents and $1.10 respectively. In the third quarter, both of which include about a 6% 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 quarter. 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 onto 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.
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.
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 filing as we've made with the SEC and the securities commissions are similar regulatory authorities in Canada, 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 $719 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 plus.
Plus 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 are adjusted EBITDA margin outlook is in line with our previous update in spite of the high decrementals from lower recycled commodity value.
Similarly, there is no change to our 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 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.
E&P waste revenue is expected at about $50 million and recovered commodity values are expected to remain largely in line with current levels.
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 cargo containers at about $50 per ton.
Adjusted EBITDA in Q4 is estimated at approximately 30% of revenue or about $553 million, which includes an expected 30 basis point margin dilutive impacts from acquisitions already completed.
Continued underlying margin expansion, primarily from price, let organic growth is expected to mostly upset both inflationary pressures and assume the outside headwinds of over 150 basis points from recycled commodity values at current levels.
Upside would come from any improvements in commodity related revenues hiring E&P waste activity acquisitions completed prior to quarter and clean up clean up activity related to hurricane Ian or easing of cost pressures given the magnitude of core focused price increases are 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 taxes.
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 expected 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, we are extremely pleased with our year to date performance and our positioning for both two four and 2023, particularly given inflationary pressures.
Labor constraints and the recent precipitous decline of resources.
From the face of these challenges pricing rosewood acquisition activity remain of elevated levels put simply we believe we're well positioned looking at.
Although we will wait until February to provide our formula look for 23, we can expand on the preliminary thoughts we shared in August based.
Based on the current economic environment.
We continue to have the ability for double digit revenue and adjusted free cash flow growth in 2023.
While I continued celebrating 12 of which policy levels plus over 4% from a physician designer clothes, but for this year.
Potential for that a milk to grow to more than five per cent or early next year based on our current acquisition pipeline.
Moreover, we expect above average underlying margin expansion to overcome headwinds from recent decreases and recycled commodity values.
The extent that we see any improvement and recycle commodity values for easing of inflationary pressures throwing the year.
Those impacts along with additional acquisitions completed throughout the upcoming year.
<unk> sorry to these preliminary thoughts.
We look forward to having better visibility on the total of economy, the pace of acquisitions and expect a commodity driven actually will be provide a formal outlook in February .
We appreciate your time today it was there.
So that will turn the call over to the operator to open up the lines for your questions.
Prater.
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 starving too.
<unk> paused momentarily to assemble our roster.
Our first question will <unk> mortgage family.
You may not go ahead.
Thanks, so much and and congratulations on the corner.
Ask about you mentioned the double digit free cash flow cross 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 working 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 that 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.
10.5% kind of in line with with what we're doing this year.
Interest expense.
I think of it in terms of the kind of book ending you think of the rates from Q3 and Q4 I described the step up sequentially from incremental outlays and higher rates, if that kind of printed a range depending on our ability to pay down debt with you over $1 billion in free cash flow after the dividend that we'd be looking at there'll be some movement there.
And then finally on cash taxes as compared to book I'll be thinking in the range of probably the 70% to 80% type of range.
Perfect.
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 and and four Q and there's sort of strength in the pricing line that that way.
C. 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 weaker 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.
Consistently you know our pricing is merely a response to the environment we operate in.
Obviously exiting the second half of this year, 10% price means will be entering next year at those elevated levels you know a lot of.
A lot of e-commerce predict that inflationary pressures will begin to repay and maybe <unk>.
Creek early in the year and move lower as we move to part of the year if that happens so I wouldn't be surprised if.
Pricing starts around 10%.
Such as you say peaks early in the year, but we still average 8% to 9% for the full year.
No it's inflationary pressures from an elevator next year pricing will remain.
You know look at that 10% or more as we move through year and so again, it's in response to the environment, but what we know is when I say, 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.
Inflationary pressures wage pressures, we talked about higher interest rates, we talked about cash taxes. When you look at inflationary pressures on capex.
So if you're going to run the gamut from top to bottom on what what needs to be price them recovered <unk>.
8% to 9% is.
The ZIP code were looking out for the full year, assuming things a bit a little bit next year. If we don't we'll do will do better than that.
Super Congratulations again really really good job.
Our next question will come from Jerry Ravitch with Goldman Sachs.
No go ahead.
Yes, hi, good morning, everyone.
Oh man I'm I'm wondering if you could just expand on the levers that you folks were able to pull.
For the fourth quarter, given just the steep drop in recycled cardboard prices that you've been able to more than offset here with better core performance.
Nearly.
The pricing outlook for twenty-three as clear as just some pressure we're able to pull level. So quickly for the fourth quarter. So can you just give us a feel for the.
Moving.
That allows you to offset that appointment have headwinds.
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 mentioned 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 and so I think that's that's fundamentally where it starts because to your observation.
And what the guidance implies for Q4 is we talked about 120 basis points underlying margin that 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 declining.
<unk>, yeah, but levers bold.
Earlier this year, we just not 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 from Q1.
So it wasn't incremental pricing.
OCC prices.
Just unfolding of interesting project.
The vast majority of it is based on what we begin.
Begin in Q1.
Super.
And what are they just a moment ago you mentioned the industry has to put up 85 per cent core price one of the items that you mentioned is higher interest costs, which is really interesting because that implies.
Margin expansion right. So I'm wondering if you could just expand on that and I I know, it's early relative to you're twenty-three framework, but.
Sharing that with the <unk>, we could see a margin expansion, even when accounting for the OCC headwind as we think about the planning assumptions for 2003.
Well, that's our that's our belief right now I mean, that's.
We use the word overcome that all set.
He has overcome for a reason.
But no it's it.
It is our belief because like you can't stop again at EBITDA and try to try to compare to one dollar basis, because there's so many items getting you below which is why I mentioned interest taxes and capex.
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 we don't have to be accountable to overcome them again.
And again pricing is only successful with it.
Originates from a local level, so that's where it's gotta be executed.
Super appreciate the discussion thanks.
Our next question will come from Kyle White with Deutsche Bank.
You may not go ahead.
Hi, Good morning, Thanks for taking my question I wanted to just follow up on your site and see if we can.
Current OCC prices, where they are what do you expect the head when it would be 442023, and then just longer term curious how you were thinking about your exposure to those of cycling commodities and if there's anything that you could do to maybe better protect in case against the volatility there.
Who are so starting with the expected impact next year at at current pricing, depending on the ultimate flow through to the bottom line from these these declines you can see that it's anywhere from 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.
As a reminder, that that's what we have been doing and 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 in development right now where we are internalizing more of our recycled <unk>.
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, which provides for better quality coming out the back end, which is.
Another way you'd be 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 yet we really appreciate that and then on the Lemonade front I think you mentioned will increase from potential sellers coming to market. I was just wanted to set a more a 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.
Have you seen any you know fluctuation or decline in private evaluation as a result.
Yeah I'll tell you the the interest is still geographically broad we mentioned that the west coast remains quite strong Canada as we've said before as active.
And frankly, no the competitive areas 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 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 were known for a couple of these are integrated collection transfer recycling landfill companies.
Those are those are quite attractive to us some form of solar standpoint, but it's an interesting time to have a dialogue because.
The the strong management teams that these does better 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 as you would hope they'd be running their business. That's why we call. These go play the companies and so.
An interesting time to have that dialogue, obviously, there's been a lot of folks that are what I'll call more C. In the oriented that.
Yeah, we better coming to market, hoping for 21 valuations.
That's not happening in this environment in this outlook for the economy and construction potentially and so.
It's a it's a mixed basketball obviously, we've now we remain vigilant on on how we diligent someone how we value them, but.
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.
From Sean Eastern was Keybanc capital markets.
You may not go ahead.
Hi, James.
Meg corner, so I just wanted to come back to the the back and forth with Jerry on the potential for margin expansion next year.
Just just for clarity I assume you guys are saying kind of underlying.
Underlying margins can see expansion year on year, and then we kind of walk back and M&A drag given that revenue growth is going to be outside is that correct.
Right now what the M&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 cut.
Got it and.
Think about our normal margin cadence, we've talked about a 20% to 40 basis points.
Margin expansion, obviously going into next year, we think of what was 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.
And turn off inflation and I think there was some kind of hope that we'd see a plateau hang in some declining coming out of the second quarter. There is 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.
What I would call the the pace of underlying inflation as well as labor I mean, as we look ahead, we see it on the horizon dot.
<unk> coming but.
<unk> there.
We're still going to.
Someone said before pull the levers needed to address the realities of what we're in right now where we are seeing some improvement obviously is is on the hiring front.
Opinion to make progress month to month on hiring more people than new openings and so that may be a sign that.
There is some light at the end of the tunnel on that side turnover has has continued to remain stable and retention increase has been increasing a little bit on new hires and so their signs.
No.
The trends are starting to suggest.
The break is coming.
We're not going to believe it's it's on us until we actually see it.
Okay helpful I'll turn it over thanks a lot.
Our next question will come from Michael Hoffman with Stifel.
I'll go ahead.
So I want to know what the pet was for the 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 are restricted greater change was versus you are open market in three Q and then the assumptions for that and.
Four Q.
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 described for Q4 is not materially different from from two three so that's about the right way to think about it except of course.
Okay.
Yeah Yeah.
So the last part again, what will pick up and took though.
Of course picking up a little bit as we described right. So we said this day around 10%, but more of it would come from corps and 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 as we are then described the continued elevated levels of pricing, we're not relying on fuel.
Surcharges to get there and then as we look ahead as worthy mansion and those restricted market, it's closer to 7%. That's how 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 of.
Settling down point and two we may slowdown economically help everybody understand the durability of us.
Well again will do.
As you know we already have.
A large percent of.
Pricing rollover into 23 based on the actions and the levels. We pulled this year just like we did in 21, which gave US a lot of visibility a price on the 22 before the year even started.
We will do the vast majority of our price increases early in the year and again that oughta set us up for the type of a.
The pricing on a macro basis that I have suggested before which is you know.
And that 89% at a minimum.
Is look at next year.
And if again if things remain elevated as we get into the queue three or Q4, we'll make another assessment, but I.
Think the feds doing a pretty good job of trying to attempt the breakthrough here.
And again once you start anniversarying the high rates of change you are seeing this year.
A lot of the map should should suggest the mid.
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 23.
Okay for the important thing is getting the pricing done early having having strong rover and doing the pricing early in Q1 looks like we always do and of course, the reminder, that about 40% of the book of businesses and those restricted markets and so when you say when we say, we're expecting 7% that number doesn't change based on what happened translation neck.
Sure 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 seeing that positive service intervals, and net 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 still running better than plan on 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.
This year will get about four years of transactions done.
We'll probably have next year big by the time, we got our call in February with.
10 more months left to go.
But.
So no it's.
The disconnect obviously is.
You know it was such a rush boats and euphoria with free money and cheap money and everyone was running around talking about multiples without any regard to what type of business are there. They have what type of cash flow conversion they have those.
Those days are gone I mean, it's it's.
Yeah. So I think there's a reality check of the ability for lower margin low cash flow generators 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 approach evaluation hasn't changed.
We've always said above market inputs on our on our return expectations.
Have always do this on the cash on cash basis.
But some of the companies, we're seeing now of 30 plus percent margins.
So the cash on cash generation as Conservatives should warn our valuation as we said before.
Real estate in some of these markets is very.
Expensive and know that can be multiple over there as well and so it's it's nothing's changed on our view, but clearly I think some sellers who are.
They were coming to the table.
Folks pitching them higher multiples without the quality of assets or cash flow to support it.
Which will create a disconnect for those sellers and and those folks might be starting the 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.
Any sustainability spending so that would be on top of that.
No Michael when we described Capex, we talk about the total Capex, we don't divvy it up that way until at 10.5% of revenue that would be everything.
That's a pretty good dip from this year, because you are 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 two years [laughter] alright, and the last one for me has the internal customer inflation at least it's not rising still or is it still rising I just wasn't sure about that message.
It stopped rising I'd say, four or five months ago, which has been <unk>.
Remaining of these elevated and as I said I was accused of being Donald Rumsfeld I think last call again, the important things that.
Knowns are known.
There's been no more unknown sort of surprised us and so we've.
Again.
Shaped the price of the required pricing consistent with the the environment and environments remained fairly stable now for the past.
Four five months.
Alright, great. Thanks.
Our next question will come from now Okay with Oppenheimer you.
You May now go ahead.
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 going to rebuild you know rabbits and activity from Covid.
What you did and what you're doing to drive continued safety improvements in the business.
Yeah, well obviously those.
Reporting that when we say an incident right it could be a bee sting it could be hitting a mailbox, we try to track everything that's impacting our people or the community right.
And that includes not preventable, meaning folks that hate us.
And obviously with proliferation of cell phones, and distracted driving and other things it always amazes me.
I mean 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 Osa's safety is is is behavioral based.
It's not in our binder.
<unk> Department.
And each individual person to own it.
Each individual has become fit for duty each.
Each individual has to remain aware and want to come home safe and we're going.
You're putting.
10000, Ralph's on a street or 11000 routes on the street.
You know, we can add some incidents, but you gotta remember, there's probably almost 11000 that are that are having any incidents.
Southern region, which is a large swath.
Texas across the Florida had zero incidents yesterday, we celebrate those days, we should expect those days, but we still celebrate them.
So no it's 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 on that.
Go through.
Everyday.
And years without any incidents.
Okay. Thanks, and then I've been sticking with the theme of of of people and labor to Michael's question earlier about internal rate of.
Cost inflation can you characterize what you are seeing in the labor market now, obviously, we're kind of heading into.
Seasonally softer period, but.
Trying to see any easing in the labor market does it remain.
Type broadly any sort of geographic easing that you may call out.
Yeah, I mean, it's it's always <unk>.
Geographic specific right I mean, you can have.
Some cases.
Wage rates running in the next three.
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.
We're assuming kind of mid single digits are a little bit higher but it varies by market and we try to be proactive unresponsive.
The big reason niche market.
Yeah, and I mean, it gets to tie that back to kind of the margin expectations right. I mean, if you're overcoming 7100 bps recycling headwind in 20th <unk> dilution next year, and you're doing that with 8% to 9% price and what does that assume for.
Internal cost inflation next year.
Yeah, you, obviously, we're working through budgets right now, but you know as I pencil 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 covering it.
Look at the B a lot of economists out there.
<unk> <unk>.
Inflation to be abating at least reported based on this issue to move out of of this year.
So maybe it kind of sorts oscillating that eight 5% so those days of nine or 10 over your behind us.
Again, both of the month to month tractors show, our expectations of 4% to 6% of the time you get your next year.
Little softening.
Part of the year.
Super helpful. Thank you.
Our next question will come from Stephanie more Jeffries.
May now go ahead.
Hi, good morning.
Hi, good morning.
Okay, continuing on the topic I'm right about Marcel on the competitive landscape I wanted to know if you were seeing any kind of changes in pricing activity marks on a local level from some of your smaller competitors Fas kind of have their that's where I'm at 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, they're they're being impacted by the same challenges that the rest of us are.
And so it's really the pricing environment.
No different.
The smaller private and then.
Then on the public's.
So I think you've seen folks March in lockstep, I mean, especially of companies that have lower margins I mean.
Get into deflationary environment hundred percent margin might get wiped out unless you got a price right and so in some cases.
Pricing and that 8% to 12% is what we see.
And on the Street and again now that the needs to recover the commodity to set before we know some many private setup, putting 2% to 4% 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 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 reality of that and competitive bidding for instance on municipal contracts are small players in many cases can't even participate because they don't have the equipment or the people or such a large price increase is 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 route density 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 new to louvers.
As we always say that acquisitions come onboard.
We typically expect a modest amount of margin improvement.
Again, many of these could be structurally.
Lower than.
The base business, because obviously they may not have the full.
Collection of assets meeting might not have.
Renewable fuels made out of landfills et cetera, E&P ways to meet some of the some of the higher margin business and so those are structurally dilutive but.
No it's.
The little tuck into a a half a million dollars here to two or $3 million, they're 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 <unk> RBC capital markets.
You may not go ahead.
Yeah, Thanks, very much good morning, everyone.
Good morning, so so so where 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 aligning 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.
It seems like every decade or so there's a wave of.
West Coast sellers, it's kind of generational shifts and and and whether to retain or or or sell a business.
And the dialogue is quite strong you've seen us again, we talked about doing that enclosed.
Many acquisitions and we've in Oregon, and California This year.
When the year plays out I wouldn't be surprised if over $200 million of of required revenue. It just sits on the west coast, that's a very active ear.
And there's dialogue that continues on the west coast and so again woods.
We call it out in the in the periods when it's quite active because 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 Youre doing these perhaps the most attractive go first <unk> at what point do you think.
You look at the annual guide you always give it then.
You hit the number that you actually do with quite a disconnect.
Sounds to me like you think 2023 is gonna be another outsize euro how how long do you think we're gonna be obese 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 will have to remind people don't own us what we haven't done yet.
So in love us even more than a year, we don't do any transactions right cause I Miss you passed on a lot of things because we should.
But no it's listed there still visibility on.
On 23, I mean, obviously as I said before we may get an average amount of annual revenue completed by.
By the time, we were sitting on this call of February right with a lot of time left to go.
Look we.
We still easily turned down 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 2000 to 30 plus years right. I mean this is it's.
The owners are finally, saying now now I'm ready.
So it's hard to predict.
Once owners of quality companies will sell they control the timing not us.
We just have to be ready to.
To to to move when they say they're ready to go.
Alright 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 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 that that degradation is it.
Is it higher than that of the acquisitions. You mentioned is it that you're better markets or you tube and better pricing.
Pricing what would you characterize in order.
Magnitude would be the most important offset to OCC price declines the nurses are you pregnant.
Well. Thank you seeing you saw in Q3 and you are seeing in queue for right. I mean, just the fact that pricing is running around 10%.
And 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.
I dunno more insight into twenty-three because they want to wait [laughter] reality is is that we're executing it.
That's in place.
And we know how to do it and we will do it again next year.
But the good news is.
As we only have what maybe eight months of or eight months of headwinds have to stay at this level and it's easy to calculate.
The poor thing also to know is it's one thing to know what the prices of O C. C. It's another thing to move the product.
And our our folks so.
And I've done a remarkable job so moving product in this environment.
You know it's versus just having a stack up.
In our facilities.
Okay, Great I appreciate the time and congrats on a great quarter.
Okay.
Again, if you have a question. Please press start in one.
Our next question will come from Stephanie E J P. Morgan.
You May now go ahead.
Hi, good morning, very great corner.
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 what have you 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 it how many months.
Without a doubt we talk even last call last two calls on special waves.
We've noted that some special ways was sliding a little bit with regards to the timing of those projects more because the.
The budgets that were put in place by those developers.
Did not incorporate the dramatic rise and logistics costs as you consumers budgets are put in place a while ago before they pull the trigger and the escalation and logistics costs just wiped out the economics.
Those projects.
As as more trucking capacity gets on the marketplace as.
Logistics costs are beginning to slip a little bit from those long haul providers.
You are seeing those projects.
Start coming back on me as I look at Q for at least so far in Q4.
<unk> I mean, especially funds.
While down just a little bit yeah.
They're nowhere near down as much as you saw him in Q3 and so on.
Other than that is you know this is more of a fixed based system.
It's one of the cans half full third full three quarters full of totally full.
We know what we're charging when it comes to.
Most of our customers and so.
It's.
I cannot CND, we're seeing continued strength you saw the Q3 numbers and revenue per pull up high single digit number both per day is still up.
See in the volume in queue for in our landfills remain slightly up.
And so we're still seeing.
Strong activity around that what I would add to that Stephanie is just.
But I would notice just have remarkably steady at the <unk>.
He says that I look at landfill volume for instance.
So what you are seeing really are those Thompson lumpiness of special wastes 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 avail, and where we saw weakness or the lowest signs with Canada, which by the way we had.
Highlighted all throughout last year, the observation that their value Mccaffrey had really out piece, 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 and 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 perfect <unk> be March on headwinds and then capital to get some cash flow and 23 expected 23, I guess in regards to.
To the free Cashwell conversion are you expecting it to be relatively steady verses 22, even with kind of the opponents depreciation impact and hitting kind of second and 23.
Yeah, It should stay above 50%, whether that's 55 or 51 or 50 152.
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 for any 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.
Maryann and Joe boxer available today to answer any direct questions that we do not cover that we're allowed to answer under <unk>, the Reg G and applicable securities laws.
Mr say.
Ah bartman called down internally by the Philly fans that we have in Pennsylvania, and so you know hanging there folks. It's best three now. Thank you again, we look forward to seeing your upcoming investor conferences or hearing from you are an expert.
The conference has now concluded. Thank you for attempt today's presentation that you may not disconnect.