Q4 2022 Waste Connections Inc Earnings Call
Good day and welcome the waste connections fourth quarter earnings call.
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I don't like the protocol, where Mr. Worthing Jackman. Please go ahead Sir.
Thank you operator, and good morning, everyone.
I'd like to welcome everyone to this conference call to discuss fourth quarter results and our outlook for both the first quarter and full year 2023.
I'm joined this morning by Mary Anne Whitney, our CFO and several other members of senior management.
As noted in our earnings release Q4 topped off an extraordinary year for waste connections highlighted by continuing outperformance during the period and providing a higher entry point and enhanced visibility for 2023.
Strong operational execution and over 10% solid waste pricing along with the acquisitions closed during the period once again provided for better than expected results.
More than offset inflationary pressures and commodity related headwinds to expand adjusted EBITDA margin by 30 basis points, excluding the margin dilutive impact of acquisitions completed since the year ago period.
Looking at the full year.
Digit percentage growth in both revenue and adjusted EBITDA, along with adjusted EBITDA margin expansion, excluding the impact of acquisitions.
Can you differentiate our results.
We overcame elevated wage fueled and inflationary pressures and a 70% drop in recycled commodity values in the second half of the year with an acceleration in pricing during the year, providing momentum for higher core pricing in 2023.
Acquisition activity during the year also outpaced expectations for a total of approximately $640 million and acquired annualized revenue.
Which along with activity year to date already provides acquisition contribution of 5% in 2023 with additional dialogue ongoing.
In short tremendous operational execution in 2022, that's provided outsized visibility for double digit top line growth along with adjusted EBITDA margin expansion in 2023.
What's the upside from any improvement in recovered commodity values for inflationary pressures as well as incremental incremental acquisition activity during the year.
So again, it's much more detail, let me turn the call over to Mary Anne for our forward looking disclaimer and other housekeeping items.
You Worthing and good morning.
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.
Radian security plot.
Actual results could differ materially from those made in such forward looking statements due to various risks and uncertainties.
Factors that could cause actual results to differ are discussed both in the cautionary statement included in our February 15th 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 rest of the way you cannot.
Presently aware or that we currently believe are immaterial, which could have an adverse impact on our debt.
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 release for a reconciliation of such non-GAAP measures to the most comparable GAAP measures.
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 Juan.
Thank you Mary Anne.
First off I'd like to recognize and applaud the efforts of our local teams whose execution most notably over the past few years in the face of arguably the most challenging operating environment has continued to drive differentiated results too.
2022, or 25th anniversary year, we once again demonstrated two hallmarks of waste connections.
<unk> ability.
And sustaining ability.
Should be no trade off between the two.
As noted earlier, we're extremely pleased with our strong operating and financial performance in Q4 and throughout 'twenty two.
As we overcame elevated wage fuel and inflationary pressures and a 70% drop in recycled commodity values to drive adjusted EBITDA margin expansion, excluding acquisitions in the year.
Here.
In 2022, we also delivered pricing of nine 2% more than 200 basis points above our initial outlook and about 85% of which wasn't core price.
Moreover, given the acceleration of pricing during the year, the lagging benefit of higher CPI resets and a strong start to the new year.
Already set up for for pricing to increase sequentially by about 100 basis points from the fourth quarter to 11, 5% in Q1 and to average about nine 5% in 2023, essentially all in core price.
We delivered adjusted free cash flow of 1.1 dollars 65 billion in 2022.
Over 15% year over year on Capex of $913 million up 23% year over year.
Reflecting a purposeful step up in capex during the year for opportunistic real estate purchases.
Net of asset sales Capex was about $30 million above our outlook in spite of ongoing supply chain constraints for fleet and equipment.
As noted in our press release, we've been navigating the uncertainties and manufacturer of delivery timing and now expect to take delivery of an additional $50 million in fleet in 2023 that was originally expected in 2022.
Our 2022 Capex also included about $75 million.
Sustainability related projects, which was about $25 million less than we originally had expected primarily for the two RMG facilities into recycling facilities with previously discussed.
It will total about 150 million once completed.
Our 2023 sustainability Capex is expected to be up from 2022 due.
Due to the timing of some of the expected 2022 outlays that drifted into this year as well as the expected initiation of development of an additional large R&D project at our recently completed acquisition.
As we have described previously these R&D facilities, our strategic investments with attractive payback that a range of values have recovered resource.
With the additional project noted our aggregate capital outlays for owned R&D projects are now approaching $200 million between 2022 and 2025.
These projects along with over a dozen others we partnered on.
Our conservative.
<unk> estimated.
To generate an incremental 200 million of EBITDA in 2026 or about a dollar of EBITDA per dollar of Capex.
Provisions in the recently promulgated inflation recovery.
But further enhance expected returns and could provide tax related benefits as soon as 2023.
One of the new plants are scheduled to be online and start contributing in the second half of this year.
As we have consistently emphasized in our approach to ESG.
These projects are integral to our business.
Consistent with our focus on value creation.
And additive to our growth strategy not something in lieu of acquisitions.
Looking next to acquisitions in 2022, we closed approximately $640 million in annualized revenue.
We completed 24 acquisitions, all in solid waste and spread across the U S and Canada.
In both franchise and new competitive markets, including integrated markets, new market entries and a number of tuck ins to existing operations.
This robust activity in 2022 cap sixth consecutive outsized years acquired annualized revenue.
Totaling over $2 1 billion since 2017.
And we've had another strong start to the year in 2023.
As always we maintain a disciplined approach to market selection the risk profiles, we accept and evaluations we determined to be appropriate.
Year end, we've closed another integrated west coast franchise with over $35 million in annualized revenue.
Which along with the rollover contribution from deals completed in 2022.
Already provides for 2023 acquisition contribution up over 5%.
Continued dialogue.
It sets up the potential for another outsized year of activity for which we remain well positioned.
And enter 2023 with leverage below three times in spite of acquisition outlays of over $2 3 billion during 2022.
Our balance sheet strength and free cash flow profile provide flexibility for continued elevated levels of investments in our organic solid waste growth strategy, along with renewable energy projects.
And solid waste acquisitions, while also increasing our return of capital to shareholders.
In 2022, we returned $668 million to shareholders through dividends and opportunistic share repurchases up nearly 20% from the prior year and we invested over $3 2 billion in Capex and acquisitions for future growth.
Now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the fourth quarter and provide a detailed outlook for Q1 and full year 2023, I'll, then wrap up before heading into Q&A.
Thank you.
In the fourth quarter revenue of 1.869 billion was $24 million above our outlook and up 245 million or 15, 1% year over year acquisitions.
<unk> completed since the year ago period contributed about 153 million of wrapping or in the quarter or about 159 net of divestitures.
Total Q4 price of 10, 6%, including 9% core price, which stepped up sequentially by 70 basis points from Q3.
Reflecting our highest levels in 2022, Q4 total price range from about 6% and our mostly exclusive market western region get between about 11% and 13% in our competitive markets.
I think acceleration in competitive regions during 2022, along with the lagging benefit from higher CPI linked market increases in 'twenty three position us for about nine 5% total price in 2023, essentially all core with over 75% of that pricing already largely in place at this.
Time for now.
Solid waste volumes in Q4 were down one 7%, excluding 80 basis points from the final quarterly impact from the purposeful Nonrenewed New L. A to municipal contracts noted throughout 2022.
Volumes were in line with our expectations in spite of the severe winter weather in late December .
Looking at Europe , a year results in the fourth quarter on a same store basis commercial collection revenue was up 14%, mostly due to price roll off pulls per day were about flat with revenue propel up 9%.
And landfill rates per ton were up about seven 5% on daily come down about 2% with MSW and special waste each down 3% to 4%, partially offset by higher C&D was up 7%.
And finally, E&P waste revenue was $53 million, but in line with the prior quarter and up more than 50% year over year.
Looking at Q4 revenues from recycled commodities, excluding acquisitions recycled commodity revenues were down about 70% year over year about as expected due to the precipitous decline in value since July which continued through November .
Prices for OCC or old corrugated containers declined about 60% sequentially from Q3 to average about $56 per ton in Q4.
OCC pricing has been relatively stable since November in the range of 55 to $60 per ton with some recent indications of improvement.
Finally, looking at year over year landfill gas sales in renewable energy credits or Rins landfill gas revenues were up nominally in Q4 with lower RIN values offset by higher values RIN values averaged about $2.65 in Q4 and have since declined to levels around $2.
Adjusted EBITDA for Q4 as reconciled in our earnings release was $564 million up 13, 8% year over year and about $11 million above our outlook.
<unk> adjusted EBITDA margin of 32%, a 20 basis point beat to our outlook.
Margin in the quarter was up 30 basis points year over year, excluding the impact of acquisitions as we more than overcame the toughest quarterly comparison, including almost 150 basis points and headwinds from lower recycled commodity values.
Moving to full year adjusted free cash flow.
We converted over 52% of adjusted EBITDA to adjusted free cash flow above our outlook at 1.1, 65 billion or 16, 2% of breath.
We over delivered in spite of an incremental $30 million in Capex as we opportunistically made certain real estate purchases during the year.
As Worthing noted our 2022 Capex was also noteworthy for what it doesn't.
That is about $50 million in fleet due to manufacture delivery delays as well as about $25 million in sustainability related outlets all of which were expected in 2022 and are now included in our outlook for 2023 Capex.
I will now review our outlook for the first quarter and full year 2023, before I do we'd like to remind everyone. Once again that actual results may vary significantly based on risks and uncertainties outlined in our safe Harbor statement and filings we've made with the SEC and the securities commissions or similar regulatory authorities in Canada.
We encourage investors to review these factors carefully.
Our outlook assumes no change in the current economic environment. It also excludes any impact from additional acquisitions that may close during the remainder of the year and expense transaction related items during the period.
Looking first at the full year 2023.
Revenue in 2023 is estimated at 8.05 billion.
For solid waste, we expect pricing of about nine 5% essentially all core and volumes in the range of flat to down 1%.
That's about 360 million of estimated revenue in 2023 from acquisitions already completed.
And E&P waste activity and values for recovered commodities assumed in line with recent levels.
Adjusted EBITDA in 2023 as reconciled in our earnings release is expected to be approximately $2 $5 billion or about 31, 1% of revenue.
30 basis points year over year in the face of approximately 100 basis points in headwinds from recycled commodity and RIN values.
Said another way adjusted EBITDA margin guidance is up 130 basis points year over year, excluding those two commodity products.
Any moderation in inflationary trends increases and the values for such recovered commodities or in E&P waste activity or additional acquisitions closed during the year would provide upside to our 2023 outlets.
To be clear our outlook does not assume any improvement in recycle commodity values from earlier this year, which for instance would add $10 million in annual revenue for every 10% move in price levels.
Or in RIN values, which would add approximately $5 million in annual revenue for every 10% move in price levels, both of which with very high cluster.
We're encouraged by the improvement and we are hearing about in February for recycled commodities with prices in some markets reported to already be up more than 10% from recent levels that said, we have not factored any such pick up into our outlook.
Interest expense is estimated at approximately $255 million and our effective tax rate for 2023 is expected to be approximately 22% with some quarter to quarter variability.
Adjusted free cash flow in 2023 as reconciled in our earnings release is expected at one point to two 5 billion on Capex of 925 million.
Including $50 million in delayed sleep delivery from the prior year as noted earlier.
We also expect about $30 million in asset sale proceeds primarily associated with excess facilities with either replaced our accident.
Given the expected timing of Capex and other outflows. This year adjusted free cash flow is expected to start the year relatively lower in Q1 and ramp higher in subsequent quarters.
Turning now to our outlook for Q1 2023.
Revenue in Q1 is estimated at approximately $1 $895 billion.
We expect price plus volume growth for solid waste at 10, 5% on pricing of about 11, 5%.
And E&P waste revenue of approximately $45 million, reflecting typical seasonality.
Covered commodity values are expected to remain in line with recent.
Adjusted EBITDA in Q1 is estimated at approximately 30% of revenue or $568 million and what sets up as the toughest quarterly comparison in 2023 for recycled commodities and Rins.
Depreciation and amortization expense for the first quarter is estimated to be about 13, 2% of revenue, including amortization of intangibles of about 38, five months or 11 cents per diluted share net of taxes.
Interest expense net of interest income is estimated at approximately 67 million.
And the tax rate is estimated at about 22%.
And now let me turn the call back over to Worthing for some final remarks before Q&A.
Thank you Mary Anne.
Our results in 2022 and positioning into 2023 are testament to the culture of accountability that has been the cornerstone of waste connections 25 year history of outperformance and value creation.
We are proud of our accomplishments in 2022 and grateful for the commitment of our over 22000 employees, whose tireless efforts positions us not only to overcome the challenges of 40 year high inflation compounded by a dramatic drop off in recycled commodity values during the year, but also to emerge a more cohesive and resilient team.
Moreover, the reference that positions us with double digit revenue growth along with adjusted EBITDA margin expansion in 2023 with industry, leading free cash flow conversion.
And to be clear, that's all without any assumed improvement for a multiyear low recycled commodity and RIN values, causing unexpected 100 basis point margin headwind.
We're encouraged by indications that we may already be off those lows and look forward to realizing upside from sustained improvement in these recovered commodities as well as any moderation in inflation freshener inflationary pressures or additional M&A activity.
So again.
Sustainability and sustaining ability.
Appreciate your time today I'll now turn this call over to the operator to open up the lines for your questions operator.
Thank you well now begin the question and answer session. That's a good question Chris.
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I will pause momentarily to assemble the roster.
First question will be from Jerry Revich Goldman Sachs. Please go ahead.
Yes, hi, good morning, everyone.
Hey, Gerry good morning.
Hey, good morning, I Wonder if you folks can just.
To expand on the margin.
Cadence.
Implied by guidance so just.
Looks like with the first quarter outlook, you're setting up to be exiting the year with margins up call. It 80.
80 basis points year over year in the fourth quarter and seasonally adjusted margin rate that is closer to 31, 5% and I'm wondering as we think about what 24 might look like.
It looks like you've got some natural momentum even before thinking about what commodity prices do to drive a year of outsized margin improvement in 24, I'm wondering if that cadence is consistent with how youre thinking about the flows.
Well I'll start with a 24 observation and hand, it off to Mary Anne for the quarterly progression.
Progression in the year.
But I think you're right with regards to 'twenty four as much as we said this year is an outsized margin expansion here exclude.
Excluding the headwinds from the from recovered commodities, obviously, they are a 100 basis point headwind and and guide up 30. It means the underlying is up 130, yeah. We typically talk about being a targeted 20% to 40 basis points to 130 <unk>.
If you move into next year again, you've got the franchise markets.
Printing pricing for next year off of CPI is we're seeing during the year this year.
By mid year.
So obviously the pricing within the franchise markets should stay in that 6% plus or minus range. We're printing seven this year.
Inflation moderates into next year, if inflation does average like the pundits think 3% to 4%. What are you seeing next year in the franchise markets is really more of the recapture what we couldnt get in 'twenty, two so that becomes an outsized year.
And again as you know within our within our overall pricing structure, we typically exceed CPI by about 150 basis points or more and so.
Next year should stay that combined with again, improving recycling values if it steps up during the year should provide for another above average margin expansion for the full year above the typical 20 to 40 basis points with regards to the flow during the year sure. Thanks breathing so Jerry when you think about that.
The flow during the year I think that most instructive way to come about it is to look at what the headwinds do and if you look at the 100 basis point headwind over the course of the year from recycled commodities and rent. It is heavily weighted to the first two quarters. So if you have about 150 basis points headwind to each of the first two quarters that gets about cut in half in Q3, and essentially goes away by Q.
Or if you just play that through you can see how to your point you'd have the toughest comparison earliest in the year and we've already guided to Q1, which by the way pretty similar the way we guided Q4, and then you'd see the improvement you see the ramp over the course of Q1 to Q4 of course with the overlay of the seasonality.
In your highest reporting quarter still being Q3 would be the likelihood because they you know the cadence there is three to four one in terms of seasonality, but the most important thing I think about 23 is the headwind is diminishing over the course of the year, even before we see any improvement.
Super. Thank you can I, just shift gears, a little bit to talk about.
LNG since.
Your last public comments.
<unk> rollout of Iran, and the overall framework really essentially blesses R&D.
And the effect of biofuel and you know with that context, I'm wondering if we could talk about it.
What number of sites that you folks have that don't currently monetize gas and the plan could ultimately overtime, if you get permitting et cetera.
Monetize gas.
Economically viable levels and separately, obviously lots of details to be worked out on Iran's but I'm wondering if you'd be willing to share.
How much.
Energy your gas to electric.
Facilities are generating.
Adjusted for your ownership position.
Well I think yes, I think you almost answered the question when you asked it which is there's still a lot of details to be worked out.
And our view on E. Rins right now is to wait until the final rules promulgated this year.
Before providing any hypothetical comment on it because anything again right now would just be hypothetical right.
Clearly he runs provides optionality for the projects, we do have underway.
We compare one R&D versus the rent approach, but I still think it's it remains to be seen who actually owns the ear and with regards to the Oems versus generators et cetera. So let's our view is let's wait until the final rules get promulgated and then we'll make some comments on it.
Fair enough worthy man I wonder if you'd just comment on the number of facilities are part of the question. So whats not monetized yet within your footprint in terms of number of facilities that could get monetized.
We have electric generation facilities at 17 of our sites.
Perfect. Thank you.
Yeah.
Thank you next question will be from Toni Kaplan Morgan Stanley . Please go ahead.
Thanks, So much I wanted to ask about volume you have feet expiring contracts running through in 'twenty. Two so that was an impact there, but it did seem that volume is getting progressively softer you did have some tough comps, but wanted to talk about.
Sort of is it is it price discipline or is it the special waste that you called out last quarter or something else and it seems like you are implying a little bit of a benefit or improvement I should say and 23. So just just wanted to ask about it and really just the normalized level.
I know the expiring contracts are rolling off so that'll help.
When we think about this industry is more of a kind of a plus.
Plus one minus one type volume industry, obviously, it's a bit more of a fixed price service based business.
<unk>, whether it be through special waste or new contract wins that could push volume above the 1% episodically within gravitational pull kind of brings it back within that range. Obviously last year, we talked about the purposeful shedding of two contracts that pushed reported volumes below the negative 1%, but we said hey.
Adjusted for that if it was still staying.
It nicely between net zero or negative one and we look at this year is likely another year of zero to negative one episodically. If there may be a couple of things that do drive us above.
Zero in to the positive on any one quarter.
Wait to see how the year plays out on that many important thing.
Obviously in this environment just price the important thing is core price.
And that's why we're pleased that the nine 5%.
Core price are regarding to for the year.
And the only thing I'd add to that Tony would be that we'd say, there's really been no change no discernible change in any of the trends. We've seen if you think about it roll off polls had been in that flat to kind of up a point or two landfill volumes had been flattish to down a little bit all year long I look at January numbers theyre not materially different maybe.
January is a little better than December was there's always a little noise in the winter, but the key is that we haven't seen any market change really to the last year or so.
Great and I was hoping you could talk about your sustaining ability within sustainability. My question really is do you see sustainability as being a bigger part of your strategy in the future. I know you gave the EBITDA benefit in the Capex, but just broadly I guess, maybe just talk about your.
Differentiators versus peers in the sustainability area.
Well first off we've always noted that our discussion on sustainability efforts.
And core to you know who we've been for 25 years. Its just where were speaking more about it. These past few years and telling our story right. So I think we're.
I think we are getting a little bit better at being more transparent about what's been going on through these years.
Obviously, our take and view on investment and it is a balanced view of projects, we owned versus projects we partner on.
And again that approach as we've talked about is is a dollar for dollar return of EBITDA for Capex all deployed in the aggregate.
But it doesn't change who we are I think are I mean, the discussion about sustaining ability.
It really is as one of reminding folks that.
Sometimes the pendulum swings from execution, all the way over to.
Prompt five year out promises on sustainability and what it might deliver I mean, I think we are.
We're proud to focus on both what we're doing quarter in quarter out year end year out how our folks step up to we've talked about again some of the most challenging operating environments. We've seen these past few years and we're proud to talk about the ear now.
So I think well with over 25 years. If you wanted to five standing ability I think it's that performance you've seen over 25 years and.
And hopefully that pendulum swings from execution to sustainability.
And really swung hard to the sustainability side from just a conversation on the market hopefully that stripping back more to a more balanced view of both execution and.
And sustainability.
Thanks, a lot of sense. Thank you.
Hmm.
Nick next question.
Operator.
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Colony, operator to check in on what's happened to the call.
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Obviously, we started.
Yes.
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Thanks, Tim Good question.
It's not a bad idea if you have a question just E mail Mariana myself.
Read the question and answer it.
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So Nick Thank you.
The next question come through yes.
Yes, that's Kevin Chang with CIBC. Please go ahead.
Okay. Thank you.
Thanks, and good morning.
Maybe if I could just talk about the M&A pipeline, if I look at it.
Maybe the average size of the deals we've steadily increased the past few years, it really called Mark jump in.
In 2022, and I'm just wondering it sounds like we should expect another outsized year in 2023, but.
Has the composition of that pipeline changed at all I E.
Are you seeing larger companies for sale or are you seeing maybe.
Oh, maybe it's the pipeline getting bigger in terms of in terms of what you'd look at it.
Tuck in acquisition, but the interesting just given some of the trends we've seen in terms of kind of the average size per deal of the past few years.
Sure and you're right I mean, Kevin there's been some what I'll call more outsize the transactions.
Companies with.
50, 68, 5 million or a 100 million type revenue profile, but you look at average year for us is.
Is.
Is 15 to 18 transactions that might be.
Two to four new market entries between 20 and $40 million of revenue.
And then it might be 10 or 12.
Tuck in or are kind of market expansion.
Acquisitions that could be as low as $5 million or $2 million or as high as five or $8 million. It's just that the combination of those 15 to 20 transactions typically has gotten us to an average of about $150 million right.
Just wanted to when we would do every year, a 24 acquisitions with.
A good handful of them being 50 plus million in revenue, that's what really drives the number to $640 million.
If you look at the pipeline right now I mean, it's still what I would call middle of the fairway.
Now, we're $20 million to $40 million is considered a large transaction.
And Theres, a lot of fives and tens in there as well there is nothing thats.
What I would call outsized, but never say never it's early in the year right, but no. The average profile of what we're targeting is no different its just.
Sellers are great businesses pick the time to sell and the shifts you've seen.
More people come to market or are finally, after 20 or 30 years of dialogue decided to say hey, it's time to sell.
<unk> and early this year again 35 million fully integrated franchise on the West Coast again, right in the sweet spot of that $20 million to $40 million.
Okay.
Perfect. That's super helpful and maybe just a second one for me just a clarification.
You talked about.
The potential upside.
With the I O Ray just confirming it doesn't sound like you're assuming any of that in your.
I guess in 2023 numbers or even your longer term kind of return profile of these investments in R&D. It sounds like that would be upside to the numbers you provided in your prepared remarks.
That's right I mean, we've got and again, an investment tax credit that we that could apply to the plant, we're bringing online in second half of this year.
Maria noted it could be about $10 million of.
Cash tax savings in the current year.
And that that could be higher than that but let's wait to see how this thing plays out it's probably it might be the first ITC that supply for.
Clearly so first one for us to see how that of that process moves through.
But that's not in our number obviously that would.
The help on the free cash flow and obviously reduced the net investment basis in that in that.
<unk>.
And again with regards to E rins.
We have not assumed anything.
Outlook as we wait to get that rule finalized.
Perfect. Congrats on a very strong 2022, there. Thank you very much. Thank.
Thank you.
Thank you. Our next question will be from Robert Franklin RBC. Please go ahead.
Thanks, very much good morning, everyone.
Thanks for the sensitivity on OTC, it's a big challenge for analysts that have varying conservatism in different management teams estimates on some of these things.
Have that in normalized for it and is it fair to say that although you said for every time I think it was 10% is $10 million revenue. That's also EBITDA as well, presumably that flows right to the bottom line is that right.
Yes, it's fair to say that you guys have said in the prepared remarks very high flow through on both OCC and resins, yes.
Okay, So thats great.
And then on acquisitions.
You know when you when you are buying a lot of companies. It was indicate about one of your peers that sometimes.
They come with some assets that are in areas that you may or may not necessarily want to be in her or it's more difficult to operate in and it's leading to some asset sales by by by one of your peers is that something that you're finding as well would you consider kind of pruning.
Or swapping would you be buying assets that competitors are selling in markets, where perhaps they are smaller than your larger and vice versa is that something that that you see a possibility of doing or where are most of your acquisitions in areas you want to be in and kind of buildup in that area.
Yes, if you think about again the profile of the companies we are buying typically.
They're in a singular market right. So it's not like it's.
It's not like they are coming with multiple multi state operations.
And we love to have the states, but not a third state et cetera, So when you're when you're the size of companies that we're talking about a profiling.
Then.
There is there's really nothing to divest.
Episodically do they come with might they have a bad municipal contract that we need to play out and reprice and be ignostic, whether we keep it or lose it sure, but it's not a wholesale.
Graphic exit.
Okay, but that addressing my questions appreciate it turn it back.
Thank you next question will be from Noah Kaye Oppenheimer. Please go ahead.
Thanks, maybe give us a picture on the labor front.
When might we start to lap these high single digit rates of labor pressure flowing through the P&L.
How would that play into the margin outlook that you've outlined for the back half and I don't know.
Some of the expectations that you outlined for 2024.
Sure well I would say.
Of course wage wage.
Wage rates stay in what I call the mid to high single digits from a from the overall pressure standpoint, I think wages.
And wage pressures for the service economy generally.
We'll be more persistent.
Then software engineers and others that you've seen in the headlines getting laid off.
It's obviously, we price above a wage pressures and you've seen that consistently.
The good news on labor or is that.
As we move through Q4.
Turnover improved.
Sequentially as we move through the year and entered this year our ability to hire.
<unk> has improved.
To month as we move through the year in Q4 was one of our highest.
Periods for new hires.
I say that because you know that.
The one pressure that that's been on wages during the last two years when hiring was more difficult was the scale of the new employee coming in was intersecting somewhere.
Within the current wage scale existing operation, which will put pressure on the wages for existing employees that's abated.
And so now we're looking at more dipped below normalized wages.
Obviously, the wages, we put in place for the year, mostly in place.
And so we will live with that this year, but clearly as if inflation steps down as we move throughout the year and get into 2004.
Is.
Okay turnover continues to improve and retention improve.
That's certainly expect wages wage pressure to be mid to low single digits as we move into 'twenty four.
That's great color, Thanks, and I'm sure others will ask about some specific guidance items, but I just wanted to ask what is the actual sustainability capex budget for 2023 since you mentioned some shift in the timing.
Right so as we mentioned.
A little bit did ship from 'twenty to 'twenty three we had originally been contemplated the $1 50 would get spent 122 and 50 in 'twenty three and that shifted some more like 75 or 75 or a little more than that given the new project.
So 75 call it $75 million to $85 million in 2023.
Okay. So really no no I'm sorry go ahead.
So as you see that play out with a total of 200 that we've talked about for R&D use and then you've got the.
Two of our recycling facility plants.
Is that Capex.
Kind of burns off through 'twenty five.
Then you see the.
Capex as a percentage of revenue dip back down Thats when you see the conversion.
Hello.
Free cash flow to revenue again and start approaching 16, 5% again and Thats. When you start layering on the contribution of the of the renewable fuel plants.
By 2006 that additional $200 million or so structurally moves of free cash flow generation to revenue by 26 to about 17, 5% of revenue.
Well, thanks for anticipating my question I'll leave it there.
Yes.
By the way your wife wants you to pick up bags in the way home.
You got it.
Okay.
Thank you next question will be from Tyler Brown Raymond James. Please go ahead.
Good morning.
Hey, Tyler.
Hey, Maryann did I hear you right, but at this point, 75% of your pricing is already set for 'twenty three and if that is right doesn't that youll have a bit more visible at this point in the year would that be cool.
That is a it's a great point Tyler so typically coming into the year by the time. We report Q1, we're in a position to make a statement like that that 75% plus is either in place or is known because it's linked to a CPI adjustment, which has a look back period and this year.
We're that much further ahead because of the nature of the price increases in 'twenty. Two so if you think about it there are a few different buckets that contribute to the 75% that's known or in place. One is the rollover contribution from Ti has done last year, which of course accelerated over the course of the year and so it sets us up for having more rolling over the next.
Since the CPI linked contracts, which as we've talked about step up from 5% to 7% in 2023. So that piece is known and then the final piece is what we've already put in place with our typical early approach to pricing, which was no different this year, we hit it hard.
The vast majority of our price increases in January this year and so the combination of those three buckets really is what gets you to about 75% as we describe it already known or in place.
Yes, perfect. Okay. That's that's helpful and then.
Can we quickly we walk the Q4 margin I think margins were down 30 basis points. I think you said 150 basis point headwind in commodities, but how much specifically.
Specifically from M&A, and maybe some fuel impact with mortgage brokers real quick.
Sure. So the pieces are that there was a 60 basis point drag six zero from acquisitions, which is why we made the point that it is up 30 basis points year over year ex acquisition and that was in the face of fuel was about a 60 basis point headwind.
And recycled commodities were about 150 on their own.
And then it's.
If I'm not mistaken you have a hedge position in your fuel how does that play out for next year.
So I'm, assuming that's in the guide, but I just want to maybe when we think about this.
<unk> three margin walk you talked about the 100 basis went from commodities, but what about from fuel and then specifically as well what about from M&A.
It seems like you bought some very nice vertically integrated companies in 'twenty. Two so is that maybe not as big of a drag.
Yes sure.
The bridge is simpler this year Tyler because of a couple of reasons so acquisitions in the aggregate looking over the full year. There really is no discernible drag from acquisition and that's because to your point of the nature of the assets. We acquired in 2002 in the concentration to disposal assets.
As I look through the year, there's a little drag in Q1, and then that abates.
So as I said for the full year I would consider it about flat and fuel has a similar dynamic in that it is a headwind in Q1, it's about 30 basis points, and then that flips and by year for the full year, it's really not a headwind at all and Thats because to your question about hedge is about 50% of our tool is now.
Hedged.
And between the movement in fuel prices have done in the the increments of locks, we advantageously put in place late last year, where basically we basically derisked that current level. There is no impact from fuel.
Okay, Perfect and then I had a couple of questions. So I just wanted to kind of go over the free cash flow guide and make sure I've got it all straight in my head. So last quarter. I think you said there was a line of sight to double digit free cash flow growth I'm going to say that was off of your one spot one six guidance, which would have put.
You wouldn't call it just under $1 3 billion assuming call it.
Low low double digit growth, but it sounded like there was about $50 million more in capex than one thing.
Anticipated so if I kind of take that off that's what kind of gets me back to where the guide is that the right way to kind of square all of that.
Yes, I would agree I agree with that the number I would use as a 10% increase off of what we expected to deliver before we elevated liver again in 'twenty. Two it was 1275 you back off the 59 year at the 102 to five guidance that we provided.
Yeah, Perfect and then just my last one real quick.
What are you talked a little bit about this but holistically what is kind of the unit cost inflation assumption in 'twenty three.
Including labor and subcontract, when everything kind of all of them.
Yeah, we're assuming that range between about 6% to 7% all in.
Okay alright, thank you.
Okay.
Thank you next question will be from Michael Hoffman of Stifel. Please go ahead.
Good morning, and not by an egg theory, but doesn't these days.
[laughter].
Free cash I wanted to ask a free cash flow of a different way how should I think about.
Two or three year free cash flow growth stack, given theres lots of things in any given period. These days so what's the message about the growth stack. If you will on free cash.
Sure I mean, you look at first off on the Capex side again, you've got.
Almost 100 basis points of revenue a 1% of revenue from sustainability projects in the current year and next year.
Again I'm rounding.
As you and it starts to moderate as you get into 'twenty five.
And so once we're through that.
That puts this year regarding what about 15, 5% or more than a percentage of revenue.
That puts us back to that 16 16, 5%.
Range as a percentage of revenue and it puts it back above comfortably above the EBITDA.
Fifth over 50% of EBITDA, but again as the R&D starts kicking in.
As we're getting as we said before about $200 million of EBIT incremental EBITDA by 2026.
Tax effect that that's putting another 141, 5% by then.
Our cash flow generation as a percentage of revenue and again Thats why I said as we get into 'twenty six we ought to be.
Backing up to about 17, 5% or approaching 55% or so.
Of EBITDA.
Okay and that's the important point is you've been living in a 50 to 55 closer to the low end and you're moving back towards the 55.
Right, because what's pushed us to the closer to 50 here, obviously is the additional sustainability capex right as well as higher interest rates higher cash taxes et cetera, but in October .
Where interest rates were going and we know what cash taxes were going into Maryann point.
This isn't we don't see here today surprised by the year over year changes yet cash taxes are up $100 million, we knew that.
You know, we we know cash interest is up it's more so for us for acquisition outlays. It's just that you know as you know the total debt outstanding grew by about 1 billion year over year, and you put any sort of floating rate of 555% on that if I'm not surprised that.
Cash interest is up.
$65 million or something year over year.
So it's anyway, it's that's not a surprise.
It's just the 50 unit the $50 million in fleet as we move through the last four months.
You know that the numbers of delays went from you know.
Less and less than 50, and maybe we will still get them to 125 to 170 to 200.
205 units as you exited the year.
But we're sitting here waiting for fleet, we ordered two years ago that still hasnt been deliberate.
Right the 'twenty to 'twenty two Capex was ordered in early 'twenty one.
And so it's that uncertainty the good news is you know.
We held at the $50 million, because we were able to pay for the chassis.
And it's really just the bodies on 200 plus units that.
The cost of that that's drifted into this year.
And then can.
Can you share with us what as bonus depreciation unwind whats. The total dollar amount that is going to walk back through.
Yes.
Obviously in this capex outlay, it's up to you guys on a dollar basis, it's going to it's going to emerge, but yes, because what happens is there is.
Certain limitations of how much bonus depreciation we apply in any one year.
Our cash taxes, this year ought to be 65% to 70% of the GAAP accrual because of the amount of bonus depreciation.
Sorry over that we did use in prior years right and so it's not as a direct stepped down that other companies might have been talking about because.
We are a little different different book here.
Okay, and then if I could shift gears to the R&D.
If I include Washington, eight plus the four that are being developed how many M. M. B to you where you own when youre done in that $200 million.
Of the EBITDA.
I don't have that number that's that sounds more like an engineering question, but.
Look I think more about revenue and.
You know if we were if we did what about $100 million or so of landfill gas and rens revenue last year, and we stepped that up to 300 million or so by 'twenty six.
We are going and by then the company obviously it will be bigger than the 8 billion, we're guiding to now and so overall on a revenue basis.
<unk> could become.
Ample gas could get to that 3% or so of revenue.
From the 115% it is right now.
Okay slice a different way as your base assumption of $2 rent and a $2 50 gas to get to that revenue number.
Correct Okay.
Everybody wants to ask about volume and Ive always heard you say, you'll trade volume for price all day long, but another way to talk about volume of service intervals sort of what's the underlying trend in the small container business.
How would you frame that because I think thats fair.
I mean as I look at just the last six months of last year to see that net new business remained positive through the year on a month to month basis.
And so obviously increases in new business are more than offsetting loss in any in any decreases okay.
And then you always have a phrase for each year. So can you share with us what growth gratitude is what's the message.
Sure.
Last year was intentional we talked a lot about what potential back to us through the years.
Look for me and I won't spend much time on this but to me growth is not about topline growth and growth in the business. It's more about the personal and professional development and growth of our leaders right now.
Our leaders have spent.
Exhausting amount of effort looking after their people through a very challenging time pandemic.
Health welfare issues et cetera.
And so our leaders just need to remember to invest in themselves.
And their own personal growth.
Obviously, we will further that based on the amount of discretionary to beat we don't I don't.
Training development discretionary, but we we put a lot of effort and a lot of a lot of dollars into training development and so it is a reminder of our leaders to <unk>.
Take care of themselves don't forget to take care of themselves and grow personally while they look after others serving leaders.
Obviously gratitude and gratitude as chip at the DNA of any servant leader in recognizing and appreciating their employees and all the good benefits that come from that and so.
It's just it's a chance to reflect.
On individuals and how grateful we all are to be part of this organization.
Keep that front and center as we as we move forward.
Great. Thank you very much.
Thank you next question will be from Chris Murray ATB capital markets. Please go ahead.
Yes, thanks folks good morning.
Maybe I'll turn it back to the Capex question, a little bit difficult parts of this.
<unk>.
If you look at this as a capex as a percentage of revenue is going to be a little bit higher this year with I guess the catch ups.
I guess.
Couple of things to think about one as we move into kind of later years and out of 22 and things start to normalize is there any reason to believe the capex doesn't snap back to kind of historical levels kind of around 10% of revenue.
And then second just looking at the cost line.
You've kind of mentioned labor and fuel a little bit.
Does getting these additional vehicles or or maybe some other things is there anything that you can talk about in terms of cost reductions or cost improvement in the margin.
Lucky maybe generate margins over and above what you can just about price.
I'll take part of it I mean from a.
From how we run the business standpoint.
There's not some great the investment that's going into Iraq, as we take out 7000 heads and <unk>.
Range the labor profile of this business.
Are we do we automate and pushed more local communities automate.
Is that their decision, yes, and so some cases, it's a very long dialogue, but we have a couple of markets that will be automating that will that will help on the labor side. Obviously I think we've just celebrated our 50th robot to go into our recycling facilities.
Obviously, each one theoretically should take out if you double shifted three to four head count.
And each per robot deployed.
I'd be curious to see if looking at head count that that's actually happened or not but obviously, we have gotten the benefit of much higher quality.
Of our product on the outbound.
We're getting above the high high on the sheets has been a huge benefit for us and the ability to move our product given the given the quality of the product.
And so they're not just labor benefit sometimes there are other benefits as well and so we're constantly looking around the edges on that obviously with regards to AI and use of.
A technology to.
Using that to try to to replace heads with regards to customer service, we're trying to make it.
The customer service experience improve and the pressures of.
Responding to inbounds lightened.
Lighten up a little bit.
To improve retention around that not not to worry.
Replace people right.
Anyway, it's just our approaches and how we message is a little bit different but.
Suffice to say, there's a lot that goes on behind the scenes around this.
And Chris with respect to Capex as a percentage of revenue you are right. Your observation that we have been in this period, where as we've described whether its sustainability related investments, whether it's opportunistically, making outlays for real estate as we look forward for future growth at various reasons.
You've seen that running higher and I think it is a reminder of why prices been so importantly, as we as we remind people there is inflation not just in the P&L, but also on the Capex side, you look at what the cost of construction projects has done and really what we're glad we've had the focus on price has had but all that being said we do look for.
As we move through this period to getting back to a more normalized rate and I'd encourage you to think of that as far as 10.5% to 11% is how to think about kind of the base capex for.
A low amount of volume growth in kind of a typical year.
Okay. That's helpful. Thanks folks.
Thank you next question will be from Stefan anymore of Jefferies. Please go ahead.
Hi, Good morning. Thank you I kind of wanted to put together I think a lot of the questions that have already been asked but maybe asked a different way I I I realize youre not accounting for much improvement in inflationary expectations, but I'm trying to think about it.
That's the case and the inflationary pressures do stay elevated does that mean, you could see some upside even on the pricing side I realize that your you know there's pretty good visibility you know, 75% you called out but is there still an opportunity for a bit more upside if inflation stays elevated but then on the other side if it does kind of abate from.
Here, then you know clearly would expect there would be upside from the margin front of that and Chris or is there a possibility we see a little bit of both I'm just trying to kind of put all the pieces together.
Sure. Good question no we have.
We have implemented pricing assuming it stays elevated.
And so it's not like.
Staying elevated longer its going to be a surprise that we need to go back in again.
We've anticipated that so to the extent that it does start abating as we noted.
That is upside because pricing is done.
And so we view that as more upside than trying to chase inflation like like we've had to do these past two years right and so our folks are ahead of it we have not.
Lot of economists think inflation is going to be crossing 335% by the end of this year.
We didn't price assuming the downward slope that most economists have from January to December because if you do that and theyre wrong in which they've been pretty consistently wrong.
Then we mispriced, our business right and so we've assumed elevated for longer.
And to the extent it does abate.
We'll get the upside from that.
Understood I'll leave it at that thank you guys.
Okay.
Thank you next question will be from Carl One Deutsche Bank. Please go ahead.
Good morning, Thanks for taking the questions I know a lot has been talked about M&A, but I'm. Just curious just given the fact that you spent quite a bit on acquisitions as last year.
You have the appetite internal firepower to complete another outsized year of acquisitions in 2023 or should we expect it to be relatively subdued as he worked to integrate some of those those deals last year.
Good question I remember after our dividend, we still have almost $1 billion of free cash flow to fund M&A and so where we were not constrained from a balance sheet standpoint.
Due to do another outsized year I mean, if we just.
If it averages $150 million and let's say with your 150 to 200 million of acquired revenue. This year, that's probably not spending about a half a billion dollars and so we still have another half a billion leftover.
For anything that might come along.
That number above 200 or to apply for other purposes and so no.
I think we're blessed to have the flexibility given the strength of the business and the cash flow generation and the growing denominator in EBITDA, but that also brings leverage down to.
To remain flexible for any opportunities that come and to that point about balance sheet flexibility. We ended the year at a little over two nine times.
Debt to EBITDA and if we're kind of in a normalized environment. We just do an average amount of your deals.
And we'd expect that leverage to just dynamically delever come down to about two five times over the course of the year.
Okay.
Got it that makes sense and then on pricing just what's been the reception the customer reception to kind of the pricing environment more recently or compared to pre pandemic levels and then on that it seems like the industry has been very disciplined on pricing front since the pandemic over the past few years.
Do you see any signs that this discipline will carry forward, maybe such that you could see a step change in pricing behavior for the better over the longer term or do you just view this all as a byproduct of the inflationary environment. We're in.
I think it's a it's a byproduct of the inflationary environment, it's a byproduct of.
Got it.
Some of the companies that live in our lower margin.
Having much more pressure on wages, given the waste profile that they had going into the pandemic to support that kind of low pricing.
Obviously capex dollars are up.
And so you know.
The pricing umbrella is there because of cost pressures because of the decline in commodity values wage pressures et cetera.
To the extent that.
You know inflationary inflation does go down to two two and a half 3% next year.
Certainly expect that pricing should step down with it right I mean, it's it's just because you can do 10% price.
Doesn't mean, you should be doing it at 3% environment right and so you're not certainly.
Fact that as we think about a longer term spread to inflation that as inflation comes down we will maintain our spread and.
And exceed that but will step down as inflation steps down too.
It sounds good good luck in the year.
Thank you.
Thank you next question will be from Stephanie E. J P. Morgan. Please go ahead.
Hi, good morning.
I wanted to ask at what point would you consider share repurchases as part of your capital allocation, perhaps this year.
Sure well as you know last year, we spent what about $425 million on share repurchases and so we're opportunistic.
And so it's a we maintain a.
Authorization to repurchase up to 5% of our of our shares annually.
And to the extent, we dip our toe in the market again.
It remains to be seen but look acquisitions are always a hire and best use.
Of our of our excess capital and so it's it's first and foremost direct it that way and of course in an environment like that Stephanie where incremental borrowing costs are over five 5% than debt repayment as another avenue that we'll consider.
Okay.
That makes sense and can you just make a comment on your customer retention rates overall.
Our retention is quite high I mean, I think the other companies have talked about it as well.
You know the reality is is when we talk about labor constraints.
It's across the industry. So it's.
The ability for competitors to poach is constrained by their lack of excess capacity as others.
I'd say that service in this environment matters, a great deal.
You can't you can't put price in the street and that service customers right and so.
Retention has been quite high I would say all time high it's a retention of pricing even at these levels is at its highest level as well.
And so again that just shows you the overall.
Constraints that everyone is operating under not just one company or another.
Got it okay. Thank you very much.
Thank you again, if you have a question. Please press Star then one.
Next question will be from Sean Eastman Keybanc capital markets. Please go ahead.
Hey, guys. This is Nick on for Shaun today.
I wanted to come back to the sustainability of lottery.
Your competitors are talking about sort of increasing demand for plastics circularity is that consistent with.
What youre seeing in the marketplace and if so would that be something you'd consider exploring further down the line.
I think our view right now, whereas we're happy to be a supplier of recovered plastics.
To some of these investments.
Or others that are that are chasing us.
Thank you.
Thank you. This concludes our question and answer session I would like to turn the call back over to Mr. Worthing Jackman for closing remarks. Please go ahead.
Terrific.
<unk> been there for us today.
There are no further questions.
Behalf of our entire management team. We appreciate your listening to and interest in the call today.
Mariana Joe box are available today to answer any direct questions that we did not cover that we're allowed to answer under Reg FD Reg G and applicable securities laws in Canada.
Thank you again look forward to seeing you at upcoming Investor conferences or on our next earnings call. Thank you.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.