Waste Connections, Inc. Common Shares

Q3 2021 Earnings Conference Call

10/28/2021

spk09: Greetings and welcome to the Waste Connections third quarter 2021 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded on Thursday, October 28, 2021. I would now like to turn the conference over to Worthing Jackman, President and CEO. Please go ahead.
spk06: Thank you, Operator, and good morning. I'd like to welcome everyone to this conference call to discuss our third quarter 2021 results and provide a detailed outlook for the fourth quarter and updated outlook for 2021, as well as some early thoughts about 2022. I'm joined this morning by Marianne Whitney, our CFO. As noted in our earnings release, we delivered another top-to-bottom beat in the period on continued strength in solid waste pricing, higher recycled commodity values, and improving E&P waste activity, along with acquisitions closed during the period. More importantly, quality of revenue drove both sequential margin improvement in the period and 60 basis points year-over-year adjustity with that margin expansion in the quarter, overcoming an estimated 40 basis points impact from margin dilutive acquisitions and hurricanes. This puts us firmly on track to exceed the increased full-year 2021 outlook we provided in August and deliver year-over-year margin expansion again in Q4. Strong execution, proactive acceleration of solid waste pricing to address inflationary pressures, and outsized contribution from acquisitions already position us for double-digit growth, underlying solid waste margin expansion, and strong free cash flow conversion in 2022. Before we get into much more detail, let me turn the call over to Mary Ann for our forward-looking disclaimer and other housekeeping items.
spk01: Thank you, Worthing, 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. Factors that could cause actual results to differ are discussed both in the cautionary statement included in our October 27th earnings release and in greater detail in Waste Connections filings with the U.S. Securities and Exchange Commission and the Securities Commission's 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 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 pre-cash flow. Please refer to our earnings releases for reconciliation of such non-GAAP measures to the most comparable GAAP measures. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. I will now turn the call back over to Warden.
spk06: Great. Thank you, Marianne. We are extremely pleased by the broad-based strength of our business and solid execution in the quarter, with better-than-expected top-line growth driven by all lines of business, starting with solid waste. Price plus volume growth of 7.3% reflects our proactive approach to managing through the current environment by implementing additional price increases to address wage and other cost pressures. Total price was 5.1% in Q3, up 20 basis points sequentially and slightly better than expected, and ranged from 2.5% in our mostly exclusive market Western region to between 4.8% and 7.3% in our more competitive regions. Looking ahead, We are positioned for another sequential increase of pricing growth in Q4 to about 5.5% as the full impact of incremental price increases is realized. Reported volume growth of 2.2% in the period was also slightly better than expected. We saw positive volumes in all of our regions except our eastern region, which was essentially flat due to the tough year-over-year comparison from an outsized special waste job in one market last year. Of note in the east, though, was the improvement that we're seeing in New York City, where volumes were up 11% as commercial activity has picked up along with reopening activity. Also noteworthy is our western region, which had the strongest volumes going into the COVID-19 pandemic and continues to lead with volumes up 5% in the quarter. Company-wide, all lines of business showed year-over-year improvement. Looking at year-over-year results in the third quarter on our same store basis, Commercial collection revenue was up 12%. Roll-off revenue was up 11%. Pools increased by about 4.5% on increases in all regions on strong pricing, driving rates per pool up about 6.5% year-over-year. Landfill tons were up about 5% in MSW, special waste, and in C&D waste. Moving on to E&P waste, revenue was also up year-over-year and stepped up sequentially, on higher activity levels in all of our major basins. We reported 35 million of EMP waste revenue in the third quarter, up 11 million year over year and up 12% sequentially from Q2, in spite of the disruption to drilling operations in the Gulf of Mexico as a result of Hurricane Ida. We are encouraged by increased rig counts and elevated crew pricing levels, which if sustained, could set up for increased activity in 2022. Finally, looking at Q3 revenues from recovered commodities, that is recycled commodities, landfill gas, and renewable energy credits or RINs, excluding acquisitions, collectively they were up about 110% year-over-year, primarily due to higher commodity values, led by old corrugated containers, or OCC, up 150% year-over-year. Prices for OCC averaged about $186 per ton in Q3, and our rent pricing averaged about $2.70. As noted earlier, all lines of business outperformed our outlook in the period, along with acquisition activity, which as expected picked up in the third quarter. Year-to-date, we have closed acquisitions with approximately $240 million in annualized revenues, with the potential for that amount to increase by another $100 to $150 million as we go into next year. We had anticipated that this would be a big year for acquisition activity for all companies across the solid waste sector, and we continue to be selective and disciplined in our approach to acquisitions as we recognize the importance of market selection and asset positioning, as well as value creation. As anticipated, the strength of our operating performance, free cash flow generation, and balance sheet positioned us for another double-digit increase in our quarterly cash dividends. As announced yesterday, our Board of Directors authorized a 12.2% increase in our regularly quarterly cash dividend, our 11th consecutive double-digit percentage increase since commencing the dividend in 2010. We continue to have tremendous flexibility to fund our differentiated growth strategy and outsized acquisition activity, along with an increase in return of capital to shareholders over the long term, including opportunistic share repurchases. We also capitalized on opportunities to invest in our business and didn't allow for any slowdown in our replacement or growth capex in spite of supply chain challenges, which have hindered investment for many companies. In fact, we increased fleet purchases during the year and accelerated our pre-order process for 2022 to position ourselves for continued growth. In addition, as noted earlier, we proactively addressed labor constraints through wage adjustments covered by incremental price increases. Moreover, throughout 2021, we have maintained and expanded upon our commitment to the health, welfare, and development of our employees, environmental stewardship, and the support of our local communities as detailed in our updated 2021 sustainability report released earlier this week. The report outlines progress we have made on the long-term aspirational sustainability targets we established in 2020 demonstrating year-over-year improvement in all areas, including an 8% reduction in operational greenhouse gas emissions to further improve our already net negative carbon footprint of over 3.2 times. We also highlight our investments in renewable fuel facilities and state-of-the-art green fuel recycling facilities, as well as upgraded safety features across our fleet and engagement tools for our employees and customers. Not only did we demonstrate considerable progress toward all of our objectives, we also incorporated sustainability metrics into our long-term incentive compensation targets to provide increased transparency and accountability. Moreover, we have maintained our focus on and support of our frontline employees whose efforts throughout the COVID-19 pandemic have been an inspiration for all of us. Our outlay of over $40 million since the onset of COVID-19 pandemic primarily to support frontline employees, is indicative of our values, priorities, and focus as we run our business day-to-day. Given our safety-focused, servant-leadership-driven culture that weighs connections, sustainability initiatives are consistent with our strategy and focus on long-term value creation for our shareholders as we grow our business. Now, I'd like to pass the call to Mary Ann to review more in-depth the financial highlights of the third quarter, and to provide a detailed outlook for Q4 and updated full year 2020 outlook, 2021 outlook. I'll then wrap up with a few early thoughts about 2022 before heading into Q&A.
spk01: Thank you, Worthing. In the third quarter, revenue was $1.597 billion, about $37 million above our outlook as a result of continued strength in solid waste, higher than expected recycled commodity values, increasing E&P waste activity, and contribution from acquisitions closed during the quarter. Revenue on a reported basis was up $207 million, or 14.9% year over year, including organic growth of approximately 11.3%, plus 3.6% from acquisitions completed since the year-ago period, which in total contributed about $54.1 million of revenue in the quarter, or about $51.4 million net of divestitures. Adjusted EBITDA for Q3, as reconciled in our earnings release, was $505.6 million, about $11 million above our outlook. Our adjusted EBITDA margin of 31.7%, up sequentially from Q2 and up 60 basis points year over year, includes approximately 40 basis points combined margin impact from Hurricane Ida and margin dilution associated with acquisitions in the quarter. Excluding these impacts would result in an underlying adjusted EBITDA margin of 32.1% in the period, up 100 basis points year over year. Looking at margin drivers in the quarter, commodity-driven impacts accounted for about 160 basis points of margin expansion, net of a 30 basis point impact from higher fuel, on diesel rates up 19% year over year, and increased E&P waste activity drove an additional 40 basis points of margin expansion. These tailwinds, buoyed by the incremental price increases we put in place during the quarter, more than offset inflationary impacts on the business, as well as the return of about 60 basis points in discretionary spending during the period, as our in-person training, meetings, employee and community-focused activities, and benefits costs continued to normalize. We delivered adjusted free cash flow through Q3 of $825.8 million, or 18.2% of revenue, putting us on track for another upward revision to our adjusted free cash flow outlook for 2021, in spite of continued increases to CapEx. As Worthing mentioned, we have been intentional and proactive about capital expenditures, already up almost 15% year over year, and now projected at $700 million. up from $625 million in our original outlook for the year, and with the potential for that number to grow as we continue to pursue opportunities to stay ahead on fleet and equipment purchases where possible. During the quarter, we also refinanced $1.5 billion in legacy privately placed senior notes with higher interest rates and more restrictive covenants to take advantage of the historically low interest rate environment and extend maturities through the issuance of 10- and 30-year registered notes. Our leverage ratio as defined in our credit agreement remained at about 2.6 times debt to EBITDA with leverage on a net debt to EBITDA basis of about 2.4 times at the end of Q3. Our current weighted average cost of debt is less than 3% with about 90% of our debt at fixed rates. I will now review our outlook for the fourth quarter 2021 and our updated outlook for the full year. 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, including as a result of or related to impacts from the COVID-19 pandemic. It also excludes any 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 Q4, revenue in Q4 is estimated to be approximately $1.58 billion. We expect solid waste price plus volume growth of approximately 6% in Q4, with pricing of about 5.5%. And recovered commodity values and E&P waste revenue are expected to remain about in line with Q3 levels. Adjusted EBITDA on Q4 is estimated at 30.8% or approximately $486 million, up 50 basis points year over year, excluding the impact of about $70 million in acquisition contribution in the quarter, driving over 20 basis points of margin dilution. And in spite of tougher comparisons, recovered commodity values and E&P waste activity, both of which picked up in late 2020 with the reopening of the economy. Depreciation and amortization expense for the fourth quarter is estimated at 13.3% of revenue, including amortization of intangibles of about 38.5 million, or about 11 cents per diluted share, net of taxes. Interest expense, net of interest income, is estimated at approximately $40 million. And finally, our effective tax rate in Q4 is estimated at about 21.5%, subject to some variability. Now looking at the full year. Revenue for 2021 is now estimated to be approximately $6.11 billion, up over $130 million from our recently updated outlook, with about half of that increase from broad-based contributions from the Q3 organic growth drivers in solid waste and recovered commodity values, plus about $65 million from acquisitions completed since our last update. Adjusted EBITDA for the full year is now estimated at approximately $1.91 billion, or 31.3% of revenue, up 80 basis points year over year, with about a 20 basis point margin drag from acquisitions. This puts us on track for year-over-year margin expansion in every quarter of 2021, in spite of escalating wage and inflationary pressures in 2021 and the sequential ramp in 2020, driving increasingly difficult comparisons. Adjusted free cash flow in 2021 is now expected at $1.025 billion, or about 54% of EBITDA, an increase of $25 million from our previous outlook, in spite of a corresponding $25 million increase to CapEx since then, now estimated at $700 million. And now, let me turn the call back over to Worthing for some final remarks before Q&A.
spk06: Thank you, Marianne. We are extremely pleased with our year-to-day performance, especially given the pandemic, widespread cost pressures, labor constraints, supply chain disruptions, and other challenges. We've not only navigated through these challenges to deliver strong growth and margin expansion, we've also increased our outlook for the second time this year and are on track for adjusted free cash flow of approximately 1.025 billion in spite of proactively accelerating truck and equipment purchases. We've already implemented price increases to address inflationary pressures with pricing growth increasing throughout the year and further accelerating into next year. We've completed about two times the typical amount of acquisition activity for the year and expect the pace of activity to remain elevated. We just announced another double-digit percentage increase of our regular quarterly cash dividend and have de-risked our balance sheet, reducing our annual interest expense while locking in up to 30-year debt at favorable terms. In short, we're already well positioned for next year, and although we won't provide our formal outlook for 2022 until next February, we're able to share some early thoughts, assuming no change in the current economic environment. Solid waste pricing growth should ramp to between 5.5% and 6% in 2022. Acquisition contribution is already at about 2.5% growth, potentially reaching 4% to 5% by year-end or early next year, and solid waste volume should reflect underlying trends in the macroactivity, with the caveat that the tradeoff of price over volume is more important than ever in an inflationary labor-constrained environment. In addition to potential double-digit top-line growth, We also expect continuing underlying solid waste margin expansion and strong adjusted free cash flow conversion next year with double-digit per share growth. We expect to have better visibility on the tone of the economy and expected acquisition contribution, E&P waste activity, and commodity-driven revenue in February when we provide our formal outlook for the upcoming year. We appreciate your time today. I'll now turn this call over to the operator to open the lines up for your questions. Operator?
spk09: Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1-4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 for about a three. One moment, please, for the first question. Our first question comes from Jerry Rubick with Goldman Sachs. Please proceed.
spk02: Hi, this is Adam Bubis on for Jerry today. Thanks for taking my questions. I was wondering if you could talk about the level of open market prices that you folks are putting in through October. And if you're able to put up 5.5% core price in Q4, do you see that potentially accelerating above the 6% range in Q1 of next year?
spk06: Well, I look at next year first. I mean, as we said on my closing remarks, we expect pricing next year overall to average between five and a half to six percent. And so we'll see how the macro performs as it moves through next year and respond accordingly if need be above six. Yes. But we don't see the need for that right now. And as we said also, obviously in our open markets, we said before, you know, pricing range anywhere between, I'm rounding 5% and 7% on average in the competitive markets. And again, as you look, if that just stays like that going into next year, and again, we've got about 40% of our business that's franchised, that's doing 2.5% price this year, that alone will go up about at least 100 basis points next year. And so just 100 basis point incremental contribution from those franchise markets, and weight that 40%, that's 40 basis points that adds to the total pricing. So effectively, we're already in that 5.5% to 6% run rate right now as we look to next year.
spk02: Great. Thanks a lot. That's helpful. And then in your sustainability report, you talk about opportunities to pursue greenfield recycling projects. When you think about targets to get to the, I think, 2.3 million targeted tons by 2033, how much of that ramp is going to be achieved from greenfield projects versus investments in existing plants?
spk06: Yeah, well, the biggest capacity jumps would be a combination of new facilities, and where we're targeting new facilities is where we already have the tons on our own trucks to make the facilities, you know, economic to pursue. In other words, these aren't just greenfield speculative facilities. well, we don't control volumes. This isn't a build it and they will come type attitude. And so you'll see us build a couple facilities in existing markets. That will be one jump in the recycling numbers. And obviously, as we continue to pursue acquisitions and bring on new facilities in additional markets, you'll see those numbers continue to move up again.
spk10: Great. Thanks so much.
spk09: Our next question comes from Sean Eastman with KeyBank. Please proceed.
spk10: Hi, team. Excellent update here. Thanks for taking my questions. Maybe just zoning in on the margins. Could you just bridge the implied margin expansion for us in the fourth quarter? I feel like that's pretty notable considering the comps are tougher. Just some context there for what you guys have been able to do in the fourth quarter would be helpful as a start.
spk01: Sure. I think that's a great question because a lot did change last year between Q3 and Q4. And if I look at those tailwinds of, call it 230 in Q3, those stepped down by about 70 basis points in Q4. And so to your point, when you see that we're still increasing margins by 30 basis points in spite of that, It tells you that you're seeing more of the benefits of those incremental price increases, which are already impacting margins this quarter, and that will step up in Q4. So I'd say that's the biggest mover, Sean.
spk06: Yeah, because the underlying is actually 50 basis points or more, but then you take the 20-plus basis points dilutive impact from acquisitions, which gets you to the 30. Correct. And so it's even more pronounced than the cover shows.
spk10: Okay, that's really helpful. And then as we look out to 2022, I mean, are there any headwinds in that bridge that we need to consider? I mean, should we see a normative level of operating leverage in the solid waste business and then maybe a little juice from E&P if this revenue run rate holds and continues to tick up perhaps? Is that the right way to think about it?
spk01: You know, sure, I'd say, of course, it's early days, and we'll give our formal guidance in February. But to Worthing's earlier remarks, you know, when we think about the pieces that are already in place for next year, yes, we'd think that we'd have sort of the typical underlying solid waste margin expansion. And then, as you know, of course, that with acquisition contribution, that would, to the extent that you layer those in, that would come in at the lower margins and have an impact. And then, you know, to your observation, if E&P were to remain at current levels and recycling and RINs, there would be some tailwinds associated with that.
spk10: Okay, terrific. Very helpful. Thanks.
spk06: Thank you.
spk09: Our next question comes from Hamza Mazari with Jefferies. Please proceed.
spk07: Good morning. Thank you. My first question is just on the volume side. You know, I understand the price over volume strategy makes a lot of sense. But just looking further just into volume, could you maybe talk about what was weaker? I know you mentioned New York was up 11%, Western volume leads. Overall volumes, I guess, were up slightly above two, which was better than your expectation, which, you know, maybe was conservative. But anything on the volume side that you would call out that was weaker you know, below 2% growth? And then also as part of that, are you actively walking away from low margin business today in this environment?
spk06: Sure. The two regions that had sub 2% volume growth are all due to special waste comps in the prior year, right? And as you know, that can be lumpy, can move from one period to the next. And so that's just a timing issue with regards to comparisons, right? Everything else was 2.5% to 5%, you know, on the volume growth side by region. When it comes to walking away, you know, what I would say is what we're seeing more is that companies that have pursued a low-margin revenue growth strategy, which because of low margins, you're basically underpaying people, so you're infected with high turnover, companies like that are failing. This is not the environment that provides a lifeline or oxygen to those companies. And so what we see more of is people approaching us in certain markets saying, can you cover us? And the answer is, sure, we can cover you, but the pricing is going to be 20% or 30% higher than what you're paying right now. And, you know, depending on the market, that's the right pricing point to be in order to satisfy the inflationary environments you have, to attract the drivers, safe operators, folks that you want to keep long-term, like the benefits, et cetera. And so, you know, the reality is that those are the companies that, you know, have to walk away because they can't afford to stay in business. And that's the fault of a strategy that was pursued. And so... Look, pricing is higher. That's in response to the current environment. Talking 5.5% or 6% price is nothing compared to, you know, the 8s, the 10s, the 20% increases you see all around you, consumer products, construction materials, utility bills. I mean, autos are up significantly. I mean, it's rampant in the economy. And so before we think that 5.5% to 6% sounds high, In the scheme of things, in the context of things, it's not that high. Would we walk away from volume at low price? Absolutely. I mean, we've had two rebids. These are legacy contracts that we got with Progressive Transaction. We said all along early in the process that we repriced the bulk of those contracts, and there were two to three that still had five years left to run on them. And guess what? Five years is up. And in both those cases, we have rebid to acceptable margins. And, you know, it's almost comical what people took them at because they took them at rates well below us and prior to the inflationary runoff. And so we'll see how they perform on those. But to your point, Hamza, we don't do this for practice. You know, labor is not – plentiful and available. So the labor that we have, we're going to make sure we pay them well and that we get paid a fair rate for that.
spk07: Gotcha. And then just, you know, pricing, shouldn't pricing be higher than 6%? Because, you know, in 2008, your pricing was 5.6. Inflation is a lot higher today. I know your business mix is a bit different, but shouldn't pricing be higher or you're just being conservative in your sort of pricing figures?
spk06: Well, you've got to remember that 40% of the business is tied to some kind of local CPI that lags or rate of return. We're not begrudging that because what we know is that volume almost acts like price, right? The incrementals from volume in those exclusive markets, because it's coming on at scale, is accretive to margins. And so when you still tag 2.5% to 3.5% type prices, as you look at those markets this year, look ahead next year, and put 5% volume on top of that, we're still running 7% to 8% price plus volume in the current environment, and volume's acting as a quasi-price. And so the element's a little bit different. Where it gets accounted for is different. But the reality is, look, if everyone's printing 7% to 8% or so organic growth right now in this environment on price plus volume, if you're expanding margins, Forget about the breakdown. If you're expanding margins, chances are you're getting more price than that. If you're not, chances are you're not. And so that's, you know, it's not as much the headline, but it's the components of where you're not getting as much price, but that's okay because what's happening on the volume side.
spk07: Got it. Last question. I'll turn it over. Just, you know, on the labor line, it looks like, you know, your op leverage was better than – one of your larger peers who reported earlier. Maybe just talk about what are you doing on the labor line to manage through labor availability issues, your inflation, it seems like you were ahead of that in adjusting wages. Just walk us through what your strategy is on the labor line that's helping you today relative to, you know, maybe some of your larger peers. And I realize not everybody's reported yet, but just any flavor there. Thank you.
spk06: Yeah, look, I would say if you step back and look at the, whatever they call this period, the great resignation, the great, you know, stay home period, whatever you want to call it. But the pressures in our markets are no different than other companies. I mean, we're all up significantly in overtime year over year. Our openings are up. Now our openings have stabilized over the past few months. We're hiring a record number of people every month. We're focused on retention and making sure we can keep more of those people longer to get them to their first year anniversary because that's where a critical hinge point. So I'd say we're all afflicted by, you know, similar pressures. So I think, as you said in the script, and we said, you know, since formation, quality of revenue matters, right? And so you've got to focus on, you've got to accept the realities of what it takes to try to keep a workforce, pay them well, have gold-plated benefits, et cetera, care about hours of service, care about the equipment that they're running in, that they're driving in, that's their office. But you've got to recognize the reality of that and then price your way through it. And so I think some of the leverage you might be referring to is the fact that, you know, when we see it, we respond to it. And we talked about this on our last call. We were early to doing that this year, early to double down on wage growth and to go out and recover it.
spk01: And I would just add, Hamza, to your observation that other people have talked more about the cost pressures. The numbers aren't different from what we've heard other companies say, the double-digit impact to the labor line. Everything with a labor component, which you're now relying on third parties to do, you have those same kind of increases, whether it's brokerage or outside repairs, et cetera. I guess the distinction is that because we have more revenue, because we went out and, among other things, did those incremental price increases, that masks the impact of those outside cost pressures. And what's remarkable, perhaps, is that the performance of the underlying solid waste business, we recovered so much of what those headwinds translate to. If you just take the simple math of a 10% increase on your cost, it would have suggested you'd be down 200 basis points, which is why we can understand how other people's numbers were different. And it shows how much we've offset with the underlying performance of the business.
spk09: Thank you. Our next question comes from Walter Spracklin with RBC Capital Markets. Please proceed.
spk04: Thanks very much, Operator, and good morning, everyone. Thanks for taking my question. The initial question here is just your assumptions underlying the guidance that you provided for the fourth quarter and into next year. Typically, you're quite conservative in terms of how you forecast and And where there is a lot of markets that are not entirely reopened yet, I think I'm sitting in one of them. Is your guide, therefore, based on kind of business conditions staying the way they are? Or do you assume when you look into next year that pretty much everything is back to normal, all markets are reopened, and your guidance is based on that? Just to get it. going to try to get a sense of how conservative the assumptions are underlying your guides for next year.
spk06: Yeah, we don't assume what we don't control. And so, no, any additional reopening activity that might be beneficial to commercial collection in particular, just like we referenced what we saw in New York in Q3, that would be additive. So it's really – that's why we haven't really pegged the volume number yet. And, again, in February we'll have more visibility into that to comment on that.
spk04: Okay, that's great. And then turning to your acquisition strategy, any change in approach in how you're looking at companies at all, and specifically, are you looking at or focusing more specifically on certain geographies and types of business? As more and more acquisitions happen, solid waste becomes less and less opportunities here. Could How do you look at liquid, special waste, that kind of thing? Is that something you just inherit when you do a solid waste acquisition? Or is this something that you could, as solid waste opportunities become less prevalent, do you start to shift your focus into more ancillary areas on the waste side? Just curious on the type of acquisition you're looking at going into next year.
spk06: Yeah, no, our runway still exceeds $4 billion in private company revenue, core solid waste. that fits our model. Again, that's within a context of about a 18 or 20 billion private company revenue basket. And so we still have a lot of runway ahead of us for the kind of deals we do. Sellers pick the timing of that. You know, right now we have, you know, easily over 15 LOIs in place. We'll see how much of that converts into signed transactions. That's coast to coast. That's in the U.S. and Canada. And so again, it's, It's maintain flexibility, be there when those sellers decide now it's time. Some, there's been a rush to exit this year. There'll be continued folks that are looking to sell next year as well. But when it comes to kind of adjunct, low margin, commoditized, you know, poor quality free cash flow, you know, type quote environmental services, that's not us. You know, in this environment, where there's no near-term implications or repercussions for overpaying. You see companies like that that I just described still trying to trade for 10 to 12 times. And, you know, solid waste is a much better return profile, traditional solid waste, than any of that. And so, no, we'll stay the company that you know and continue to do what's driven our past success as we look ahead.
spk04: Okay, that's great, Connor. Appreciate the time, and congrats on the good quarter. Thanks. Thanks.
spk09: Ladies and gentlemen, as a reminder, to register a question, please press the 1-4 on your telephone. Our next question comes from Jeff Goldstein with Morgan Stanley. Please proceed.
spk00: Hey, good morning. Thanks for taking my questions. So you mentioned the prepared remarks seeing prices ranging from 4.8% to 7.3% in your competitive regions. So I'm curious in those higher price regions, where is that exactly occurring? And is that largely because of the higher rate of labor inflation in those markets? Or is there some other dynamic in play there? Mainly, I'm curious if other regions could pick up to that higher level as well.
spk06: Yeah, it's really, I hate to use the word mix, but in some of the regions where you saw kind of the five-ish percent, while they're called competitive regions, What they have in there is a mix of shorter term municipal contracts. We think of that as competitive because those typically go out to rebid. And so you've got contracts in place that may be tied to CPI as a piece of the business within those, quote, competitive regions. And that's what generally averages down the comparative price. So it's really a mixed issue of how much of those municipal contracts are within each of those, quote, competitive regions.
spk01: The other thing I would add is that also with respect to mix, it's that more heavily commercial markets are where you see the greater proportion of higher PIs.
spk00: Okay. Okay. That makes sense. And then with volumes continuing to be positive year over year, are you able to comment on overtime hours specifically? Have these hours increased significantly given the uptick we're seeing in volumes, or do you feel you still have that under control? Just given the pricing that you've been able to do. How should we think about the give and take there?
spk06: Yeah, look, it's overtime's up. I mean, I think you heard a company or a peer earlier this week talk about overtime dollars being up 30 percent year over year. We're no different. You know, you've got to manage through it when openings are higher. Hours of service can go up and that'll drive that'll drive overtime. Do I wish we could hire more drivers and reduce that? Absolutely. Are we trying? Absolutely. If we hired more recruiters to address it? Absolutely. Are we distributing more recruiters into the field versus regional offices? Yes. So, no, this will naturally correct itself as, again, as we make further inroads in the number of openings, as we get into kind of upcoming seasonality in the business, upcoming seasonality is a little lighter on the business. And so we can see improvement in that as you look ahead too.
spk10: Okay, appreciate it.
spk09: Our next question comes from Tyler Brown with Raymond James. Please proceed.
spk08: Hey, good morning. Hey, good morning. Good morning. Hey, I just want to go back a little bit to kind of to Hamza's question. So in 22, just based on the CPI mechanics, wouldn't the second half pricing change
spk06: accelerate from the first half just on the cpi rollover strengthening through the year and doesn't that actually give you maybe a little bit of line of sight into 2023 already yes uh and yes um but um let's get to february we'll give you the exact math but no you're right i mean look to average five and a half to six it means you're starting at you know the lower end probably of that and exiting the high end or better right? As you look at, as you look at next year. So the entry point into 23 is higher.
spk08: Okay. And then you, you sound very optimistic again on M and a, uh, even as we close out the year, but if we start to think about next year a little bit, and again, you've kind of got this specter of something that happening on the tax side, which I think is kind of driving all these deals maybe here, uh, in 21. I mean, how should we think about deal flow in 22? Do you think that could be a below-normal year, or do you think that that is likely not the case?
spk06: No, again, as we said earlier, I mean, we could start the year with 4% to 5% contribution already in place, right? So that's a high number going into the year. Next year, there's no reason why we shouldn't do at least the averages, which, again, is about $150 million of acquired revenue in the year. Look, people still go through, you know, lineage transition issues, health issues, estate planning, et cetera. That's a natural, um, you know, we won't sit here today and predict an outsized year next year, but let's see how the year plays out. But there's enough momentum in place and kind of, um, you know, momentum to, to, uh, to get that average size of transactions done next year. And so if it's just the midpoint of that, that's another $75 million contribution of the year, which adds another 1% plus, right? So that's potentially a 6% plus contribution in the full year.
spk08: Right. Okay. Okay. That's helpful. And then my last one here, it is impressive on the CapEx side. I mean, even most of my truckers are struggling to get their full spend in. So number one, can you talk about how you plan for that? And then number two, Marianne, can you just give us any preliminary thoughts on on CapEx trends next year? Do you expect them to rise or is there maybe a pre-buy this year? Just any dynamics there?
spk06: Yeah, well, I'll start, Mary. Look, our planning for 2020 and 21 started when the pandemic hit. Look, we knew when factories shut down or when they cut back staff or you know, distancing and capacity was basically cut, you know, we stepped on the accelerator. You know, we actually, in some cases, offered financial lifelines to some of our vendors to make sure that they, you know, would be fine during the pandemic. It wasn't necessarily in the end, but we certainly reached out early on just out of concern for folks when you think about how dark the dark days were, as people speculated early in the pandemic. But look, we got ahead on things last year, as you know. This year, we were already speccing fleet for 22 back in early Q1. And we had half our units specced already. And what we decided to do was to say, look, along the way, if we could find those units now, let's just put them in the fleet now. Let's take maintenance pressure off. Let's get the age down. There's some We probably got about 120 to 140 more units this year on the fleet side than we had budgeted. Some of that's growth. A lot of that's getting head start to 22. Yellow iron, the same thing. We put another 10 to 20 million at work above budget. Container capital, again, given the growth in the area in some markets, you know, they were out of container capital budgeted by March. And so we don't say no to growth. And so we were very aggressive on container capital as well. some land purchases. I mean, it's an all-of-the-above approach to capital. It's almost like being Santa Claus all year, right? And whenever someone approached and said, hey, I can get my hands on these 20 units for this or that, what do you think? Go get it. And again, these units that fit our specs, and we had always anticipated doing it. So yeah, CapEx is up, you know, 75 million or more relative to original guidance. And I'm sure Marianne's going to say that means CapEx next year ought to be down year over year. But I won't put those words in her mouth.
spk01: And you would be right, Worthing. So, Tyler, of course, to your question, what we sought to avoid was having an air pocket in 22, to all of Worthing's observations. And that's how we've positioned ourselves. And so, yes, certainly as a percentage of revenue is down and absolute dollars, it should be down. And I would say to the extent that we get more done, as we both mentioned, you know, in prepared remarks between now and year end, we think of those as pull forwards, you know, further pull forwards from 22. So that's the way to think about it.
spk08: Okay. Perfect. Very helpful as usual. Thank you. Mm-hmm.
spk09: Our next question comes from Kevin Chang with CIBC. Please proceed.
spk13: Thanks for taking my questions. Congrats on a good quarter there. I suddenly come across my screen this morning, actually just, you know, just the impact of a lot of these vaccination mandates and a lot of, you know, local and I guess federal government and the impact that's having on labor availability. I'm just wondering, Are you seeing any of that? I mean, labor is already pretty tight. Is that a growing issue for you or not in the sense that you might not be under that umbrella of kind of having a vaccination mandate in your labor force?
spk06: Well, look, in any labor-constrained environment, anything that might put further pressures on that is concerning. you know, look, our, our employee base, uh, you know, reflects the, the private vaccination levels, um, uh, similar to the country, uh, or the race or ethnicity within the countries, um, and, and their beliefs, uh, and, and positions about, um, the, the vaccines go both ways. Right. Um, and so look, um, You can't call frontline employees essential and heroes one year and then chase them off, try to chase them off and force them to do things another year, right? And so, look, being inclusive means inclusive in everything we do, not just what's convenient, right? And so, you know, we value the input and the differing views of all employees, and that extends to the vaccines. And that's what servant leadership is, is listening to your folks and understanding it. And so, by all means, we're watching it. But I don't think the profile of our employee base is any different than other large frontline organizations. And the government, if they want to get this economy back going and get supply chain bottlenecks taken care of and all that kind of stuff, You know, we'll probably see delays in this kind of stuff as you look ahead because it's not something that – this is not a time when the government needs to exert additional pressures within an already constrained environment.
spk13: Well, that makes sense, and I think it's a sentiment echoed by many frontline companies there. My second question I know I know it's early days and just in your sustainability report you can highlight it You know beta testing electric vehicles, but if I kind of just pull up the the time frame here I'm wanting to this does this have a Call it a near term or medium term impact on how you think about or how you see capital intensity just given the higher upfront cost of for these vehicles? Does that materially change kind of how your typical capital intensity run rate looks? And then just how that flows into margins, because you do get the benefit of obviously no fuel costs and lower maintenance. Do you see a point where that structurally starts to impact your margins positively from kind of the range it's been at in recent years?
spk06: I'd say eventually, yes, but it's, we can't even, we don't even have a line of sight on that right now, because again, we're now what, almost over a year delayed in getting the first two units. I mean, that's not our state, that's the manufacturing issue, right? And inspection issues and crossing the border issues in a pandemic. And so, look, a year ago, we would have thought we'd have eight units on the road, fully electric, meaning electric chassis and electric body, We thought we'd have eight units on the road by the end of this year, and we're still waiting for the first two to come later this year or early next. And so, but by all means, when capacity – first year, we'll beta test them, make sure to prove them out, right? But eventually, when manufacturing capacity escalates, absolutely, you'll be turning OpEx into CapEx, which means, you know, operating margins go up. you know, as you said, you nailed it. I mean, maintenance ought to be down, right? Fuel ought to be down. A host of things ought to be down that we would hope, you know, will get us a six or seven year payback on the incremental CapEx at most. And so we need to prove it. But, you know, that's not going to happen in a foreseeable future. We're probably five to 10 years away from having enough manufacturing capacity where you'd see a a notable change in this trade-off of OPEX for CAPEX.
spk13: Okay. I'm not aware of one, but there's so many out there. Are refuse electric vehicles subject to a lot of the grants you see for some other commercial vehicles out there? Is that something you can tap into, or is this something you'd have to self-fund without any real direct government support?
spk06: Yeah, you know, don't have the answer for that because we haven't factored that in. If there are available, that will help to pay back.
spk13: For sure. Okay. That's it for me. Thanks again and great quarter there. Perfect. Thanks.
spk09: Our next question comes from Anola K. with Oppenheimer. Please proceed.
spk03: Good morning, and thanks for taking the questions. Just thinking about the tightness in the labor market, I mean, there's been tightness in this labor market for a long time, but just given where it is right now, I want to ask you about your investment priorities. Obviously, waste is a people-first business, and the way you run business reflects that. But wondering how you think about technology as a lever to alleviate some of these labor constraints over time. Obviously, there's a lot of conversation on a competitor call about automation, whether it's at the MRFs or other functions. But I would just propose the question more broadly, where do you see technology having greatest potential to help manage labor pressures in your business?
spk06: Sure. Again, I'll start, Mary Ann, chime in. Look, it's an all the above, right? I mean, there's no one specific thing you do and say that's the secret solution, right? Across the board, are we looking to automate manual routes where possible? Yes. Are we putting robotics in the MRFs to take out on average one to two people per robot per shift? Yes. I think we'll have over 42 robots or so that we would have bought in the past, you know, 16 or 18 months as you get to the end of this year. So we do that as well. Are we looking or have we already deployed engagement tools and technology, you know, basically our own Instagram in-house to better engage employees? Look, engagement and retention are critical because if you want to If you want to help solve your labor constraints, keep the people you got. I mean, now, there's always going to be involuntary turnover for folks that exhibit risky behavior or other things. But on the voluntary side, I mean, if we're stepping up and improving our processes on recruiting, if we're stepping up and improving our onboarding and training and stay interviews and engagement following, not only with the employee but their families, I would hope more people that we're hiring lately will stay with us longer and give us a chance. This is a hard industry to work in. We recognize that, and we have to do all we can to engage our people and make for a work-life balance for our drivers. So if we can do all that, that's our answer to trying to solve it. Because, look, we can hire 450 to 500 people a month. We've got the machine to do that. you know, if we can keep our people more and we only need to hire 300, that'd be a whole lot easier, right? But anyway, so there's no one answer. You know, we don't spotlight technology, but, you know, we're doing all the investments you would expect from not only on the employee engagement side, but the digital connectivity with our customers and our ability to improve the customer experience with regards to engagement with our CSRs locally. So you never rest. There are always dozens of initiatives we have, including just click-to-order where folks can order online and it goes right to dispatch. CSRs never touch the customer with regards to setting themselves up for service. So it's, again, it's an all-of-the-above approach.
spk01: And the only thing I would add is, of course, from a safety standpoint, and as you may recall, we have been working on an upgraded camera technology that we're working through our whole fleet in passing that out to. And again, that's where the focus on our people and our number one priority, which is the safety of our employees.
spk03: Perfect. Thanks for that answer. And I just want to ask a quick clarifying question. You commented to expectations for underlying solid waste margin expansion next year. Just want to make sure that comment on underlying, the caveat there would be the dilutive impact of acquisitions, or is there any other factor we should be considering that might contribute to the movement in solid waste margins?
spk01: No, to your point, we're referring to the margin dilutive impact of acquisitions.
spk03: Right. So it's not like further discretionary costs or anything like that.
spk01: No, again, we think it's a more normalized environment.
spk03: Okay, perfect. Thank you so much.
spk09: Our next question comes from Michael Hoffman with Stifel. Please proceed.
spk11: Hey, gang, how you doing? I'll try and be quick. Thanks.
spk01: Good morning.
spk11: So I want to talk about the business just in general. So are you seeing new business formation? Are we getting service interval upgrades? Are we in that sort of part of the cycle?
spk06: Yeah. I mean, increases are well in excess of decreases. We look at our gross and our net new business relative to budget on the competitive sales side. And, you know, that's trending well ahead of budget. So short answer, yes. Okay.
spk11: And that momentum was building to the second half. So it, carries through the first half, and I know we're not talking about absolute volume guides, but price as much as you want, but we've got some macro things that are favorable around volume.
spk06: Well, macro things that are favorable, and then as I referenced before, some contracts, again, that, you know, that we rebid where they should be and have not renewed. That's fine for us because those are EBITDA dollar and margin acquitted for us.
spk11: Yep, yep, I get that. I have been at a couple of different trade group meetings and hearing from vendors that they're hearing small market muni is having so much trouble with labor that they're willing to start privatizing. Is there a little bit of a small wave of that out there as well?
spk06: Well, it's clearly a pressure, again, whether it be municipal providers or, you know, as I've talked before, revenue-focused, low-margin private companies that, look, when wages are moving as much as they are, when external pressures are, you know, all adding up to 10% or 12% pressures in their P&L, that's called 100% of their margin. And so, clearly, whether it be privates looking to surrender or municipalities saying, I'm down 40% of my drivers. How do I, you know, they weren't ready to dynamically respond with regards to required wages to do it. And so it's, I wouldn't be surprised to your question that we'll see a little bit of that, but that's incremental. That's not a needle mover.
spk11: Yeah, no, I get that. And then on the M&A side, can we think of most of the year-to-date being primarily tuck-in, so as you anniversary the integration, while it may have an initial dilution, there's pretty healthy leverage to it?
spk06: Well, yeah, we talk about, you know, the impact of acquisitions. It's, you know, obviously it's talking about stand-alones. These are the major stand-alone transactions where you're keeping a separate P&L, and you can look at just the impact of those on the business, and As you know, a heavy collection-oriented, you know, is running in the mid-20s to high 20% margin. And if you throw something that's got more recycling or resource recovery in this environment, you know, it can approach 30%. And so to the extent that, again, that's in the mix, obviously tuck-ins are in the mix as well. And tuck-ins themselves don't move the needle because, right, if we just – The vast majority of that were standalone transactions, new market entries versus tuck-ins.
spk11: Okay. That's what I was trying to get at. And then when we think about where the RINs are, what are you able to do to protect the downside risk there? Because, you know, there's part of this you can't control if they wake up and decide the RBO is a different number next year. So what are you doing to try and help protect the downsides?
spk01: Well, what you saw us do this year, Michael, was to put some hedges in place, some locks in place. And so about 60 percent, for instance, this year has been locked. And so as we look ahead, we will consider doing the same thing going forward.
spk11: Okay. And then lastly for me, can you frame what the current run rate is on the internal cost of inflation?
spk01: Well, what we can look at are specific line items, and we can say, look at labor, for instance. And as Worthing mentioned, I think we'd really echo what we've heard other people say, and our experience is very similar, that we're seeing double-digit, a 10% plus increase if I look at all the labor lines. And then as I mentioned-
spk06: you know, temp, subcontract, whatever it may be.
spk01: Right, not just the wage increase, for instance, year over year, but the all-in increase. And then, as you know, Michael, and as I made reference earlier, there's several other line items which capture those from a third-party standpoint, and so we have several of the buckets where they are up 10%, again, which is why it's so important, you know, even if it's just recovering it on a dollar basis on the top line to be getting the incremental price increases.
spk06: And in discretionary on top of that. I mean, it's You know, we were quick to flip the switch last year, as many companies were, to pare back on discretionary in the teeth of the pandemic. We kept on saying we want those costs back in the business. That's an important element of who we are and our culture. And as quickly as we turned them off, we turned it back on. And so you saw that impact the quarter. So that's on top of those inflationary pressures.
spk11: All right. So for quick math and. Off the top of my head, that puts you in a four-plus-something internal cost inflation. You're pricing at five. Therefore, people should be happy.
spk06: Again, I mean, so far we just have one peer to compare ourselves to. And, again, given sequential improvement in the business, Q2 to Q3 on margins and what we did year over year, you know, it stands in contrast.
spk11: Yeah. Okay. Thank you.
spk09: Our next question comes from Chris Murray with ATB Capital Markets. Please proceed.
spk12: Yeah, thanks, folks. Good morning. Just going back to thinking about the recycled business, you know, today, you know, certainly commodities are moving in your favor and it's making a lot better. But, you know, we've gone through a couple cycles now. and some of the discussions around just how you price that business or how we structure it. I'm just wondering if maybe improved pricing, you start looking at maybe more aggressively restructuring contracts as we go forward, or is this something that you're maybe looking at differently than maybe you were a year ago when prices were a lot lower?
spk01: Sure. Good morning, Chris. I would say that it's important to remember how we're set up for recycling and the fact that about 70% of the recyclables that we process come off of our own trucks, and many of them are in markets where we have long-duration contracts. And so, as we've framed it, there really wasn't an opportunity to de-risk the business or restructure contracts, but the way we've approached it is, as Worthing mentioned earlier, in some cases, internalizing the recycling by bringing them to our own facilities. We've bought up a couple of distressed facilities, we've done acquisitions that came with recycling facilities, and we're working on some greenfield projects. We think about making sure that it's a rational market, and we think that overall the industry has moved in that direction, and it's a good thing specific to our customers and how we're set up. That's how we're addressing and improving the business on the areas we control. Okay.
spk12: Okay. But is there any further opportunity, maybe getting more interest in folks wanting to look at the commodity piece of it in this environment and maybe laying off some of that risk?
spk01: As I said, given the protracted duration of a lot of the contracts where this revenue sits, think West Coast and the value of those franchises. When we look at those contracts in the aggregate, we're very pleased with the way they're structured, and we wouldn't consider at this time changing that.
spk06: We've considered commodity hedges in the past, and we haven't done them, and I'm glad because I would have been wrong 100% of the time.
spk12: Fair enough. And then moving on just to the E&P business, just, you know, this business comes on and off like a light switch and we're where we're at right now. And you did talk about the fact that, you know, next year, I mean, the E&P business could really step up. Can you just remind us, you had started making some investments in some landfills at one point, like some new capacity. And then I think maybe pause that a little bit as the commodity price dropped and activity levels dropped. Where do you really stand today in terms of your capacity? And, you know, at one point we're running, call it 50 million, a quarter plus type revenue numbers. Is that something that we should be thinking about would be kind of peak for you guys at this point, or is there maybe a different way to think about the profile?
spk06: No, we, we do not have capacity constraints. And so more, it's a function of drilling activity and yet grews back above 80 and probably heading higher than that. But, you know, it seems like the the CapEx noose has been slipped around so many of these drillers to not not drill for fossil fuels that, you know, there's the there's the dependency right there. Is crude going up? Yes. Will it continue to go up? Most likely. Now you've got to answer the question of what will the capital spending patterns be of our customers. But we don't have a capacity constraint that says we can only do 50 a quarter or do 70 a quarter, et cetera. That's not the issue. And, again, I think right now we're still sitting less than 500 rigs or still less than a third of two cycle ago peak, and we're not going to get back to that, or we're still less than half of the most latest cycle peak. But, you know, if the rigs show up, Oh, by the way, they need labor. There is this issue called getting labor and getting crews to do this, and they're constrained as well. But, you know, to your reference to, you know, facility we mostly built out, to the extent the demand is there, we'll finish that facility. It's a pretty quick thing to do, and we'll open it up for additional capacity. But there's no constraints right now.
spk13: All right. That's helpful. Thanks, folks.
spk09: Mr. Jackman, there are no further questions at this time. Please continue with your presentation or closing remarks.
spk06: 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 Ann and Joe Box are available today to answer any direct questions that we did not cover that we are allowed to answer on the Reg FD, Reg G, and applicable securities laws in Canada. Thank you again. We look forward to speaking with you at upcoming investor conferences, Zooms, or on our next earnings call.
spk09: Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.
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