Waste Connections, Inc. Q3 FY2021 Earnings Call

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. 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 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 waste, 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 ranged from 2.5% in our mostly exclusive market in the 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 essentially 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 volumes 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 the 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%, and volumes increased by about 4.5% on increases in all regions, with strong pricing driving rates per pull up about 6.5% year-over-year. Landfill tons were up about 5% in MSW, special waste, and C&D waste. Moving on to 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 recovered commodities, that is recycled commodities, landfill gas, and renewable energy credits or wind, 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 the 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 that 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 the 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 greenhouse 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. Not only did we demonstrate considerable progress toward all of our objectives, but 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 the 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 and 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 in more 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 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 while having a 30 basis point impact from higher fuel and diesel rates, which were up 19% year-over-year, and increased E&P 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, with the potential for that number to grow as we continue to pursue opportunities to stay ahead on fleet and equipment purchases. 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, as defined in our credit agreement, remained about 2.6 times debt to EBITDA, with leverage on a net debt to EBITDA basis of about 2.4 times at the end of Q3. Our current weighted average cost of debt is less than 3%, with about 90% of our debt at fixed rates. Now I will review our outlook for the fourth quarter of 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 uncertainties outlined in our safe harbor statement and filings we've made with the SEC and the Securities Commissions or similar regulatory authorities in Canada. We encourage investors to review these factors carefully. Our outlook assumes no significant change in underlying economic trends, 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 or transaction-related items during the period, looking first at Q4 revenue. 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 E&P 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. Finally, our effective tax rate in 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 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 in spite of escalating wage and inflationary pressures in 2021 and the sequential ramp in the 2020 contrast driving increasingly difficult comparisons. Adjusted free cash flow in 2021 is now expected at $1.025 billion, about 54% of EBITDA, 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.

We are extremely pleased with our year-to-date 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 $1.05 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 the typical amount of acquisition activity for the year and expect the pace of activity to remain elevated. We just announced the double-digit percentage increase of our regularly 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 5.5% and 6% in 2022. Acquisition contribution is already at about 2.5% growth, potentially reaching 4% to 5% by the year-end or early next year, and solid waste volume should reflect underlying trends in the macro activity, with the caveat that 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.

Operator instructions. Our first question comes from Adam Bubes 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 in my closing remarks, we expect pricing next year overall to average between 5.5% and 6%. And so, we'll see how the macro performs as it moves through next year and respond accordingly. If we need to, it could go above 6% but we don't see the need for that right now. As we said, obviously in our open markets, we stated before, pricing averages 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 into 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 by at least 100 basis points next year. And so just a 100 basis point incremental contribution from those franchise markets, and with that 40% that's 40 basis points added 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 a 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, these aren't just Greenfield spec facilities, where we drive 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 the recycling numbers. And obviously, as we continue to pursue acquisitions and bring on new facilities in additional markets, you'll see those numbers 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 comps are tougher. Just some context there for what you guys have been able to do in the fourth quarter would be helpful as a start.

Sure. I think that's a great question because a lot 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 dilution 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'd say of course it's early days, and we'll give our formal guidance in February, but to Worthing's earlier remarks, when we think about the pieces that are already in place for next year. Yes, we think that we'd have sort of the typical underlying solid waste margin expansion. And then, of course, that would come in at the lower margins and have an impact from acquisition contribution. And then, to your observation, if E&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 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 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 prior year, right? And that can be lumpy, can move from one period to the next. And so that's just a timing issue with regards 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 that what we're seeing more is that companies that have pursued a low-margin revenue growth strategy, because of low margins, you're basically underpaying people. So you're impacted 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, that's the right pricing point to be in order to satisfy the inflationary environments, you have to attract the drivers, safe operators, and 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 stay in business. And that's the fault of the 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, and autos are up significantly. It’s rampant in the economy. And so before we think that five and a half to six sounds high in the scheme of things and the context of things, it's not that high. Would we walk away from volume at low price? Absolutely. I mean, we've had two rebids. These were legacy contracts that we got in a progressive transaction. We said all along early in the process that we repriced the bulk of those contracts. And there were two or three that who had five years left to run on them. 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 because they took them at rates well below us 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 will 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 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'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 when you still tag 2.5% to 3.5% 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 and volume are acting as a quasi-price. So the elements are a little bit different where it gets accounted for in different ways, but the reality is, look, if everyone's printing seven to 8% 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 what you are doing 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 overtime 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 is. So I'd say we're all afflicted by similar pressures. So I think as you said in the script, and 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 try to keep a workforce, pay them well, have well-placed benefits, etc., care about hours of service, care about the equipment that they're running, and that's their office in driving. But you got to recognize the reality 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. We talked about on our last call we were early to do that this year, early to double down on wage growth and to go out and recover it.

I would just add Hamzah that your observation is correct. Other people have talked more about 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 a labor component, which you're now relying on third parties to do. You have those same kind of increases, whether it's brokerage, outside repairs, etc. 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 ask the impact of those outside cost pressures. And what's remarkable perhaps is 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's 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 taking my question. So just the initial question here is just on your assumptions underlying the guidance that you provided for the fourth quarter and into next year. Typically you're quite conservative in terms of how you forecast and, and 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 additional reopening activity that might be beneficial to commercial collection in particular, just like you, we referenced what we saw in New York in Q3, that would be additive. So it's really why we haven't really pegged the volume number yet. And again, in February, we'll have more visibility into that to comment on.

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 or refocusing more specifically on certain geographies and types of business as more and more acquisitions happen, solid waste becomes less and less opportunities there? Could you, how do you look at liquid special waste, that kind of thing? Is that something you just inherit when you do a solid waste acquisition, or is this something that you could, as solid waste opportunities become less, perhaps shift your focus into more ancillary areas?

No, 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 an 18 or 20 billion private company revenue basket. And so we still have a lot of runway ahead of us for the kind of 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 signed transactions. That's coast to coast, that's in the US and Canada. And so again, it’s maintained flexibility there when those sellers decide. So there's been a rush to exit this year. There'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 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. Solid waste has a much better return profile than any of that. And so no, we'll stay the course and continue to do what's driven our past success as we look ahead.

Our next question comes from Jeff Goldstein with Morgan Stanley. Please proceed.

Hey, good morning. Thanks for taking my questions. You mentioned the prepared remarks 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 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 because those typically go out to bid. 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 are 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 these hours increased significantly, given the uptick we're seeing in volumes, or do you feel you still have that under 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 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 we make further inroads into the number of openings as we get into the upcoming seasonality in the business. The upcoming seasonality is a little lighter on the business. And so we can see improvement in that as you look ahead too.

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

Hey, I just want to go back a little bit to kind of the Ho's question. So in '22, just based on the CPI mechanics, wouldn't the second half pricing 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 '23 already?

Let's get to February; we'll give you the exact map, but no, you're right. Look, to average five-and-a-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 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?

No, again, as we said earlier, we could start the year with four to 5% contribution already in place, right? So that's a high number going in next year. There's no reason why we shouldn't do at least the averages, which again, are about $150 million of acquired revenue in the year. Look, people still go through lineage, transition issues, health issues, estate planning, etc. That's a natural. We won't sit here today 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. If it's just the midpoint of that, that's another $75 million contribution in 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. 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 concerning the impact of a lot of these vaccination mandates and a lot of local and 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 growing issue for you? Or, not in the sense that you might not be under that umbrella 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 their beliefs about the vaccines are both positive and negative. And so look, you can't call frontline 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, as an organization being inclusive means inclusive in everything we do, not just what's convenient. Right? And so we value the input and the differing views of all employees, and that extends to the vaccine. And that's what servant leadership is: listening to your folks and understanding it. And so, we're watching it. But I don't think the profile of our employee base is any different than other large frontline organizations. If the government wants to get this economy back going and get, supply chain bottlenecks taken care of and all that kind of stuff, 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 companies there. Maybe my second question. I know it's early days and in your sustainability report, you again highlighted testing electric vehicles, but if I kind of just pull up the timeframe here, does this have 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 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 winning 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, but by all means when CAPEX first year, we'll beta-test them, make sure to prove them out. But eventually when manufacturing capacity escalates, absolutely you’ll be turning OPEX into CAPEX, which means margin operating margins go up. As you said, you nailed it—maintenance ought to be down, fuel ought to be down, a host of things ought to be down 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 ten years away from having enough manufactured capacity where you'd see a notable change in this trade-off of OPEX for CAPEX.

Okay. And I mean, just, I'm not aware of one, but there are so many out there, it's re-fined electric vehicles subject to a lot of the grants you see for some other commercial vehicles out there. 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 faced that. If we can find available grants, that'll help to pay back for sure. Okay. No, that's it for me. Thanks again and great quarter there.

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 in the call today. 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.