Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenue and adjusted EBITDA increased by 11.2% and 16.4% respectively, driven by solid operational execution and acquisitions.
- Full-year 2024 outlook raised to approximately $8.85 billion in revenue and $2.9 billion in adjusted EBITDA.
- Continued improvement in employee retention, with voluntary turnover now below 15%, marking the seventh consecutive quarter of improvement.
- Record year of private company acquisition activity expected, with over $700 million in acquired revenue anticipated by the end of 2024.
- Investments in technology, including robotics in recycling facilities and AI-driven applications, are expected to drive growth and value creation.
Negative Points
- Reported solid waste volumes were down 2.8% in Q2, reflecting ongoing purposeful shedding and price-volume trade-offs.
- Special waste tons were down 13% year over year in Q2, indicating cyclical sensitivity and reduced project activity.
- Incremental costs and delays in the commissioning and startup of three renewable natural gas plants, now expected to commence operations in Q3.
- Higher employee wage increases above 5.5% continue to exert cost pressures, despite expectations for these pressures to abate.
- Challenges in the macro environment, including potential impacts from municipal budget constraints and delayed project activities, could affect future volume improvements.
Q & A Highlights
Q: What are the expectations around volume in the second half of the year? Will Q3 still be under pressure, and will Q4 ease as you anniversary the purposeful shedding?
A: Volumes were expected to be most negative early in the year and sequentially improve as we anniversary the shedding and non-renewal of contracts. We haven't seen underlying volume generation yet, which is why the updated guidance reflects that. We expect sequential improvement in Q3 versus Q2 and about the same or a little better in Q4, with potential upside from any pickup in activity.
Q: Do you think roll-off and volumes could stabilize into 2025 or 2026 after three years of negative volumes?
A: We can't predict the total macro economy, but many municipalities are delaying larger projects due to budget constraints. This should naturally bounce back, and we expect improvement in 2025 and 2026. Historically, national election years see a stall in activity, followed by a release once results are known.
Q: How much of the margin performance this year is attributable to labor benefits versus solid execution and positive price-to-cost spread?
A: We've captured about 25 to 30 basis points of the expected 100 basis points of margin expansion from labor efforts. There's another 70 to 75 basis points to go, and we remain confident in capturing that. The benefits come from various areas, including labor, overtime, and third-party repairs.
Q: Are your assets acquired from Secure Energy impacted by the Alberta wildfires?
A: Our assets from Secure Energy are not impacted, but we have solid waste assets in proximity to some fires. We had complete evacuation of some operations last summer but have not had any evacuations this summer.
Q: Can you provide an update on the acquisitions made in the quarter? Are these focused on the rural exclusive market, and are they all collection businesses?
A: We acquired recycling facilities in the Pacific Northwest, which were strategic for internalizing recyclables. We also did multiple tuck-ins throughout our footprint and a smaller E&P deal in Canada. We signed larger deals yet to be closed, including franchise markets on both the West and East Coasts.
Q: How should we think about the drivers of the Q3 EBITDA margin guidance of 33.7%?
A: The incremental deal contribution changes the mix, and the lack of special waste becomes more of a headwind. There's also an extra day of expenses in the quarter, impacting year-over-year comparisons. Commodity tailwinds are smaller in the back half of the year.
Q: What are the expected returns on recent acquisitions, and how have multiples changed?
A: Overall multiples have drifted down about 1.5 to 2 turns over the last two-plus quarters. We target an IRR between 11% and 15% and a positive NPV on invested capital. The returns are expected to improve over time as we continue to acquire and develop landfills.
Q: Can you provide an update on the DRNG sustainability investments and their expected contribution to EBITDA?
A: We had expected a contribution of $15 to $20 million, but this was taken down by about $10 million due to delays. We remain committed to the plans and expect the projects to come online during 2026, contributing about $200 million in EBITDA.
Q: Why was the free cash flow guidance kept unchanged despite raising the EBITDA guide?
A: The CFFO remains largely unchanged due to incremental interest expense from acquisition outlays. We didn't adjust CapEx despite the M&A, which often comes with upfront CapEx needs. There's underlying yield upside outperformance, absorbing the incremental CapEx.
Q: Can you expand on the technology opportunities or productivity initiatives mentioned in the prepared remarks?
A: We are using robotics and AI in our MRFs, reducing headcount and increasing productivity. New camera technology on trucks for commercial overhead loads and dynamic routing technology are also being implemented to improve revenue, productivity, and safety.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
