Waste Connections Q3 2023 Earnings Call Transcript

There are 12 speakers on the call.

Operator

Good day, and welcome to the Waste Connections, Inc. 3rd Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded.

Operator

I'd now like to turn the conference over to Ron Mittelstaedt, President and CEO. Please go ahead.

Speaker 1

Okay. Thank you, operator, and good morning. I would like to welcome everyone to this conference call to discuss our 3rd quarter results And to provide a detailed outlook for the Q4 as well as some early thoughts about 2024. I'm joined this morning by Mary Anne Whitney, our CFO As well as other members of our leadership team. As noted in our earnings release, we are extremely pleased by the durability of our financial and operating results in the quarter With momentum for continued outsized margin expansion, solid operational execution drove adjusted EBITDAR margin of 32 5% in the 3rd quarter, as expected, up about 140 basis points sequentially and up 120 basis points year over year, In spite of over $15,000,000 in unforeseen headwinds.

Speaker 1

Moreover, normalizing for recycled commodity values from just over a year ago, Underlying adjusted EBITDA margin eclipsed 33% in the quarter. And this is total company EBITDA margin, not just solid waste. During the quarter, we overcame elevated levels of risk related expenses and other lagging effects of higher employee turnover in prior periods, As well as site specific incremental operating expenses at one of our landfills in California. The expected Q4 and ongoing impact This evolving landfill situation are currently being evaluated along with the recent shorter term development at a landfill in Texas and as such Weren't anticipated in the full year outlook we provided in August. We expect to get more clarity going forward, but currently estimate the range of outcomes in Q4 To include impacts of up to $20,000,000 to revenue, adjusted EBITDA and adjusted free cash flow.

Speaker 1

We remain encouraged by the pace of improvement in employee retention, which along with our differentiated strategy and execution Should provide for above average underlying margin expansion in solid waste collection, transfer and disposal in 2024. On that basis, We should be positioned for high single digit adjusted EBITDA growth in 2024 on mid to high single digit revenue growth, Including approximately $150,000,000 of revenue carryover from acquisitions signed or closed year to date, with upside from additional acquisition activity and any further improvement in commodity related activity. 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.

Speaker 2

Thank you, Ron, and good morning. 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, 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.

Speaker 2

Factors that could cause actual results to differ are discussed both in the cautionary statement included in our October 25th earnings And in greater detail in Waste Connections' filings with the U. S. Securities and Exchange Commission and the Securities Commission or similar regulatory authorities in Canada. You should not place undue reliance on forward looking statements as there may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward looking statements in order to reflect events or on both a dollar basis and per diluted share and adjusted free cash flow.

Speaker 2

Please refer to our earnings releases for a reconciliation of Other companies may calculate these non GAAP measures differently. I will now turn the call back over to Rob.

Speaker 1

Thank you, Mary Anne. We are extremely pleased by our operational execution in Q3, driving results largely as expected in spite of the incremental headwinds described earlier, With adjusted EBITDA margin accelerating to 32.5 percent, our continued price led organic growth in solid waste, Reflecting a price cost spread of 2 50 basis points. As mentioned earlier, underlying adjusted EBITDA margin eclipsed 33% in the quarter at commodity values of just over a year ago. As noted additionally, we overcame over $15,000,000 in unforeseen headwinds during the quarter, Primarily in 2 areas. 1st, an increase of approximately $9,000,000 to already inflated risk related expenses.

Speaker 1

This development was associated with prior period activity and reflects the higher safety incident rates that accompanied the increased employee turnover in recent years. A reminder that risk is a lagging indicator as claims develop, while turnover is a leading indicator. As we drive down turnover, risk will improve along with claim frequency and severity. Next, we absorbed over $6,000,000 in additional operating expenses at our Kita Canyon Landfill in Southern California, where we are managing and working to resolve what is characterized as an Elevated temperature landfill or ETLS event. This refers to a reaction resulting in the rapid breakdown of waste at elevated temperatures.

Speaker 1

In this case, occurring deep underground in an older portion of the landfill involving non hazardous waste That was accepted and handled prior to our ownership of the site. While there are currently no impacts to ongoing waste acceptance at the site, The reaction has led to escalating amounts of leachate generation accompanied by odor impacts. Since communicating this occurrence to the appropriate governing and regulatory bodies, we have been coordinating our efforts to address the odors, handle the leachate and satisfy the concerns of various constituents. The incremental costs in Q3 primarily included leachate treatment and disposal along with engineering and monitoring costs. We expect these expenses to expand in Q4 to over $10,000,000 primarily as a result of increased leachate generation.

Speaker 1

Beyond that, we have determined that we are not yet currently in a position to estimate the ultimate impact or timing of resolution. We expect to have good clarity of timing and resolution by our February call. The second landfill issue noted earlier is more clearly defined And more limited, but nonetheless expected to impact Q4. At our Sea Breeze landfill in Texas, we experienced a slope failure at the end of the 3rd quarter That has resulted in our shutting down the landfill and redirecting tons to alternative disposal sites, while we complete repairs and site work. The impact of lost revenue and increased expenses at this site in Q4 are expected to be in the range of $5,000,000 to $10,000,000 depending on how quickly we're able to reopen the site.

Speaker 1

We currently expect to reopen the site in mid December. We consider both of these landfill issues to be unusual, site specific and non recurring in nature, although differing and differ in duration. While historically many analysts and investors may have adjusted for similar types of non recurring events by adding back the impacts. These are developing in real time and we are not currently in a position to make a final determination. We have not included them in our outlook for Q4 or our preliminary thoughts for 2024, But in the interest of transparency are providing the estimated range of potential outcomes in Q4 to include impacts of up to $20,000,000 to revenue, Adjusted EBITDA and adjusted free cash flow.

Speaker 1

Returning to the strength of our operating and financial performance in Q3, We delivered core price of 8.8 percent and total price of 7.7 percent including 110 basis point decline And fuel and material surcharges, primarily related to the decline in diesel prices. Reported volume Growth of negative 1.9 percent on a day adjusted basis reflected the continued impact from intentional shedding as expected with recent As described last quarter, rightsizing markets and improving revenue quality should be considered integral to a disciplined approach to acquisitions and therefore Especially given the magnitude of acquisition activity we have enjoyed over the past few years. Moving on to the topic of acquisitions. We continue to see above average levels of seller interest and as typical some activity getting pushed to year end. To date, we have about $170,000,000 in annualized revenue closed with an additional $80,000,000 already signed and in Some cases awaiting regulatory consents, which are expected to close by year end or very early in 2024.

Speaker 1

As such, we have visibility for almost 2% in acquisition rollover contribution in 2024 with the potential for that amount to grow from additional transactions anticipated to sign or close by early next year. Our pipeline remains quite robust Across our footprint, including some opportunities to further expand our portfolio of West Coast exclusive markets. We continue to have capacity for outsized acquisition activity, while we fund our differentiated growth strategy, including our sustainability related projects And expand our return to capital to shareholders. To that end, our Board of Directors authorized an 11 point Percent increase to our regular quarterly cash dividend, our 13th consecutive annual increase since the initiation of the dividend in 2012 2010, excuse me. While executing our growth strategy, we also demonstrated the ability to drive down emissions and show significant progress Towards achievement of our sustainability related targets, as highlighted in our recently released 2023 Sustainability Report.

Speaker 1

In fact, as further outlined in that update, we saw a 14% reduction in scope 1 and 2 emissions in 2022 In spite of outsized revenue growth, resulting in a 27% reduction in emissions intensity. Moreover, we backed up that progress by doubling our targeted emissions reduction to 30% and have initiated Process of aligning our emissions reduction targets with the Science Based Target Initiative or SBTI. Our updated sustainability report also highlights our progress on the development of incremental capacity for recycling and renewable gas Or RNG generation. We increased our operational offsets by 8% in 2022, Driven primarily by an 18% increase in recycling tons, bring our annual total to over 2,000,000 recycled tons. And looking ahead, we are positioned to significantly expand our biogas recovery through development of additional RNG facilities, Including 3 new facilities expected to open in 2024.

Speaker 1

Moreover, we continue to expect incremental annual EBITDA contribution of $200,000,000 by 2026 from a comparable level of investment to that end, including approximately $125,000,000 to 150,000,000 of capital outlays on RNG facilities anticipated in 2024. We continue to pursue the development of other RNG projects, including at our most recent acquisitions, which we believe will be additive to these amounts as we look to 2026 and beyond. Continued investment in sustainability related projects is consistent with our objective of value creation for our stakeholders And along with enhanced disclosure and demonstrated progress indicative of our commitment to the environment and the communities we are truly privileged to serve. And additionally, we continue to invest in our most important asset, our people and anticipate additional margin expansion opportunities From innovative approaches to further improve employee retention and engagement, we are encouraged by the progress we have made in employee retention efforts in Q3 With voluntary turnover stepping down sequentially for the 4th consecutive quarter, as compared to the peaks we saw in 2022, Voluntary turnover is now down over 20% and open position requisitions are down over 30%. We look forward to seeing these trends continue and supporting the efforts of our local leaders with resources to facilitate that progress.

Speaker 1

We characterize our efforts as doubling down on human capital as we renew our focus on empowering leaders for success in our decentralized operating model. Changes include revamping recruiting through upgraded technology offerings And more than doubling training focused on frontline employees. We've initiated a pilot program for our own training academy for drivers And our coordinating efforts for a Diesel Technician School offering. We're excited about our progress today and we look forward to Seeing continued improvement as we enter 2024 when we should realize the lagging effects from improving retention rates during 2023 And into 2024. As noted earlier, while we deliver industry leading margins, we are still absorbing the residual effects of higher turnover in previous periods, which include elevated reliance on third party services as well as the increased overtime and associated equipment wear and tear, which ultimately have an impact on safety incident rates and the associated cost of risks.

Speaker 1

The good news is that the progress and retention we're seeing today sets us up for future benefits from improving costs and risk, Labor and maintenance as the same cycle should play out in reverse when incident rates and severity decline along with turnover. And now I'd like to pass the call to Mary Anne to review more in-depth the financial highlights of the Q3 and to provide a detailed outlook for Q4. I will then wrap up with some thoughts about 2024 before we head into Q and A.

Speaker 2

Thank you, Ron. In the Q3, revenue of $2,065,000,000 was above our outlook and up $185,000,000 or 9.8 percent year over year. Acquisitions completed since the year ago period contributed about $103,000,000 of revenue in the quarter, net of divestitures. Core pricing of 8.8% range from about 6.5% in our primarily exclusive market Western region To a range of approximately 8% to 10% in our competitive regions. As expected, core pricing stepped down sequentially from Q2 as a result of both the typical cadence of seasonality on reported price and the waning impact of outsized pricing activity from 2022 as compared to previous quarters.

Speaker 2

The Q3 volume decline of 1.9% on a day adjusted basis Within line with Q2 and similarly spread across residential collection with the non renewal of certain municipal contracts, Commercial collection from opportunistic shedding of lower quality accounts and in post collection in reduced transfer volumes Directed to 3rd party disposal outlets. Our most impacted markets were in our Eastern region, where we have had outsized acquisition activity over the past 2 years. Looking year over year at other lines of business, roll off pulls per day were up about 1% on revenue per pull up about 6 And landfill tons were up 5% year over year, largely driven by higher special waste tons up 17% With C and D tons up 2% and MSW tons up 1%. The increase in special waste activity in Q3 followed 2 down quarters And with the result of a few jobs either getting delayed from Q2 or likely pulled forward from Q4, a reminder of the event driven Sure, an inherent lumpiness of these projects. Through 9 months, special waste tons are up 1% year over year.

Speaker 2

Moving next to revenues from recovered commodities. Excluding acquisitions, recycled commodity revenues were down 27% year over year in Q3 And down 6% sequentially, about as expected due to a sharp decline in the value of plastics during the quarter, Partially offset by improvements in old corrugated containers or OCC, which averaged $88 per ton. Landfill gas sales were up 7% year over year in Q3 due primarily to higher renewable energy credits or RIMs, which averaged about $3 And finally, E and P waste activity. We reported another increase in E and P waste revenue to $59,000,000 in the 3rd quarter, up 6% sequentially from Q2 and up 10% year over year. Adjusted EBITDA for Q3 as reconciled in our earnings release Increased by 14.1 percent year over year to $671,200,000 again above our outlook.

Speaker 2

At 32.5 percent of revenue, our adjusted EBITDA margin was up 140 basis points sequentially from Q2 And up 120 basis points year over year, all from solid waste as we delivered the outsized margin that we projected in our updated outlook provided in August. And as Ron noted, that achievement was in spite of the $15,000,000 And unforeseen cost headwinds overcome in Q3. In fact, underlying solid waste margins arguably expanded by 150 basis points year over year on a normalized basis as headwinds from the incremental landfill costs in Q3 Accounted for about a 30 basis point drag to reported margins. Within solid waste, Price led organic growth drove margin improvement across many areas, with outsized improvement in 3rd party logistics on disposal and with offsets most notably from higher risk costs. Beyond solid waste, commodity impacts were awash.

Speaker 2

20 basis points benefit from higher E and P waste activity, plus another 20 basis points from lower fuel rates were offset by recycled commodity values, Which although improving, we're still a 40 basis point drag to margins. Net interest expense of $66,200,000 Reflects a weighted average cost of about 4% on a mix of approximately 80% fixed and 20% variable rate debt With an average tenure of over 10 years. Leverage remained unchanged in the quarter at about 2.75 times debt to EBITDA. And our Q3 tax rate was slightly lower than expected at 21.6 percent due primarily to the impact from lower foreign exchange rates for the Canadian dollar. Year to date, we have delivered adjusted free cash flow of $969,300,000 or 16.2 percent of revenue, On track for our full year adjusted free cash flow outlook of $1,225,000,000 excluding the ongoing landfill impacts Ram outlined earlier.

Speaker 2

I will now provide our outlook for the Q4 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 trends. It also excludes any impact from additional acquisitions that may close during the remainder of the year and extending of transaction related items during the period. And finally, it does not reflect the 2 landfill situations described earlier, which could result in impacts in the quarter of up to $20,000,000 in revenue, Adjusted EBITDA and adjusted free cash flow.

Speaker 2

Revenue in Q4 is estimated to be approximately 2,040,000,000 We expect core price of about 8.5% and total price plus volume of 5.5% to 6%. Recycled commodity values and RINs are projected in line with recent levels and adjusted EBITDA in Q4 is estimated at approximately $658,000,000 or 32.3 percent of revenue. Depreciation and amortization expense for the 4th quarter Is estimated at about 12.6 percent of revenue, including amortization of intangibles of about $39,500,000 or about $0.11 per diluted share, Net of taxes. Interest expense net of interest income in Q4 is estimated at approximately $68,000,000 And finally, our effective tax rate in Q4 is estimated at about 23%, subject to some variability. And now, let me turn the call back over to Ron for some final remarks before Q and A.

Speaker 1

Thank you, Mary Anne. Again, we are extremely pleased with our year to date performance and our positioning for 2024, particularly given the strength of execution throughout 2023 And the improving dynamics in employee retention. Although we won't provide our formal outlook for 2024 until February, We are able to expand on the early thoughts we provided in August, assuming no change in the current economic environment. We continue to have visibility for outsized adjusted EBITDA margin expansion resulting in expected high single digit adjusted EBITDA growth in 2024, Unexpected mid to high single digit revenue growth, including price led organic growth in solid waste, plus almost 2 point Percent from acquisitions signed or closed thus far in 2023 with the potential for that amount to grow by early next year based on our current pipeline. To the extent that we see further improvement in recycled commodity values or easing of inflationary pressures during the year, those impacts along with additional acquisitions Completed throughout the upcoming year, we provide upside to these preliminary thoughts as would the benefit from RNG facilities coming online by 'twenty four.

Speaker 1

Adjusted free cash flow conversion would be expected to remain in the current range of 45% to 50% of adjusted EBITDA, excluding the outlays for RNG projects described earlier. We look forward to having better visibility on the tone of the economy, the pace of acquisitions, Expected commodity driven activity and the projected resolution timing of the landfill situation when we provide our formal outlook in February. As we continue to grow towards revenue of $10,000,000,000 and more, we maintain that our decentralized operating philosophy And therefore, our people are our greatest differentiator. Our results today and our outlook for 2024 are a reflection of their commitments and accomplishments. We recently celebrated our 26th anniversary as a company and had the opportunity to be together as a team with our local leaders for the first time Since the pandemic, to renew the relationships that we know drive our results and to reinforce the vision and values that have guided Waste Connections Since its inception, safety, integrity, accountability, customer service, servant leadership and being a great place to work.

Speaker 1

In short, it's about both relationships and results. We appreciate your time today. And with that, I will now turn this call over to the operator

Operator

And today's first question comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Speaker 3

Thank you

Speaker 4

so much. Very strong pricing quarter once again. I was hoping you could maybe give some initial thoughts on pricing in 2024, Maybe just kind of ballpark, how should we think about the trajectory? Would you expect sort of price to come down as Inflation comes down or are you not really expecting too much of a drop at all? Thanks.

Speaker 2

Sure. Thanks, Tony. So in terms of pricing, I'd start with you'll recall that about 40% of our pricing is CPI linked and therefore there's that lagging impact. And so the CPI you see this year informs us about how Think about what that pricing looks like for next year. And then beyond that, we think in terms of that spread To drive margin expansion.

Speaker 2

And so as Ron described the preliminary thoughts for 2024 saying mid to high single They're just including the 2% acquisition contribution sort of informs you as how we're thinking about price plus volume, Making up the other piece to get you to that mid to high. And then in terms of the cadence during the year, the typical cadence, Tony, is that pricing on a reported basis is On a reported basis, it's typically highest in the Q1 and steps down over the course of the year because of the denominator growing. And so most of the pricing gets done early in the year, so we have good visibility by the time we report Q1.

Speaker 1

And Tony, this is Ron. What we strive for continually is to be about 150 to 200 basis point spread To the CPI on an ongoing basis. So sort of whatever you would assume is the CPI for next year, if you're assuming that's 3.5% to 4%. I would add 150 to 200 basis points, plus to that assumption for the price. As is this quarter, we did 2 50 basis points better than a cost spread, but we certainly strive to be in that 150 to 200 at least on a regular basis.

Speaker 4

Terrific. Very helpful. I also wanted to ask you did a nice job Describing the issues that you're seeing with the landfills in California and Texas. And You talked about it being not recurring and site specific. I was just wondering, are there always issues like these, but these are bigger, so they have to be called out or is there a reason why there are a couple of issues at the same time?

Speaker 4

And just trying to figure out As we go forward, if we're going to see like some additional issues, I know these are supposed Sort of one time, but maybe just talk about if anything has changed.

Speaker 1

Sure. So first off, Tony, nothing whatsoever has changed. First off, we have well over 100 landfills in the company. And in 26 years, we've never once at any of our landfills had one of these elevated temperature events. So that tells you how rare and how unique they are.

Speaker 1

They definitely happen within the industry. Probably any given time, there's 5 or maybe 10 of these going on nationwide with various owners, But we have never had one before. And so that is unique. It is also in Southern California and Los Angeles, Which makes it a little bit more complicated because of the density of the population. So that's one.

Speaker 1

The second one, the Texas And these are completely unrelated and coincidental in timing. The second one, the Texas issue was a Slope failure, that was actually our error caused by us. We could have prevented that, But we missed a few things. And we have only had 2 of those out of over 100 landfills in 20 6 years, one about 14 years ago and smaller and we never needed to call it out or did call it out. The other reason we've called out these 2 is because there has been press coverage of these in the media.

Speaker 1

And because of that, we felt it would be inappropriate not to communicate it to investors and other listeners when it is in the press. So that's how I would characterize these 2 as to why they many would add this back is because of their non recurring nature And we've really never had either of these before.

Speaker 4

Super. Thank you.

Operator

Thank you. And our next question today comes from Kevin Chiang with CIBC. Please go ahead.

Speaker 5

Hi, thanks. Thanks for taking my question. Good morning, everyone. I appreciate, I guess the uncertainty in how you're going to deal with some of these costs related to the landfill both in I guess specifically in Q4. But if I look at Q3 and if I And Marianne mentioned it, if you back that out, you saw solid waste margin expansion of about 150 basis points.

Speaker 5

Does that change how you think about the launching point for 2024? Excluding these issues and if we treat them as one time, it does feel like you're entering 2024 maybe a little Higher than maybe what we would have thought a quarter ago. I'm not sure if you'd agree with that.

Speaker 1

Yes, I mean, I think Kevin, so number 1, it does not change how we think about the launching point. Look, 3, an EBITDA, and we overcame $15,000,000 So we really would have beat by $17,000,000 So some have said, hey, This is up to $20,000,000 in Q4. Why wouldn't you just not acknowledge that and You could probably beat it. And what we would tell you is, look, we didn't expect to be Q3 by $18,000,000 in EBITDA. Good things happen, rough things happen sometimes.

Speaker 1

So we're being transparent on the rough things we know And we do believe they're non recurring completely. The Texas is will be over in Q4. The California will not be over in Q4, but we believe it is still will be non recurring. And so, no, we don't think of the launch off point or the jump off point as any different with these than we had, which is why in our comments, we've said We have outsized margin expansion. Look, we are now up 2.50 basis points between Q1 and Q3 in margin, Okay.

Speaker 1

And we have just guided Q4 up substantially over last year's Q4. So the jump off point is clearly Higher than was anticipated earlier in the year.

Speaker 5

That's helpful. And then when I think back to the Q2 call, you gave a lot of color on some of the stuff you're doing on addressing labor turnover. And I think one of the comments you did make was, as you get turnover lower, that could yield about 100 basis points of margin improvement over the next call it 18 to 24 months. You called about $9,000,000 of experience costs that weren't expected in the Q3. Does that change how you think about the margin Tunerdi, that you laid out back on the Q2, whether it's the magnitude of the margin improvement or maybe the timing of realizing those?

Speaker 1

No, it really doesn't Tony excuse me, Kevin, I apologize. It really doesn't and here's why. Because in the $9,000,000 of incremental risk Spence, that's really a one time issue on prior claims, okay? A part of it is forward looking, but the smallest Set that, we'll more than overcome that and we stand by that margin impact. One of the reasons we reiterated, Hey, if you we just had a year ago commodities, we're already north of 33% is to show you that With that 100 basis point improvement over a few years, the 34% EBITDA margin visibility is really pretty clear right now.

Speaker 2

The other thing I would add, Kevin, just to put some numbers around it. When we think about the cost of risk and coming how it Was playing out in 2023 and specifically in Q3, our expectation was that it was a headwind. It was just a greater headwind. So it ended up being a 90 basis point headwind to reported margins. We had expected it to be a 40 basis points to 50 basis points.

Speaker 2

So my point is that has been a factor throughout 2023, but it is one of those examples of as turnover goes down, the lagging benefits that accrue to us over 2024 and 2025 potentially, that's one of the items that we'd expect to improve.

Speaker 5

That's great color. I'll leave it there. Thank you very much and best of luck as you close out the year here.

Speaker 1

Thank you.

Operator

And our next question today comes from Tobey Sommer with Chirrus Securities. Please go ahead.

Speaker 6

Hey, good morning. This is Jasper Bibbond for Toby. Solid waste margins in the quarter, Obviously quite strong even with the unexpected costs. Also seems like cost inflation particularly on the labor side is moderating a bit. I was hoping to get your preliminary expectations for how we should think about those main unit cost buckets tracking into 2024?

Speaker 2

Sure. So certainly start and welcome Ram's input. We look at a couple of key areas, one being wages. And so wages in Coming into the year, we expect it to be in the range of 6% to 8%. The increase is same employee increases Starting at 8% and moderating maybe to that 6% or 6.5% over the course of the year.

Speaker 2

And the update is that's happening. And so we're seeing those improvements And in wages particularly. And then I'd say more broadly, the inflation we're seeing and that we've referred to in that price cost spread Has stepped down over the course of the year from low double digits from over 10% to now more like 5.5%. So I'd say the trajectory, first of all, it's playing out as we expected because the expectation was that, for instance, on the wage front, The outsized increases we put in during the course of 2022, we knew would anniversary over time and not need to be put in at the same level in 2023. So as we continue that trajectory should continue to moderate.

Speaker 2

But I think what we've proven is that being in that 5% to 5.5% range. That should be we expect that's what we would see and it's playing out largely as expected.

Speaker 1

And I would say Jasper that for 2024, we're seeing CPI somewhere in that 3% to 4% range is what's being talked about or actually what's coming in now, actually in the low 3% range. I would expect wage increases to be in that 3.5% to 4.5% range. So stepping down somewhat obviously from the high level of CPI in 'twenty three, But that would be sort of what I would expect from our 24 as we sit today.

Speaker 6

Thanks. That makes sense. And then some of your peers have discussed Project delays on their landfill gas build out, just hoping you could give some color on your experience getting these early projects off the ground. And are you seeing Any of the timelines move to the right at all there because of permitting or utility issues?

Speaker 1

Yes. Well, our peers are not alone. The reality is that The utility infrastructure for the most part in the country is not quite as ready as perhaps The producers like us are ready. There is significant delays in them getting transmission lines and interconnects ready. And that is pushing projects out, sometimes 6 to 12 months from expectation.

Speaker 1

And we are also seeing some supply chain for transformers, generators and other components that are needed Be delayed as well. So still very good visibility on the projects. Feel very comfortable with our 200 By 'twenty six, but can some projects move 3 to 9 months? Yes, they can and yes, they are. And we are seeing that as well.

Speaker 2

And that's one of the reasons as we think about our preliminary thoughts for 2024, The projects coming online, the 3 that we anticipate by early next year will be additive to anything we've talked about for 2024.

Speaker 6

Right. That's super helpful.

Speaker 7

Thanks for taking the questions.

Speaker 1

Of course. Thank you.

Operator

And our next question today comes from Michael Hoffman with Stifel.

Speaker 8

Just to touch on 24, am I in the right neighborhood if I go price volumes negative 2, entered fuel surcharge 0, M and A is 2 and that gets you to that sort of 6 to 8 is that mid to upper Organic top line, is that the right way to think about it?

Speaker 2

Clearly, what we've said Implies price plus volume probably mid single digits, right, to get to the mid to high. Now Is it 6 minuteus 2? Is it 5 and 0? Is it 5 and half? There's moving pieces in there, but we expect Volumes to continue to be negative and price needed to be more than that to get to that mid single digit range.

Speaker 2

And Michael, the way

Speaker 1

I think you should think out of it again, probably price in that 6 to 7 range, volume in that negative one range, Up to negative 2 probably starts a little higher just as comps and then improves throughout the year. Again, we don't have Quite as many acquisitions this year as we did coming out of 'twenty two into 'twenty three. So there'll be less shedding. So I think you get to the same math, but there's just a little nuance on it.

Speaker 8

Okay. That helps a lot. And then, Mary Anne, can you tell us what your year to date average commodity basket and year to date average RIN prices? And then What is the current number so we can kind of figure out how to roll that into next year?

Speaker 2

Sure. So for OCC, We're trending for the full year to about $80 a ton. And that's using Q4 being at current rates, which are closer to $100 and then RINs for the full year are trending to about 2 $60 assuming Q4 is closer to $3

Speaker 8

Okay. All right. That's very helpful. And then, Ron, you've talked about the 34% getting the whole company back to 34%. Everything heard so far there's nothing that backs you off of that target and somewhere in the 2025 time zone?

Speaker 1

That's correct. Yes, I think And Michael, I have said that we will get there. I believe we will get there. Again, depending I've also said that is with sort of 21 level commodities, okay. So with that caveat, but that is also without RNG.

Speaker 8

Right, which is all tailwind at this point if we're staying in that $2 to $3 range. Are we What can you remind us what your 2021 commodity basket was?

Speaker 1

It was probably right at about Give us one second and we can. We're looking for that information. So we are going to be for the year, Mary Anne just said, we'll exit You're at a blended 80, Michael. We'll exit the year about. So, it was 150.

Speaker 1

150. So the basket was just a little lower.

Speaker 8

The 2021 was 150, is that what you said?

Speaker 2

That's right. Yes. The TC average 150.

Speaker 8

Okay. All right. And then last one, I mean, I get it your experience on elevated temperatures, there is none because it hasn't happened to you. You did mention that this has been something in the modern era of landfill design we've been dealing with. What's the engineering Department saying about the long term outlook here.

Speaker 8

Does this do you actually reverse the temperature or you stabilize it? And therefore, that's how what you're trying to get your hands around to talk to us about in February?

Speaker 1

Yes. No, Michael, you actually reverse the temperature. As you reverse the temperature, which is what we are doing, we have added significant number of wells in this late in the third Quarter and so forth through the Q4, we have added over 50 new wells to pump out leachate And gas and reverse the temperature. As the temperature reverses and cools, The reaction stops and the generation of water stops. And that is the resolution.

Speaker 8

And when it comes down, the leachate management costs, which are running somewhere $0.10 $0.15 a gallon, so it's a big number.

Speaker 1

Yes, they're actually $0.38 a gallon in LA, because we're trucking it all off to POTW because of the magnitude right now. We Not recirculate. When it comes down, there's a partial of that that we can recirculate during times of the year. But yes, it comes down dramatically,

Speaker 8

Okay. Thank you very much.

Operator

And our next question today comes from Brian Berninger with Citi. Please go ahead.

Speaker 9

Good morning. Thank you for taking the question. Ron, you may have alluded to this earlier on, I think, Kevin's question and sorry if

Speaker 8

I missed

Speaker 9

this. 3Q EBITDA was essentially in line with your guidance despite these kind of unexpected landfill costs. Is it possible to

Speaker 1

I will say what would be better, is that what you said?

Speaker 9

Yes, yes. If you had $15,000,000 in kind of unplanned fuel costs in the quarter, But you still kind of met your guide. What maybe came in above your expectations that netted out to your guide?

Speaker 2

Sure. So I'd say what we'd say is it's really the execution, the delivery in Q3. And as I described, the margin expansion comes from lots of small improvements within the P and L. And so within solid waste, we did a little better than expected. And then I'd say, arguably, we had a little And then I'd say arguably we had a little assist from E and P weights, which did step up sequentially in Q3,

Speaker 1

but it's largely execution. Yes. And Generally, E and P does step down some in Q4, Brian. So that might not be in the same assist that it was in Q3. You had a little assist from RINs elevating at the end.

Speaker 1

So that right now appears to be holding, but we certainly can't project that to hold. And then you have, as we said, special waste was a little better than we had projected. It was up in the quarter. Whether or not comes through in the Q4 because you start to get into the winter weather. So those are things we're not projecting, But and some are weather dependent.

Speaker 1

Those are the kinds of things that could make that come through.

Speaker 9

Understood. Thanks for the detail. And last question for me, I'm just wondering if you can provide an update on Truck orders, data and some of the comments from your peers seems pretty positive. Do you have a sense for maybe what Percent of your 23 oars are going to come in this year. And as we start to look out in 2024, do you see backlogs are maybe Shrinking or expanding?

Speaker 1

Yes. Our experience is a little bit different than at least our large public peer. And we are planning that we'll get somewhere in the high 80s to almost 90% of our Chassis and bodies, therefore, the full units delivered this year. We expect somewhere in that 10% to 12% To push or roll into 'twenty four, by the way, that is a little less than what rolled into 23 from 22. So in that way, it has improved.

Speaker 1

But the manufacturers, particularly on the body Not the chassis side. The chassis side we can get right now, which is opposite of last year. But the manufacturers on the body side are still saying there Should be some delays through 'twenty four and it would be normalized in early to mid 'twenty five. That is what we're hearing and experiencing.

Speaker 9

Got it. Thanks a lot. I'll turn it over.

Operator

And our next question today comes from Tyler Brown of Raymond James. Please go ahead.

Speaker 10

Hey, good morning.

Speaker 1

Hi, good morning, Tyler.

Speaker 10

Hey, Ron. So I want to come back to turnover. So I think you guys gave some great In the ESG report, you talked about voluntary turnover, I think in 2022, correct me if I'm wrong, but it was circa 21%. You mentioned that here in recent quarters you have improved, but can you tell us where that number is today? I think you said it was down 20%.

Speaker 10

So is it basically Already back down to that mid to high teens kind of where we were pre COVID?

Speaker 1

Yes. It's 17.4 right now.

Speaker 10

Okay. And so the whole idea here is that leads, but the benefits are a bit lagged. So that's what's really going to help us in 2024 and likely off into 2025.

Speaker 1

Yes, that's right. Our objective is to continue to drive that voluntary down further. Our involuntary, meaning Us making a proactive decision will run higher for a little while because we accepted Employees that were probably a little more marginal than we would have otherwise and maybe a little more risk. And so As voluntary comes down, we'll be more active on the involuntary and then that will fall to as we Restaff with a little bit more of a higher caliber employee in those. So that's how that will flow.

Speaker 10

Okay, perfect. And I want to kind of come at the landfill developments here a little bit different way. So typically, how long would it Take to rectify a slope failure and typically how long does it take to remediate one of these elevated temperature events? I mean, I appreciate Maybe if you're somewhat new to some of it, but I think I heard you said that the slope event maybe is a 1 to 2 quarter issue, but the temperature remediation Could definitely take longer since it's in the landscape, is that right?

Speaker 1

Yes. We'll try to provide you as much clarity as we have and our Spiren, so the slope event, we will have remediated in the quarter. So that will be under 90 day. And when I say Remedicating solve. We will have the landfill reopened and the slope stabilized And begin backfilling into a new area.

Speaker 1

So in that way, the event will be contained within the quarter. There will still be waste we have Relocate in the Q1 of next year, but that's not really anything you would see. That's Just sort of using lateral airspace and then we will go up later. So that one's relatively simplistic to do. And this was not a large failure.

Speaker 1

There was no equipment, no personnel, no anything involved. This Really a side slope failure with ways moving laterally some. It just happened to be near our road, Which is one of the reasons we closed the site on a temporary basis. Okay. The elevated temperature Sure, Vince.

Speaker 1

It's a little bit harder to predict right now, Tyler. But here's what I will tell you. We've been monitoring this Since March or April of this year, as temperatures were rising, we really didn't start seeing any significant of additional leachate or odors until really, really August is when that occurred. And so now as we sit here at almost the end of October, we believe that we're just probably about a month Away from being at the fulcrum point and starting to come down in some of the certainly at least the odor component, The leachate generation will go on for a while, but I think we'll have a lot better we will have a lot better clarity in February. These events, these reactions can go on for some period of time.

Speaker 1

So sort of think of it as It's going to go on and it takes time for the temperature to come down. As it comes down, the leachate generation comes down. As it comes down, the odor comes down and it just sort of continues to diminish until it stops. So it's a matter of getting both the leachate And the methane out to slow the reaction fully, because it's an organic reaction. So but it should sort of peak at some point, we believe here in the Q1 or early next year.

Speaker 10

Okay, perfect. And then Mary Anne, couple of modeling questions. So I may have missed it, but what was the average commodity price in Q3?

Speaker 2

So Q3 OCC average was

Speaker 9

$88 $88 perfect.

Speaker 10

And then I appreciate the margin walk, but was M and A dilutive? Would have thought that Arrowhead would be dilutive just given all the transportation revenue flowing there.

Speaker 2

Yes. No. So M and A was not dilutive. It Came in line in the aggregate.

Speaker 1

In the aggregate, yes. There's a nominal dilution. You are correct on the margin For Arrowhead because of the transportation at this point, as we march forward that will reverse.

Speaker 10

Okay. So we should expect some dilution?

Speaker 1

I would tell you de minimis, if it's 10 bps, That's probably a fair number.

Speaker 10

Okay, perfect. And then what is the revenue contribution in Q4 from M and A, if I could?

Speaker 2

$50,000,000 Perfect.

Speaker 10

Okay. Thank you guys so much.

Speaker 2

Thanks, Tyler.

Operator

Thank you. And our next question today comes from Noah Kaye with Oppenheimer. Please go ahead.

Speaker 7

Hey, good morning. Thanks for taking the questions. So I'm asking to help clarify this by investors. So I just want to make sure we're all clear. Please can you clarify that the outlook for 2024 is based off of the current FY2023 guidance, which Does not include the $20,000,000 potential impact for 4Q?

Speaker 2

That's correct. That's consistent with the way we've approached it, yes.

Speaker 7

All right. Appreciate that. Maybe if you can put some color Around the RNG capital outlays, you said $125,000,000 to $150,000,000 for 2024. You would call that previously a total CapEx spend of $200,000,000 through $26,000,000 So A, making sure there's no change there in the total expected spend. B, remind us what you're tracking to spend in 2023 and then maybe confirming the implication that you expect to be most of the way through that

Speaker 2

Sure. So for 2023, maybe $35,000,000 or $40,000,000 is the way to think about the spend. And so that tells you the vast majority of it is next year in 2024.

Speaker 7

All right, excellent. Last question, We've gotten this from folks that the volumes associated with shedding seem higher relative to the level of M and A than perhaps If you look back 4 or 5 years in the past. And wondering if that is a function of just a lot of legacy contracts in these acquisitions you're doing recently being underpriced for the inflationary environment, is there something else we should read into? And then really I guess Question is, at what point in the future would you expect the shedding associated with some of this M and A to start to abate?

Speaker 1

Yes. Well, first off, Noah, when you're doing M and A, there's always going to be Some level of shedding. So, because when you're acquiring a private company that's I'm just going to use this, it's got $40,000,000 of revenue, They probably have somewhere between $4,000,000 $8,000,000 that is going to come up in a 1 to 3 year period that you're Probably going to bid to lose or keep at a margin that you want. You start doing $200,000,000 $400,000,000 $500,000,000 as we've done per year over the last several years, 2021, 2022, especially a fairly large year already this year, that's going to you're going to have some of that for a period of time. We are still believe it or not, we are still rightsizing Progressive.

Speaker 1

We acquired that in 2016. Several of the larger contracts in that we have lost in 2023 Came out of Progressive in both Canada and Florida. And there were 10 year agreements that we lived with till expiration And we bid them to either keep them and make money or happily walk away. And Obviously, we've only done one progressive over time. So and that is I would tell you that type of shedding is effectively probably done From that footprint.

Speaker 1

But there's got to be some. We think of the negative volume as probably roughly about 3 quarters to a point related to shedding and about up to a point, maybe a little less for a conscious price volume trade off In competitive commercial markets. I mean, that's the way we think of that. And obviously, we have comfortably led the entire sector In 'twenty two in price, comfortably let it again in 'twenty three in price. And we are happy to take that Price volume trade off as I think you're seeing it show up in the pace of the margin acceleration.

Speaker 2

No. The other observation I would make an offer is that if the observation is, hey, it looks like there's more shedding with these recent acquisitions, I'd say no, we don't see a material difference. I think what's different is that the underlying economy isn't generating more volumes and so it's more pronounced for And others in the industry. And so I think it's always going on, but there's generally a base of positive volume to offset it.

Speaker 7

Yes, that's great context. Thank you, both.

Operator

Thank you. And our next question today comes from Jerry Revich with Goldman Sachs.

Speaker 3

I'm wondering if you could just talk about the margin trajectory in the core business. You folks sequentially posted margins that were a point better normal seasonality, the guidance excluding the noise, suggests another 60 basis points improvement versus normal in 4Q. Does that momentum continue into the Q1? Or are we getting caught up on Price cost from here or will you be at the appropriate run rate exiting 4Q?

Speaker 2

Sure. So I'll start with just let you keep in mind that Q3 is the seasonally strongest margin contributor in the across the industry for ourselves. And so that's For ourselves, and so that's important to put it in context to remember that's the starting point that you're going from right now. So I'd say there is normal seasonality, which impacts the degree to which that impacts reported margins. We've also Had the changing dynamics of recycled commodities and RINs, which of course were the big headwind going into the year, that's waning And becomes the tailwind.

Speaker 2

So I'd say within that context, are we still encouraged by the trajectory of margins? Yes. And it's for the reasons that we've The opportunity for outsized price cost spread, we've pointed to that as a driver of the potential for outsized margin expansion 24. And then the follow on benefits from the improving retention that we've described. So no change in the way we're thinking about those things and yes, that is positive in terms of the trajectory.

Speaker 3

And it sounds like the momentum is continuing into the Q1, Just to be clear, Maryann, or at least expect it to continue.

Speaker 2

Yes. Nothing we've seen would depart from that. As I said, those Tailwinds on the commodities, for instance, are positive and we haven't seen any incremental cost pressures. So we're encouraged by the trends.

Speaker 3

Okay, super. And in terms of you spoke to D3 RINs just mathematically given where Pricing is now that suggests 24 versus 23 will be about a $50,000,000 tailwind of current spot prices Hold, given the supply issues we've been talking about. Anything that would preclude you from realizing that benefit if the spot rate Holds, do you have any contracts in place? And I just want to confirm if spot prices do hold, it would be Additive to the guidance or preliminary outlook that you shared?

Speaker 2

So a couple of things. 1, whenever the guidance we've given It's basically marking to market commodity values. And so what we've said is continued movement in commodities would be upside along with the new projects Coming online. So we've already factored in some tailwind from RINs as well as recycled commodities. The other comment, Jerry, would be I never think in terms of that spot price because as you know that's not indicative of where you We sell rims even in the current environment.

Speaker 2

So rather than picking a point like $3.40 I'd say we're probably in that range of $3 to $3.25 is the way we've thought about it.

Speaker 3

Got it. Thank you. And can you just update us on the timing of CapEx related to these projects? What are you expecting in $24,000,000 and $25,000,000 on the projects where you are putting capital to work?

Speaker 2

Right. So that would be that $125,000,000 to $150,000,000 in CapEx associated with the RNG projects that we said Will impact $24,000,000 when that's the vast majority of the $200,000,000 in outlays that we'd expect for all those projects To generate that $200,000,000 in EBITDA by $26,000,000

Speaker 3

Super. And then just a clarification, the $200,000,000 I believe when you had set that target, D3 rent prices were in the low 2s, correct? Can I get you to fact check that for me, please?

Speaker 2

I think what we talked about was a 5 year average. And so I think it's north That's

Speaker 1

250 to 270.

Speaker 3

Okay. That's super. Thank you.

Operator

Thank you. And our next question today comes from Stephanie Moore, Jefferies. Please go ahead.

Speaker 11

Hi, guys. I appreciate the time. I'll keep Just one here. We talked a little bit about the volume environment in your own actions of shutting accounts. But could you maybe talk a little bit about the Strength in the underlying environment, what you're seeing on both the commercial and residential side.

Speaker 11

I know you called out specialty being stronger, but that can be kind of volatile. So let's just give your overall view. Thanks.

Speaker 1

Well, I would tell you overall, Stephanie, that the economy is okay. I wouldn't say it is by any way strong. I would say it's sort of a flattish environment From a growth standpoint, you have pockets of strength. I wouldn't really say there Too many pockets of weakness, just flatness. And we looked at, so year to date, our new business sales through our sales force activity Is 102% of what it was year to date last year.

Speaker 1

So better than last year, But 2% in terms of new sales. So overall, I would say you've seen a little improvement over 'twenty two, but really pretty flat. And I think you saw that in our comments that in Q3, roll off polls were up 1%. Price on per poll was up quite strong, but roll off polls were up 1%. So I think that's indicative With our footprint being as large as it is, I think that's indicative of what's going on in the economy.

Speaker 1

And It's sort of appears to be a soft landing scenario, but there's certainly no underlying Real growth in the economy, not at this point. If some of the infrastructure spending occurs the way it is Plan to occur in 2024 and 2025, and I think that could certainly accelerate development. What

Speaker 2

I'd add to that Stephanie is just that that's not a material change from what we've been saying really for the past 6 quarters or so. There's just not been a lot of movement.

Speaker 11

Thank you. Thank you.

Operator

Thank you. And today's final question comes from Stephanie Yih with JPMorgan.

Speaker 11

Hi, good morning. I was wondering if you can give us some color on what you're seeing in the M and A market, Just who you're coming up against, is that other strategic or financial players and how are valuation levels Trending. And just any color on where you're doing the acquisitions, maybe the geography or type of business that you've been acquiring?

Speaker 1

Well, let's start with the last one and easiest. I mean, the geography is throughout the U. S. And Canada. We've had a little more focus on West Coast over the last 18 months or so.

Speaker 1

And of course, we're acquiring our typical solid waste disposal collection and transfer For type companies, who do we compete with? We obviously compete with the other public companies And we certainly compete with some regional private equity backed companies and then private mom and pop companies Executing their own growth strategy. So as far as valuations, we've seen valuations probably Over the last 4 months or so, probably pull back about a turn to maybe 2 turns of EBITDA from where they Sort of peaked in, I'd say, late 2022. And we would probably expect that to continue to tighten a little bit As interest rates have continued to rise and are expected to perhaps have another adjustment or so, And being in a relatively flat economic environment. So that Hopefully, would be the answer to those questions you had, Stephanie.

Speaker 11

Yes. No, that is very helpful. Thank you.

Speaker 10

You're welcome.

Speaker 11

And just one follow-up, just on the intention for share repurchases. I know you Renewed your issuer bid. But I guess just in terms of how you're thinking about M and A versus share repurchases, it sounds like M and A is still, In your view, the best use of capital, is that correct?

Speaker 1

Well, that may be changing rapidly, but Yes. No, it's clearly M and A is still our best use of capital on any long term basis And how we should create the most value, but we clearly are opportunistic in the share repurchase And we'll continue to stay opportunistic in that way.

Speaker 11

Okay. Sounds good. Thank you so much, Ron.

Operator

Thank you. And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any closing remarks.

Speaker 1

Okay. Thank you, operator. Well, if there are no further questions, on behalf of our entire management team, we appreciate your listening to and interest in the call today. Mary Anne and Joe Box are available today to answer any direct questions we did not cover that we are allowed to answer under Regulation FD, Regulation G and applicable securities laws in Canada. Thank you again.

Speaker 1

We look forward to seeing you at upcoming investor conferences or hearing from you on our next earnings call.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

Earnings Conference Call
Waste Connections Q3 2023
00:00 / 00:00