Q2 2023 Waste Connections Inc Earnings Call
Good morning, and welcome to the waste connections, Inc. Second quarter 2023 earnings Conference call all participants will be in listen only mode.
You need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to you.
Ron Miller, President and CEO . Please go ahead.
Okay. Thank you operator and good morning.
I would like to welcome everyone to this conference call to discuss our second quarter results.
And updated outlook for 2023.
As well as to provide a detailed outlook for the third quarter I'm joined this morning by Mary Anne Whitney Our CFO I'm also joined by Joe Box, Our recently promoted Vice President of Investor Relations Congratulations Joe.
As noted in our earnings release, we are extremely pleased by the strength of our operational execution during the quarter for a solid beat on revenue and adjusted EBITDA to deliver margins 30 basis points above our outlook.
Solid waste core pricing growth of nine 8% positioned us to expand underlying solid waste collection transfer and disposal margins by 100 basis points in the period largely overcoming the ongoing headwinds from year over year declines in recovered commodity values and continued inflationary pressures during the period.
Our performance in the first half of 2023, along with recent acquisitions and reduced headwinds from fuel and other commodity related impacts positions us to increase our full year outlook for adjusted EBITDA to approximately 2.5 dollars 5 billion expanding our adjusted EBITDA margin to 31, 5% for the full year.
Up 40 basis points from our initial outlook and up 70 basis points as compared to the prior year.
Most importantly, we are encouraged by improving trends in safety and employee retention as we double down on human capital and our decentralized operating model, including through the realignment of our organizational structure with the addition of a six region and refinements to our corporate operational structure, we look forward to driving outsized margin expansion.
Spansion in the second half of 2023 and into 2024 before we get into much more detail, let me turn the call over to Mary Anne for our forward looking disclaimer and other housekeeping items.
Thank you Ron and good morning the.
The discussion during today's call includes forward looking statements made pursuant to the safe Harbor provisions of the U S. Private Securities Litigation Reform Act of 1995 include.
Including forward looking information within the meaning of applicable Canadian securities laws actual results could differ materially from those made in such forward looking statements due to various risks and uncertainties factors.
Or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward looking statements in order to reflect events or circumstances that may change after today's date.
On the call, we will discuss non-GAAP measures such as adjusted EBITDA adjusted net income attributable to waste connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measures management uses certain non-GAAP measures to evaluate and <unk>.
What are the ongoing financial performance of our operations other companies that calculate these non-GAAP measures differently.
I will now turn the call back over to Rob.
Okay. Thank you maryann.
Looking at Q2, our results begin with price led organic solid waste growth from core price of nine 8% ranging from over 7% and are mostly exclusive markets western region to between nine and 12% and our competitive regions total price of nine 1% includes a 70 basis point decline.
In fuel material surcharges, reflecting lower diesel prices in the quarter as projected.
Reported volume growth of negative one 9% reflects a degree of intentional shedding of lesser quality accounts and purpose all non renewals of certain municipal contracts.
Putting in some cases at recently acquired operations, where we've identified opportunities for improving revenue quality.
We consider this pruning to be integral to our disciplined approach to growth and typical of the opportunities for margin improvement we see in acquisitions, given the number of acquisitions over the past few years. This was fully anticipated.
Our volumes also reflect a muted seasonal ramp in activity levels as we had anticipated impacting collection transfer and disposal volumes, most notably special waste tons, a good barometer of the more cyclical and event driven aspects of the business were down 7% year over year on reduced or delayed project activity.
Across most regions. However in July special waste volumes were up 9% year over year.
A reminder of how these how lumpy. These project volumes can be and why it's tough to generalize about broader volume trends based on improvements in special waste or other event business.
Lastly, consistent with the constructive tradeoff between price and volume. We've described in prior periods, we're making a conscious choice of up to one point of volume reduction to achieve our price objectives, we're very comfortable with the trade off and our improving EBITDA margins reflect the benefit.
Looking next at Q2 revenues from recovered commodities that is recycled commodities landfill gas and renewable energy credits or Rins.
Excluding acquisitions collectively they were down about 40% year over year due to tough comparisons for values of both recycled commodities and rents.
OCC or old corrugated containers averaged about $75 per ton.
And rents averaged about $2.15 in Q2.
Starting lower and jumping to over $3 late in the quarter in response to a favorable EPA ruling establishing renewable volume obligations.
We are encouraged by the EPA ruling given our portfolio of renewable natural gas facilities under development, which remains on track to deliver the projected 200 million in incremental annual EBITDA by 2026 from over a dozen LNG projects with a range of ownership structures. Those benefits begin later this year.
With three facilities are expected to be operational and should ramp in 2024, when we are projecting the majority of capital expenditures.
Beyond these projects, we continuously evaluate additional opportunities, including as we complete acquisitions.
Moving onto the subject of acquisitions, we recently closed on Arrowhead environmental at 100 million dollar revenue integrated transportation and disposal network with rail access from multiple transfers locations on the east coast to Arrowhead landfill in Alabama.
Operating locations include Trans load facilities in Connecticut, Massachusetts, New Jersey, and Florida, all of which feed into Arrowhead.
<unk> 1400 acre MSW landfill serviced directly by rail. This important strategic addition provides enhanced internal was up internalization opportunities to our operations across the northeast and has the potential both to reshape existing markets and to expand acquisition opportunities given the internalization benefits.
That's afforded by leveraging the strategic disposal asset.
In time, we expect this will be one of our most strategic assets in the company.
This year was on track to once again be what we consider above average in terms of activity as we have already closed acquisitions with over $160 million in annualized revenue.
In addition dialogue remains very active with a robust pipeline all in solid waste setting up the potential for additional rollover contribution into 2024 for many acquisitions completed later this year.
Our focus remains as always on value creation and replicating the success achieved over 25 years through disciplined capital allocation and consistency in market selection.
Along with an intentional culture.
In short there is no change to our strategy.
Our decentralized operating philosophy has been and continues to be a point of differentiation for waste connections along with our servant leadership oriented culture.
To that end, we made a number of changes to reinforce this approach both in the field and within our corporate operational organization, serving the field.
Among other things we completed our segment realignment to accommodate continued growth across our footprint and maintain our field focused decentralized approach to decision, making and implementation.
We expanded our regional structure through the addition of a fifth U S region, we're calling the mid South this serves to accommodate the growth we have enjoyed over the past several years a portion of which was heavily concentrated in the eastern U S, including our just announced acquisition of Arrowhead.
With the addition of a regional office infrastructure in Charlotte North Carolina, a region leadership team is well positioned to maintain the relationships with local operations, which we believe ultimately drive the results in our model.
Moreover, this additional bandwidth sets us up for continued growth across our footprint as we look ahead to revenue of $10 billion and more.
To that end, we also implemented leadership changes with an emphasis on coaching and developing our next generation of leaders as we position ourselves for the future.
In conjunction with a purposeful evaluation of corporate resources to serve the field. We made some changes to the rules of certain of our long tenured senior regional leaders to broaden their experiences and perspectives, while not necessarily significant from an outsider's point of view. These changes are expected to be impactful internally as they are.
Will influence the next generation of leaders to drive operating and financial results.
These changes are also designed to streamline decision, making to support the field in two ways.
To further enhance local autonomy on operational matters as appropriate.
And second to prioritize resource utilization from corporate support directed towards the achievement of a local objectives.
I've always maintained that this is a local business and regardless of our size. We are committed to ensuring that we are set up to manage it that way as we believe human capital is critical to our success.
To that end. We are also focused on addressing the challenges of employee retention and what we still see as a tight labor environment.
As noted earlier, we are encouraged by the progress we have seen year to date with voluntary turnover levels down, 15% and open headcount requisitions down 25% from the peak seen during 'twenty two in early 'twenty three.
And we look forward to driving further improvements through a variety of approaches.
We're adding resources expanding our use of technology and we're exploring alternative approaches to improving the flow of qualified candidates, including two driver and technician training facilities in which we have ownership interests or other involvement.
Given the high correlation between retention and safety, we're mindful of the potential to accelerate improvements in safety incident rates along with retention.
We're also leveraging the recent investments we've made in updated camera technology and telematics to drive continuous improvements in safety and customer service, including at our newest acquisitions, where the opportunities are the greatest.
And now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the second quarter and our increased outlook for 2023 and to provide a detailed outlook for Q3, I will then wrap up before heading into Q&A.
Thank you Ron.
In the second quarter revenue of 2.021 billion was $21 million above our outlook and up $205 million or 11, 3% year over year.
Acquisitions completed since the year ago period contributed about $122 million of revenue in the quarter or about $121 million net of divestitures.
As Ron noted core pricing was nine 8% in Q2, but the vast majority of pricing done for the year as we've described in prior quarters total pricing steps down on a reported basis over the course of the year as a result of the combined impact.
Negative fuel surcharges from improving diesel cost the anniversarying of outsized price increases in 2022, and the typical cadence of seasonality unreported price.
With respect to volumes around already described the dynamics and the key drivers here are the stats looking at year over year results on a same store basis commercial revenue was up about 10% on pricing up about 11% daily.
Daily rollout pulse were up nominally on rates propel up about 7%.
And landfill tons were down nominally on flattish MSW tons with special waste tons down, 7% as noted and C&D tons up.
About 7%.
Adjusted EBITDA for Q2 as reconciled in our earnings release increased by 11% to $628 9 million or 31, 1% of revenue 30 basis points above our margin guidance underlying solid waste margins expanded by 100 basis points year over year, largely offsetting 110 base.
<unk> points in combined headwinds from tough year over year comparisons for recycled commodities, a 90 basis point drag and rents a 20 basis point drag.
Other year over year margin drivers included 30 basis points combined benefits from higher E&P waste activity and acquisitions completed since the year ago period with us offsets from a 30 basis point impact to deferred compensation related to stock market movements during the period.
Our Q2 tax rate stepped up to 24, 7% as a result of two factors first the impact of nonrecurring executive severance payments most of which were non deductible and second higher foreign exchange rates for the Canadian dollar.
Normalizing for the severance yields an adjusted rate of 23, 6%.
Year to date, we've delivered adjusted free cash flow of $630 million or 16, 1% of revenue, leaving us well positioned to meet our full year outlook for one to two 5 billion in adjusted free cash flow.
During the quarter, we opportunistically paid down about $240 million in debt, taking leverage down to 275 times debt to EBITDA and resulting in a mix of about 15% variable rate debt and a weighted average cost of about three 8% the.
The strength of our balance sheet and free free cash flow generation affords the flexibility to reinvest in our business and execute on our growth strategy. While also returning capital to shareholders, including as we've demonstrated over the last dozen years through double digit percentage per share annual increases to our cash dividend, which we will revisit again.
Later this year.
I will now review our updated outlook for the full year and provide our outlook for the third quarter of 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 significant change in underlying economic trend. It also excludes any impact impact from additional acquisitions that may close during the remainder of the year and expensing of transaction related items during the period.
Looking first at our updated outlook for the full year as provided for and reconciled in our earnings release.
Adjusted EBITDA for the full year is now estimated at approximately 252 5 billion or about 31, 5% of revenue up $25 million and 40 basis points from our initial outlook for a 70 basis point year over year increase in adjusted EBITDA margin for 2020.
Three.
Our updated revenue outlook of approximately $8 <unk> 5 billion reflects a $35 million reduction in fuel and material surcharges related to declining fuel costs since providing our initial outlook in February .
This adjustment our revenue outlook is up $10 million in February an updated value to recycle commodities in rins plus contributions from acquisitions completed since that time with solid waste volumes, reflecting Q2 trends.
Our adjusted free cash flow outlook of one to two 5 billion reflects an increase to net capital expenditures of $25 million set another way, we increased our outlook for adjusted free cash for adjusted cash flow from operations by $25 million in line with our EBITDA range and took.
Capital expenditures as well.
Turning next to our outlook for Q3.
Revenue in Q3 is estimated to be approximately 2.06 billion.
We expect core price of approximately 9% and total price plus volume of five and a half just 6%.
Recycled commodity values are projected in line with recent levels down sequentially from Q2 on lower values for plastics with returns in the range of $2 50 to $3.
Adjusted EBITDA in Q3 is estimated at approximately $670 million or 32, 5% of revenue.
Depreciation and amortization expense for the third quarter is estimated at about 12, 5% of revenue, including amortization of intangibles of about $39 $5 million or about <unk> 11 per diluted share net of taxes.
Interest expense net of interest income in Q3 is estimated at approximately $68 million and finally, our effective tax rate in Q3 is estimated at about 23, 5% subject to some variability.
And now let me turn the call back over to Ron for some final remarks before Q&A.
Thank you Marianne.
Once again, we're extremely pleased by our results to date and current and encouraged by the factors driving our increased margin outlook for the full year, particularly given the realities of ongoing inflationary impacts as provided in our updated outlook for 2023 and the back half of the year. We are set to exit 2023 at close.
To 32, 5% adjusted EBITDA margin as the jumping off point for 2024.
Normalized for recycled commodities. This puts our adjusted EBITDA margin well north of 33% and yes. This is our total company EBITDA margin not just solid waste and.
And it translates to year over year margin expansion of over 150 basis points in the back half of the year.
Demonstrating the power price led organic growth along with a disciplined approach to acquisitions and the avoidance of margin dilutive activities away from that core strategy.
Looking ahead, we anticipate another year of price led organic solid waste growth positioning us for underlying margin expansion in 2024, along with benefits from continued improvements in retention abating inflationary pressures and purposeful shedding.
Moreover, ongoing acquisition activity contributions from new R&D facilities and improvements to commodity driven revenue could potentially produce further growth, which we will lay out when we provide our formal outlook for 'twenty four in February .
I want to conclude by thanking our 23000 employees, whose dedication and hard work has driven our performance in the first half of the year and set us up for outside margin expansion in the second half.
Their efforts and these results, including continuous improvement in our industry, leading safety metrics. Once again validate our market selection strategy and the wall of local decision, making and driving results. Our focus is on maintaining a strategy that has served us well.
Executing on our playbook and delivering on our commitments. We appreciate your time today and with that I will now turn this call over to the operator to open up the lines for your questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.
The first question is from Toni Kaplan of Morgan Stanley . Please go ahead.
Do you so much I wanted to start with the contracts that were shattered I guess first any common themes between them where are they in particular geographies or verticals and is this sort of it.
Are we finished with the shedding or or is there more to go I'm just trying to think about volume over I know you mentioned that the negative one 1% was that cumulative or or incremental thanks.
Sure.
Well first off Tony.
To negative margin, you know that going in and you identify that and as those contracts come up you work to replace them or to exit them. So you know there <unk>. There has always been in our model always for 25 years intentional shedding.
It's you're seeing more now because of the large amount of M&A done over three years and also you're in a flat effectively a flat economy over the last year from a G. D. P standpoint, so you've got a you know a little software economy, so with a large amount in M&A, you see a little bit more of it in.
The volume numbers again, so in a normalised economy, whatever that is two three per cent G. D P. Anna and a slower acquisition pace, we're still doing it you just don't see it on a quarter and quarter out basis. So.
You know I would expect that that number to calm down because you know we haven't done a billion dollars this year and M&A, but this is a you know this is part of our normal running the business. The way we do with a focus on returns again I I think if you look it appears.
That are reported in the corridor, you know and who also had some pretty heavy M&A over the last several years you basically saw the exact same thing they that today I acquire companies. They inherit the same you know the same situation. So that is that's really the story around.
Municipal contracts and then just the one thing I would add to that Ron touched on a couple of the region. The other I would add would be Canada, where where you stopped purpose foe shedding a certain residential municipal contracts and I mentioned that because to ron's point about the impact of acquisitions of course that dates back to progressive from <unk>.
Seven years ago that tells you that you're still refining the portfolio Opportunistically as contract still real multiple years. After the acquisition is completed and frankly, the other point I'd make it then followed the margin because if you look at our regional reporting in in our queue, you'll see the margin improvement.
That really stands out in our eastern region in Canada, both of which we mentioned as having shedding going on.
Yeah, and lastly, Tony I would say, obviously as as I mentioned you have a number between.
10, and 20 per cent of that acquired revenue that you ultimately made reprise for shed you know you're not seeing that level of it why cause there was also municipal contracts were winning all along as well. So again. This is sort of a net number of that and and is Marianne set you know follow them.
Margin because that that tells you whether we're making the right decision on repricing or not.
Sure if Atkins and for my final up I wanted to go to the margins. So you know you mentioned second.
Second half and and third quarter expect it to be you know 32, and a half per cent you know even just staying at that level in 24 would be hundred basis points of expansion year over year over this year. It seems like all the higher than <unk> and then you have inflation moderating and then maybe.
Even some normal operating leverage on top of that like I guess.
<unk> why shouldn't we be modeling you know 100, plus even you know basis points of expansion for for next year, what what would be the factors to offset some of that or or is is that your expectation.
Well first off remember and I'm Gonna, let Marianne take parts of this as well Tony first off remember the second half of the year is your seasonally higher margin period. So the second half of the year, you know Q3 being guidance of 32, five if you do the math I think Q4 comes in around 32 three.
<unk>. So 32, four blend you're gonna naturally have a step down in Q1 and Q2 seasonally so your your total margin is it quite at 32 five yet as we have guided this year at 31, five so you're you're somewhat below that is.
You enter but you know look I think it's too early yet to make any projections for next year's margin. You know, we generally say as you know with price led growth we get around 30 to 40 basis points of margin expansion, Yes, I think the number will be north of that next year.
Not not ready to commit to what that will be the there's certainly a number of moving things that also also depends on the level of M&A over the balance of this year because as you know that can come in margin dilutive. So you know, we wanna be cautionary and what we're we're guiding too well, but what we are saying is this.
Second half of this year on a normalized basis it depending on what you want assume for commodities is at that 33 per cent number. So yeah I would be cautious telling you 100, I'm not saying that can't happen, but there are things outside our control which influence that.
Yeah just.
Reiterate what Brian Sandwich that is of course that we're not providing guidance right. Now we think it's instructive to talk about the dynamics, resulting in <unk>. The sequential improvement were expecting to see in the back half of the year and you know the reality is we really haven't seen the cost pressures debate in the first half of the year and that.
Part of what setting up the comps get easier on things like wage increases et cetera from last year. It sets up the back half of this year to be a little stronger and then of course will combat again next year. So that'll influence the kaden Kaden some margin expansion next year, which would be the other reason to be cautious about your jumping off point.
Going up from there.
Thanks, a lot.
The next question is from Sean Ethan is Keybanc capital markets. Please go ahead.
Hi, James Thanks for taking my questions I, just wanted to come back to the margins. The the 33 per cent comment just just for clarity is that where where run rating on an annualized basis and the second half at sort of a longer term average commodity input level. Just just some clarity there would be helped.
<unk>.
So I think the <unk> the appointment trying to communicate with as you exit the you're at 32.5% you say the commodities are really up about only 20% from where they exited last year, which was down 70% from the highest last July right. So it says there's a long way to go to get back to last july's level.
<unk> and so that was Rams point just layer on it's more than 50 basis points is probably 70 basis points, and so you're saying well north of thirty-three if we're exiting at around 32 and a half.
Okay understood and then and then are there any sort of K P eyes or margin enhancement targets that you could share or quantify around the you know the big employee retention.
Cultural programs that you're taking off here.
Yeah.
Sure well Shawn as I, there's a number of things we look at but as I've mentioned in previous investor meetings and analysts conferences.
There there is not some hundred basis point lever that we are missing here at waist connections you know the company has always been a very cost focus and well one company, but with turnover where it had been <unk>.
There is no question that there is up to 100 basis points that we can take out of our cost structure over the next 18 to 24 months in seven or eight line items as retention improves.
As we drive you know turnover from the what was in the mid 30 per cent level down I'm I'm Gonna call that 10 point, so I'm into the mid 20 per cent level, you're gonna see seven or eight line items improve 10 to 15 basis points H and and that is.
You know that's gonna come in labor, it's gonna come in labor overtime, that's gonna come in our our variable account, it's gonna come on our outside repairs, it's gonna come and risk it's gonna come in SG&A. It comes in and volume because everything gets better when you're fully staffed and.
And People's workloads or balance and you're not running both your people and your equipment at Max level and so so there's things we're looking at in each of those categories that we monitor but the number one thing is you know I as I said just focus on.
Turnover and his turnover comes down you'll see these line items as a percentage of revenue continued to improve air.
<unk> and I think will demonstrate that throughout the balance of this year and will demonstrate that throughout throughout next year. So you know those are the things and Sean I you know if if if you accept what I said exiting the year at approaching 32.5% for the back half and normalizing commodities that getting.
Very interesting and helpful I'll turn it over thanks, so much.
The next question is from Tyler Brown Raymond James. Please go ahead.
Hey, good morning.
Morning, Sarah.
<unk> curious if we could get some more details on the Arrowhead deal I'll just have so it seems very interesting to me I'm. Just curious if you can talk about how that fits in the northeastern disposal strategy and basically does it give you more confidence in acquiring collection in that market or even other rail served transportation.
On the East Coast and then there's this move have anything to do with Seneca basically is it an alternative that site will be shut down.
Sure let's attack the last part of that question for <unk> regarding Seneca. So first off has nothing to do with Seneca Seneca is doing very well, we're very confident in our our position and and our expansion there and and no no real change to that.
You know we have grown quite a bit along the eastern Seaboard is you know and was it was just really need to have incremental connectivity to disposal options to integrate many of those markets that up till now had been <unk>. We've been looking at this for the last year and a half.
<unk> and had internally committed that we were going to be able to integrate the eastern seaboard. So to your first part of your question absolutely. This opens up additional market opportunities for M&A. This opens up additional opportunities to integrate markets. We have that are currently not integrate.
<unk> and.
<unk> Yeah. So this is an asset that's very strategic and and we're very excited about you know it's it's a large landfill as we mentioned in the release 1300 acre MSW site. You know work today that that asset is taking you know around 3500 tons, a day and and you know we can handle in time.
<unk>, a multiple of that or more and have permitted capacity to do so for quite some period of time. So I think you'll continue to see is over in suing quarters and in the next year talk about the development that we have planned as you know we think we try to think about these things and you know multi <unk>.
<unk> and that is how we are looking at this asset. It does open up other rail transfer options form on acquisition standpoint. So yes. It is is very strategic in our mind.
Yeah, Okay, very interesting and then Marianne just from a modeling perspective, just based on the acquisitions today, how much contribution from M&A is kind of important before your guide.
Yeah for the full year. The original Guy was about 360 million and we're now at like 405 to 410.
And then the rollover for next year is around 70.
Perfect. Okay, and then my last one in here wants a bigger picture question.
So I think it's it's already been 100 days back and see.
That you never really left but you have been interfacing investors pretty actively and I'm just curious what your impressions have been there with all the new investors. What do you think the market is still seems to miss about you or the story if anything.
Well, Thanks, Tyler it's 100 days today to answer your question.
And I have appreciated getting back in touch with many investors, who have known us, but a tremendous amount of investors who are newer to the industry in in our store that I hadn't had the opportunity to meet look I think the investment community is very well informed we've got a a very well followed from an analyst community <unk>.
<unk> and and I think that all helps and transparency, but look I think the thing that is and I think it's topical on top of mind right. Now is I think there's a misplaced and misunderstood issue regarding volumes [laughter].
I I think there's this conception that all volume is good volume and that's just completely inaccurate.
I I don't think people should read into negative volumes is something that it should be concerning whatsoever. It should be concerning if margins in cash flow are going the other direction, but if they're if they're recruiting I think that tells you why people are doing it so that would be the you know I would just reiterate that.
Just because it's it's topical right now more than anything.
Perfect good stuff. Thank you.
The next question is from Brian Birchmeier City. Please go ahead.
Good morning, Thanks for taking the question.
No your your guide and your comments.
Quite a bit of a fairly balanced capital location you're.
Scott.
<unk>.
Just from a big picture perspective can you expand.
See the best pitchers for weeks connections right now and can you remind me what.
What do you think these connections.
Sure start with leverage first so we feel very comfortable sitting in the two and a half to three times range and and what we like about that is it provides a lot of optionality. If there's if there's an opportunity for a large outlay, which there isn't in the current environment to Tate you'd taken.
Leverage hire me mathematically it takes a lot to drive our leverage about three times. So it'd have to be a really big deal, but it's nice to have optionality and in the meantime, we maintain access to low cost capital ever raining, retaining our investment grade rating, which we all want to wait here too. So that's just one data point regarding leverage them, we sit right in the middle of that range.
275, right now with respect to capital deployment and the best returns.
If you think about <unk> with over a billion in free cash flow after paying a dividend which is around double digits for the last dozen years, we have a tremendous amount of flexibility to not only reinvest in the business, which is what most of our Capex is you know an across this industry, you're running 10, 11% ingestion replaced.
Capital and building out your landfill and then of course, we're also investing in you know opportunistically and projects like Orange G, which you know when we think about the best returns we'd say those are great returns certainly we're in an environment, where it's you we can be opportunistic given tax credits and so when we look ahead <unk>.
Next year will be a big year for Capex, we mentioned that in the prepared remarks about 120 million in Capex is what we would expect for R. N G and will continue to make those outlays opportunistically.
We're really not limited and so that's why you know I started with where we sit on leverage and how much of of our Capex is reinvesting in the business. We we feel really good about where we're taking where we sit and continue to have a lot of optionality.
Brian I would just add that and Marianne set it with without stating it directly look are are best return of discretionary capital is in appropriately priced strategic M&A that that meets our our market or financial in our operating criteria.
I mean that that is how we have built the valuation we have over 25 years. That's how we will continue to build it going forward and and so you know that that's what I think you've seen from us and you'll continue to see from us.
Got it thanks for Monday.
Maybe just follow up on the emanate outlook.
You just provide a little bit of detail and where your pipeline city spans right now would you say it's <unk>.
Two years ago.
Early on a niche market.
I'm gonna find deals just a little bit.
Sure Yeah, <unk> may or May not know, Brian we obviously don't provide for for obviously sensitivity and proprietary reasons any real great detail on the M&A pipeline, but what I will tell you is pipeline is very full there's a lot of L. O wise in an offer stage, there's a number of L O y.
As in a final negotiating stage and we feel very comfortable about you know as we look out over the next several quarters Oh, what are emanate cadence will be you know look relative to I'm, just using a year ago, you're in a quarter ago, you know where where lower than that and.
Pipeline, but you have to understand that was a very unique period. You. You <unk> you had a you you were coming out of two years of a pandemic coming off of hyperinflation. There was a number of <unk> you had a very low interest rates a number of catalyst that made more than normal private sellers, who had sort of.
Pent up demand from the pandemic look at doing something with their business because they had been on the sidelines. So I think you have to look at you know sort of 22 was a little bit of an anomaly. So it'd be it'd be misleading to tell you. Our pipeline is equitable to where it was and 22, but relative to sort of historical norms.
It is above those and continues to be so and it's a broad base a mix of of collection and disposal all solid waste opportunities across our footprint in both the U S and Canada.
Makes sense makes up the details I'll turn it over.
The next question is from Michael Hoffman S. T. Four please go ahead.
You're very much can we talk about price and trend swinford and for your guidance as you're maintaining the nine and a half.
And if I follow the trend on restricted to 7% in two two.
Aren't we resetting at a higher number unrestricted in the second half given 20 twenty-two as inflation was eight nine.
And so that's that's.
You don't need a big reach an open market they hit the nine that you're giving in the two and the three two outlook on.
The way it I'd encourage you to think about it Michael is that coming into the year. We we basically know what the price increases will be on the 40 per cent of our business that you're referring to where there those contract reset and that's been factored into what we're communicating for filling your numbers and most of those price increases.
Yes, there are some that reset in mid in middle of the year and that influences those numbers, but the majority of our price increases more broadly happen early in the air and so that really determines the overall number there's a little movement over the course of the year the bigger factor in driving the cadence Hanna reported basis what is that.
As we mentioned and prepared remarks, you've got a few things happening one is that the rolling off of that size price increases that we did last year in the face of accelerating inflationary pressures earlier in the year and then also just the <unk> the denominator getting bigger which is why on a reported basis are poor price.
Comes down a little bit.
Okay fair enough, but you've trended ahead of your budget on open market.
Pertain better.
So I again.
Okay Wednesday, Fridays finding out about as we expected Michael we feel really good about the visibility we had on pricing coming into the air We said last quarter. We already had about 85 per cent of it locked up dawn or known enter even about that now so we'd encourage people that night and have a pretty good number for the full year.
Okay.
<unk>, what's the O C C. It's 75 and your model is above rizzi, which is at 50, yeah. So there's two questions here what are what are you able to do differently than the underlying rosy, but more importantly, you've.
He made a comment that normal recycling, what what O C C price equals normal when we think about normal recycling.
And margins.
Well, it's a couple of things I think we all talk about what what we see in our book a business, which is influenced by geography. Another other dynamics and so yeah. When we talk about lows of maybe $50 that might've been list or is the pricing in the high thirties. So it's it's tough it's tough to compare.
We're always running about now I do think in addition, we benefit from doing some things to make sure. We're maximizing the value of our commodities by the way we have a national marketing agreement, where you know, we're taking advantage of volume and consolidating and also we're seeing the benefit of the improved quality.
<unk> coming out of our facilities, we're <unk>, we're using robotics and you know their cardboard decreasing contamination coming out the back end of recycling facility. So I would say those influence what we communicate as what the the numbers are I think so it's all relative to expectations early in the year.
And we're about 20% above where we were when we exited last year and that's with factored into what we've got it for for the full year.
Right, Michael I would Oh go ahead <unk> good no no I, yeah, I've been everything Marianne set is spot on I would tell you you know what do we think we think somewhere in that hundred and 10 to 120 is sort of a you asked what is a normal lives I'd call that a normalized you know O C C price.
Saying and that's how you get to what we're saying where you know down year over year, you know obviously it peaked well above those numbers in the 160 to 200 range. So we're not saying that but we are that that's sort of what we're calling more normalized and also you have to recognize Michael so much of.
<unk> commodities in our model comes off of one of the two Kos I know most people to do but there you've got transportation advantages to markets that you don't have when you've got a lot of your volume in the Midwest and the south and so that gives you some spread to the wisdom pricing as well.
Challenges of the current Labour World.
Yeah, you know I I think it is Michael obviously, that's that's a high goal a high bar, but we're gonna hold ourself to that high bar you know I say I think certainly getting into the mid twenties first and then working our way down from the mid twenties down to that 20 per cent or below level is.
Is is the goal our goal is to get it into the mid 20th by the early part of next year or the mid part of next year and then work it down from there. There's a lot of there's a lot of components that go along to that from from sourcing to onboarding too.
You know supervision two two equipment everything there's just so many things that you have to fine tune to get those numbers down a point at a time once you get down to that 23 per cent number so but yes. It is achievable and we're gonna we're gonna hold ourself to that I would also.
Say, Michael you know a E. It what we really focus on his look if you're at 23 per cent just pick a number how much of that is involuntary versus voluntary as long as that involuntary number is somewhere in that 40 50 per cent rank, we're not as hung up on what turnover is.
Because that means we're making proactive decisions most likely about safety unemployed, who are not gonna make it in again cause or a bigger issue wait.
We could bring turnover report it down to 23% today, if we backed off the involuntary so you got to understand that that it as long as we're we're gonna hold our standard to where almost half of that we're making proactive decisions really that voluntary number is dropping to 10 to 30.
10% when you get to 23 per cent.
Got it and then you shared with US a couple of self-help things like price volume.
<unk> 30, 40 basis points Labour spread over two years is this what we just talked about another 40 50, what about repair and maintenance and fleet age and getting fleet replacement what's that opportunity.
Yeah, I mean that that is clearly an opportunity Michael and that's a function of several things look like you know part of the turnover issue is also in in technicians and when you're down technicians, just use the same percentage 20, 20% to 25% you're sending a lot of repairs outside that you don't have the manpower to do inside.
Instead of something being a 10 to 12000 dollar internal cause you're turning it into a 30 to 40000 dollar external repair. So when you properly staff, you're gonna, you're gonna see improvements and repairs and maintenance, particularly outside repairs, you're also going to see last breakdown maintenance.
Between outside repairs and an internal repairs and that's also a function Michael of your Capex replacement schedule happening on schedule, which is continuing to improve but will probably continue to be delayed some units throughout probably mid to late 24.
From what we're hearing from manufacturers at this point.
Okay. Thank you very much.
The next question is from Kevin Chang C. I P. C. Please go ahead.
Hey, Thanks, Thanks for taking my question Congratulations Jo on.
The new title there.
Maybe if I could ask her question. This way if I look at your segment of the results.
<unk> your lower margins segments or the eastern <unk> segments that you you can start to disclose.
Resulting from convergence between those two segments, which is what you see somebody.
Some of the other markets.
Fortunately improves your competitive positioning and sustainability of margins in a market area over a longer period of time. So that's why it is so important you you're gonna also remember Kevin when you look at the is that the the northeast in particular is always for the.
Most part taken as a whole going to be a lower margin profile business because of the pricing of disposal, yeah, you're talking about a market that is you know 80 to $130 a tonne pick 100 hundred and 10 is a mid point comparing that to a midwest or.
South that might be 30 to $45 a ton.
So you've got an inflated revenue number because of disposal in your collection system in your revenue and therefore, obtaining the same EBITDA margin is that much more difficult. So if you look at you know company based in the northeast like to sell you've seen.
Historically lower than someone not based in northeast public company margin and that's a reflection of our market area as much as anything else. So you know are we going to raise the northeast margins too you know the Canadian or the the west coast margins well <unk>.
Most likely not because it's it's not structurally possible, but it is structurally possible to raise it from where it is and and an arrowhead will absolutely help that.
That's a that's a great color.
And again you can kind of noted this in your previous response just just.
Constituents of what what what within <unk> revenue impacts of segmented revenue in terms of the cost structure of those those individual regions, but.
If I looked at it simplistically with the with the new <unk>.
<unk>, let's say you're running at least if I look at the most recent quarter roughly 100 million in revenue quarterly below.
Maybe the the second.
Smallest region in the U S or excluding Canada <unk> <unk>.
Is the argument <unk> cause the perception here that that the mid Suffolk grow to the size of some of your other U S segments. So that's kind of the opportunity in front of him itself, whether it's through M&A or upsize organic Rosa, but you can close it down from a from a from a overall top one perspective here.
<unk>, yes.
Okay. So yeah. So yeah. Good question, Kevin So first off let me let me explain how we think of our original alignment. Okay. So we think about it not just in terms of revenue size. We we think about it in terms of employee size, we take what we think of it in terms of geography, and our ability to get within that G.
<unk> either over the road or via other mechanisms because our original staff has to travel and cover that we think of it in terms of waste flows how it flows within a geography and and and then we think of it in terms of forward looking M&A opportunity and growth. So you can't look at.
<unk> say well this region's annualizing a billion dollars in another one's at 2 billion. So they must think that ridge and can go from one to two that would be a misleading way to characterize the way to think about it because that is only one factor. We may have the close to the same number of employees <unk>.
Or in a billion to billion to region that ran a 2 billion dollar <unk> because of the price of disposal because of other things. So we we in the mid South if you look at Tennessee, Kentucky, Alabama, you know more rural States.
You're covering a lot of geography.
And so you have more people. We also have a lot of more residential business. So you've got more people employed through that so it's a complex way to tell you. How we think about what goes within a region does the mid south have a tremendous growth opportunities absolutely. We believe it does just look at those states but.
The next question is from Jerry <unk> of Goldman Sachs. Please go ahead.
Yes, hi, good morning, everyone.
I'm wondering if you <unk> run I'm wondering if you talk about how much the Alabama acquisition.
Experience your potential M a pipeline with companies that.
With the waste connections <unk>, given how much would I also it can be scaled.
Yeah, I mean, <unk> again, it would just be a gas and I would hate to I don't want to do that for you or anyone cause I don't know that exactly we don't know that exactly but look if you look at our Massachusetts, and Rhode Island market as an example.
Prior to yesterday's announcement, those or non integrated markets for us. They are now integrated okay. We can take <unk> well most of our mass and Ah, Rhode Island market to the Arrowhead landfill through our network as up today. So.
You know that that gives you an idea that there's opportunities within those states surrounding states that we are not in and and some we are and where there's more M&A opportunity today than there was you know a few days ago, what that exact number is is I I don't.
No yeah, Jerry I think as we go forward in a couple of quarters and have greater understanding we could give you something more clarified but suffice it to say that it gives us opportunity that <unk> some of which we had passed on K because we weren't sure if we could become integrated remember.
Whole model is it worries are gonna be an exclusive market, where we have a a franchise or similar agreement or we're gonna try to create a de facto asset franchise through through asset positioning within a market and in a competitive market. If you are longterm disposal disadvantaged.
You're not gonna create that the facto asset franchise.
Mmm Mmm Super <unk>, an appointment becoming vertically integrated in the existing markets and some of those areas, there's a local disposal options.
You're currently flown through that or just more efficient and shipping all the way to to Alabama by rail. So can you just experience on on that point in terms of.
Plan. So it was it was just really pick your view disposal capacity five years <unk> <unk> <unk>.
In those markets.
And on that because I know.
You folks aren't.
Railcars for malpractice <unk>, you want to make sure you're getting.
Really good returns on those investments.
Yeah, absolutely and look you know we we have not said this is gonna we're gonna take all of our northeast market two arrowhead by any means there are there are you know each each of our markets within a market area are are nieces that some of us have local.
Stand that many parts of the northeast R. N 80 to 130 dollar market pick $100 is the mid point just for conversation.
You can move waste on rail a long ways at $100 a ton.
Okay, so unless there's a contraction and disposal pricing along the northeast, which we don't project by the way if it happened doesn't hurt us that helps us on a collection basis.
You're gonna continue to see US move you know waste work makes the most economical return basis and so we've taken a very hard look at this you've got diminishing disposal capacity along the northeast you're gonna continue to have an upward bias on price throughout the throughout the northeast.
As as disposal lives contract. So I I think if anything you're gonna see waste continue to move outside of the northeast and longer distances.
Mmm Super appreciate the the details can I truly just to update us on how the landfill gas developments are are tracking and you know as as we think about when they start flowing through and obviously contributing to margins any update on the timing <unk> given the movie pieces in there.
Industry, not only from project timing, but getting G. P. A certified in other.
Other pieces that are.
Essentially blamed some players ramping up capacity utilization.
Yeah, Jerry Uhm, we'd say the update as our projects are on track there are in line with our expectations. We said there were a couple that should be online by the end of this year that they would then layer ran over the next couple of years and we've talked about that 200 million in annual EBITDA by 26, and there's no change.
<unk> to that outlook.
Mmm well done thank you.
Yeah.
The next question is from now Okay I'm Oppenheimer. Please go ahead.
Oh, thanks for taking the questions and I appreciate the thoughtful responses today and I just wanted to do a little bit of housekeeping to clean. These up you know first just the level set on where we sit today on turnover and if you can disaggregate into voluntary versus an adult and military.
Sure I can do so.
So we we peaked and turnover at the end of two four of 22 at about 35% <unk>.
We brought that down by the middle of 222 about 30 <unk>.
And we have decrease that further to just under 29% at the end of Q2, we.
We are tracking below that as we head into Q3 of 23 and I would project that to be you know by the end of Q3, a point or two lower at the end of Q3, then where we ended cute too.
<unk> P. A at the end.
<unk> Q4 of 22 at about 1900 open positions for about 8% of head Count. We are currently we ended June at about 1200 <unk>.
Open positions or about 5%, a head count and I would project by Q3, we would get that into the 1100, maybe just below range getting that into the 4.5% range of 4.5% is a very comfortable number optimal in my mind is.
<unk> you know you're always gonna have some you're gonna want some that's your involuntary that you're making decisions on but if we can get to that 3.5% open positions over the course of the next six eight months, we'd be very happy there's a material difference running.
Seven 8% of open head count versus three and a half for for.
Very helpful. Thanks, and then just to remind us how much you're spending this year in capex, an orangy, a new recycling facilities and did that number change at all in the $25 million higher Capex Guy.
Mm no no change and and the higher guide so this year.
Total for twenty-three the expectation is around 45 million for Iron G and another 25 for recycling facilities for a total of about 70.
And I mentioned earlier it steps up the expectation is the R. N G spending steps up and 24, I'm, probably $125 million <unk>.
Okay. So you said and 80 million step up an orangy and recycling's that kind of flattish for next year or those investments rolling off.
For many a nominal amount in 24.
Okay. So no net that's like Ah you know.
50, 560 million dollar increase in in total capex above and beyond what you normally spend.
Okay, Yeah, that's all.
And then an arrowhead you know look I don't know if transformative is the right word but this is extremely significant for for your operation through Mississippi and there are a lot of appears you know with northeast and East Coast, you know operations I imagine this network would be valuable to so can you maybe just talk a little bit about how how these <unk>.
It's came to you you know why waste connections.
Well [noise] sure. We can certainly try obviously somewhat of that redfin the answer from the sellers.
We can tell you what we what we understand first off these assets came to us because we went after those these assets. This was not a shop transaction. This was not a marketed or or brokered or auction transaction, we began pursuing over a year.
You're almost a year and a half ago intimate discussions with the ownership and we accelerated those throughout the course of this year heading into a queue to so this was something that was targeted sort of a rifle shot I would say by us and it was you know proactive.
<unk> taken off the market by us in that manner.
So that that's how it happened why us I think the sellers would tell you obviously they felt that was a fair economic transaction, but I think they felt our ability to develop N and really turn the entire network and to their dream of what it can be.
<unk> there was they had a high degree of confidence in our ability to execute on that and and I believe that's why they would tell you that they chose us as well as what they felt was it was a cultural fit for their employees and their leadership, who was staying with us. So I think those would be the major reasons.
Mmm nice okay. Thank you for the color scheme.
[noise]. The next question is from Toby Summer I've true. It. Please go ahead.
Thanks, I'm just wondering if you see the decline in open <unk> voluntary turnover is attributable to.
Changes in the labor market external market related changes or your own internal actions cause I'm not sure. If your internal actions are already yielded results or sort of more on the <unk>.
Yeah that'd be that's a fair question tell me I would I would tell you that I think our internal actions are more on the calm I think we've had some impact but you know that would be misleading to take you know 50 per cent or more of the credit internally that that would be an accurate I think as we get six months out from now that will.
B much more impactful internally and and I do think it is a function of the labor market easing somewhat although you know as we've said that that continues to be remain tight, but but definitely is not where it was in Q4 of last year Q1 of this year.
Here, we've definitely seen that so you know what if I had to put a number I'd say, it's 75 per cent the market 25 per cent. So I mean, I'm just I'm just estimating at that but it's clearly you know more external and internal right now that will pretty rapidly flip.
Great I appreciate that.
Just one other question on pricing and then I'll I'll be done do you expect the difference in relative price increase in your west coast markets versus competitive markets do you should get spread to be relatively stable or do you have an expectation for a wide new york or contracting and that difference.
Well that that's certainly will be a function of where inflation ultimately settles out which dictate you know real time, you're leaving forward looking what price increases happen in the competitive markets and influences that spread and of course and then the C. P I linked to Mark.
It's a look back right. So those dynamics would dictate that you know we know that we'll we'll continue to get the benefit of higher C. P. I Prince coming into this year in the pricing for next year as we look ahead in those C. P I Lynch markets.
The next question is from Stephanie E. J P. Morgan. Please go ahead.
Hi, good morning, and thanks for all the color on D M employee retention.
He can provide some color on the customer side and just guaranteed price increases that has been <unk>, yeah, <unk>, what you're seeing some of our customers and I'm ever attention standpoint.
Sure.
Well, what I would tell you is that our retention continues to be good. We continue to hold you know sort of in that 85 per cent plus of our price increases that we did early in the year anytime we can get into that range were.
Or you know it tells us our retention is good and and that we haven't quote exceeded the market. If you will there are markets, where you know that's not true but overall it is [noise] you know customers you know they are experiencing have experienced significant inflation in there.
Business and we tend to be a very small part of our businesses and of course of households monthly expenses. So you know although.
10, 12% is a big number you know when you were talking about it on a 30 dollar residential bill or a 200 dollar commercial bill you're talking about you know smaller number three four dollar numbers on a residential or months or 15 $20 on a commercial bill that <unk>.
<unk> from their service providers. So you know customers never want to see which is understandable their rates increase and that always drive some tension in that relationship until you can get beyond you know the immediacy of it and and again, if you're providing service <unk>.
Quality, then that makes the acceptance of that rate increase a lot easier where you. If you have service quality issues and obviously a customer is very legitimate reason to to <unk> you know pushback on your rent increase so we have a heavy focus on service quality, that's that's a never ending battle.
The next question is from Harold Angela Jeffrey Please go ahead.
Hello. This is her line to offer stuff anymore. Just wanted to ask if you. If you could talk about any type of software automation most of the company.
Okay.
Areas, you'd think need attention I'll be looking for the bulk of them for the rest of the year.
Sure I I think it was a little hard to understand to to hear I apologize, but I think your question was about investments in software the company is making and in the back half of the year and you know Harold we are we have made a an investment in our entire Rick.
Crooning platform software that we brought online in July which is significant enhancement to what we had been doing up until then and that is probably most significant.
We are also have made significant investments and the telematics that are coming out of our truck into for both real time safety productivity and customer satisfaction.
So you know, but these are all <unk> the.
The way we think about these these are all normal course investments that we make your any neral sort of in a continuous improvement process. There is nothing that is significant that we're calling out in our expense our our capex about this because it's just all normal course.
Thank you for the code.
This concludes our question and answer session I would like to turn the conference back over to Ryan mental sat for closing remarks.
Okay. If there are no further questions on behalf of our entire management team. We appreciate your listening to and interested in the call today Marianne <unk> are available today to answer any direct questions. We do not cover that we were allowed to answer under regulation F. D regulation G and applicable securities laws in Canada.
Thank you again, we look forward to seeing you at upcoming Investor conferences or hearing from you at our next earnings call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.