Waste Connections, Inc. (WCN) Q4 2019 Earnings Report, Transcript and Summary

Greetings and welcome to the Waste Connections Fourth Quarter 2019 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, February 13, 2020. I would now like to turn the conference over to Worthing Jackman, President and CEO. Please go ahead.

Thank you, Leena, and good morning everyone. I like to welcome everyone to this conference call to discuss our third quarter 2019 results and provide a detailed outlook for the first quarter and full-year 2020. I'm joined this morning by Mary Anne Whitney, our CFO and several other members of our senior management team. As noted in our earnings release, 2019 ended on a high note, and financial results for the fourth quarter exceeded expectations on better than expected solid waste price growth, EMP waste activity and acquisition contribution. We're also extremely pleased with our results for the full year as underlying adjusted EBITDA margins and solid waste collection, transfer and disposal expanded by 50 basis points, excluding CNG credits. Moreover, our ability to deliver full year adjusted free cash flow of 916.8 million or 17% of revenue, and 54.8% of adjusted EBITDA on a 16.2% increase in capital expenditures. As we reinvested in and expanded our business is indicative of our discipline, focus on quality of revenue and free cash flow generation. Acquisition activity also accelerated into year-end, as we announced an additional 130 million and acquired annualized revenue in December. Acquisitions completed in 2019, provide rollover revenue growth of approximately 170 million in 2020, and the pace of acquisition activity remains elevated. Along with strong pricing growth, this already sets us up for high single-digit growth and revenue and adjusted free cash flow, positive solid waste volumes, any increases in value, or recycled commodities or renewable energy credits since year end, or additional acquisitions close during the year will provide upside to our initial 2020 outlook. Before we get into much more detail, let me turn the call over to Mary Anne, for our forward-looking disclaimer and other house-keeping items.

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 on page three of our February 12th earnings release and in greater detail in Waste Connections filings with the U.S. Securities and Exchange Commission and the securities commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements and information as there may be additional risks of which we’re not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitments to revise or update any forward-looking statements and information in order to reflect events or circumstances that may change after today's date. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measure. 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 Worthing.

Thank you, Mary Anne. In the fourth quarter, solid waste price plus volume growth was 4% in line with the upper end of our outlook for the period. Pricing growth of 5.4% exceeded our outlook for the quarter, up 60 basis points year-over-year and 30 basis points sequentially, primarily reflect any additional price increases implemented in prior periods to address cost pressures and to recover through collection pricing, a portion of the impact from lower recycled commodity values. Pricing in Q4 ranged from about 3.5% in our western region exclusive markets and over 5.5% in our more competitive markets. Reported revenue growth in Q4 was negative - volume growth in Q4 is negative 1.4% consistent with our assessment coming out of Q3, that we had seen some pull forwarded volumes from Q4 and Q3 and therefore expected to see a decline in volumes of Q4. Volumes tend to swing period to period, as evidenced by our expectation for positive volume growth in Q1 2020. Looking further at 2020, we expect pricing growth to continue to average about 5% starting higher at approximately 5.5% early in the year due to the rollover impact of higher price increases implemented during 2019 and exiting 2020 between 4% and 4.5% is that rollover contribution wanes during the year. We expect reported volumes to be about flat for the full year, again starting positive in Q1 with some variability by quarter. Looking at year over year results in the fourth quarter by line of business on the same store basis. Commercial collection revenue increased approximately 5% mostly due to price increases. Roll up revenue increased approximately 4.5% on a combination of higher polls and higher revenue per poll. In the US, polls per day increased about 2% and revenue per poll was also up about 2%. In Canada, polls per day increased about 2% and revenue for poll increased about 3%. Solid waste landfill tonnage increased about 1% or higher MSW tons, up about 1% led by increases in Florida and on the West Coast, and higher C&D tons up 7% with the largest increases in the northeast. Special waste tons we're down about 2% in Q4, primarily due to certain markets where outsized activity in Q3 as noted earlier, where special waste was up 10% year over year, but increases in all regions. On a combined basis, commodity related revenues from recycled commodities and renewable energy credits or RINs for landfill gas sales were largely aligned with Q3 as expected, with slightly weaker recycled commodity values offset by stronger RINs. First recycling, recycling revenue excluding acquisitions was about $12 million in the fourth quarter, down $10 million, or approximately 46% year-over-year. OCC prices in Q4 averaged about $41 per ton, which was down 56% from the year ago period, and down about 5% or $2 per ton from Q3. The estimated flow-through from changes in recycling revenue was similar to earlier quarters, with decremental margins of approximately 140%, due to the combination of lower fiber values, and higher recycling processing costs paid at third party facilities. The resulting impact was about a $14 million impact to EBITDA or drag on reported margins of about 80 basis points, and about $0.04 per share of EPS in Q4. OCC prices currently averaged approximately $45 per ton and have largely stabilized in the $40 to $45 range for the past six months. 2019 OCC pricing averaged $52 per ton, peaking at $77 in Q1, which therefore will be the toughest quarterly comparison in 2020. Kind of pricing of $45 per ton is down about 42% year-over-year for the quarter. We continue to believe that pricing stability and ultimately some amount of improvement are reasonable expectations as a result of higher demand for recycled feedstock, by both new mills and domestic mills expected to convert to accepting recovered fiber. We've also seen indications of higher international demand for OCC, which could also support higher domestic fiber pricing for us. Next, renewable energy credits or RINs, landfill gas revenue was approximately $12 million in the quarter, down about $4 million or 25% year-over-year. RINs, which account for about 40% to 45% of landfill gas revenue, averaged approximately $0.82 in Q4, up 19% from Q3, but down 59% year-over-year, resulting in a drag of about 20 basis points to reported margins in the period and about $0.01 per share of EPS. Throughout January, RINs prices remained mostly in line with Q4 levels, but recently have jumped as high as $1 60. It is too soon to know these levels will persist throughout the quarter and full year, so while, we are encouraged by recent increases, we have not baked this into our outlook for the year or for that matter, Q1 Moving next to E&P waste activity, we reported $62.5 million of E&P waste revenue in the fourth quarter, above the high end of our outlook, in spite, of further rig count declines during the period. E&P waste revenue in Q4 was down about 2.3% year-over-year, and down about 5.8% sequentially from Q3, which was our strongest quarter in over two years, despite the weakening macro last year. As noted, throughout 2019, our activity held up better than expected, as overall, E&P waste revenue increased 4.5% year-over-year, in spite of a 20-plus percent decline in rig count. As also noted throughout 2019, we benefited from our asset positioning and diversity of basins, as well as contribution from new or expanded facilities. That said, particularly given the recent decline in crude and concerns about global demand we remain cautious in our outlook for E&P waste activity. Looking at acquisition activity, as noted earlier, we closed approximately $130 million in annualized acquired revenue in Q4, including a new market entry in Pennsylvania, and tuck-ins in Illinois and Tennessee. These acquisitions include Penn Waste, in South Central Pennsylvania, which provide solid waste collection and state of the art recycling services. Additionally, we acquired a recycling facility in Illinois, which complements our existing operations and allows us to internalize additional recycled commodities in that market. We also expanded our existing market positioning of Tennessee through the acquisition of collection and transfer assets, enabling us to internalize additional dispose of volumes in that market. Along with other acquisitions completed earlier in the year, this brings our total acquired annualized revenue in 2019 to approximately $300 million and provides rollover acquisition contribution of about $170 million in 2020. Three years ago, we had suggested that there may be a four-year window of outsized acquisition activity. Our experience over the past three years has been consistent with that expectation, as we have essentially completed six years’ worth of transactions over that three-year period. As we enter 2020, we continue to believe that the fact is that have been viewed favorably by sellers are still relevant. They continue to note the strength of their underlying businesses, and the clarity resulting from tax reform under the current administration, with the potential for uncertainty being introduced as a result of any change to the status quo. Given those concerns, and the current amount of dialogue, we believe 2020 could be another year of outsized acquisition activity. In 2019, we deployed approximately $835 million on acquisitions with leverage decreasing to about 2.4 times debt to EBITDA, as we finished the year with over $325 million in cash on the balance sheet. As such, we remain well-positioned for potential continued outsized capital deployment. Now, I'd like to pass the call to Mary Anne to review more in depth, the financial highlights of the fourth quarter and provide a detailed outlook for Q1 and full year 2020. I will then wrap-up before heading into Q&A.

Thank you, Worthing. In the fourth quarter, revenue was 1.36 billion, up 100.2 million over the prior year period, and about 17 million above the high end of our outlook due to higher solid waste pricing and E&P waste activity, as well as contribution from acquisitions closed during the quarter. In total, acquisitions completed since a year ago period contributed about 70.4 million of revenue in the quarter, or about 68.59 net of divestitures. Adjusted EBITDA for Q4 is reconciled on our earnings release with 419 million, about $14 million above our outlook for the period on higher than expected revenue and the benefit of the compressed natural gas tax credit, which was applied retrospectively for 2018 and 2019 in December and totaled approximately 7.5 million. EBITDA was up 21.8 million year over year, despite an estimated $18 million hit to EBITDA from recycled commodities, and RINs. Adjusted EBITDA as a percentage of revenue in Q4 was 30.8%, down 70 basis points year-over-year, but exceeding our expectations, an estimated 50 basis point increase in underlying solid waste collection transfer and disposal margins and a 50 basis point increase due to CNG credits were more than offset by an estimated 100 basis point impact from lower recycled commodity values and RINs as noted earlier, and an estimated 70 basis point impact for lower margin acquisitions completed since the year ago period. Fuel expensing Q4 was about 3.9% of revenue were essentially flat year-over-year. We averaged approximately 269 per gallon for diesel in the quarter which was up about $0.4 from the year ago period, and up about $0.08 sequentially from Q3. Depreciation and amortization expense for the fourth quarter, as expected was 13.8% of revenue down 20 basis points year-over-year. Interest expense, net of interest earnings in the quarter increased by 1.8 million over the prior year period to 33.5 million dues to a combination of higher total borrowing as compared to the prior year period and lower interest earnings from invested cash balances. Debt outstanding at quarter end was about 4.35 billion, and our leverage ratio as defined in our credit agreement ended the year at approximately 2.4 times debt to EBITDA with cash balances of approximately 327 million. At year-end, approximately 85% of our debt was at fixed rates. And our weighted average cost of debt was approximately 3.4%. Since year-end, we've increased the portion of our debt that is fixed to almost 100% as we completed a $600 million public offering of 2.6% 10 years senior notes in January, which lowered our all-in average cost of debt to approximately 3.3%. Our effective tax rate for the fourth quarter was 17.7%, slightly lower than expected. There was no impact to the rate from the proposed regulations previously expected to be finalized in 2019. As such regulations still have yet to be finalized. GAAP and adjusted net income per diluted share in Q4 were $0.50 and $0.69 respectively. Adjusted net income in Q4 primarily excludes the impact of intangible amortization and other acquisition related items and impairments. As noted earlier, the impact to our adjusted net income per diluted share from recycling and RINs was a drag of about $0.05 in Q4. Adjusted free cash flow in 2019 was 916.8 million or 17% of revenue and above our $915 million outlook for the year in spite of higher CapEx. Capital expenditures in 2019 were 634.4 million, up 16.2% year over year and approximately $20 million higher than anticipated, due primarily to a high number of fleet deliveries received in December. I will now review our outlook for the first quarter and full year 2020. 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 are similar regulatory authorities in Canada. We encourage investors to review these factors carefully. Our outlook assumes no change in the current economic and operating environment unless otherwise indicated. It also excludes any impact from additional acquisitions or divestitures that may close during the remainder of the year. And expensing your transaction related items during the period. Looking first at full year 2020, revenue in 2020 is estimated to be in the range of 5.725 billion to 5.775 billion. For solid waste, we expect pricing growth of approximately 5.0% with volume about flat. Adjusted EBITDA in 2020 as reconciled and our earnings release is expected to be in the range of approximately 1.76 billion to 1.785 billion, or range of 30.7% to 30.9% of debt down 20 to 40 basis points a year over year, as underlying margin expansion in solid waste collection, transfer and disposal is expected to be more than offset by a combined estimated 65 basis point impact from the following. An estimated 25 basis points impact from recycled commodities and RINs assuming year-end 2019 values approximately 20 basis points impact from an assumed 10% decline in the E&P waste activity and an additional estimated 20 basis points of margin dilution from approximately 170 million in rollover acquisition contribution already in place for the year. Positive solid waste volumes, any increases in value for recessive commodities or renewable energy credits since year end, or additional acquisitions closed during the year would provide upside to our initial 2020 outlook. For instance, to the extent that higher RIN pricing were to persist at the recent elevated levels described earlier, the annualized incremental EBITDA benefit could be $15 million to $20 million. Regarding tax rates, our effective tax rate for 2020 is expected to be approximately 21.5% with some quarter to quarter variability. Adjusted free cash flow in 2020, as reconciled and our earnings release is expected to be in the range of 975 million to $1 billion, or between 17% and 17.3% of revenue. Turning now to our outlook for Q1 2020, revenue in Q1 is estimated to be approximately 1.36 billion. We expect price growth for solid waste to be approximately 5.5% in Q1, with volume in the range of flat to up 50 basis points. E&P waste revenue is estimated in the range of 55 million to 60 million and RIN revenue does not reflect the recent run up in pricing described earlier. Adjusted EBITDA in Q1 is estimated to be approximately 405 million or 29.8% of revenue, down 120 basis points year over year. The margin headwinds expected from lower year over year commodity related revenues, lower E&P waste revenues and acquisition contributions are most pronounced in Q1 totalling over 100 basis points, and therefore mask our underlying improvements. One additional headwind specific to Q1 is the impact of one extra day in the quarter doodle leap here, which is expected to result in a drag and about 60 basis points to reported margins. The drags on reported margins are expected to abate as the year progresses, as we anniversary the toughest comps for recycling and RINs in the first half of the year and of course, leap year only impact Q1. Depreciation and amortization expense for the first quarter is estimated to be about 13.7% of revenue of that amount. Amortization of intangibles in the quarter is estimated to be about 31.5 million or $0.09 per diluted share net of taxes. Interest expense, net of interest income in Q1 is estimated to be approximately 35 million. And finally, our effective tax rate in Q1 is estimated to be about 19.5%, subject to some variability. Similar to Q1 2019, the effective rate for the period includes a slight benefit to the provision related to excess tax benefits associated with equity-based compensation. And now, let me turn the call back over to Worthing for some final remarks before Q&A.

Okay, thank you, Mary Anne. Once again, we're extremely pleased with our results for 2019 driving our 16th consecutive year of positive shareholder returns. We expanded underline margins of solid waste collection transfer and disposal by 50 basis points in the year, excluding CNG credits, completed another year of outsized acquisition activity and converted almost 55% of the free cash flow. Most importantly, in spite of continued labor constraints, we maintain our focus on safety, as evidenced by the over 55% of our operating locations that either posted zero safety related incidents in 2019 or drove further year over year improvements. We would like to recognize the tireless efforts of our more than 18,000 employees for our continuing success. Given the headwinds to 2018 and 2019, we appreciate the greater visibility we have as we enter this New Year. If you'll excuse the already overused pun, the 2020 vision, that's Mary Anne's little pun. Give her credit for that one. That vision starts with our financial outlook; high single digit revenue growth from price increases, and acquisition contribution already largely in place; continued underlying solid waste collection, transfer and disposal margin expansion and maintaining our industry-leading free cash flow conversion to drive up to $1 billion in adjusted free cash flow. And again, positive solid waste volumes, any increases in value to recycle commodities or renewable energy credits since year-end or additional acquisitions closed during the year will provide upside to our initial 2020 outlook. Our 2020 vision is also focused on engagement with our employees, our customers and our communities. Engagement means continued investment and training and development for our local leaders and frontline employees and building our technology offerings to increase connectivity both inside and outside of the company, engagement drives culture increases retention, and further improve safety. In addition, our 2020 vision is focused on sustainability. Waste Connections, we recognize the importance to our stakeholders of our continuing efforts to minimize our impact on environment, but also to measure the positive impacts we have in the communities we serve. The development and welfare of our employees, the financial health of our company and the returns to our shareholder. We hold ourselves accountable to deliver on these commitments. We appreciate your time today. I'll now turn the call over to the operator to open up the lines for your questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Brian Maguire from Goldman Sachs. Please proceed with your question.

Hey, good morning. Congrats on being the only company that covers, I actually waited till 2022 to give their vision 2020 outlook. You might be the only one that actually hits it. So, let's see. I just wanted to get at the underlying margin improvement that's in the guidance, because there's a lot of moving pieces. And I think you gave a lot of detail there. But it seems to me, like the underlying margins of 2020 are going to be up 50 bps. If I break out the, I guess you said 25, from recycling 25 from E&P waste, 20 from M&A, probably another 10 or so from the leap day. But just kind of trying to separate all of the noise and with the 5% price increase that's kind of embedded in the guidance, it seemed you're getting pretty good underlying margin expansion on that?

Sure. I think Brian, you just identified the moving parts. Of course, there's little drag from CNG because of course, we've got two years’ worth of credits in the end of 2019, little drag there too. So, yes, you're right with the guide suggests is underlying margin expansion in solid waste, similar to what we saw this year. And of course, our guidance, we like to leave ourselves with some room to do better. So, yes, you're right. Coming into the year with 5% price, we would hope to meet or beat.

Okay. And I guess E&P volumes of sales came in better than you thought. And for to see like the outlook for 2020 only down 10% is maybe a little bit better or, more optimistic than I wouldn't guess given the rate count moves and how oils perform year-to-date. So just getting a sense of how conservative you think that is and what factors drove your volumes to be better than the overall industry? How you guys added to capacity earlier in the year, just maybe that's a factor but just what would allow you to kind of outperform the overall market.

You can't respond to that question without recognizing the efforts of our group and how talented they are in this current environment, but obviously we've said throughout the year, The Permian was down in 2019 year-over-year, but the diversity of basins allowed us to benefit from increases in Louisiana onshore and offshore. Obviously, we've opened the additional landfill up in Wyoming, up into Powder. We've talked about investments we're making also in the Permian during the year, last year. Those will start to come online. This year, we'll start to see some benefit from those modestly but still, coming off with zero base from those assets last year, that'll help us a little bit this year. Look, I'll say that January exceeded our expectations internally for E&P waste. And so, you know, one month down 11 months left to go. Our view is it has to come down. And so, while we haven't seen anything that is worse than our expectations so far, obviously, we'd rather be cautious at this time of year as we look out ahead. Because if we had not assumed down 10% and assumed as current environment, you've been asking us why didn't we assume E&P would be down 10% or at least in the year. And so, let's throw 10% number out there. Obviously, if we're doing well, early in the year, that means we've got that cushion above 10% as you move through the year, in case things do weaken later in the year. As you know, we've been expecting a weakening amount of activity for the past, almost 12 to months. Again, hats off to our folks in their execution of our business plan there.

Okay, I'll turn it over. Thanks.

Thank you. Our next question comes from the line of Tyler Brown from Raymond James. Please proceed with your question.

Hey, good morning, guys.

Hey, Good morning.

Hey, Worthing, just want to start with volume. So, I appreciate the flat guidance, but in 2019, didn't you guys spend on a couple of new contracts that I thought would give you around a 50-basis point tailwind in 2020? And if so, does that imply that you're guiding effectively to kind of down core volumes?

Well, I say there are two answers for that. One is obviously early year; you want to give yourself cushion to exceed right. And we talked about the contracts last year, we said that was about a 50-basis point benefit to volume for the year. And so, if all that plays out, if underlying a slide that we benefit from the new contracts, that would mean there's about a $25 million buys to the upside for volume growth, if things play out like they might. 25 million is not a big needle mover from a top-line or an EBITDA standpoint, but we left that as cushion on the upside. Look at total volumes last year, in 2019, full year basis, we were down about 20 basis points. So, we're essentially flat. If that repeated this year, and that 20 basis points gets improved by the 50 basis points in new contracts. That means we're up about 30 basis points in volume. So again, the numbers are starting to get pretty small here. I would rather leave that for upside versus doing it all in guidance at this point.

Okay, conservative, I think that is maybe a good way to put it, but in the same vein. So, I'm a little surprised to see CapEx remain somewhat heightened in 2020. I thought you would have had, again, some reprieve from those contracts spending that presumably doesn't repeat. You just talked about E&P being down. Core volumes aren't exactly doing a whole lot, at least under the current assumptions. So any thoughts there on the CapEx? And is that something that we might see step down in 2021?

We put some question in the guide, because we find is that as you move through the year, you know, as acquisitions come in, people stay focused on incremental EBITDA and incremental free cash flow from it and forget about increase CapEx that results from acquisitions too. So obviously, there is some cushion in that guide. I'll also tell you as you look at the - just one month playing out, the landfill vibes and in January alone were up mid-single digits. So that persist obviously, we're also assuming that there might be additional landfill CapEx above and beyond we currently anticipate.

Okay, and then on the landfill, I may have missed it. But did you give MSW landfill pricing?

We didn't break that out. Specifically, Tyler, as we think about reporting pricing in the aggregate, and, of course, talked about our 5.4% core pricing in the year, you've seen through the course of the year that we've talked before. And that, 2.5% to 3% type of range is the type of increases we've seen on average across our network of landfills.

But as you move through the year, last year, and if we needed to get this year, we will as well I mean, last year, we saw escalating costs at certain sites, for legal aid handling, yes and obviously CapEx at landfills getting less for you dollar these days, right and so it's not just P&L pressure at landfills. It's increasing cost to build out landfills overtime. And so, landfill pricing overall, we'll be moving higher. It's just this question of kind of what sites and what regions you see the most movement and some locations, we moved pricing as much as 5% or 6% last year.

Okay, that's helpful. And then maybe going back on the court margin improvement side, what are you guys seeing on the labor inflation side? Have you have you seen that begin to abate at all?

We have Tyler, that was encouraging in Q4, that was really the first time we saw stepped down in past few quarters. We've talked about the fact that same employee increases had been around 4.85% and this was the first quarter was in the low fours so dropped by about 50 basis points, which is encouraging and also make sense because our feeling was that we had been through the worst of those market adjustments we had done really over the past two years, which drove outsized wage increases in those markets. So, we're we are beginning to see signs that are optimism about the abating those cost pressures was well placed.

And then my last one here modelling question Mary Anne, any color on cash tax rate or as a percentage of the book?

Sure. Yes. We talked about a 21.5% effective tax rate for the year and cash taxes. I would think about them as percentage of book is being up slightly from 2019. I think in that 65 to 70% range, little higher than we talked about last year. Of course, what changes that is that to the extent we do continue to get deals done, and we get incremental benefits from acquisitions, you could see that come down.

Right. Okay. Very good. Thank you.

Thank you. Our next question comes from the line of Hamza Mazzari from Jefferies. Please proceed with your question.

Hi, this is Mario [ph] on for Hamza. How are you?

Hey, good morning. Good.

Just quick question on landfill pricing, you had already mentioned that that you seeing pretty good increases so far last year, just wondering how long you think that's sustainable for and then maybe you can just comment on or discuss what the catalyst has been the sector has been pretty consolidated for a while and you've been relatively disciplined. Just curious to know if there was any, any other catalysts in there that's causing these to rise, longer term.

Sure, I think its first, if you look back longer-term over the past 10 or 15 years for us. Overall, the company we've averaged about CPI plus 150 basis points, kind of as a portfolio of market pricing. That's been more elevated than that last couple years. As last couple of years this industry has faced the impact from lower recycle commodity values and the need to push the cost of recycling to the generators. You've also seen some episodic spikes and certain cost items. Mary Anne already talked about labor. Last couple of years you've seen higher third-party logistics cost the other one. And those mostly validated. We talked about those getting good line of sight on those and kind of the surprised has stopped, Q2 or so of last year on those. The ones that will persist are more focused on the landfill side. I mean those that will persist will be leading [ph] a cost. We as a company are looking longer-term to try to control our own destiny and bring the lead shape handling treatment in house versus, we're having to rely in some cases on third party POTW plants. Landfill has generated a lot of lead shape, they're big rain collectors, right. And so, as those costs move up, that's the needle mover for this industry. Again, I already talked about rising CapEx costs and for that matter, rising litigation costs. The US is very litigious society, anybody with a check book will get sued and landfills have a target on their back in some markets and so, the persistence of those cost items will not abate anytime soon. So, I wouldn't be surprised if you see disposal pricing, continue to click up despite other pressures having abated.

Great, one more, and I'll turn it over. Your leverage sits around 2.4 times right now and just giving you a clear free cash flow profile. If you guys get sub two times do you think your balance sheet gets a little inefficient? And if that's the case, do you have any larger deals in the pipeline? Or do you guys just go straight to buying back a lot of stock?

We agree with you it is inefficient if it got that low, which is why the only time we ever got that low was episodically in late 2008, early 2009 while we were ready to deploy, almost a $0.5 billion in acquisitions. You haven't seen us go below two times since then. Would you have to closer to 2.2 times in Q3 of last year and we've increased back to 2.4 times, but these are high class problems to have because leverage is coming down despite spending about a billion dollars a year in acquisitions and returning capital to shareholders above and beyond that. So, I don't expect to see our balance sheet fall below two times, obviously as the return on capital increases the shareholders, Yes, that'll keep the leverage probably longer-term between 2.5 and 3 times when you combine that with acquisitions, versus seeing a strip closer to two times.

Great, thank you so much.

Thank you. Our next question comes on the line of Michael Hoffman from Stifel. Please proceed with your question.

Hey, thank you very much. Hi, Worthing and Mary Anne. To follow through on the commentary around the business trends and everybody keeps focusing on volume. Can we talk about little bit and remind everybody how the volume calculation works? But landfills clearly, it's just straightforward but vast majority the business is service based and therefore, price is really the motivator. And so flat volumes against the strong price on inflation at 2.5% is exceptionally powerful?

Well, yes, I think you're leading the witness with the answer, which is okay. Look, this business is more about, many cases a fixed pay system, right, fixed pay service. And so, when you look at kind of units of increase, it really narrows down the amount of revenue that's exposed to that. And that being third party volumes that the landfill, which obviously gets weighed. I mean, you can look at volumes for that. But third-party disposal revenue in most companies is anywhere from kind of 12% to 15% of total revenue. So, even if landfill volumes go up 4%, you're looking at a whopping 50 basis contribution to overall volume growth. Away from that you've got a point to point business in roll off for construction related activity. And as we said, for that, that's up 2% in polls, and so that businesses all in 8% to 10% of total, now you talking about another 20 basis points or so and so, it's really difficult to move the needle in this industry on volume on a sustained basis, meaning volume at 2%, 3%, 4%, unless you've got, when those things happen, those are episodic large special waste jobs. Those are the start of large new contracts that one would have to call out. This industry is not about a volume game. I mean, it is an industry where price retention is most important. And we like that have our fixed pay approach in good economies and bad.

Okay, that helps. Thank you. And then where are we as a company on infrastructure related spending to as you get bigger and bigger things like ERPs moving from servers to clouds. And I'm assuming you're doing that all those investments are normal course of business that we don't, we don't need any particular carve outs form.

We've never called out or added back any sort of IP related. That's just a cost of doing business and, look, it depends what you're talking about. I mean, it's, Amazon's got a very powerful product out there on the cloud and obviously, we've moved, certain parts of our business up to the cloud. Things that we're doing right now looking at new technology deployment also pulls in the cloud, new connectivity that we talked about with regards to employee engagement and customer connectivity. These are things that we just - are part of running a business and so I don't - we're making all the right investments; we have a lot going on. Like most companies, IT is probably a biggest growth department in the company. And that’s a good thing, given all the benefits it will realize in matter of time.

Okay. And then, because cash flow is so important, one should really try to do a multiyear model and just think about sort of trend lines. So, if I take this economy in all of your headwind related issues, recycling RINs, everything stays constant from this point forward? So, right way to think about price is something in the low 4s consistently, a zero to a little bit of positive volume and then inflations 2%, 2.5% and therefore you can model through how you want to think about operating leverage if you are taking a sustain long view about how to think about the model?

Absolutely. We've always talked about this being kind of a 4% to 6% price plus volume growth of that business, especially, in that 2.5% type underlying CPI. Obviously, we're on the lower end of that 4% to 6% range. In Q4, we will be on the high end or better of that in Q1. So, it’s kind of keep move around quarter-to-quarter and that kind of 4% to 6% organic growth, if its price led, auto drive EBITDA growth and free cash flow growth on a dollar basis, slightly above that. Acquisitions are adding up to that. And obviously, on a per share basis as we start to return more capital to shareholders through buybacks, per share basis, you get growth that accelerates faster than that as the denominator starts to shrink.

Got it. And last question just to make sure that nobody is confused. You would never overpay for a deal to keep your leverage at 2.5% or better. The capital allocation will still be strictly done on good returns-based metrics.

Yes, because we could have been doing that the last 22 years if you want. I mean, when you see cash building up that $300 million, $400 million, $500 million plus, that’s just because we're saving it for the better deals versus blowing it on deals that have gotten done.

And Michael, we've tried to be very fair about the fact that we're not chasing a growth rate and I think we should expect more return to shareholders overtime to the extent the deal activities slows down.

Got it. Thank you so much.

Thank you. Our next question comes from the line of Noah Kaye of Oppenheimer. Please proceed with your question.

Thanks. Good morning. So, you called out the improving employee engagement, obviously, the strong safety performance and improvement there as well as the lower labor costs pressure. Could you tell us where are you currently with the labor turnover rate? And can you remind us of the historical benchmark?

Sure, Well, I'll tell you the historical low as a company was coming out of the great recession, where we bottomed out at about 11% to 12% all in. As economy improved - by the way, the total turnover for us is voluntary and involuntary. Involuntary for us runs about one third of our total turnover just to make sure you're framing it correctly, because again, we still believe it's important. If we got to make our life easier if we didn't have involuntary turnover, but again, if you're risk based scoring your employees, you want to make sure you're mindful of what the right thing to do is here. But turnover clicked up to about 16% by 2015 or so. The combination with progressive waste which had turnover north of 40% in 2016, that combination, obviously pulled a total company turnover up into the low 30% range, following that transaction. And we've trended that now back down towards the mid-20s on a total basis. Again, that's voluntary plus involuntary. And our goal is to continue to move that closer to 20%. The fact that between '16 and '19 we've been able to bring it down from the 30% plus range down into the mid-20s. In the face of, tightening labor environment just shows you how much effort we're spending to lean into this, and bring that lower. And we've got additional things lined up this year to hopefully benefit from that we started last year, that I hope, we will continue to see improving trends within that direction.

Great helpful. Thank you. And then on M&A, you have mentioned potential during the prepared remarks for another year of outsized activity. And in the past, you've provided some metrics around, say the amount of LOIs out there. So, just anything you can do to characterize the pipeline in terms of LOIs or other sort of sense of quantity, and then the mix of tuck-ins versus new markets?

Yes. I'll just say that there's nothing needle moving in and of itself, right. I mean, there's half dozen or more and that kind of $10 million to $50 million range that collectively, if we just execute and bet our averages, I would think that by our July call, we've probably signed or closed what I would call a full year's worth meeting, 125 million to 150 million of revenue with still half a year left. So, really playing out no different than how the last three years have played out with regard to that. People have asked us overtime, does your pipeline include anything from potential waste in advanced combination? And the answer has always been no. We don't think of that as something we're including any pipeline. Obviously, we've been very cautious in our dialogue around that. And, it's way too early to tell whether or not we'll benefit from any of that.

Great, thank you very much.

Thank you. Our next question comes from the line of Sean Eastman of KeyBanc Capital Markets. Please proceed with your question.

Thanks for taking my questions. I guess just continuing on this leverage discussion, and the deal pipeline, just curious to feel you out on where you're at on maybe considering some more non-core M&A we've seen some of your peers look at some more environmental services type stuff. Just curious on where you guys are at their relative to what you have in the pipeline on the traditional solid waste side.

It's been our belief that our runway is long enough in solid waste. Last time, I checked, there's still almost $18 billion of private company revenue in the sector and 3.5 billion to 4 billion of that fits our model. And if we closed all 4 billion of that during this year, which we won't, then you can ask that question, but no, we remain focused on solid waste services. Obviously, there's a lot that comes through here because people know they want to be the buyer choice for a lot of unrelated or closely related businesses and we pass. Again, it's our view is that shareholders ought to go buy the stocks of those other companies that we want to play those suckers.

Okay, thanks. That's helpful. And you guys highlighted a $15 million to $20 million number, could you just remind me exactly what that was? I guess what I'm trying to understand is this what this dollar 60 RIN price today translates into for 2020 EBITDA is that holds?

Sure, Sean. So, what I said in the prepared remarks is that there could be as much as 15 to $20 million in annualized EBITDA impact if the RINs were to stay at the elevated levels that we reference. So, in essence, if you had year-end numbers around %0.80, they'd hit as high as 160. What that saying is a doubling of RIN equates to 15 to 20 million on a full year basis.

Of benefit.

Yes.

Okay, got it. And then and then can I just ask where the recycled commodity baskets today relative to the exit 2019 level that's reflected in the outlook?

Right, as, as we've said, we've really been sitting in that low to mid-$40 range for OCC, which is a good indication of where the basket is, as a whole. What we've seen recently is that that there's, indications of higher pricing in February and that's the basis for some of the optimism in the short-term. And as we've said before, longer term throughout the course of the year, the optimism came from the additional emails expected to come online and you're also seeing some dynamics internationally where the spread between OCC and mixed paper is widening as demand increases for OCC. So, I'd say in the near term, we are seeing some improvement, kind of couple of dollars up from where we exited the year. We think longer term, it's where there's more benefit.

And frankly, if we continue to benefit from higher RINs and higher recycling, it'd be nice for that to finally become a tailwind after fighting two years of headwinds, especially around recycling.

Got it? And last quick one for me. I'm kind of ducking for cover from Michael asking a volume question. But just curious on the, those lumpy, special waste type opportunities, are there things like that potentially in the pipeline this year and what point in the year will you have line of sight around, that type of that side driver on the volume side?

Sure. So, certainly, Sean, every year you have kids between really 2% and 3% of our revenue is special waste activity. And it is lumpy, which is why, we talked about it in Q3 and does potentially impacting Q4. And that's exactly what happened. The line of sight is typically around 90 days. Now sometimes you have indications longer term if there are infrastructure projects or something going on specific to an individual market. Because it all becomes about asset positioning. We typically as logistics driven and so if we're in the market, we're likely to get the job. And they may question is, when does it start? And how long does it last? That's where the uncertainty comes in. So certainly, there's that potential out there. Again, we think the prudent way to guide at the beginning of the year is to say volumes are flat, and we'll let you know if we do better.

Got it. Very helpful. Thanks for the time.

Thank you. Our next question comes from the line of Chris Murray AltaCorp Capital. Please proceed with your question.

Thanks, folks. Good morning. I'm just thinking about the guidance for 2020. You know, it's interesting, a lot of the headwind’s you guys talk about in terms of the EBITDA pressures are probably ones I would have thought it would have had an outsized impact on free cash flow. And we're looking at CapEx being fairly flat year-over-year. So, I guess my question is, you know, even with all those pressures, how are you actually kind of growing free cash flow on couple things I'm looking at, you know, working capital seems to be year-over-year even in a growing business positive. Any thoughts around how we should be thinking about you're getting to hit those operating cash flow numbers?

Well, certainly coming into every year, we try to position ourselves to have some flexibility. And as you know, we guided to 915 million in free cash flow did an extra 20 and CapEx and still achieve that number and didn't deliver more than that as we did last year. If you think about it last year, we exited the year, and we actually delivered about 20 million higher than expected. So, on that 915, or 917, we delivered this year, arguably, that base is even higher. So, we don't see that being as much of a stretch year-over-year as it might indicate otherwise. So, we try to come in with working capital question and to plan accordingly. And so that's really the basis for our expectation that we can achieve those numbers.

On a percentage growth basis is really consistent with percentage growth and EBITDA. And so, it's, you know, I think the other way you can ask, the question is, is could it have been? Could we have gotten higher? Yes, but early in the year?

Okay, fair enough. And then just thinking back about acquisitions, and maybe, you know, kind of back to Michael's questions, we're thinking longer term, you know, get even going back to your comment about, you know, we're kind of hitting the fourth year or four. So, let's assume, for argument's sake, that this will be another call 300, 400 million acquired revenue type of year that we've seen the last two years. Historically, we've always sort of said three to 4% of revenues to normalized run rate. And, is this something that as we go through the election cycle that you know, is this sort of the last year at the party or is it something that longer term, you think could actually extend but it depends on, you know, a couple different actions I'm sure.

Well, as I said earlier, I mean, there's about $18 billion of private company revenue out there. But if all we're doing is knocking down 300 million or so in an outsize year, that's effectively, you know, the growth rate of that, basket. And so, there's a, there's a long runway here, and as we've always said, look, sellers - owners of good businesses pick the time to sell, sellers drive the timing. And so while there's been a kind of a heightened amount of activity last three years and expected again this year, there's still a large revenue basket out there, that will continue to come to the market over time, and they'll just meter itself out over a long period of time. That's why I talked about a kind of a long runway for M&A growth. And, again, if you think about the, the capital outlay dollars as we grow the business kind of in this third decade of our existence, I mean, you've got obviously, the organic growth is now 75% to 80% of top line growth on an average year that has less CapEx dollar, capital dollar outlay, than if you looked at, you know, our first decade of existence where M&A growth was that 75% to 80% of top line growth. So, you just tacked to the realities of how you're evolving as a company, you don't force the growth, you don't overpay. And again, you let sellers drive autonomy for M&A will continue will be on this year.

Okay, thanks very much, folks.

Thank you. Our next question comes from the line of Kyle white from Deutsche Bank. Please proceed with your question.

Hello, good morning. They stay my question is pulling up on the recovered paper discussion with OCC up $10 per ton on average here in February relative to the end of 2019. What kind of benefit is that realized on an annualized basis? Similar fashion to what you've been providing for RINs, are you able to provide that for recover paper?

Sure. And again, what they said was pricing was a couple dollars higher than where it had ended the year. If you look at our overall numbers for the full year, a 10% movement in the recycled commodities, works out to about $6.5 million. And so that's the way to think about the benefit, the revenue and EBITDA and it would be a good indication of what that movement would be.

And where are you seeing this increased demand internationally? On the recover paper, do you believe it is, it's something that's short lived? Or do you see it as something that is a little bit more sustainable?

And just to be clear, most of what we handle is we handle it domestically. What I mentioned was that there's an international effect which could have ripple impact on the domestic market that could impact our pricing. And what we were referring to was India for instance, where they've pushed out mixed paper, and therefore the demand for OCC, the higher quality paper has gone up and that spread has widened between sec and mixed paper.

And then just last question, just quick thoughts on SG&A for 2020, you made good progress on this line item, you see more progress this coming year or is 10% of revenue has a good target?

Now, you look, you could see a CF over time, drive as a percentage of revenue down as we grow the top line of business and we're probably right now and that 10% plus or minus 20 or 30 basis points around that.

Thank you and good luck in the court for the year. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Mark Neville from Scotiabank. Please proceed with your question.

Hi, good morning. Just trying to just want to understand I guess fully the again the sensitivities around the RINs and the recycle commodity. 15 to 20 million RIN the 6.5 million for OCC that's an annual number on the 10%?

Yes, all recycled commodities.

Yes. Okay. And then I guess it's effectively 100% contribution margin. Again, this trying to understand this sensitive sensitivity.

Yes, I mean, that's how we're thinking about the very high.

Yes, okay. Maybe just on the margin guide, again, lots of lots of color and again, I apologize for getting maybe too granular. But I think there was a 20-basis point benefit from the absence of the 401(k) match that in the 50-basis point or is that something separate?

We didn't break that up separate, what I tried to call it a the things that were the headwinds, and then arguably there are moving parts within the underlying solid waste margins as I said, there's a couple of drags from leap year and the CNG tax credit not repeating two years’ worth but just one and then yes, there's some pickup from something like 401(k), there also other than other puts and takes during the year whether it was some stock market moving which impacted deferred comp and things like that. I just hadn't gotten that granular on the underlying solid waste margin expansion. What I would encourage you to do is think about as being similar to 2019.

Okay, good. That's helpful. And maybe just one Worthing you made some comments just on the CapEx and I missed them. I thought something around building some pushing into the number sort of miss what you said is if you can repeat that, that'll be helpful?

Yes, I think what we're talking about it what we it's not a typical for us, the budget one year, and as you move through the year, things come up, right And, that's our view is as you lay out capital for the year, CapEx expectations, make sure you've increased it to allow for some cushions for the unknown. And to make sure you have people focused on a higher number because frankly, as we close acquisitions during the year, the CapEx that goes along with those newly acquired sites, people always seem to tend to model in revenue and EBITDA from acquisitions. And don't look below a P&L and get to the CapEx line and so we're trying to be anticipatory of some of that as well.

Okay, got it. Thank you. That's helpful. I think I'll just leave it there. Thanks a lot.

Thanks.

Thank you. Mr. Jackman. There are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you. If there are no further questions on behalf of our entire management team, we appreciate your listening to and interest in the call today. Mary Anne and I are available today to answer any direct questions that we've made that we did not tell. 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 or on our next earnings call.

Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.