Waste Connections, Inc.

Good morning, everyone, and welcome to the Waste Connections, Inc. Q1 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one on your touch-tone phones. To draw your questions, you may press star and two. Please also note today's event is being recorded. This time I'd like to turn the floor over to Ron Mittelstadt, President and CEO. Please go ahead.

Okay. Thank you, Operator, and good morning. I would like to welcome everyone to this conference call to discuss our first quarter results and to provide a detailed outlook for the second quarter. I'm joined this morning by Mary Ann Whitney, our CFO, and several other members of our senior management. We are extremely pleased by the strong start to the year, driving better than expected operating and financial results, which, along with recently completed acquisitions, positions us well for the remainder of 2024. Adjusted EBITDA margin expansion of 160 basis points to 31.4% in the seasonally weakest quarter of the year puts us on track to exceed our industry-leading full-year margin outlook of 32.7%, as continuing improvements in employee retention and safety trends, along with rising commodity values, provide momentum for continued performance. Before we get into much more detail, let me turn the call over to Mary Ann for our forward-looking disclaimer, as well as other housekeeping items.

Thank you, Ron, and good morning. The discussion during today's call includes forward-looking statements made pursuant to the Safe Harper provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward-looking information within the meeting 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 April 24th earnings release and in greater detail in Waste Connections' violence with the U.S. Securities and Exchange Commission and the securities commissions or similar regulatory authorities in Canada. We 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 the dollar basis and per diluted share, and adjusted free cash flows. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measures. Management uses certain non-GAAP measures to evaluate and 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 Ron.

Okay. Thank you, Marianne. As noted earlier, we're off to a great start in 2024 by any number of measures, beginning with our financial results. Already set up for industry-leading outsized margin expansion during the year, we delivered a top-to-bottom beat in the quarter with adjusted EBITDA margin, 20 basis points above our outlook, and momentum for continued outperformance from a number of drivers. And this was all achieved in spite of significant weather impacts in January and early March. Along with better than expected financial results, we saw continued improvement in trends for employee retention and, most importantly, safety. In Q1, voluntary turnover once again stepped down sequentially, making the sixth consecutive quarter of improvement to levels which are now 30% below the peaks we saw in late 22. Similarly, we saw continued improvement in safety, with incidence rates declining for the seventh consecutive month. In fact, during Q1, we achieved some of our best safety performance in years, with monthly incidence down to three-year lows in spite of outsized growth from acquisitions during that period. We believe these results reflect our commitment to a culture of accountability within empowered and engaged employees. To that end, we're excited about the steps we've taken to support employee growth and development with expanded training, including through our in-house driver academies, the second of which will open this summer, and our diesel technician school partnership offering. We expect that these internal efforts will augment the improving dynamics we've seen in employee recruiting, resulting from additional resources and targeted efforts. As noted previously, the progress in retention and safety we're seeing today positions us to unlock future benefits from improving costs in risk management, along with continued and expected growing savings across several areas, including labor, maintenance, and third-party services, all of which we are seeing in the financials today. Moving back to our financial results, starting with organic solid waste growth. In the first quarter, we delivered solid waste core pricing of 7.8%. And to be clear, our core price is what we actually retained, not what was implemented, which in other models gets reduced by churn to calculate yield. Our price retention was in line with our expectations and continues to reflect the resilience of our market model. Similarly, reported volume growth of negative 3.8% was in line with our expectations following extreme weather events, primarily during January, which we believe impacted reported volumes by about 100 basis points beyond what we would consider typical levels of ongoing purposeful shedding. Looking ahead to Q2, we would expect a sequential step-up in reported volumes of about 100 basis points, assuming a typical seasonal ramp in activity. And as a reminder on volume calculations, our reported volumes are strictly solid waste volume changes, not RNG, E&P, recycled commodities, or acquisitions until after we've owned them for 12 months. Companies calculate volumes differently, and they may view them differently. As discussed in previous quarters, our outsized growth over the past few years has created the opportunity for improving revenue quality, and otherwise right-sizing newly acquired locations. Depending on the market, purposeful shedding and contract non-renewals may provide multi-year tailwinds for margin expansion, along with improvements in asset utilization and operating efficiencies. We look forward to similar opportunities from acquisitions that fit our strategy and meet our financial criteria as we maintain our focus on long-term value creation. We continue to see high levels of seller interest and have a robust pipeline of solid waste opportunities across our regional footprint. As noted, acquisition activity has already contributed to our strong start to the year, with approximately $375 million in annualized revenue completed today. In addition to the secure energy divestitures we acquired in February, we've completed acquisitions of over $150 million in annualized solid waste revenue, including a new market entry providing services to customers in Indiana and southern Michigan. The strength of our financial position and free cash flow generation provide flexibility for continued acquisition outlays in 2024 for what could be one of our busiest years ever, along with continuing to increase our capital to shareholders. Beyond M&A, we continue to make progress on our development of multiple renewable gas or RNG facilities, three of which are scheduled to be operational this year. In spite of industry-wide delays related to equipment and utility installations, we continue to anticipate an incremental $200 million of annual EBITDA beginning in 2026 from the projects in development on a commensurate capital outlay. As noted previously, $150 million of that capex will be deployed in 2024 and has been factored into our full-year free cash flow outlook. I'd like to pass the call to Marianne to review more in-depth the financial highlights of the first quarter and provide a detailed outlook for Q2. I will then wrap up before heading into Q&A.

Thank you, Ron. In the first quarter, revenue of $2.073 billion was about $23 million above our outlook, due primarily to incremental acquisition contributions and higher recovered commodity values. Revenue on a reported basis was up 172 million, or 9.1%, year over year. Acquisitions completed since the year-ago period contributed about $81 million of revenue in the quarter, or about $78 million net of divestitures. Solid waste organic growth was led by 7.8% core price, which ranged from over 5% in our mostly exclusive market western region to up to 9% in our competitive markets. Total price of 7.1% reflected a reduction of about 70 basis points in fuel and material surcharges, primarily related to lower fuel rates. We have high visibility for full year 2024 total price in the range of 6 to 7%, with 75% of our core price either already in place or specified by contract, as is pretty typical for us by this point in the year. Solid waste volume losses of 3.8% in Q1 include about 1% from January storm-related closures and other weather impacts that resulted in volume losses to varying degrees across all of our geographic regions beyond the ongoing purposeful shedding and price volume trade-off. Looking at year-over-year results in the first quarter on a same-store basis, Daily roll-off polls were down 3%, driven by outside declines in our most weather-impacted markets in our mid-south and eastern regions. And daily landfill tons were down 6% on lower special waste activity and C&D tons, both of which were down about 15%, while MSW tons were flat in spite of the weather impact noted. Looking at special waste and C&D, the year-over-year slowdown in Q1 was widespread but most notable in our central region and Canada, both of which benefited from outsized activity in prior year periods. We saw improving trends in both roll-off polls and MSW tons during the quarter, beginning with January activity down high single digits due to severe weather and ending with March about flat or up nominally on a year-over-year basis. And in our western regions, the best barometer of underlying activity given the nature of franchises reported volumes were positive in Q1, in spite of the weather impacts in January. Beyond solid waste, revenues played out slightly better than expected in Q1, with recycled commodities, landfill gas, and renewable energy credits, or RINs, collectively up about 50% year over year, on recycled commodity values up around 15% from earlier this year. Prices for OCC, or old corrugated containers, averaged about $130 per ton in Q1, and RINs averaged about $3.10. Adjusted EBITDA for Q1 as reconciled in our earnings release was 650.7 million, up 14.8% year over year and about $10 million above our outlook. At 31.4% of revenue, our adjusted EBITDA margin was up 160 basis points year over year and 20 basis points above our outlook. These results include an estimated 40 basis point margin drag related primarily to the extreme weather-related impacts noted. Therefore, on a normalized basis, margins were up 200 basis points year over year. Net interest expense in the quarter increased by $10.8 million over the prior year period to $76.4 million due to higher outstanding debt and increased interest rates as compared to the prior year period. During Q1, we completed a public offering of 750 million of senior notes with proceeds directed to floating rate debt repayment, reducing borrowing costs by over 100 basis points. Our current weighted average cost of debt is approximately 4.15% with an average tenor of over 10 years. We ended the quarter with debt outstanding of about 7.9 billion, about 19% of which was floating rate, liquidity of approximately $830 million, and our leverage ratio as defined in our credit agreement was about 2.8 times debt to EBITDA. Our effective tax rate for the first quarter was just under 21%. The Q1 rate, as expected, included a benefit to the provision related to excess tax benefits associated with equity-based compensation. In addition, it reflected the impact of an investment tax credit associated with an RNG facility expected to begin service during the year, which has about a 70 basis point benefit to our effective tax rate for 2024. And finally, adjusted free cash flow of approximately $325 million was in line with our expectations and our full year outlook of $1.2 billion as provided in February. I will now review our outlook for the second quarter of 2024. 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 expensing of transaction-related items during the period. Revenue in Q2 is estimated to be in the range of $2.2 to $2.225 billion. This includes solid waste price plus volume growth of approximately 4%, from total price of 6.5% to 7%, on core price of 7% to 7.5%, and volume down 2.5% to 3%. Adjusted EBITDA margin in Q2 is estimated at approximately 32.5%, up 140 basis points year over year. Depreciation and amortization expense for the second quarter is estimated at approximately 12.8% of revenue, including amortization of intangibles of about $44 million, or 13 cents per diluted share net of taxes. Interest expense and of interest income is estimated at approximately $82 million for the second quarter. And finally, our effective tax rate in Q2 is estimated at about 23.5%, subject to some variability. And now let me turn the call back over to Ron for some final remarks before Q&A.

Thank you, Mary Ann. When I returned to the seat one year ago this week, I emphasized the importance of the decentralized operating model and culture of accountability that has served to drive differentiated results since our beginnings as a company. Reflecting on the progress that has been achieved over the past 12 months, I could not be prouder of our local teams. Although we've added to the playbook and made some organizational changes, we've mostly reinforced our vision and values, and as we say, doubling down on human capital. And you've seen the results in our most important operating values. as recorded in March, the lowest number of safety incidents that we've seen for three years in spite of adding over 3,000 employees during that same period. So I want to conclude by thanking our 23,000 employees who put safety first every day and whose commitment to accountability is evident in not only what they say, but what they do, as demonstrated by delivering such a strong start to 2024. With solid waste pricing largely in place, improving operating trends, higher commodity values, and the benefit of what could be a record year of M&A, we are well positioned. That all said, we believe it's appropriate, as in the prior years, to wait until our Q2 earnings release to consider updating our outlook for the full year. We appreciate your time today, and I will now turn this call over to the operator to open up the lines for your questions. Operator?

Ladies and gentlemen, we'll now begin the question and answer session. To ask a question, you may press star and 1 on a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and 2.

Time will pause momentarily to assemble the roster. And our first question today comes from Tyler Brown from Raymond James.

Please go ahead with your question.

Hey, good morning, everyone. Good morning, Tyler. Hey, Ron. Hey, obviously, you know, margins up 160 basis point. I mean, a great start to the year, particularly given the drag from weather. But I was just hoping we could get a little bit more detail, maybe on some of the puts and takes in the quarter, because I do assume that maybe fuel, recycling, M&A were all slight tailwinds, but just any additional color would be helpful.

Sure, Tyler. So the way we think about it, as we said in the remarks, think of it as 200 basis points, excluding those outsized impacts from weather, which resulted in lower volumes. So when I think about those 200 basis points, I split it into two large buckets, one being commodity-driven, recycling and RIMS being combined, close to about 100 basis points, and the remainder, the rest of the business. So that's really primarily underlying solid waste. You do, you know, E&P was a good guy, acquisitions are creative. And so, you know, in the aggregate, that's another 100 basis points. And within there, you're seeing the benefits of that price-cost spread and the improving trends on the operating side. For instance, when you look within wages, where we had said we'd been looking at same employee increases, that last year went from 8% to about 6%, you're down sub-6, between 5.5% and 6% in Q1. So an example of where you're seeing that leverage from price cost. And then similarly, on some of those third-party costs, as we bring down turnover and improve safety.

Yeah, excellent. Okay. Yeah, at a very core level, good improvement. Hey, Ron, I'm sure there's going to be some additional questions about this, but maybe I'll just kind of kick it off the discussion about it. But obviously the US government EPA made some changes on the regulatory side on PFAS in the last couple of weeks. And I was just hoping you could give us some high level thoughts about that broadly, what it means for waste connections. But specifically, I was wondering to get your thoughts on what this may mean for landfill leachate costs just in the near to intermediate term. And what are the prospects to recoup any additional costs, whether it be operating or capital costs?

Sure. Well, first off, Tyler, let me say that I think what transpired with the legislation was effectively totally as expected, number one. This is not some surprise to us or to the greater industry by any means. Number two, I think step back. Traditionally, and we can point to several examples of this, but traditionally, uniform new incremental federal regulation such as this is very good in both the short and long term for the well-capitalized public companies. It has, it creates a uniform playing field. It creates a playing field where those with the access to capital and the infrastructure to take advantage of it, are able to do so. And it creates a price opportunity that, you know, generally quite exceeds the cost to comply both operating and capital-wise. It also traditionally has created sort of an M&A catalyst. So I don't think the public companies in any way are concerned or fear this change in, you know, federal regulations. The other thing I would tell you is there's a lot of activity going on within the legislature and particularly, of course, at the staff level that, you know, things get passed and then really the work begins of amending and modifying that regulation. And I think, you know, from everything we're hearing, there will be changes to the regulation or really a codification of the regulation further that gives the the intended uh the intention of the regulation which was not so to be punitive to passive receivers such as landfills okay landfill is a passive receiver it's taking this material as required by law and permit on behalf of the producers and the consumers of it this legislation is really targeted if there's a word at producers of the material, not passive receivers. So I think you're going to see the language that the law amended and changed to reflect more of that. So as I said, and I think the EPA has been very clear that they've said that it is not meant to create liability for those that are passive receivers. And that's what you know, our landfills are. So, a long-winded answer to you, Tyler, but, you know, the devil's ultimately in the details of how this gets implemented. We're still a ways from that. Look, there are relatively low-cost capital opportunities for treatment, such as foam fractionation and others, for PFAS that we are doing already proactively at several of our landfills over the last year and a half to two in anticipation of this. So we have a good idea of what works and what may not. And what I would tell you is it's not going to really move the needle, I don't think, for the industry on the capital cost, and it will present an incremental pricing cost to price through it and recover it. At least I can speak for us on that. As far as the cost of leachate, again, if you go with a low-cost capital cost and do some on-site treatment, Tyler, it won't change the cost of leachate. Now, there are some POTWs that may not opt to take it, even treated for just fear. But in most markets, there are options. If that does raise the cost of leaching, again, that will be a local pricing opportunity through that customer base where there are less options. So, I mean, it's a long-winded answer, but I think that's how we holistically think about this.

Yeah, no, perfect. Extremely good color. Very much appreciate it. One quick housekeeping. Marianne, based on what we know today, what's the M&A benefit to 24 revenue based on what we know as of right now?

So when I think about the incremental deal activity that was done, that would add 80 to 90 million for the full year on top of what we already had, which I think was 325.

Excellent. Perfect. Thank you.

And our next question comes from Sabahat Khan from RBC Capital Markets. Please go ahead with your question.

Great. Thanks very much. Just on the Q2 guidance that you provided around volume, being down 2.5% to 3%. I was just hoping if you can maybe detail that out a little bit in terms of shedding versus some of the other factors, please.

Yeah. So I would say, if anything, what I think you should read into that is it suggests more margin opportunity and really reflects sort of an increased amount of M&A over certainly already the start of this year and the second half of last year. So, you know, I would tell you that that's probably about 50 basis points more of the increase, which is basically all of that based on the guidance. And, you know, what we would expect you to see is, you know, roughly a 50 to 75 basis point incremental continuous improvement throughout this year, 100 basis points just on weather, as we said, Q1 to Q2, and then continuing Q2 to 3, 3 to 4, stepping up another 100. 50 to 75 basis points per quarter. Again, that can change a little bit due to incremental shedding, but that's really the delta.

Okay, great. And then maybe just continuing the margin discussion from the last question. We're looking at another, I think, 100 plus beeps of margin improvement in Q2. Seems like the Q1 margin improvement was split between core business and recycling, etc. Maybe just Walk us through kind of the confidence around that 120 beeps in Q2. What is that coming from? Maybe the split there. And, you know, how much of a tailwind from sort of commodities and RINs are you baking into that improvement into the next quarter?

Sure. So the way to think about it is that the greatest margin contribution from recycled commodities and RINs would be in the first quarter. It would decrease over the course of the year. All of the things being equal just because the comparisons get tougher, right? Because you had commodities ramp last year. And so if, by way of example, you started with 100 in Q1, you could see that stepping down to 60 or 50 basis points in Q2. So that really tells you that the tailwinds are coming from the underlying business, and that is growing. And as we said, you know, coming into the year, we had talked about that outsized opportunity between that price-cost spread that I described we're already seeing in Q1, and we expect that to continue, and also the operating leverage we're getting from those improving dynamics around retention and turnover, where we've said that we'd see it in a number of different areas, and as we've indicated, we're starting to see that, whether it's the relationship between overtime and straight time, even as we have more heads in place, but seeing overall improvement, and the reduction or the slower growth in third-party costs, providing some more margin expansion on things like outside repairs. So those are the types of dynamics that would contribute to a growing operating leverage as we move through the year. And that's what gives us the conviction for Q2 is that we're already seeing it in the numbers in our operating statistics. And we know that the dynamic is that the savings follow after you see those quarter after quarter of improvement.

And one other thing I would note, just you didn't ask it, but just to get it even more granular, As you know, we closed the secure E&P transaction in the first quarter, and we noted that it is margin accretive for the full year. I would note that different than our solid waste business, Q2 is actually the lowest seasonal quarter for revenue, EBITDA, and margin in that business. due to the thaw breakup period that goes on in Canada from April through mid-June. So unlike our solid waste business, where Q1 is the seasonally weakest quarter, in that business, Q2 is comfortably the seasonally weakest quarter. So the point being, that is not what is driving margins in Q2. It is our underlying solid waste business.

That's super helpful. And maybe just a quick follow-up, Ron, around your answer in the earlier question about the new PFAS regulation potentially adding to the M&A opportunity set. Presumably, this is going to take a while to play out, but maybe from a philosophical perspective, how big of an addition could that be to the M&A set in terms of how many more folks could come to market? And over what period of time do you think that plays out in terms of the benefit to the larger acquirers?

Yeah, well, you know, number one, I would tell you it is too early to, you know, understanding and all that. I think it depends on ultimately what the regulation is and, you know, how private folks decide, excuse me, to comply with it. You know, obviously, it has the most effect on disposal-related assets directly. And, of course, there are far less of those today than there were in previous cycles of, you know, incremental federal regulation change. But without question, it has traditionally been a macro driver. It does take time for that to happen. So it's not something that's going to be a 24 or maybe even an early 25 thing. But over time, it does, it tends to drive M&A.

Thanks very much for the call.

Our next question comes from Michael E. Hoffman from Stiefel. Please go ahead with your question.

Hi, good morning, and thanks for taking the questions. Ron, how would you think about where open positions are versus year-over-year? And then sort of second to that is, at the point you get fully loaded with your in-house training, how do you feel about how the proportion of your fill rate will be driven by the things you actually own and control in the training?

Okay. So, Michael, we have historically, meaning for, you know, let's just call it 15, 20 years through various cycles, we've always targeted running the company at about a 3.5% to 4% open headcount at all times, given through some natural attrition and then, of course, involuntary turnover that we're being proactive on. At our worst time, as we came through into 22 into 23, we actually peaked at approaching 7.5% open headcount positions. We have reduced that throughout 23 to present to where we are now down right to about 4%, maybe even 3.9 on a run rate basis. So we're really at where we have historically run. We have a few regions that are down in the 2.5% level. And, you know, and we're very comfortable with that. So, you know, we've reduced open head counts year over year to date by 46%. That is the number. We've reduced voluntary turnover by where it peaked. We are now down to about 15.7% as of April 1st. with a target of getting to between 10 and 12 by year end and entering 25. So we're well more than halfway to our target from where we were 12 months ago. Now to the second part of your question, I would say that our objective as we come through what we believe will be mid-25, so call it a year from this summer, our objective is to get to sort of a third or more of those that we hire coming through our in-house, what I'll call our in-house development and academies. That would be the target. Now, you know, could be more beyond that, but that's our target, one in three of getting to that.

Okay, that's terrific. And then everybody's going to wring their hands about PFAS for a while until this all plays itself out. But putting it in perspective, leachate costs are 1% to 2% of revenues, and then it's not 5% to 10%.

No, it's actually even lower, Michael. You know, one is a fair average. It actually is just below.

Okay. And the treatment technologies that you mentioned, I mean, we're 15 to 20 billion gallons a year of leachate. As an industry, it's 5 to 20 cents a gallon is the range, but the treatment technologies are inside that range. So it's not like you're quadrupling or whatever if you had to add those technologies to pre-treat and take the PFAS out before –

No, I mean, Michael, I mean, you know, as you know, there's great variability in the size of landfills and the amount of leachate based on how old they are and how much waste mass is in place. And of course, what the weather conditions are in that geography. But, you know, you're talking about, you know, one to four million dollars for the capital cost to do treatment of most landfills in the U.S. And that will then lower the leachate cost to what it is today.

Got it. Okay. And then my understanding in the Senate had a meeting about a month ago that proactively the environmental public works committee proactively sought to discuss what that intervention language should look like with a real objective of trying to get something passed in 2024. Are you hearing anything different than that?

You know, I have heard the same thing through industry association council. and lobbyists, but I do not have any better information than that, Michael.

Okay, great.

Thank you.

Thank you.

Our next question comes from Kevin Chang from CIBC. Please go ahead with your question.

Thanks for taking my question and congrats on a good quarter here and start to the year. Maybe if I could just start with the marginal performance. If I look at your full year guide, which I know you haven't updated at this point in time, full year 120 basis points. If I think back to how we thought that would play through, play through, through the year. You know, maybe a little bit of performance in H1, maybe a little bit below the 120 in H2, but broadly speaking, pretty even throughout. You know, just given the outperformance in H1, should we think of that outperformance carrying through H2? I know you're not officially updating your guide, but anything, I guess, anything you push back on that kind of simple math, just given in the H1 performance so far?

Sure. So just to reiterate or underscore what you've talked about in terms of what expectations we laid out for the year, you're right. We said that it was pretty evenly distributed with our expectation for that 120 basis points margin expansion. We also said, as I mentioned earlier, that the contribution for recycled commodities and RINs would be greater in the first half and abate over the course of the year. So I'd just be mindful of the fact that, as we've noted, some of the benefit in Q1 was from commodities. And so the expectation would have to be that if you're marking the market here, then you'd continue to have that benefit. The other thing to keep in mind is some of our outsized performance on the top line was M&A. And so as we continue to do M&A, which is typically a little dilutive if it's the typical collection company, you'd want to factor that into your expectations you know, which is why, as we think about it, updating in July is, or considering taking a look at that in July, as we always do, feels appropriate, given all those dynamics.

Okay, that's helpful. Maybe just my second question, and maybe it's a bigger picture question on some of the in-house development you're doing, and you talked about a target of one-third, and I'm not sure if you have enough granularity on this, but I'd be interested in knowing, I suspect you're pulling a lot of people or people move back and forth between working for the broader transportation sector, so truck drivers and maintenance workers in that field versus you know, those that might enter the waste sector. You know, we're in the midst of a very long freight recession here. So I suspect that's a tailwind for people that are looking to join your firm. I guess as you think about that freight recession eventually exiting, just how much volatility do you think that adds to, I guess, your in-house development? Like, do you think it ends up being pretty steady through a freight cycle just because you offer a different work-life balance? Or do you think It becomes more challenging if a freight economy starts to really move up here and compensation for long-haul trucking becomes a little bit more favorable than it is today?

Yeah, well, so let's take a step back, Kevin. I'll answer it in a little bit different way, but I think it will get to what you're asking. So traditionally for us, and I would say most of the industry... Remember, our largest two employee bases are of course CDL drivers and diesel technician or mechanics. When we have had as a company and an industry an opening for that, we have sought to pursue somebody who is a CDL driver or somebody who is a certified diesel technician. which means that we either have to find them unemployed or we have to steal them from another employer, usually by a better compensation and or structure for them. That in a tight economy is a vicious cycle. What we are doing by opening these academies that we are doing is we are actually pursuing a different type of employee. This is an employee who we are upskilling quite dramatically from where they are. So we are not bringing in somebody who has a CDL into our CDL driving academies. We are not bringing someone in to our diesel technician partnership school for somebody that has a maintenance background. So this is a longer approach. It is a dynamic, positive change to the impact of that type of employee. It is often an employee who has been with us for a period of time so we know their character that we are making an investment in. We're also doing it from people on the outside. So an example would be, instead of hiring somebody with a CDL and taking them from another waste company or a trucking company, We're hiring someone who's been with Home Depot for two years as a forklift operator that has a great track record and safety culture, but it's another $10 an hour opportunity if we can get them their CDL, and it totally changes their life and I'd say the commitment to us. So that's why it won't be 100% to my response to Michael Hoffman, but I think it will ultimately be a third. So I'm less concerned as we go into a tight economy, if and when we do, which of course we will, with us having this approach to help buffer that. It's another reason we're actually doing it.

That's great, Calder. Thank you very much.

Our next question comes from Noah Kay from Oppenheimer. Please go ahead with your question.

Thanks. Hey, Ron. You know, we talked last quarter about, you know, the $5 billion or so now fitting the market model for M&A and, you know, the internalization opportunities around the Northeast. I guess just given your comments around this year potentially being one of the busiest ever and in recognition of what you've done already, just wondering if we could get some more color either around the regional mix that you see those opportunities in and or the kind of the profile of the types of acquisitions you're looking at.

Sure. Well, I would say, first off, Noah, that we've got opportunities in all of our solid waste regions. We have five regions in the U.S. and one in Canada, as you know. And we have active LOIs signed and discussions going in all of those regions. They are all what I would consider our traditional solid waste. companies, collection companies, integrated companies, companies with transfer stations, et cetera. So, you know, I'm not necessarily saying there's an incremental weighting to some geographer or the other. It's probably a little bit more in our competitive footprint right now. Of course, our competitive footprint is a little larger. franchise transactions and the exclusive models take a little longer, although we have several signed as well. So it's pretty balanced, which is what gives us the confidence to say that, you know, we have an opportunity at perhaps a record year other than, you know, the year we did a public merger. So, and this, you know, this is, as I said, all core key solid waste business. Certainly we're focused on improving our utilization of our Arrowhead asset and incremental tonnage through that asset that we acquired in August of 23. And there are definitely transactions that will boost that. But those can come from sort of the mid-south all the way up through the eastern seaboard. We have a busy plate, a lot going on, and I think over the next couple quarters, hopefully some of that will become clearer for everyone.

Thanks, Ron. I was just reflecting on your comments to start the call about where you and the business sit a year later since you're coming back. And I guess the question is, you know, too certain to declare victory, but you've made a lot of progress already on things like employee retention and turnover reduction. Where are your incremental focus areas at this point for operational improvement within the business?

Well, first off, thank you. I would say all our team, our local teams and our regions have made the improvements. We just get to talk about them. But You know, look, we're going to continue doing that. You know, when I first got back, I said, I think on this call one year ago this week, you know, if you're going to follow one thing, follow turnover because it drives everything. You know, it drives incremental improvement in cost. It drives safety. It drives customer satisfaction. It drives our ability to pursue incremental volumes of all types. that we otherwise might not be able to if headcount is too open. So it will help us get better across the board. So that's going to continue to be a huge focus and continuing to maintain and drive down particularly voluntary turnover. So that's a focus. We have a huge focus on risk. As you know, we've always had a huge focus on price. That's not going to change. And as we continue to get, you know, I'll call it healthier in how we're performing, both operating wise and financially, then we've got the ability to step on the pedal on growth, both organically and inorganically. And I would tell you that, you know, a year ago, we really couldn't afford to do that because we were just trying to get through the quarters with the amount of open positions, et cetera. And that just puts strain on the entire organization at every level. So the focus isn't going to change other than I think you'll continue to see, you know, us have more opportunity for growth. You know, we've got, you know, we don't talk about it. That's not our style. We've got all kinds of different You know, things we're working on, utilization of AI in a number of different areas. But we don't come out and put benchmarks to that. You know, we'll let the margin talk about that when we complete them. So, you know, certainly we have room for technology improvement in our operating platform over the next several years.

Appreciate that, Colin. Thank you.

Our next question comes from Brian Burmeier from Citi. Please go ahead with your question.

Good morning. Thank you for taking the question. Ron, I know it's only been, you know, three months since you've closed a secure acquisition, but, you know, I think in the last call you mentioned the company is running about 22 of the 29 acquired facilities, and some of them, you know, maybe come back online this year. Um, is there any update there? I guess I'm just curious, uh, what exactly is, is being assumed in guidance now. And, uh, if it's too soon to say, I totally understand, you know, maybe that's a better item for July or October.

Yeah. Okay. Well, thanks Brian. Um, so number one, um, the guidance does not assume any incremental opening of those seven, uh, shuttered facilities. I believe that prior to year end, we will open up to two of those. I think we'll understand that better come July. But I think we will open potentially two of the seven that are shuttered right now before year end or maybe right at year end. So, you know, maybe not contributing anything to 24, but certainly some rollover into 25. And then we will, you know, evaluate, continue to evaluate the other five of the seven, and you'll see various openings that occur throughout 25 and into 26. I ultimately believe that we will probably open six of the seven incremental ones that we acquired.

Got it. Got it. Thanks for that detail. And, you know, last question for me, maybe just for Marianne and Ecologies, if I missed this. Can you remind us what your guidance is assuming right now for recycled commodity prices and RIN prices and then where Waste Connections stood with those items in 1Q? Thank you. I'll turn it over.

Sure. So for one Q, OCC was $130 a ton and RINs averaged $3.10. You did see OCC tick up a little higher over the course of the quarter and it ended closer to $140. So we always mark to market. So basically the assumption is they're around current levels. That's what is included in the guidance for Q2. Okay.

And our next question comes from Tony Kaplan from Morgan Stanley.

Please go ahead with your question.

Hi, guys. This is Hillary Lee on for Tony. You know, great quarter. Congrats. I just wanted to talk about margin a little bit, kind of going back to Kevin's question. It looks like, you know, with the rest of the year potentially being evenly distributed, it could possibly reach 34% by the back half of the year. So just wondering, you know, what would need to happen for you guys to get to that threshold or, you know, what could hold you back?

Well, you know, first of all, I'd say in the guidance we gave for the full year, we acknowledged that in Q3, the seasonally strongest quarter, we would be approaching those levels. Because if you just put 120 basis points on top of each of the four quarters, I think that brought you up to 33.7, right? Yeah. Basically, we said we've outperformed. As I noted, some of that's commodities, some of it is the underlying business, and some is acquisition contribution. And so those three variables, I would say, will dictate the extent to which we get to that level or somewhere around there. But I don't disagree with your setup. And if, again, if things play out in subsequent quarters the way they did in Q1, meaning the outperformance we saw from all of those various drivers, That certainly is in striking distance.

Got it. Thank you. And, you know, because the 34% is, you know, well within sight, I guess, do you guys have another target in mind or, you know, anything that you guys are kind of reaching towards after that? I know it might be a little early to comment on that, though.

Well, we never meant for 34% to be a limiting factor. It was just almost more conversational. because we've certainly been there before. But as you may recall, or some folks on the call may recall, we said that before we had closed the secure transaction, and we said that secure would be about 50 basis points accretive to overall margins. And so I think that tells you we already have our sights set well north of 34%.

And I would also say, Hillary, that, you know, remember, that does not include 200 million of EBITDA from proposed and planned RNG facility openings in 26, our contribution that we've said. So it also did not include that.

Great, thanks. And just lastly, I just wanted to know if you guys have an update regarding the New York City franchise process, you know, anything going on there, any updates?

You know, no real updates. I mean, everything's moving incrementally forward, positive. We start September 4th, whatever the day is, right after Labor Day. That Tuesday is the first operating day of the beta pilot for several of the zones that the city is going to run for 90 days, basically till almost year end. I would tell you the other update is the city asked us a while back to demo some electric vehicles and we have taken delivery of some of those in the month of April and have begun operating those for the city to see how that works performance wise in all areas. So, I mean, these are just a little anecdotal updates, but those are really the updates right now.

Great. Thank you. And, you know, if we could get invited to the New York demo, that'd be great. But thanks again. Great quarter. Thank you.

Our next question comes from Jerry Revich from Goldman Sachs. Please go ahead with your question.

Hi, this is Adam one for Jerry today. Thanks for taking my questions. Really strong M&A activity to date. I was just hoping to better understand the makeup of solid waste acquisitions here to date. So I think you referenced the acquisitions included a new market entry in Indiana, Michigan. Was that one deal or multiple deals? And how large of the $150 million did that represent? Just trying to understand the makeup a little bit better. Thank you.

Sure. Yeah, Adam. So the transaction we acquired was a company out of Elkhart, Indiana, which is in North Indiana approaching the southern Michigan border, named WasteAway, a phenomenal nearing third-generation company, really very, very well-known in our industry company. Phenomenal family ownership that was retiring. Had an incredible management team in place that we have taken with us. And that represented, you know, more than half of the total revenue of that incremental 150 that we reported. A large acquisition by any stretch, certainly in our platform. about 300 employees out of three locations. And I would tell you that, and we closed that, you know, obviously in the quarter, I would tell you that we are already in the process of closing our first acquisition in that area as well in the middle of Q2.

Great. Appreciate the color. And then you folks have achieved a really strong improvement in employee retention and turnover over the last four quarters or so. Can you just update us on where we are in seeing the benefits of lower turnover flow through the cost structure given there's a lag there?

Sure. So, you know, what we've talked about is that there's an incremental hundred basis points associated with improvement in several different line items. And as I mentioned, Earlier, we're starting to see those, for instance, in overtime and some of our third-party costs like subcontracting business. And so if I were to think about it in terms of that 100 in the aggregate, I'd say we're down at that maybe in the 10 to 20 basis points of the improvement is what we've started to see. Of course, we know that there are pieces of it that will lag even longer, most notably the cost of risk, which is, as we've described it, You know, you can bring down your incidents in the current period, but you're still paying for incidents in prior periods, and so we're not surprised, but that certainly continues to be a headwind rather than a tailwind, and anticipate that that takes multiple periods to start being recognized.

Great. Thanks so much. Thank you.

Our next question comes from Tony Bancroft Danco investors, please go ahead with your question.

Thanks so much. Congratulations, Ron and team, on the great quarter. Maybe as to more of a long-term question, you know, you made the large acquisition with Secure Energy. I know that you look more into additional solid waste is sort of where you're focused, but any other opportunities there or maybe even longer term? You know, there's these large regionals that they've always talked about Is there ever going to be opportunity to do something more transformational there? Or maybe even on the municipal side, have you seen anything incremental with maybe higher costs to towns and municipalities to transfer those to private operators? Thanks, Ron.

Well, so let's break that apart a little bit. So on the secure side, You know, as you know, we had been in the E&P business strongly since 2012 in the U.S., mostly on the drilling side. The beauty of the secure transaction was about the exact same size as what we had in the U.S., but it was completely inverse. It was 85% production. And so we like that balance and we like the size that the combination of those are. And as we continue to grow our core solid waste, that will become a smaller percentage just naturally in the company. However, having said that, you know, we have some incremental opportunities, we believe, in that space. They're smaller, but they're nice and they're additive. And we'll continue to pursue those as we have over the last decade. many years in the U.S. Now we have the Canadian market to look at for this space as well. As far as anything transformational, Tony, I mean, look, I guess you wouldn't, you know, you never say never because then you regret it if you do something. But, you know, it's as close to never as I think I can come in saying, you know, look, we are a core solid waste company. That's what we are, and that's what we want to be. That's our competency. And we've got a lot of runway in that space. We know it well, and I think we know how to perform fairly well in it. And that's going to be what we do for the indefinite and sustaining future. We'll look at things, and certainly – if regulation or something drives local governments to look to exit certain things and those are good assets, absolutely we'll entertain that. This is a business, as I said, we know well. But we're not looking to pivot into something differential due to lack of opportunity in our core business. It would only be because we thought it had similar characteristics in terms of financial performance and defensibility and a growth opportunity. And if we saw that, we'd take a hard look at it.

Perfect. Great answer. Thank you.

Our next question comes from Toby Summers from Truist Securities. Please go ahead with your question.

Yeah. Hey, good morning. This is Jack Wilson on for Toby. Can we maybe dig into those weather headwinds you were seeing and sort of what distinguished those from normal seasonal weather patterns?

Sure. I'll start. So, you know, look, weather's nothing new. It occurs every year, whether we like it or not. It occurs most harshly in the first quarter, of course, here in North America. But we had in January in both the West Coast and parts of what we call the Mid-South and the Southeast, a very extreme weather and particularly very high, very low, frigid temperatures that shut down our ability to run. We had markets that we could not operate in for one to two weeks at all. Facilities completely shuttered, employees home, and nobody could run because the Department of Transportation within those states and areas, such as Oregon is a great example, disallowed transportation that was not deemed, you know, something safety, fire or police or other. That is abnormal. OK, you know, we can handle cold weather, we can handle snow. But when we're told by authorities that we're not to be on the road, that's not something we violate. You know, Alaska, we're the largest player in Alaska. And if you would think anywhere is used to significant weather, it's Alaska. and we had over 60 inches of snow in a five-day period in Alaska, shut down Alaska for 12 days that we could not run. So those are examples of what we're referring to, that the weather was prohibitive in that it just closed geographic areas.

Okay, thank you for that color there. And then just one quick follow-up question. If you do achieve that one-third of sort of in-house up-skilled role fields, is it possible to quantify sort of the margin impact that might have? No.

You know, I would say no. The answer is I don't think it is. What I would say is it's part of how we believe there's, you know, 100 basis points plus, as we've said, in incremental margin improvement from these employee initiatives. And then I think there's just things that are too difficult to quantify in your consistency of your service quality, your ability to price and retain more price, your ability to pursue event jobs because you're fully staffed that right now you can't pursue. There's just a lot of it, of those kinds of things. And just the ability to have a stronger overall company because of, you know, a balance in everybody's life. So, you know, what that exact margin impact is, we would only be guessing right now.

Thanks very much.

And our final question today comes from James Shum from TD Cowan. Please go ahead with your question.

Hey, guys. Good morning. Good morning. Nice quarter. Nice quarter. Could you give an update on the Chiquita Canyon landfill? How are expenses tracking relative to your expectations? And do you expect to have to revise cost estimates higher, perhaps due to relocation or other ancillary charges?

Yeah. So I would tell you that Chiquita is is tracking about where we would think at this point. It may be a little ahead, but that's actually a good thing in a way, because it means we're perhaps making more headway a little faster than we had planned. We we don't believe right now that there that our. that what we've presented and accrued in terms of the $160 million is going to change or change significantly. What we do, just so you're aware, and this is not something new, we've done it every year for 26 years, is once a year we review our closure and post-closure accruals based on engineering estimates And as we have told you, this is a closure cost to our Chiquita landfill because it's in a closed section of the landfill. So we will review that cost once a year. And if there are changes to it, we will make them. If they're material, we'll communicate them. We don't expect they would be material. And that is not anything different than we do at every one of our landfills and have for 26 years. So, uh, it's just, uh, it's a larger, more public view, you know, issue that is more well known because of, uh, everything surrounding Southern California and, and this, this type of event. But, um, you know, Chiquita is tracking about where we, uh, thought it would be at this point in time.

Okay, great. Thanks, Ron. And, um, I recognize that we're only a few weeks into April. but wanted to know how Q2 is tracking relative to normal seasonal expectations thus far. Is there any color you can provide there?

As we said, the way we've guided serves that sort of normal seasonal ramp and probably too early to say, but nothing to suggest it's outside of anything extraordinary. It certainly hasn't been weather or anything else that would cause us to change our thinking on the quarter, but we'll look forward to letting you see how the quarter plays out.

Okay, great. Thanks a lot, guys.

And ladies and gentlemen, with that, we'll conclude today's question and answer session. I'd like to now turn the floor back over to Ron Mittelstadt for any closing remarks.

Okay, 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 under Regulation FD, Regulation G, and applicable securities laws in Canada. Thank you again. We look forward to connecting with you at Waste Expo, upcoming investment conferences, or on our next earnings call.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.