Waste Connections, Inc. (NYSE:WCN) Q1 2024 Earnings Call Transcript

Waste Connections, Inc. (NYSE:WCN) Q1 2024 Earnings Call Transcript April 25, 2024

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Operator: Good morning, everyone and welcome to the Waste Connections, Inc. Q1 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note today’s event is being recorded. At this time, I’d like to turn the floor over to Ron Mittelstaedt, President and CEO. Sir, please go ahead.

Ron Mittelstaedt: Okay. Thank you, operator and good morning. I would like to welcome everyone to this conference call to discuss first quarter results and to provide a outlook both the second quarter. I am joined this morning by Mary Annee Whitney, our CFO and several other members of senior management. We are extremely pleased by the strong start of the year, driving better than expected operating and financial results, which, along with recently completed acquisitions, positions us well for the remainder of 2024. Adjusted EBITDA margin expansion of 160 basis points to 31.4% in the seasonally weakest quarter of the year puts us on track to exceed our industry-leading full-year margin outlook of 32.7%, as continuing improvements in employee retention and safety trends, along with rising commodity values, provide momentum for continued performance.

Before we get into much more detail, let me turn the call over to Mary Anne for our forward-looking disclaimer, as well as other housekeeping items.

Mary Anne Whitney: Thank you, Ron, and good morning. The discussion during today’s call includes forward-looking statements made pursuant to the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward-looking information within the meaning of applicable Canadian securities laws. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement included in our April 24 earnings release, and in greater detail in Waste Connections filings with the U.S. Securities and Exchange Commission and the Securities Commission’s or similar regulatory authorities in Canada.

We should not place undue reliance on forward-looking statements as there may be additional risks to which we are not presently aware, or that we currently believe are immaterial, which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change after today’s date. On the call, we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both the dollar basis and per Duluth share, and adjusted pre-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 Ron.

Ron Mittelstaedt: Okay, thank you, Mary Anne. As noted earlier, we’re off to a great start in 2024 by any number of measures, beginning with our financial results. Already set up for industry-leading outsized margin expansion during the year, we delivered a top-to-bottom beat in the quarter with adjusted EBITDA margin, 20 basis points above our outlook, and momentum for continued outperformance from a number of drivers. And this was all achieved in spite of significant weather impacts in January and early March. Along with better-than-expected financial results, we saw continued improvement in trends for employee retention and, most importantly, safety. In Q1, voluntary turnover once again stepped down sequentially, making the sixth consecutive quarter of improvement to levels which are now 30% below the peaks we saw in late ’22.

Similarly, we saw continued improvement in safety, with incidence rates declining for the seventh consecutive month. In fact, during Q1, we achieved some of our best safety performance in years, with monthly incidence down to three-year lows in spite of outsized growth from acquisitions during that period. We believe these results reflect our commitment to a culture of accountability with an empowered and engaged employees. To that end, we’re excited about the steps we’ve taken to support employee growth and development with expanded training, including through our in-house driver academies, the second of which will open this summer, and our Diesel Technician School Partnership offering. We expect that these internal efforts will augment the improving dynamics we’ve seen in employee recruiting, resulting from additional resources and targeted efforts.

As noted previously, the progress in retention and safety we’re seeing today positions us to unlock future benefits from improving costs in risk management, along with continued and expected growing savings across several areas, including labor, maintenance, and third-party services, all of which we are seeing in the financials today. Moving back to our financial results, starting with organic solid waste growth, in the first quarter, we delivered solid waste core pricing of 7.8%. And to be clear, our core price is what we actually retained, not what was implemented, which in other models gets reduced by churn to calculate yield. Our price retention was in-line with our expectations and continues to reflect the resilience of our market model.

Similarly, reported volume growth of negative 3.8% was in-line with our expectations following extreme weather events, primarily during January, which we believe impacted reported volumes by about 100 basis points beyond what we would consider typical levels of ongoing purposeful shedding. Looking ahead to Q2, we would expect a sequential step-up in reported volumes of about 100 basis points, assuming a typical seasonal ramp in activity. And as a reminder on volume calculations, our reported volumes are strictly solid waste volume changes, not RNG, E&P, recycled commodities, or acquisitions until after we’ve owned them for 12 months. Companies calculate volumes differently, and they may view them differently. As discussed in previous quarters, our outsized growth over the past few years has created the opportunity for improving revenue quality and otherwise right-sizing newly acquired locations.

Depending on the market, purposeful shedding and contract non-renewals may provide multi-year tailwinds for margin expansion, along with improvements in asset utilization and operating efficiencies. We look forward to similar opportunities from acquisitions that fit our strategy and meet our financial criteria as we maintain our focus on long-term value creation. We continue to see high levels of seller interest and have a robust pipeline of solid waste opportunities across our regional footprint. As noted, acquisition activity has already contributed to our strong start to the year, with approximately $375 million in annualized revenue completed to date. In addition to the secure energy divestitures we acquired in February, we’ve completed acquisitions of over $150 million in annualized solid waste revenue, including a new market entry providing services to customers in Indiana and Southern Michigan.

The strength of our financial position and free cash flow generation provide flexibility for continued acquisition outlays in 2024 for what could be one of our busiest years ever, along with continuing to increase our capital to shareholders. Beyond M&A, we continue to make progress on our development of multiple renewable gas or RNG facilities, three of which are scheduled to be operational this year. In spite of industry-wide delays related to equipment and utility installations, we continue to anticipate an incremental $200 million of annual EBITDA beginning in 2026 from the projects in development on a commensurate capital outlay. As noted previously, $150 million of that CapEx will be deployed in 2024 and has been factored into our full year free cash flow outlook.

Now I’d like to pass the call to Mary Anne to review more in depth the financial highlights of the first quarter and provide a detailed outlook for Q2. I will then wrap up before heading into Q&A.

Mary Anne Whitney: Thank you, Ron. In the first quarter, revenue of $2.073 billion was about $23 million above our outlook, due primarily to incremental acquisition contributions and higher recovered commodity values. Revenue on a reported basis was up $172 million or 9.1% year-over-year. Acquisitions completed since the year-ago period contributed about $81 million of revenue in the quarter or about $78 million net of divestitures. Solid waste organic growth was led by 7.8% core price, which ranged from over 5% in our mostly exclusive market western region to up to 9% in our competitive market. Total price of 7.1% reflected a reduction of about 70 basis points in fuel and material surcharges, primarily related to lower fuel rates.

We have high visibility for full year 2024 total price in the range of 6% to 7%, with 75% of our core price either already in place or specified by contract, as is pretty typical for us by this point in the year. Solid waste volume losses of 3.8% in Q1 include about 1% from January storm-related closures and other weather impacts that resulted in volume losses to varying degrees across all of our geographic regions beyond the ongoing purposeful shedding and price volume trade-off. Looking at year-over-year results in the first quarter on a same-store basis, daily roll-off pulls were down 3%, driven by outside declines in our most weather-impacted markets in our Mid-South and Eastern regions. And daily landfill tons were down 6%, on lower special waste activity and C&D tons, both of which were down about 15%, while MSW tons were flat in spite of the weather impacts noted.

Looking at special waste and C&D, the year-over-year slowdown in Q1 was widespread but most notable in our central region and Canada, both of which benefited from outsized activity in prior year periods. We saw improving trends in both roll-off pulls and MSW tons during the quarter, beginning with January activity down high single-digits due to severe weather, and ending with March about flat or up nominally on a year-over-year basis. And in our Western regions, the best barometer of underlying activity given the nature of franchises, reported volumes were positive in Q1, in spite of the weather impacts in January. Beyond solid waste, revenues played out slightly better than expected in Q1, with recycled commodities, landfill gas, and renewable energy credits, or RINs, collectively up about 50% year-over-year, on recycled commodity values up around 15% from earlier this year.

Prices for OCC, or old corrugated containers, averaged about $130 per ton in Q1, and RINs averaged about $3.10. Adjusted EBITDA for Q1, as reconciled in our earnings release, was $650.7 million, up 14.8% year-over-year, and about $10 million above our outlook. At 31.4% of revenue, our adjusted EBITDA margin was up 160 basis points year-over-year, and 20 basis points above our outlook. These results include an estimated 40 basis point margin drag related primarily to the extreme weather-related impacts noted. Therefore, on a normalized basis, margins were up 200 basis points year-over-year. Net interest expense in the quarter increased by $10.8 million over the prior year period to $76.4 million, due to higher outstanding debt and increased interest rates as compared to the prior year period.

During Q1, we completed a public offering of $750 million of senior notes, with proceeds directed to floating rate debt repayment, reducing borrowing costs by over 100 basis points. Our current weighted average cost of debt is approximately 4.15%, with an average tenor of over 10 years. We ended the quarter with debt outstanding of about $7.9 billion, about 19% of which was floating rate, liquidity of approximately $830 million, and our leverage ratio, as defined in our credit agreement, was about 2.8 times debt to EBITDA. Our effective tax rate for the first quarter was just under 21%. The Q1 rate, as expected, included a benefit to the provision related to excess tax benefits associated with equity-based compensation. In addition, it reflected the impact of an investment tax credit associated with an RNG facility expected to begin service during the year, which has about a 70 basis point benefit to our effective tax rate for 2024.

And finally, adjusted free cash flow of approximately $325 million was in-line with our expectations and our full year outlook of $1.2 billion as provided in February. I will now review our outlook for the second quarter of 2024. Before I do, we’d like to remind everyone once again that actual results may vary significantly based on risks and uncertainties outlined in our Safe Harbor Statement and filings we’ve made with the SEC and the Securities Commission’s or similar regulatory authorities in Canada. We encourage investors to review these factors carefully. Our outlook assumes no significant change in underlying economic trends. It also excludes any impact from additional acquisitions that may close during the remainder of the year and expensing of transaction-related items during the period.

Revenue in Q2 is estimated to be in the range of $2.2 to $2.225 billion. This includes solid waste price plus volume growth of approximately 4%, from total price of 6.5% to 7%, on core price of 7% to 7.5%, and volume down 2.5% to 3%. Adjusted EBITDA margin in Q2 is estimated at approximately 32.5%, up 140 basis points year-over-year. Depreciation and amortization expense for the second quarter is estimated at approximately 12.8% of revenue, including amortization of intangibles of about $44 million, or $0.13 per diluted share net of taxes. Interest expense and of interest income is estimated at approximately $82 million for the second quarter. And finally, our effective tax rate in Q2 is estimated at about 23.5%, subject to some variability.

And now let me turn the call back over to Ron for some final remarks before Q&A.

Ron Mittelstaedt: Thank you, Mary Anne. When I returned to the seat one year ago this week, I emphasized the importance of the decentralized operating model and culture of accountability that has served to drive differentiated results since our beginnings as a company. Reflecting on the progress that has been achieved over the past 12 months, I could not be prouder of our local teams. Although we’ve added to the playbook and made some organizational changes, we’ve mostly reinforced our vision and values, and as we say, doubling down on human capital. And you’ve seen the results in our most important operating value, as we reported in March the lowest number of safety incidents that we’ve seen for three years, in spite of adding over 3,000 employees during that same period.

So I want to conclude by thanking our 23,000 employees who put safety first every day, and whose commitment to accountability is evident in not only what they say, but what they do, as demonstrated by delivering such a strong start to 2024. With solid waste pricing largely in place, improving operating trends, higher commodity values, and the benefit of what could be a record year of M&A, we are well positioned. That all said, we believe it’s appropriate, as in the prior years, to wait until our Q2 earnings release to consider updating our outlook for the full year. We appreciate your time today, and I will now turn this call over to the operator to open up the lines for your questions. Operator?

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Q&A Session

Operator: Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator instructions]. And our first question today comes from Tyler Brown from Raymond James. Please go ahead with your question.

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

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

So an example of where you’re seeing that leverage from price-cost and then similarly, on some of those third-party costs, as we bring down turnover and improve safety.

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

Ron Mittelstaedt: Well, first off, Tyler, let me say that I think what transpired with the legislation was effectively totally as expected, number one. This is not some surprise to us or to the greater industry by any means. Number two, I think, step back. Traditionally, and we can point to several examples of this, but traditionally, uniform, new, incremental federal regulation, such as this, is very good in both the short and long term for the well-capitalized public companies. It creates a uniform playing field. It creates a playing field where those with the access to capital and the infrastructure to take advantage of it are able to do so. And it creates a price opportunity that generally quite exceeds the cost to comply both operating and capital-wise.

It also traditionally has created sort of an M&A catalyst. So I don’t think the public companies in any way are concerned or fear this change in federal regulation. The other thing I would tell you is there’s a lot of activity going on within the legislature, and particularly, of course, at the staff level, that things get passed, and then really the work begins of amending and modifying that regulation. And I think, from everything we’re hearing, there will be changes to the regulation or really a codification of the regulation further that gives the intended, the intention of the regulation, which was not so to be punitive to passive receivers such as landfills. Landfills are passive receivers. It’s taking this material as required by law and permit on behalf of the producers and the consumers of it.

This legislation is really targeted, if there’s a word, at producers of the material, not passive receivers. So I think you’re going to see the language, the law amended and changed to reflect more of that. So this is, so as I said, and I think the EPA has been very clear that they’ve said, they’ve said that it’s not meant to create liability for those that are passive receivers. And that’s what, our landfills are. So a long-winded answer to you, Tyler, but, the devil’s ultimately in the details of how this gets implemented. We’re still a ways from that. Look, there are relatively low cost capital opportunities for treatment, such as foam fractionation and others for PFAS that we are doing already proactively at several of our landfills over the last year and a half to two in anticipation of this.

So we have a good idea of what works and what may not. And what I would tell you is it’s not going to really move the needle, I don’t think, for the industry on the capital costs. And it will present an incremental pricing cost to price through it and recover it. At least I can speak for us on that, as far as the cost of leachate, again, if you go with a capital, if you go with a low cost capital cost and do some on-site treatment, Tyler, it won’t change the cost of leachate. Now, there are some POTWs that may not opt to take it, even treated for just, fear. But, in most markets, there are options. If that does raise the cost of leachate, again, that will be a local pricing opportunity through that customer base where there are less options.

So, I mean, it’s a long-winded answer, but I think that’s how we holistically think about this.

Tyler Brown: Yes, no, perfect. Extremely good call. I very much appreciate it. One quick housekeeping. Mary Anne, based on what we know today, what’s the M&A benefit to ’24 revenue based on what we know as of right now?

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

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

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