Waste Connections, Inc. (WCN) Q3 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Waste Connections' Third Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on, Thursday, October 28, 2021. I'd now like to turn the conference over to Worthing Jackman, President and CEO. Please go ahead.

Thank you, operator and good morning. I'd like to welcome everyone to this conference call to discuss our third quarter 2021 results and provide a detailed outlook for the fourth quarter and updated outlook for 2021 as well as some early thoughts about 2022. I am joined this morning by Mary Anne Whitney, our CFO. As noted in our earnings release, we delivered an another top to bottom beat in the period on continued strength and solid waste pricing, higher recycled commodity values and improving E&P waste activity along with acquisitions closed during the period. More importantly, quality revenue drove both sequential margin improvement in the period and 60 basis points year-over-year adjusted EBITDA margin expansion in the quarter, overcoming an estimated 40 basis points impact from dilutive -- margin dilutive acquisitions and hurricanes. This puts us firmly on track to exceed the increased full year 2021 outlook we provided in August and deliver year-over-year margin expansion again in Q4. Strong execution, proactive acceleration to solid waste pricing to address inflationary pressures and outside contributions from acquisitions already positioned us for double-digit growth, underlying solid waste margin expansion and strong free cash flow conversion in 2022. Before we get into much more detail, let me turn the call over to Mary Anne for our forward-looking disclaimer and other housekeeping 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 US private securities litigation reform act of 1995, including forward-looking information within the meaning of applicable Canadian Securities Laws. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement included in our October 27 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 as there may be additional risks of which we are not presently aware or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change after today's date. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measures. Management uses certain non-GAAP measures to evaluate and 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.

Great, thank you, Mary Anne. We are extremely pleased by the broad based strength of our business and solid execution in the quarter with better than expected top line growth driven by all lines of business. Starting with solid ways, price plus volume growth of 7.3% reflects our proactive approach to managing through the current environment by implementing additional price increases to address wage and other cost pressures. Total price was 5.1% in Q3 up 20 basis points sequentially and slightly better than expected and range from 2.5% in our mostly exclusive market Western region to between 4.8% and 7.3% in our more competitive regions. Looking ahead, we are positioned for another sequential increase of pricing growth in Q4 to about 5.5% as the full impact of incremental price increases is realized. Reported volume growth of 2.2% in the period was also slightly better than expected. We saw positive volumes in all of our regions except our Eastern region, which was essential flat due to the tough year-over-year comparison from an outside special waste job in one market last year. Of note in the East though, was the improvement that we're seeing in New York City where vines were up 11% as commercial activity has picked up along with reopening activity. Also noteworthy is our Western region, which had the strongest volumes going into COVID 19 pandemic and continues to lead with volumes up 5% in the quarter. Companywide all lines of business showed year-over-year improvement. Looking at year-over-year results in the third quarter on a same store basis, commercial collection revenue was up 12%, roll-off revenue was up 11%, pools increased by about 4.5% on increases in all regions on strong pricing driving rates per pull up about 6.5% year-over-year. Landfill tons were up about 5% in MSW, special waste and in C&D waste. Moving on the E&P waste, revenue was also up year-over-year and stepped up sequentially on higher activity levels in all of our major basins. We reported $35 million of E&P waste revenue in the third quarter up $11 million year-over-year and up 12% sequentially from Q2 in spite of the disruption to drilling operations in the Gulf of Mexico as a result of Hurricane Ida. We are encouraged by increased rig counts and elevated crude pricing levels, which if sustained, could set up for increased activity in 2022. Finally looking at Q3 revenues from recover commodities that is recycled commodities, landfill gas and renewable energy credits or winds, excluding acquisitions, collectively they were up about 110% year-over-year, primarily due to higher commodity values led by old corrugated containers or OCC up 150% year-over-year. Prices for OCC averaged about $186 per ton in Q3 and our wind pricing averaged about $2.70. As noted earlier, all lines of business outperformed our outlook in the period along with acquisition activity, which as expected picked up in third quarter. Year to date, we have closed acquisitions with approximately $240 million in annualized revenues with the potential for that amount to increase by another $100 million to $150 million as we go into next year. We had anticipated that this will be a big year for acquisition activity for all companies across the solid waste sector and we continue to be selective and disciplined in our approach to acquisitions as we recognize the importance of market selection and asset positioning, as well as value creation. As anticipated, the strength of our operating performance, free cash flow generation and balance sheet positioned us for another double-digit increase in our quarterly cash dividend. As announced yesterday, our board of directors authorized a 12.2% increase in our regularly quarterly cash dividend, our 11th consecutive double-digit percentage increase since commencing the dividend in 2010. We continue to have tremendous flexibility to fund our differentiated growth strategy and outsized acquisition activity along with an increase in return of capital to shareholders over the long term, including opportunistic share repurchases. We also capitalize on opportunities to invest in our business and it didn't allow for any slowdown in our replacement or growth CapEx in spite of supply chain challenges, which have hindered investment for many companies. In fact, we increased fleet purchases during the year and accelerated our pre-order process for 2022 to position ourselves for continued growth. In addition, as noted earlier, we proactively address labor constraints through wage adjustments covered by incremental price increases. Moreover, throughout 2021, we have maintained and expanded upon our commitment to the health, welfare and development of our employees, environmental stewardship, and the support of our local communities as detailed in our updated 2021 sustainability report released earlier this week, the report outlines progress we have made on the long term aspirational sustainability targets. We established in 2020 demonstrating year over year improvement in all areas, including an 8% reduction in operational in house gas emissions to further improve our already net negative carbon footprint of over 3.2 times. We also highlight our investments in renewable fuel facilities and state of the art green fuel recycling facilities, as well as upgraded safety features across our fleet and engagement tools for our employees and customers that only did we demonstrate considerable progress during, toward all of our objectives. We also incorporated sustainability metrics into our long term incentive compensation targets to provide increased transparency and accountability. Moreover, we have maintained our focus on and support of our frontline employees whose efforts throughout the COVID 19 pandemic have been an inspiration for all of us. Our outlay of over 40 million since the onset of COVID 19 pandemic, primarily to support frontline employees is indicative of our values, priorities, and focus. As we run our business day to day, given our safety focus, servant leadership driven culture at waste connections, sustainability initiatives are consistent with our strategy and focused on long term value creation for our shareholders. As we grow our business. Now I'd like to pass the call to Mary Anne, to review more in depth, the financial highlights of the third quarter, and to provide a detailed outlook for Q4 and updated full year 2021 outlook. I'll then wrap with a few early thoughts about 2022 before heading into Q&A.

Thank you, Worthing. In the third quarter, revenue was $1.597 billion about $37 million above our outlook as a result of continued strength in solid waste, higher than expected recycled commodity values, increasing E&P waste activity and contribution from acquisitions closed during the quarter. Revenue on a reported basis was up $207 million or 14.9% year-over-year, including organic growth of approximately 11.3% plus 3.6% from acquisitions completed since the year ago period, which in total contributed about $54.1 million of revenue in the quarter or about $51.4 million net of divestitures. Adjusted EBITDA for Q3 as reconciled in our earnings release was $505.6 million about $11 million above our outlook. Our adjusted EBITDA margin of 31.7% up sequentially from Q2 and up 60 basis points year-over-year includes approximately 40 basis points combined margin impact from hurricane I Ida and margin dilution associated with acquisitions in the quarter, excluding these impacts would result in an underlying adjusted EBITDA margin of 32.1% in the period up 100 basis points year over year, looking at margin drivers in the quarter, commodity driven impacts accounted for about 160 basis points of margin expansion net have a 30 basis point impact from higher fuel on diesel rates up 19% year over year and increased the NP waste activity drove an additional 40 basis points of margin expansion. These tailwinds buoyed by the incremental price increases we put in place during the quarter more than offset inflationary impacts on the business, as well as the return of about 60 basis points in discretionary spending during the period as our in-person training meetings, employee and community focused activities and benefits costs continued to normalize. We delivered adjusted free cash flow through Q3 of 825.8 million or 18.2% of revenue putting us on track for another upward revision to our adjusted free cash flow outlook for 2021 in spite of continued increases to CapEx. As Worthing mentioned, we have been intentional and proactive about capital expenditures already up almost 15% year over year, and now projected at $700 million up from $625 million in our original outlook for the year and with the potential for that number to grow as we continue to pursue opportunities to stay ahead on fleet and equipment purchases, where possible during the quarter, we also refinanced 1.5 billion in legacy privately placed senior notes with higher rates and more restrictive covenants to take advantage of the historically low interest rate environment and extend maturities through the issuance of 10 and 30 year registered notes. Our leverage ratio is defined in our credit agreement, remained about 2.6 times debt to EBITDA would leverage on a net debt to EBITDA basis of about 2.4 times at end of Q3. Our current weighted average cost of debt is less than 3% with about 90% of our debt at fixed rates. I will now review our outlook for the fourth quarter, 2021 and our updated outlook for the full year before I do. We'd like to remind everyone once again, that actual results may vary significantly based on risks and certainties 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 significant change in underlying economic trends, including as a result of, or related to impacts from the COVID 19 pandemic. It also excludes any impact from additional acquisitions that may close during the remainder of the year of transaction related items during the period, looking first at Q4 revenue and Q4 is estimated to be approximately 1.58 billion. We expect solid waste price plus volume growth of approximately 6% in Q4 with pricing of about 5.5% and recovered commodity values. And E&P waste revenue are expected to remain about in line with Q3 levels. Adjusted EBITDA Q4 is estimated at 30.8% or approximately $486 million up 50 basis points year over year, excluding the impact of about $70 million in acquisition contribution in the quarter, driving over 20 basis points of margin dilution, and in spite of tougher comparisons, recovered commodity values. And IP waste activity, both of which picked up in late 2020 with the reopening of the economy, depreciation and amortization expense for the fourth quarter is estimated at 13.3% of revenue, including amortization of intangibles of about $38.5 million or about $0.11 per diluted share net of taxes, interest expense net of interest income is estimated at approximately 40 million. And finally, our effective tax rating Q4 is estimated at about 21.5% subject to some variability. Now looking at the full year revenue for 2021 is now estimated to be approximately at least $6.11 billion up over $130 million from our recently updated outlook with about half of that increase from broad based contributions from the Q3 organic growth drivers in solid waste and recovered commodity values. Plus about $65 million from acquisitions completed since our last update adjusted EBITDA for the full year is now estimated at approximately $1.91 billion or 31.3% of revenue up to 80 basis points year over year with about a 20 basis point margin drag from acquisitions. This puts us on track for year over year margin expansion in every quarter of 2021 inspired of escalating wage and inflationary pressures in 2021. And the sequential sequential ramp in 2020 driving increasingly difficult comparisons adjusted free cash in 2021 is now expected at 1.025 billion for about 54% BDA, an increase of $25 million from our previous outlook in spite of a corresponding $25 million increase to CapEx since then now estimated at 700 million. And now let me turn the call back over to Worthing for some final remarks before Q&A. Thank you

We are extremely pleased with our year to day performance, especially given the pandemic widespread cost pressures, labor constraints, supply chain, disruptions, and other challenges. We've not only navigated through these challenges to deliver strong growth and margin expansion. We've also increased our outlook for the second time this year and are on track for adjusted free cash flow over approximately $1 billion to $5 billion. In spite of proactively accelerating truck and equipment purchases, we've already implemented price increases to address inflationary pressures with pricing growth increasing throughout the year and further accelerating into next year. We've completed about two times a typical amount of acquisition activity for the year and expect the pace of activity to remain elevated. We just announced now the double digit percentage increase of our regularly regular quarterly cash dividend and have de-risked our balance sheet, reducing our annual interest expense while locking in up to 30 year debt at favorable terms in short we're already well positioned for next year. And although we won't provide our formal outlook for 2022 until next February, we're able to share some early thoughts, assuming no change in the current economic environment, solid waste pricing growth should ramp to between five and a half and 6% in 2022 acquisition contribution is already at about two and a half percent growth, potentially reaching four to 5% by year end or early next year as and solid waste volume should reflect underlying trend in the macro activity with caveat. The trade-off of price over volume is more important than ever in an inflationary labor constrained environment. In addition to potential double digit top line growth, we also expect continuing underlying solid waste margin expansion and strong adjusted free cash flow conversion next year with double digit per share growth. We expect to have better visibility on the tone of the economy and expected acquisition contribution, E&P waste activity and commodity driven revenue in February when we provide our formal outlook for the upcoming year. We appreciate your time today. I'll now turn this call over to the operator to open the lines up for your questions. Operate?

[Operator instructions] Our first question comes from a Jerry Revich with Goldman Sachs. Please proceed.

Hi, this is Adam Bubes on for Jerry today. Thanks for taking my questions. I was wondering if you could talk about the level of open market prices that you folks are putting in through October, and if you're able to put up, 5.5% core price in Q4, do you see that potentially accelerating above the 6% range in Q1 of next year?

Well, I look at next year first. As we said my closing remarks, we expect pricing next year overall to average between 5.5% to 6%. And so we'll see, how the macro performs as it moves through next year and respond accordingly if need be above 6%.yes, but we don't see the need for that right now. And as we said, also, obviously in our open markets, we said before, pricing range anywhere between I'm rounding 5% and 7% on average in the competitive markets. And again, as you look, if that just stays like that going in the next year, and again we've got about 40% of our business that's franchise, that's doing 2.5% price this year, that alone will go up about at least a 100 basis points next year. And so just a 100 basis point incremental contribution from those franchise markets and weight that 40% that's 40 basis points it adds to the total pricing. So effectively we're already in that 5.5% to 6% run rate right now as we look to next year.

Great. Thanks a lot. That's helpful. And then in your sustainability report, you talk about opportunities to pursue Greenfield recycling projects. When you think about targets to get to the, I think $2.3 million targeted tons by 2033, how much of that ramp is going to be achieved from Greenfield projects versus investments in existing plants?

Yeah, well the biggest capacity jumps would be combination of new facilities where we're targeting new facilities is where we already have the tons on our own trucks to make the facilities, economic to pursue now words, these aren't just Greenfield spec facilities, where we drove dump patrol volumes. This isn't a build it and they will come type attitude. And so you'll see us build a couple facilities in existing markets. That will be one jump in, in the recycling numbers. And obviously as we continue to pursue acquisitions and bring on new facilities in additional markets, you'll see those numbers can continuing to move up again.

Our next question comes from Sean Eastman with KeyBanc. Please proceed.

Hi team. Excellent update here. Thanks for taking my questions. Maybe just zone in on the margins. Could you just bridge the implied margin expansion for us in the fourth quarter? I feel like that's pretty notable considering that the cops are tougher. Just, just some context there for what you guys have been able to do in the fourth quarter would, would be helpful as a start.

Sure. I think that's a great question because a lot does change did change last year between Q3 and in Q4. And if I look at those tailwinds of call it 230 in Q3, those step down by about 70 basis points in Q4. And so, to your point, when you see that we're still increasing margins by 30 basis points, in spite of that, it tells you that you're seeing more of the benefits of those incremental price increases, which are already impacting margins this quarter and that will step up in Q4. So I'd say that's the biggest mover, Sean.

Yes because the underlying is actually 50 basis points or more, but then you take the 20 plus basis points to dilutive back from acquisitions, which gets you to the 30. And so it's even more pronounced than the cover shows.

Okay. That's really helpful. And then as we look out 2022, are there any headwinds in that bridge that we need to consider? Should we see a normative level of operating leverage in the solid waste business and then maybe a little juice from E&P if this revenue run rate holds and continues to pick up, perhaps is that the right way to think about it?

Sure I I'd say of course it's early days and, and we'll give our formal guidance in, in February, but to where things earlier remarks, when we think about the pieces that are already in place for next year. Yes. We'd think that we'd have sort of the typical underlying solid waste margin expansion. And then as of course that with, with AC contribution, that would, to the extent you layer those in, that would come in at the lower margins and have an impact. And then, to your observation, if E and P were to remain at current levels and recycling and RINs, there would be some tailwinds associated with that.

Our next question comes from Hamzah Mazari with Jefferies. Please proceed.

Good, good morning. Thank you. My, my first question is just on the volume side, I understand the price over volume strategy makes a lot of sense. But just looking further just into volume. Could, you maybe talk about what, what was weaker? I know you mentioned New York was up 11% Western volume leads. Overall volumes, I guess, were up slightly above 2%, which was better than your expectation, which maybe was conservative, but anything on the volume side you would call out that was below 2% growth. And, and then also as part of that, are you actively walking away from low margin business today in this environment?

Sure. the two regions that had sub 2% volume growth are all due to special waste comps in the fire year. Right. And that that can be lumpy, can move from one period to the next. And so that's just a timing issue with regards to, to comparisons, right? Everything else was two and a half to 5%, on the volume growth side by region when it comes to walking away, what I would say is what we're seeing more is that companies that have pursued a low margin revenue, growth strategy which because of low margins, you're basically underpaying people. So you're infected with high turnover companies like that are failing. This is not the environment that provides a lifeline or oxygen to those companies. And so what we see more of is people approaching us in certain markets saying, can you cover us? And the answer is sure we can cover you. But the pricing's going to be 20% and 30% higher than what you're paying right now. And, depending on the market by that's the right pricing point to be in order to satisfy the inflationary environments, you have to attract the drivers safe operators, folks that you want to keep long term like the benefits, etcetera. And so, the reality is that those are the companies that have to walk away because they can't afford to, to, to stay in business. And that's the fault of a strategy that was pursued. And so look pricing is higher. That's in response to the current environment, talking five and a half or 6% price is nothing compared to the eights, the tens, the 20% increases you see all around you, consumer products, construction materials, utility bills. Autos are up significantly. It just it's rampant in the economy. And so before we, we think that five and a half to six sounds high in, in the scheme of things and the context of things, it's, it's not that high. Would we walk away from, from volume at low price? Absolutely. I mean, we've, had two rebids. These were legacy contracts that we got progressive transaction. We said all along early in the, in the process that we repriced the bulk of those contracts. And there were two to three that who had five years left to run on him and guess what five years is up and in both those cases, we have rebid to acceptable margins. And it's almost comical what people took them at and because they took them at rates well below us and prior to the info. And so we'll see how they perform on those. But to your point, Hamzah, we don't do this for practice. Labor is not plentiful and available. So the labor that we have, we're going to make sure we pay them well and that we get paid a fair rate for that.

And then just, pricing sure. Pricing. We be higher than 6% because in 2008, your pricing was 5.6. Inflation's a lot higher today. I know your business mix is a bit different, but, but shouldn't pricing be higher or, or you're just being conservative in, in your sort of pricing figures.

Well, you got to remember that 40% of the business is tied to some kind of local CPI that lag or rate return. We don't, we're not begrudging that because what we know is that volume almost acts like price, right? The incrementals from volume in those exclusive markets, because it's coming on, at scale is accretive to margins. And so, so when you, when you still tag, 2.5% to 3.5% percent type price, as you look at those markets this year, look ahead next year and put 5% volume on top of that. We're still running, 7% to 8% price plus volume in the current environment and price act and volume acting as a quasi price. And so, the elements a little bit different where it gets accounted for is different, but the reality is, look, if everyone's printing seven to 8% or so organic growth right now in this environment or price plus volume, if you're expanding margins, forget about the breakdown, if you're expanding margins, chances are, you're getting more price than that. If you're not, chances are, you're not. And so that's it's not as much the headline, but it's the components of where you're not getting as much price, but that's okay, because what's happening in the buy.

Got it. Last question. I'll turn it over. Just on the labor line, it looks like your Op leverage was better than one of your larger peers who reported earlier. Maybe just talk about, hat are you doing on, on the labor line to manage through labor availability issues your inflation, it seems like you were ahead of that in adjusting wages, but just walk us through what your strategy is on the labor line. That's helping you today relative to maybe some of your larger peers. And I realize not everybody's reported yet, but just, just any there. Thank you.

Yeah. Look, I would say if you step back and, and look at the, whatever they call this period, the great resignation, the, the great, stay home, period, whatever you want to call it. But the pressures in our markets are no different than other companies. We're all up significantly in over time, year, over year, our openings are up now, our openings have stabilized over the past few months. We're hiring a record number of people every month. We're focused on retention and making sure we can keep more of those people longer to get them to their first year anniversary, because that's where a critical hinge point. So I'd say we're all afflicted by, similar pressures. So I think as you said in the script and we, we said, since formation quality of revenue matters, right? And so you've got to focus on, you got to accept the realities of what it takes to, to try to keep a workforce pay them well, have goal played benefits, et cetera, care about hours of service care about the equipment that they're running in, that are driving in that's their office, but you got to recognize the reality that, and then price your way through it. And so I think some of the leverage you might be referring to is the fact that when we see it, we respond to it. And we talked about on our last call we were early to doing that this year early to double down on wage growth and to go out and, and recover it. And

I would just add Hamzah that to your observation, that other people have, have talked more about the, the cost pressures, the numbers aren't different from what we've heard. Other companies say double digit impact to the labor line everything with, with a labor component, which you're now relying on third parties to do you have those same kind of increases, whether it's brokerage or outside repairs, etcetera. I guess the distinction is that because we have more revenue because we went out and among other things, did those incremental price increases that asked the impact of those outside cost pressures. And what's remarkable perhaps is that the performance of the underlying solid waste business, we recovered so much of what those headwinds translate to. If you just take the simple math of a 10% increase on your cost, it would've suggested you'd be down 200 basis points, which is why we can understand, how other people numbers were different, and it shows how much we've offset with the underlying performance of the business.

Our next question comes from Walter Spracklin with RBC Capital Markets. Please proceed.

Thanks very much operator and good morning, everyone. Thanks for take you my question morning. So just the initial question here is just your assumptions underlying the guidance that you provided for the fourth quarter and into next year. Were they, typically you're quite conservative in terms of how, how you, how you forecast and, and, and were where there is a lot of markets that are not entirely reopened yet. I think I'm sitting in one of them. Is your guide therefore based on kind of business conditions staying the way they are or do you assume when you're looking into next year, that pretty much everything is back to normal. All markets are reopened and your guidance is based on that. Just to get a sense of how conservative the assumptions are underlying your guidance for next year.

Yeah, we don't assume what we don't control. And so no, any addition, additional reopening activity that might be beneficial to, to commercial collection in particular, just like you, we, we referenced what we saw in New York and Q3 that would be additive. So it's really, it's why we have, haven't really pegged the volume number yet. And again, in February, we'll have more visibility into that to, to comment on that.

Okay. That's great. And then turning to your acquisition strategy any change in approach in how you're looking at companies at all and specifically, are you looking at or re, or, or focusing more, more specifically on certain geographies and types of business, as more and more acquisitions happen, solid waste becomes less and less opportunities there. Could, could you, how do you look at liquid special waste, that kind of thing? Is that something you just inherit when you do a, a solid waste acquisition, or is this something that you could as solid waste opportunities become less prevail? You start to shift your focus into more ancillary areas for on wayside. Just curious on the, on the type of acquisition you're looking at, going into next year. Yeah,

No, we, our runway still exceeds 4 billion in private company revenue, core solid waste that fits our model. Again, that's within a context of about a 18 or 20 billion private company revenue basket. And so we still have a lot of run way ahead of us for the kind deals we do, sellers pick the timing of that. Right now we have easily over 15 Lois in place. We'll see how much of that converts into sign transactions. That's coast to coast, that's in the us and Canada. And so again, it's, it's maintained, flex be there when those sellers decide. So there's been rush to exit this year. They'll be continued folks that are looking to sell next year as well, but when it comes to kind of adjunct low margin commoditized poor quality, free cash flow, type, quote, environmental services, that's not us in this environment where there's no near term implications or repercussions for overpaying, you see companies like that, that I just described still trying to trade for 10 to 12 times. And, solid waste is a much better return profile traditional solid waste than any of that. And so now we'll stay, we'll stay the company that and continue to do. What's driven our past success as we look ahead.

Okay. That's great color. Appreciate the time and congrats on the good quarter.

[Operator instructions] Our next question comes from Jeff Goldstein with Morgan Stanley. Please proceed.

Hey, good morning. Thanks for taking my questions morning. So you mentioned the, you mentioned the prepared marks seeing prices ranging from 4.8% to 7.3% in your competitive reach. So I'm curious in those higher price regions, where is that exactly occurring? Is that largely because of the higher rate of labor inflation in those markets? Or is there some other dynamic in play there mainly I'm curious if other regions could tick up to that higher level as well?

Yeah, it's really, I hate to use the word mix. But in some of the, the regions where you saw kind of the five ish percent, while they're called competitive regions what they have in there is a mix of shorter term municipal contracts. We think of that as competitive cause those typically go out to Reid in. And so you've got contracts in place that may be tied to CPI as a piece of the business within those quote competitive regions. And that's what generally averages down the comparative price. So it's really a mix issue of how much of those municipal contracts or within each of those quote competitive regions. The other thing I would add is that also with respect to mix, the more heavily commercial markets or where you see the greater proportion of higher PIs.

Okay. That makes sense. And then with volumes continuing to be positive year over year, are you able to comment on overtime hours specifically have, have these hours increased significantly given the uptick we're seeing in volumes or, or do you feel you still have that under or control? Just given the pricing that you've been able to do? How should we think about the give and take there?

Yeah, look, it's overtime's up. I mean, I think you heard a company peer earlier this week talk about overtime dollars being up 30% year over year. We're no different, you got to manage through it when openings are higher hours of service can go up and that'll drive that'll drive overtime. Do I wish we could hire more drivers and reduce that? Absolutely. Are we trying absolutely. If we hire more recruiters to address it, absolutely. Are we distributing more recruiters into the field versus regional offices? Yes. So now this will act -- this will naturally correct itself. As, as again, as we make further inroads into the number of openings, as we get into kind of upcoming seasonality in the business, upcoming seasonality is a little lighter on the business. And so we can, we can see improvement in that as you look ahead to.

Our next question comes from Tyler Brown with Raymond James. Please proceed.

Hey I just want to go back a little bit to, to kind of the Ho's question. So in 22, just based on the CPI mechanics, wouldn't the second half price seen accelerate from the first half, just on the CPI rollover strengthening through the year. And doesn't that actually give you maybe a little bit of line of sight into 20, 23 already?

Let's get to February, we'll give you the exact map but no, you're right. Look to average five and half to six, it means you're starting at the low end probably of that and exiting the high end or better. Right. Okay. As you look at next year, so the entry point into '23 is higher.

Okay. And then you, you sound very optimistic again on M&A even as we close out the year, but if we hard to think about next year, a little bit, and again, you've kind of got this specter of something happening on the tax side, which I think is kind of driving all these deals maybe here in '21. How should we think about deal flow in 22? Do you think that could be a below normal year? Or do you think that that is likely not the case?

No, again, as we said earlier, we could start the year with four to 5% contribution already in place, right? So that's, that's a high number going in in the year next year. There's no reason why we shouldn't do at least the averages, which again is about 150 million of acquired revenue in the year. Look, people still go through, lineage, transition issues, health issues, estate planning, et cetera. That's a natural, we won't sit here today and, and predict an outsized year next year, but let's see how the year plays out. But so there's enough momentum in place and kind of momentum to get that average size of transactions done next year. And so if it's just the midpoint of that, that's another 75 million contribution of the year, which adds another 1% plus. Right. So that's potentially a 6% plus contribution in the full year.

Right. Okay. That's helpful. And then my last one here it is impressive on the CapEx side. I mean, even most of my truckers are struggling to get their full spend in. So number one, can you talk about how you plan for that and then number two, Mary Anne, can you just give us any preliminary thoughts on CapEx trends next year? Do you expect them to rise or is there maybe a pre-buy this year? Just any dynamics there?

Look our planning for '21, excuse me, for 2020 and '21 started when the pandemic hit. Look, we knew when, when factory shut down or when they cut back staff or, distancing and capacity was basically cut. We stepped on the accelerator. We actually, some cases offered financial lifelines and some of our vendors to make sure that they would be fine during the pandemic. We never, it didn't wasn't necessarily in the in, but we certainly reached out early on, just outta concern for folks. When you think about how dark the dark days were, as people speculated early in the pandemic, but look, we got ahead on things last year, as this year we were already specking fleet for 22 back in early Q1. And we had half our units spec already. And what we decided to do was to say, look along the way, if we could find those units, now let's just put them in the fleet. Now let's take maintenance pressure off let's, let's get, get the age down. There's some, we, we probably got about 120 to 140 more units this year on the fleet side then we had, but budget, some of that's growth. A lot of that's getting headstart to '22 yellow are in the same thing. We put another $10 million to $20 million at work above budget, container capital, again, given the growth in the area in some markets, they were outta container capital budgeted by March and so we don't say no to growth. And so we were very aggress, one container capital as well, some land purchases. It's an all the above approach to capital. It's almost like being Santa Claus all year. Right and whenever someone approached and said, Hey, I can get my hands on these 20 units for this or that. What do you think? Go get it. And again, these you units that fit our specs and we had always anticipated doing it. So yeah, CapEx is up, $75 million or more relative to original guidance. And I'm sure Mary Anne's going to say that means CapEx next year ought to be down year over year, but I won't put with those words in her mouth and you would be right worthy.

So Tyler to of course, to your question, what we, what we sought to avoid was having an air pocket in '22 to all avoiding observations and that's how we've positioned ourselves. And so, yes, certainly as a percentage of revenue it's down and, and, and absolute dollars, it should be down. And I would say to the extent that we get more done, as we both mentioned in prepared remarks between now and year end, we think of those as pull forwards, further pull forwards from 22. So that's the way to think about it.

Okay, perfect. Very helpful as usual. Thank you.

Our next question comes from Kevin Chiang with CIBC. Please proceed.

Thanks for taking my questions. Congrats on a good quarter there. I saw something come across my screen this morning, actually just, just the impact of a lot of these vaccination mandates and a lot of you know, local, I guess, federal government and the impact that's having on labor availability. I'm just wondering, are you seeing any of that? I mean, labor is already pretty tight. Is that a, a growing issue for you or, not in the sense that you're, you might not be under that, that umbrella of kind of having a vaccination mandate in your labor force?

Well, look in any labor constrained environment, anything that might put further pressures on that is concerning, look, our employee base reflects the private vaccination levels similar to the country or the race or ethnicity within the countries and, and their beliefs and, and positions about the, the vaccines go both ways right. and so look you can't call you can't call front line employees essential and heroes one year, and then chase, them off, try to chase them off and force them to do things another year. Right. And so look at, as an being inclusive means inclusive in everything we do, not just what's convenient, right. And so we value the, the input and the differing views of all employees and that extends to the vaccine. And that's what servant leadership is, is listening to your folks and understanding it. And so file means we're watching it. But I don't think the profile of our employee base is any different than other large frontline organizations and the government, if they want to get this economy back going and get, supply chain bottle next, taken care of and all that kind of stuff, I we'll probably see delays in this kind of stuff as you look ahead because it's not something that this is not a time when the government needs to exert additional pressures within an already constrained environment.

No, that makes sense. And I think that it's a sentiment echoed by, by many frontline frontline companies there. Maybe my second question. I know, I know it's early days and, and just in your sustainability report, you again, highlighted, be testing electric vehicles, but, but if I kind of just pull up the, the timeframe here I'm wanting to, does this, does this have a call it a near term or medium term impact on how you think about, or how you see capital intensity just given the higher upfront cost for these vehicles? Does that materially change kind of how your typical capital intensity run rate looks and then just how that flows into margins because you do get the benefit of I say obviously no fuel costs and lower maintenance, just, do you see a point where that structurally starts to impact margins positively from kind of the range it's been at in recent years?

I'd say eventually. Yes, but we can't even, we only have a lot of sight on that right now, because again we're now what almost over a year delayed in getting the first two units. I mean, that's not our state, that's a manufacturing issue, right. And inspection issues and crossing the border issues in a pandemic. And so look, a year ago, we would've thought we'd have eight units on the road fully electric, meaning electric chassis and electric body. We thought we'd have eight units on the road by the end of this year. And we're still waiting for the first two to later this year, early next. And so, but by all means when, when Capac first year we'll beta test them, make sure prove them out. Right. but eventually when manufacturing capacity escalates, absolutely you'll, you'll be turning OPEX in the CapEx, which means margin operating margins go up. As you said, you nailed it. Maintenance ought to be down, right. Fuel ought to be down host of things ought to be down that, that we would hope, will get us a six or seven year payback on the incremental CapEx at most. And so we need to prove it, but that's not going to happen in a foreseeable future. We're probably five to 10 years away from having enough manufactured capacity where you'd see a, notable change in, in this trade off of OpEx for CapEx.

Okay. And I mean, just, I'm not aware of one, but, there's so many out there it's re-fi electric vehicles subject to a lot of the grants you see for some other commercial vehicles out there. Is that, is that something you can tap into or is this something you'd have to self-fund without any real direct government support.

Yeah. Don't have the answer for that because we haven't faxed that in if we, if there are available, that'll help to pay back for sure.

Okay. No, that's it for me. Thanks again and great quarter there.

Our next question comes from Noah Kaye with Oppenheimer. Please proceed.

Good morning. And thanks for taking the questions. Just thinking about the tightness in the labor market. There's been tightness in this labor market for a long time, but just giving where it is right now. I wanted to ask you about, of your investment priorities. Obviously waste is a, is a pup first business. And in the way you run business reflects that. But wondering how you think about technology as a lever to alleviate some of these labor constraints over time. Obviously there's a lot of conversation on a competitor to call about automation, whether it's at the Merc or other functions, but I would just propose the question you more broadly, where do you see technology having grace potential to help manage labor pressures in your business?

Sure. Again, I'll start Mary Anne chime in. Look, it's an all of right. I mean there's no one specific thing you do and say that's the, the, the secret solution, right? Across the board. Are we, are we looking to automate manual routes where possible yes. Are we putting robotics in, in the MEFs to take out on average one to two people per robot per shift. Yes. I think we'll have over 42 robots or, or so that we would've bought in the past, 16 months or 18 months as you get to the end of this year. So we do that as well. Are we looking, or have we already deployed engagement tools and technology, basically our own Instagram in-house to better engage employees look engagement and retention are critical, because if you want to, if you want to help solve your labor constraints keep the people you got now there's always going to be involuntary turnover for folks to exhibit risky behaviour or other things, but on the voluntary side, if we're stepping up and improving our processes on recruiting if we're stepping up and improving our onboarding and training and stay interviews and engagement following not only with the employee, but their families, I would hope more people that we're hiring lately. We'll stay with us longer and give us a chance. This is a hard industry to work in. We recognize that and we have to do all we can to engage our people and make for work life balance for our drivers. So we can do all of that that's our answer to trying to solve it because if we look we can, we can four and 50 to 500 people a month. That's not the, we got the machine to do that. If we can keep our people more and we'll need to hire 300, that'd be a whole lot easier. Right. but anyway, so there's no one answer, we don't spotlight technology, but we're doing all the investments you would expect from not only on the, on the employee engagement side, but the digital connectivity with our customers and our ability to improve the customer experience with regards to engagement with our CSRs locally. So it's you never, you never rest there are always dozens of initiatives we have including just click order where post can order online. It goes right to dispatch, CSRs, never touch, touch the customer with regards to setting the sales up for service. So it's against all the above approach. And the only thing I would add is of course from a safety standpoint, and as, as you may recall, we were working have been working on an upgraded camera technology that we're PA working through our, our whole fleet in, in passing that out to. And again, that's where the focus on our people and our number one, priority, which is the safety of our employees.

Perfect. Thanks for that answer. And I just want to ask a quick clarifying question. You commented to expectations for underlying solid waste margin expansion next year. Just want to make sure that that comment on underlying the caveat there would be the dilutive impact of acquisitions, or is there any other factor we should be considering that might contribute to the movement in south waste smarts?

No. To, your point, we are referring to the margin dilutive impact of acquisitions,

Right? So it's not like further discretionary costs or anything like that coming back.

No, again, we think it's a more normalized environment.

Our next question comes from Michael Hoffman with Stifel. Please proceed.

So I want to talk about the business just in general. So are you seeing new business formation? Are we getting service interval upgrades? Are we in that sort of part of the cycle?

Yeah. Increases are well in excess of decreases. We look at our growth and our net new business relative to budget on the competitive sales side and, that's trending well ahead of budget. So short answer. Yes.

Okay. And that momentum was building to the second half. So it carries through the first half. And I know we're not talking about absolute volume guides, but price as much as you want, but we've got some macro things that are favorable around buying

Well, macro things that are favorable. And then as I reference before some contracts again, that we rebid where they should be and, and, and have not renewed, that's fine for us because those are, those are EBITDA dollar and margin Acquia for us.

I get that. I have been at a couple different trade group meetings and hearing from vendors that they're hearing small market muni is having so much trouble with labor that they're willing to start privatizing, or is there, is there a little bit of a small wave event out there as well?

Well, it's clearly a pressure. Again, whether it be municipal providers or as I talked before, revenue focused, low margin, private companies that look when, when wages are, are, are moving as much as they are when external pressures start, all adding up to 10 or 12% pressures in their P&L that's called a hundred percent of their margin. And so clearly whether it be privates to surrender or municipalities saying I'm down 40% of my drivers, how do I -- they weren't ready to dynamically respond with regards to required wages to do it. And so it's, I wouldn't be surprised to your question that we'll see a little bit, but that's incremental. That's not in the mover.

Yeah, no, I get that. And then on the M and a side can, when we think of most of the year to date being primarily tuck in, so as you anniversary the integration, well may have anal dilution. It pretty healthy leverage to it.

Well, yeah, we talk about the impact of, of acquisitions. It's, obviously it's talking about standalone. These are the major standalone transactions where you're keeping a separate P&L. And you can look at the, just the impact of those on the, on the business. And as, you know, a heavy collection oriented, it was running in the mid twenties to high 20% margin. And if you throw something that's got more recycling or resource recovery in this environment, it can approach 30%. And so to the extent that, again, that's in the mix, obviously tuck-ins are in the mix as well. And tuck-ins, tuck-ins themselves. Don't move the needle because right. If we just we've already done a hundred and what 40 240 million of acquired revenue already. The vast majority of that were standalone transactions new market entries versus tuck-ins

Okay. That's what I was trying to get at. And then when we think about where the RINs are, what are you able to do to protect the downside risk there because you -- there's part of this, you can't control if they wake up beside the RBO is a different number next year. So what are you doing to try and help protect the downside?

Well, what you saw us do this year, Michael was to put some, some hedges in place, some locks in place. And so about 60% for, for instance this year has been locked. And so as we look ahead, we will consider doing the same thing going forward.

Okay. And then lastly, for me, can you frame what the current run rate of is on the internal cost of inflation?

Well, what we can look at are specific line items and we can say, look at labor for instance. And as, as Worthing mentioned, I, I think we'd really echo what we've heard other people say. And our experience is very similar that we're seeing double digit 10% plus increased. If I look at all the, the, the labor lines. And then as I mentioned, mean the total cost of labor, will it be wages, overtime benefits, temp, subcontract, whatever case may, Not just the wages, not just our instance year over year, but the all-in increase. And then as Michael, and as I made reference earlier, there's several other line I items, which capture those from a third party standpoint. And so we have several of the buckets where they are up 10% and again, which is why it's so important. Even if it's just recovering it on a dollar basis on the top line to be getting the incremental price increases and then Discretionary on top of that, I mean, it's, we were quick to flip the switch line last year. As many companies were to, to pair back on discretionary in the teeth of the pandemic, we kept on saying, we want those costs back in the business. That's an important element of who we are in our culture. And as quickly as we turned them off, we turned them back on. So you saw that impact the quarter. So that's on top of those inflationary pressures.

All right. So we could off the top of my head. That's to put you in a four plus something internal cost inflation you're pricing at five. Therefore people should be happy

Again. So far we just have one peer to compare ourselves to, and again, given sequential improvement in the business, Q2 to Q3 on margins and what year over year, it stands in contrast.

Our next question comes from Chris Murray with ATB Capital Markets. Please proceed.

Yeah. Thanks folks. Good morning. Just going back to think about the recycled business, today certainly commodities are, are moving in your favor and it's making it a lot better, but we've gone through a couple cycles now. And some of the discussion is around, just how you price that business or how we structure it. Just wondering if, maybe improve pricing, you start looking at maybe more aggressively restructuring contracts as we go forward order. Or is this something that, you're maybe looking at differently than maybe were a year ago when, when prices were a lot lower?

Sure. Good morning, Chris. I would say that it's important to remember how we're set up for recycling and the fact that about 70% of the recyclables that we process come off of our own trucks and many of them are in, in markets were long duration contracts. And so as we've framed it, there really wasn't an opportunity to de-risk the business or restructure contracts, but the way we've approached it is as worth they mentioned earlier, in some cases internalizing the recycling by bringing them to our own facilities. We've bought up a couple of distress facilities. We've done acquisitions that came with recycling facilities and we're working on some Greenfield projects. So we, we think about making sure that it's a rational market and we think the overall, the industry has moved in that direction. And it's a good thing specific to our customers and, and how we're set up, that's how we're addressing and, and improving the business on the areas we control.

Okay. But is there any further opportunity, maybe getting some more interest in folks wanting to look at the commodity piece of it in this environment and maybe laying off some of that risk,

As I said, given the long, the protractive duration of a lot of the contracts where this revenue sits, think west coast and the value of those franchises, when we look at those contracts and the aggregate, we're very pleased with the way they're structure, we wouldn't consider at this time changing that. Yeah. We've considered commodity hedges in the past and we haven't done 'em and I'm glad because I would've been wrong a hundred percent of the time.

Fair enough. And then moving on just to the E&P business, just this business comes on and off like a light switch and with where we're at right now and you did talk a of the fact that, next year in the EMMP business could, could really step up. Can you just remind us you had started making some investments in some landfills at one point like some new capacity? And then I think maybe pause that a little bit as, as the commodity price dropped and activity levels dropped. Where do you really stand today in turn of your capacity? And, at one point we're running call it 50 million a quarter plus type revenue numbers. Is that something that we should be thinking about would be kind of peak for you guys at this point? Or is there maybe a different way to think about the profile?

No, we do not have capacity constraints and so towards a function of drilling activity and routes back above 80 and it's probably heading higher than that. But, it seems like the CapEx noose has been slipped around so many of these drillers to not drill for fossil fuels that the dependency right there. Is crude going up? Yes, we'll continue to go up most likely. Now you got to answer the question of what will the capital spending patterns be of, of our customers. But we do, we don't have a capacity constraint that says we can only do 50 a quarter or do 70 a quarter, et cetera. That's not the that's not the issue and again, if as I think right now we're still sitting less than 500 rigs or still less than a third of two cycle to go peak. And we're not going to get back to that, or we're still less than half of the most late lady cycle peak. But if the rigs show up, oh, by the way they need labor, there is this issue called getting labor and getting a cruise to do this. And that's, they're constrained as well. But, to your reference to facility, we mostly built out to the extent that the demand is there. We'll finish that facility. It's a pretty quick thing to do and we'll open it up for, for additional capacity, but there's no constraints right now.

All right. That's helpful. Thanks folks,

Mr. Jackman, there are no further questions at this time. Please continue with your presentation or closing remarks.

Well, if there are no further questions on behalf of our entire management team, we appreciate your listening to and interest on the call today. Mary Anne Mary Anne and Joe Box are available today to answer any direct questions that we did not cover, that we are allowed to answer under Reg FD, Reg G and applicable securities laws in Canada. Thank you again. We look forward to speaking with you at upcoming investor conferences, Zooms or on our next earnings call,

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.