Good morning, and welcome to the Waste Connections Q3 2022 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Worthing Jackman, President and CEO. Please go ahead.

Thank you, operator, and good morning. And congrats to the team last night. Yes, Jason Craft, you can pay me now. I'd like to welcome everyone to this conference call to discuss our third quarter results and to provide a detailed outlook for the fourth quarter and updated outlook for 2022, as well as some early thoughts about 2023. I'm joined this morning by Mary Anne Whitney, our CFO. As noted in our earnings release, strong execution once again provided for better than expected results driven in the third quarter by continued acceleration of solid waste pricing and higher E&P waste activity, along with acquisitions closed during the period. Most notably, we overcame 50 basis points in incremental headwinds primarily from the precipitous decline in recycle commodity values in September, to beat our outlook and expand adjusted EBITDA margin both sequentially and on a year-over-year basis, excluding the dilutive impact from acquisitions completed since the year-ago period. Our outperformance through the third quarter and acquisitions closed year-to-date enhance our visibility for expected double-digit revenue and adjusted free cash flow growth in 2023, led by pricing expected to remain at elevated levels, plus contributions from acquisitions already signed or closed year-to-date. In addition, we expect underlying margin expansion to overcome headwinds from recent decreases in recycled commodity values. 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 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 discussed both in the cautionary statement included in our November 2 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 the 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.

Thank you, Mary Anne. We're extremely pleased by the strength of our results in Q3, as continued pricing acceleration and strong execution enabled us to overcome both the precipitous decline in recycled commodity values during the quarter and continued inflationary pressures. We delivered total Q3 price of 10.1% led by core pricing of 8.3%, plus 180 basis points of fuel and material surcharges. Pricing ranged from 5.5% in our mostly exclusive market Western region to between 10% and 13% in our competitive regions. The 130 basis point sequential increase in total pricing growth from Q2 was almost entirely attributable to core pricing, which is expected to increase further in Q4. As noted last quarter, the continued acceleration of core pricing through the back half of 2022 positions us well for ‘23 with visibility for continued elevated pricing, including in our exclusive markets where pricing is now expected to approach 7%. Volumes in Q3 were down 70 basis points excluding the impact from the purposeful non-renewal of two municipal contracts noted in earlier periods and continue to reflect tough comparisons following last year's reopening activity. More importantly, however, volumes reflect continued discipline around quality of revenue. Looking year-over-year at Q3 by line of business, commercial collection revenue was up about 15% due mostly to price. Roll-off revenue was up about 11% on revenue per pull, up about 9% and daily pulls up about 2%. Landfill rates per ton were also up over 9% on revenue up about 3% and tons down 6%, primarily due to continued tough comparisons for special waste. Special waste tons were down 16% in the period, but related revenue was up nominally year-over-year. MSW tons were down 4% and C&D tons were up 3%. Moving next to revenues from recycled commodities, excluding acquisitions, recycle commodity revenues were down almost 35% year-over-year, reflecting a sequential decline from Q2 of 30% or about twice the magnitude anticipated given the precipitous decline in recycled commodity values in September. Looking at year-over-year landfill gas sales and renewable energy credits or RINs, landfill gas sales were up nominally in Q3 on slightly higher RINs values and higher volumes. And finally, looking at E&P waste activity, we reported another sequential increase in E&P waste revenue to $53 million in the third quarter, up 52% year-over-year. Moving to acquisition activity, as anticipated, acquisition activity continues to run well above historical levels, with $535 million in annualized revenue closed year-to-date, plus an additional $35 million under definitive agreement, expected to close by year end or early in 2023. As such, we are already set up for over 4% in rollover acquisition contribution in ‘23 from signed or closed deals. Moreover, our pipeline remains quite robust for additional acquisitions expected to close later this year or early next, driven by continued above-average levels of interest from high-quality private company sellers, including some unique opportunities to expand our portfolio of West Coast exclusive markets. We opportunistically prepositioned our balance sheet for expected continuing outlays by raising $1.55 billion in two recent debt offerings at favorable terms. We continue to have capacity for outsized acquisition activity while we fund our differentiated growth strategy, including our sustainability-related projects and expand our return of capital to shareholders. The strength of our operating performance, free cash flow generation, and balance sheet positions us for another double-digit percentage annual increase in our quarterly cash dividend as announced yesterday. Our Board of Directors authorized a 10.9% increase to our regular quarterly cash dividends, our 12th consecutive double-digit percentage increase since the initiation of our dividend in 2010. This followed our August announcement of the annual renewal of our normal course issuer bid authorizing the repurchase of up to 5% of our outstanding shares, which we will continue to approach opportunistically as we did earlier this year. While executing our growth strategy, we maintain focus on our most important asset, our people, as highlighted in our recently released 2022 Sustainability Report, which details the efforts of over 20,000 employees who embody our values, culture, and share view of sustainability as integral to our strategy for long-term value creation. Our updated report highlights significant advancement towards our aspirational ESG targets and the addition of a target for emissions reduction. It also provides expanded ESG-related disclosure with the introduction of Task Force on Climate-Related Financial Disclosures or TCFD. Our continued progress, expanded targets, enhanced disclosure, and ongoing investments in sustainability-related projects are all emblematic of our commitment to the environment, and our employees and the communities we are privileged to serve. Now, I'd like to pass the call to Mary Anne to review more in-depth, the financial highlights of the third quarter and our increased outlook for 2022 and to provide a detailed outlook for Q4. I will then wrap up with some preliminary thoughts about 2023 before heading into Q&A.

Thank you, Worthing. In the third quarter, revenue was $1.88 billion, up $283 million or 17.7% year-over-year about $15 million above our outlook. Acquisitions completed since the year-ago period contributed about $154 million of revenue in the quarter or about $151 million net of divestitures. Adjusted EBITDA for Q3 as reconciled in our earnings release was $588 million, up about $82 million or 16.3% year-over-year, and about $7 million above our outlook. This was in spite of an incremental $10 million drag from the precipitous drop in recycled commodity values, primarily in September, which essentially doubled the sequential decline as compared to our expectations in early August. Looking at margins. First, on a sequential basis, at 31.3% adjusted EBITDA margin was up 10 basis points as compared to Q2, in spite of a $20 million quarterly step down in recycled commodity revenues. Next, as compared to our expectations, we more than overcame 50 basis points in incremental headwinds during the quarter to beat our outlook by 30 basis points excluding acquisitions. Incremental headwinds included 40 basis points from the further deterioration in commodity values and 10 basis points from impacts related to Hurricane Ian. And finally, looking year-over-year, adjusted EBITDA margin was up 20 basis points year-over-year, excluding 60 basis points margin dilutive impact from acquisitions. Other key margin drivers were as follows: underlying solid waste margins expanded by 120 basis points, as leverage from double-digit price growth provided margin expansion to offset continued cost pressures. In addition, increased E&P waste activity provided 40 basis points margin expansion and higher RINs values and gas generation added another 10 basis points. These increases were offset by 150 basis points combined margin drag from lower recycled commodity values of 90 basis points and an additional 60 basis points headwind from higher fuel costs, net of the CNG tax credit catch up through Q3 of about $3 million. Depreciation and amortization expense for the third quarter was 12.3% of revenue, down 70 basis points year-over-year. Adjusted EBIT margin of 18.7% was 10 basis points above our outlook and up 20 basis points year-over-year, even including the margin dilutive impact of acquisitions. Interest expense in the quarter increased by $10.7 million over the prior year period to $51.2 million, due primarily to higher total borrowings resulting from acquisition outlays as compared to the prior year period. Including higher interest income from invested cash balances, net interest expense in Q3 increased by $9.5 million year-over-year to $49.4 million. Debt outstanding at quarter end was about $6.2 billion over 90% of which was fixed rate and our weighted average cost of debt was approximately 3.2%. Our leverage ratio is defined in our credit agreement, net of cash balances increased nominally in the quarter to about 2.7 times net debt to EBITDA. GAAP and adjusted net income per diluted share were $0.92 and $1.10 respectively in the third quarter, both of which include about a $0.06 after-tax benefit primarily resulting from the impact on certain debt from changes in foreign currency exchange rates in the period. That is the decline in the value of the Canadian dollar during the quarter. This unrealized benefit is reflected in both other income and in the tax provision. While changes in foreign exchange rates and the corresponding translational impact operating results are not factors that we call out. The extreme currency volatility in recent months and the resulting outsized Q3 benefit, mostly related to unrealized gains on certain debt warranted some additional commentary. Moving on to free cash flow. Year-to-date, we've delivered adjusted free cash flow of $929 million, or 17.4% of revenue, up 12.5% year-over-year in spite of capital expenditures up $139 million, or 29% year-over-year. As such, we are well positioned to achieve our full year free cash flow outlook in spite of the incremental headwinds from lower recycled commodity values and the continued inflationary pressures impacting both operating expenses and CapEx. I will now review our updated outlook for the full year and provide our outlook for the fourth quarter of 2022. 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. 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. Looking first at our updated outlook for the full year, as provided for in our reconciled earnings release. Revenue for 2022 is now estimated to be approximately $7.19 billion, or $65 million above our previously updated outlook due primarily to the following: $85 million in contributions from acquisitions completed since our previous update in August, plus higher pricing, partially offset by lower recycled commodity values. Adjusted EBITDA for the full year is estimated at approximately $2.21 billion, up $20 million from our previously updated outlook. A 30.7% of revenue, our adjusted EBITDA margin outlook is in line with our previous update, in spite of the high decrementals from lower recycled commodity values. Similarly, there's no change to our outlook for adjusted free cash flow or CapEx of $1.16 billion and $850 million respectively. Turning next to our outlook for Q4. Revenue in Q4 is estimated to be approximately $1.845 billion. We expect price plus volume growth for solid waste of 7.5% to 8% led by total price remaining around 10% with core price expected to tick up sequentially from Q3. Reported volumes will continue to reflect the 80 basis point impact from expired contracts. E&P waste revenue is expected at about $50 million, and recovered commodity values are expected to remain largely in line with current levels. RINs are in the $250 to $260 range, and recycled commodities are down about 60% sequentially from Q3, with average prices for OCC or old corrugated containers at about $50 per ton. Adjusted EBITDA in Q4 is estimated at approximately 30% of revenue or about $553 million, which includes an expected 30 basis point margin dilutive impacts from acquisitions already completed. Continued underlying margin expansion primarily from price led organic growth is expected to mostly offset both inflationary pressures and assume outsized headwinds of over 150 basis points from recycled commodity values at current levels. Upside would come from any improvements in commodity-related revenues, higher E&P waste activity, acquisitions completed prior to quarter end, cleanup activity related to Hurricane Ian, or easing of cost pressures given the magnitude of core-focused price increases already in place. Depreciation and amortization expense for the fourth quarter is estimated at about 12.9% of revenue including amortization of intangibles of about $42 million, or about $0.12 per diluted share net of taxes. Interest expense net of interest income is estimated at approximately $62 million, up from Q3 on higher outstanding balances as acquisition outlays continue and assuming the recent and continued expected interest rate increases. And finally, our effective tax rate in Q4 is estimated at about 21.5%, subject to some variability.

Thank you, Mary Anne. Again, we are extremely pleased with our year-to-date performance and our positioning for both Q4 and 2023, particularly given inflationary pressures and ongoing labor constraints and the recent precipitous decline in recycled commodity values. We're in the face of these challenges, pricing growth and acquisition activity remain at elevated levels. Put simply, we believe we're well positioned looking ahead and although, we will wait until February and provide our formal outlook for ’23. We can expand on the preliminary thoughts we shared in August based on the current economic environment. We continue to have visibility for double-digit revenue and adjusted free cash flow growth in 2023, led by continued elevated solid waste pricing levels, plus over 4% from acquisitions signed or closed thus far this year with the potential for that amount to grow to more than 5% by early next year based on our current acquisition pipeline. Moreover, we expect above-average underlying margin expansion to overcome headwinds from recent decreases in recycled commodity values and to the extent that we're seeing any improvement in recycled commodity values or easing of inflationary pressures during the year, those impacts along with additional acquisitions completed throughout the upcoming year will provide upside to these preliminary thoughts. We look forward to having better visibility on the tone of the economy, the pace of acquisitions, and expected commodity-driven activity when we provide our formal outlook in February. We appreciate your time today. And with that, I'll now turn the call over to the operator to open up the lines for your questions.

We will now begin the question-and-answer session. Our first question will come from Toni Kaplan with Morgan Stanley. You may now go ahead.

Thank you very much and congratulations on the quarter. I wanted to ask about your expectation for double-digit free cash flow growth next year. Could you provide more insight into some potential factors, both positive and negative? I know you mentioned a few already, but I'm considering aspects like taxes, interest, working capital, and incentive compensation, which we may not have all the details on at this point. Thank you.

Sure. Happy to do so, Toni. So, as Worthing described expecting double-digit top line growth and overcoming the headwinds from recycled commodities at current levels. And so you start with that as your EBITDA expectation. And then, in terms of the puts and takes, I think of CapEx of about 10.5% kind of in line with what we're doing this year. Interest expense, I think of it in terms of kind of book ending, you think of the rates from Q3 and Q4, I described the step up sequentially from incremental outlays and higher rates. If that kind of goes into the range depending on our ability to pay down debt with the over $1 billion in free cash flow after the dividend that we'd be looking at. There'd be some movement there. And then finally, on cash taxes, as compared to book, I'd be thinking in a range of probably the 70% to 80% type of range.

Terrific. And just as a follow-up. Wanted to ask about pricing, I know you've mentioned a few times on the call, you're expecting the core price to increase further in Q4 and there's sort of strength in the pricing line that we could still see. Just wanted to ask about when you think about the trajectory next year, would you think first half still has this momentum because of the restrictive pricing, but maybe weaker in second half or just wanted to understand anything around the timing of when we might see a pricing peak? Thanks.

Sure. Well, as we've said consistently, our pricing is merely a response to the environment we operate in. Obviously, exiting the second half of this year at 10% price means we'll be entering next year at those elevated levels. A lot of economists predict that inflationary pressures will begin to abate and maybe peak early in the year and move lower as we move to the latter part of the year. If that happens, I wouldn't be surprised, if pricing if it starts around 10%. In essence, as you say, peaks early in the year, but would still average 8% to 9% for the full year. Now if inflationary pressures remain elevated next year, pricing will remain at that 10% or more as we move through the year. And so again, it's in response to the environment. But what we know is, when I say 8% to 9%. 8% to 9% is really the minimum I think companies need to deliver. When you look at the commodity pressures, when you look at inflationary pressures, wage pressures, you talked about higher interest rates, you talked about cash taxes and you look at inflationary pressures on CapEx. So if you're going to run the gamut from top to bottom on what needs to be priced and recovered, 8% to 9% is the zip code that we're looking at for the full year assuming things abate a little bit next year. If they don't, we'll do better than that.

Super. Congratulations again. Really good job.

Our next question will come from Jerry Revich with Goldman Sachs. You may now go ahead.

Yes. Hi. Good morning, everyone. Worthing, Mary Anne, I'm wondering if you could just expand on the levers that you folks were able to pull for the fourth quarter given just the steep drop in recycled cardboard prices that you've been able to more than offset here with better core performance. Clearly, the pricing outlook for ‘23 is clear. I was just impressed you were able to pull levers so quickly for the fourth quarter. So can you just give us a feel for the moving pieces that will help you to offset that 1.5 headwind for 4Q? Thanks.

Sure. I would say this is a continuation of our efforts in the field as we have consistently acknowledged the need to maintain our focus on pricing and execution throughout the year. We are managing costs while also prioritizing the top line with ongoing pricing increases. As noted, the sequential rise in core pricing observed in Q3 will carry on into Q4. This approach addresses the need for price increases, as Worthing mentioned. Our guidance for Q4 suggests that we expect a 120 basis point underlying margin improvement, which needs to expand in Q4 to counterbalance the additional pressure from the sequential decline in commodity prices.

Yeah. But levers got pulled earlier this year. We just don't wake up in September or October and say, hey, let's pull the lever and impact Q4. These things have to be predictive and they started in Q1.

So it wasn't incremental pricing actions since OCC prices dip, this was just unfolding of existing pricing actions?

The vast majority of it is based on what we began in Q1.

Super. And Worthing, just a moment ago, you mentioned the industry has put up 8% to 9% core price in one of the items that you mentioned is higher interest cost, which is really interesting because that implies EBITDA margin expansion, right? So I'm wondering if you could just expand on that? And I know it's early relative to your ‘23 framework, but are you saying that with the pricing actions, we could see a margin expansion even when accounting for the OCC headwind as we think about the planning assumptions for ‘23?

Well, that's our belief right now. I mean that we use the word overcome, not offset. We use overcome for a reason. But no, it is our belief because, look, you can't stop again at EBITDA and try to compare it on a dollar basis because there's so many items hitting you below, which is why I mentioned interest, taxes, and CapEx. And so our folks at a local level understand the challenges. This only happens based on the success of our folks locally executing their playbook, this isn't corporate driven. I mean our folks know how to predict these challenges. We know how to communicate, discuss them. We know how to be accountable to overcome them. And again, pricing is only successful if it originates from a local level. So that's where it's got to be executed.

Super, appreciate the discussion. Thanks.

Our next question will come from Kyle White with Deutsche Bank. You may now go ahead.

Hey. Good morning. Thanks for taking the question. I wanted to just follow-up on the recycling and see if you keep current OCC prices where they are, what you expect the headwind would be for 2023? And then just longer term, curious how you're thinking about your exposure to those recycled commodities? And if there's anything that you could do to maybe better protect in case against the volatility there?

Sure. Starting with the anticipated impact next year at current pricing, depending on how these declines ultimately affect the bottom line, you might see a margin hit ranging from about 70 to 100 basis points. This is what we consider when evaluating our overall reported margins. Regarding mitigating that aspect of the business, we have been addressing this by adjusting curb pricing as needed due to downturns in recycled commodity values to ensure we are compensated appropriately on the hauling side. Furthermore, we are developing projects that allow us to handle more of our recycled commodities internally, minimizing our exposure to third-party processing fees, which can increase when values decline. Additionally, part of building these new facilities involves integrating updated technology that enhances the quality of the output, which further reduces risk and helps maximize value by effectively marketing our materials and leveraging our volume. We're always considering these factors, and while there are elements of our model that are linked to commodity values, our primary focus is on clearly communicating these dynamics so you can understand them.

Got it. And yeah, we really appreciate that. And then on the M&A front, I think you mentioned an increase from potential sellers coming to market. I was just wondering, is that a more one-off on some specific assets or broadly? Are you seeing more sellers coming to market? I mean, what do you think is causing that and as a result, are you seeing any fluctuation or decline in private valuation as a result?

The interest remains widespread geographically. The West Coast continues to be strong, and Canada, as mentioned previously, is active. Competitive areas across the U.S. have also remained engaged. We have a robust pipeline that is not limited to any single transaction. Our focus includes many revenue transactions ranging from $20 million to $40 million, which is where we excel. Some of these involve integrated operations like collection, transfer, recycling, and landfill companies, and they are quite appealing to us. From a seller's perspective, this is an intriguing time for discussions. Strong management teams at these companies are adjusting prices by about 200 to 400 basis points in response to declining commodity prices, as is expected of them; that's why we refer to them as gold-plated companies. However, there are others, particularly in the C&D sector, who have entered the market hoping for 21 valuations, which are unlikely in the current economic climate and construction outlook. Thus, while the situation is diverse, we continue to be diligent in our evaluations. Overall, the opportunity exists from coast to coast in both the U.S. and Canada.

Sounds good. Appreciate all the details.

Our next question will come from Sean Eastman with KeyBanc Capital Markets. You may now go ahead.

Hi team, great quarter. I wanted to revisit the discussion with Jerry about the possibility of margin expansion next year. Just to clarify, I understand that you're suggesting the underlying margins could expand year-on-year, and we might offset an M&A drag since revenue growth is expected to be significant. Is that correct?

Right now, the estimated M&A impact for next year is around 20 basis points, which is not a significant amount. Considering our usual margin trends, we previously mentioned a margin expansion of 20 to 40 basis points. However, looking ahead to next year, we expect that number to be considerably higher to compensate for the commodity costs and also to counterbalance the current acquisition impact, which stands at 20 basis points.

Okay. That's very helpful. And then maybe just help us think about the different moving parts in the internal inflation. I think there was some kind of hope that we'd see a plateauing and some declining coming out of the second quarter. There was some encouraging signs on the labor front. It seems like the message now is more persistent, which is not particularly surprising, but just some color on those moving pieces would be great?

We haven't noticed much change in the rate of underlying inflation and labor conditions. Looking ahead, we anticipate some changes coming, but until they arrive, we will continue to take necessary actions to address our current situation. On a positive note, we are making progress in hiring, with more people hired each month than there are new job openings, which suggests that there may be improvements on that front. Employee turnover has remained stable, and we are seeing a slight increase in retention among new hires. These trends indicate that improvements may be on the horizon, but we will remain cautious until we see concrete evidence of that change.

Okay, helpful. I'll turn it over. Thanks a lot.

Our next question will come from Michael Hoffman with Stifel. You may now go ahead.

So I want to know what the bet was for the second game?

No. This could be a long call, Michael.

I want to quickly return to the topic of pricing. Could you share what your restricted rate of change was compared to your open market in the third quarter, and what your assumptions are for the fourth quarter?

Sure. In our exclusive markets, it was about 5.5%, and in our competitive regions, it ranged from about 10% to 13%. The situation we described for Q4 is not significantly different from Q3, so that’s a good way to think about it.

Except that core might tick up a little bit. But yes.

Say the last part again, what would tick up and tick down?

The core is ticking up a little bit as we described. So we said we'd stay around 10%, but more of it would come from core. We hope that people that's what they appreciate, right? The core continues to accelerate, which is part of the setup for next year and the conviction that as Worthing described, the continued elevated levels of pricing. We're not relying on fuel surcharges to get there. And then as we look ahead, as Worthing mentioned, in those restricted markets it’s close to the 7% is how we're thinking about next year.

Got it. That's very helpful. Can you talk a little bit about what happens with price as a rate of change as well as unit price as we couple of things. One, inflation does find a settling down point and two, we may slow down the economy. Help everybody understand the durability of this?

We already have a significant portion of our pricing adjustments set for 2023 based on the strategies we've implemented this year. Similar to what we did in 2021, this has provided us with clear visibility into pricing for 2022 even before the year began. Most of our price increases will occur early in the year, which should position us for the pricing range I previously mentioned, around 8% to 9% at a minimum for next year. If conditions remain elevated as we approach the third or fourth quarter, we will reevaluate the situation. However, I believe the Federal Reserve is effectively managing inflation. As we begin to compare against the high rates of change from this year, we should anticipate mid-single-digit inflation levels by the middle of next year, with the possibility of a slight decline as we move beyond 2023.

And of course, the reminder that about 40% of the book of business is in those restricted markets. And so when we say, we're expecting 7% that number doesn't change based on what happens to inflation next year. That of course impacts ‘24, not ‘23 because it's a look back.

Right. And then from a volume standpoint, are you still seeing net positive service intervals and net new business formation versus losses?

Yeah. I'd say, we track the sales results in these competitive markets where you can track that. Again, we're still running better than plan on net new business as well as on net new price.

And then on the M&A side, are you seeing any easing evaluation given the debt markets have kind of locked out the non-strategic buyer. Is that helping valuation? And second, do you think the above-average pace pauses if the sellers or if we're in a recession, sellers back off and wait?

Well, again, Steve, if you wish you will get about four years of transactions done. We'll probably have next year planned by the time we have our call in February with 10 more months left. The disconnect is clear; there has been a surge of individuals in private equity fueled by easy money, and many were discussing high multiples without considering the actual quality of the business or its cash flow. Those days are over. There is now a reality check for lower margin, low cash flow businesses that believe they can achieve what they thought was possible in 2020 or 2021. Clearly, there's a reset for such businesses. Our approach to evaluation hasn't changed; we have consistently used above-market expectations for returns and assessed on a cash-on-cash basis. In fact, some companies we are currently evaluating have margins above 30%, which should warrant a higher valuation. As we mentioned before, real estate in some markets is quite expensive, which may also affect multiples. Our perspective remains the same. However, I think some sellers coming to the market with pitches for high multiples, without the asset quality or cash flow to back them up, will likely face disappointment.

Okay. And then, Mary Anne, for capital spending next year, you said 10.5% but that doesn't include any sustainability spending. So that would be on top of that.

No, Michael. When we describe CapEx, we talk about the total CapEx. We don't divvy it up that way. And so at 10.5% of revenue that would be everything.

Okay. That's a pretty good dip from this year because you're running closer to 12% this year.

But we've been very successful and if you don't put it that way in spending money these past two years.

All right. And then last one for me. Has the internal cost of inflation at least peaked? It's not rising still or is it still rising? Just wasn't sure about that message.

No, it's not rising. I'd say, four or five months ago, it's just been remaining at these elevated. And as I said, I was accused of being Donald Rumsfeld, I think last call, again, the important thing is that the unknowns are known and there have been no more unknowns that have surprised us. And so again, we've shaped the price, the required pricing consistent with the environment and environment remain fairly stable now for the past four or five months.

Okay. All right. Great. Thanks.

Our next question will come from Noah Kaye with Oppenheimer. You may now go ahead.

Great. Thanks for taking the question. Interesting nugget from the sustainability report to see incident rates come down again in 2021 and that's really despite the increased activity right from reopening healthy amount of M&A that you did. And I'm just curious if you could talk a little bit about as you kind of rebuilt routes and activity from COVID, what you did and what you're doing to drive continued safety improvements in the business?

It's important to understand that when we discuss an incident rate, it can refer to various events such as a bee sting or accidentally hitting a mailbox. We track everything that affects our employees or the community, including incidents that aren't preventable, like those involving distracted drivers. It's surprising how many people actually hit garbage trucks. There’s a lot involved in that number. From our perspective, safety is based on behavior. It’s not just paperwork or a departmental issue; each person needs to take responsibility. Every individual must come prepared for work, stay aware, and prioritize their safety so they can return home safely. Even with more than 10,000 or 11,000 routes in operation, we do experience some incidents, but it’s important to note that there are almost 11,000 routes that have no incidents. For example, our southern region in Texas and Florida had zero incidents yesterday, which we celebrate and expect, but we still acknowledge them. Maintaining a relentless focus on safety every day is crucial, and our team is committed to being accountable for their health. These professional drivers operate in a challenging environment, and we commend those who manage to go day after day and year after year without any incidents.

Okay. Thanks. And then I think sticking with the theme of people and labor to Michael's question earlier about internal rate of cost inflation. Can you characterize what you're seeing in the labor market now? Obviously, we're kind of heading into a seasonally softer period, but we're starting to see any easing in the labor market it? Does it remain tight broadly? Any sort of geographic easing that you might call out?

Yeah. I mean, it's always geographic specific, right? I mean, you can have in some cases wage rates running in that 3% to 5% range and in some areas you might have market adjustments that push you higher than that. And so overall, I'd say, obviously, we're assuming kind of mid-single digits or a little bit higher, but it varies by market and we try to be proactive and responsive for the vagaries in each market.

Yeah. And I mean, I guess to tie that back to kind of the margin expectations, right? And if you're overcoming 150 bps recycling headwind in 20 bps M&A dilution next year. And you're doing that with 8% to 9% price and what does that assume for internal cost inflation next year?

Yes. We are currently working through the budgets, and based on my calculations, I wouldn't be surprised if the average is around 6%. If I'm wrong, it could be as high as 7%, which is why it's important to ensure coverage. There is a lot of e-commerce activity, and we anticipate inflation will begin to ease as we approach the end of this year. It may start to fluctuate between 8% and 8.5%. Hopefully, the days of 9% or 10% inflation are behind us, and the month-to-month trackers suggest that we can expect inflation to decrease to around 4% to 6% by mid-next year, with some softening in the latter part of the year.

Super helpful. Thank you.

Our next question will come from Stephanie Moore with Jefferies. You may now go ahead.

Hi. Good morning.

Hey. Good morning.

Hi, Stephanie.

Continuing on the topic on price, but more so on the competitive landscape. I wanted to know if you were seeing any kind of changes in pricing activity more so on the local level from some of your smaller competitors, if they have kind of had their foot on the gas as much as the larger names in terms of just continuing to push price. Any color there would be helpful.

Yes, that's a great question. They are facing the same challenges as everyone else, and the pricing environment for smaller private companies is similar to that of public ones. We've observed companies moving in sync, particularly those with lower margins. The supply chain issues have significantly impacted margins, unless they can secure the right pricing. Currently, pricing fluctuations in the range of 8% to 12% are common. Additionally, many private companies are now increasing their prices by 2% to 4% more than what they initially anticipated earlier this year as we approach the coming year. This trend reinforces the need for pricing adjustments to cover rising costs and the effects on commodity prices.

And just to add to that, Stephanie, we continue to see the reality of that in competitive bidding, for instance, on municipal contracts for small players in many cases can't even participate because they don't have the equipment or the people or such a large price increase as necessary to hold on to the business.

Great. That's helpful. And then kind of switching gears, this year shaping up to be another record M&A year after a robust last year. Can you talk about maybe as you think about the last really two years of M&A activity and improvements to route density and kind of building out some concentration in key markets and how that's driving any margin improvement here this year?

Yeah. We don't look at it as driving margin improvement. I mean, obviously, it helps on the fringes but these aren't needle movers. As we always say, acquisitions that come on board, we typically expect a modest amount of margin improvement. But again, many of these could be structurally lower than the base business because obviously they may not have the full collection of assets meaning might not have renewable fuels, might not have landfills, et cetera. Some E&P waste, I mean, some of the higher margin sides of business. And so those are structurally dilutive. But it's little tuck-ins of $0.5 million here to $2 million or $3 million there doing 15 or 20 those a year, that's not really going to move the needle for what you're asking about.

Understood. Thanks so much.

Our next question will come from Walter Spracklin with RBC Capital Markets. You may now go ahead.

Yeah. Thanks very much. Good morning, everyone.

Good morning.

It seems that every decade or so brings shifts among West Coast sellers regarding whether to retain or sell a business. The discussions around this are quite significant. This year, we have closed many acquisitions in Oregon and California. By the end of the year, I wouldn't be surprised if over $200 million in acquired revenue is primarily from the West Coast. It has been a very active year, and the conversations continue in that region. We highlight these periods of activity because they are not always consistent, and when there is significant West Coast activity, it often leads to a higher-than-average number of transactions and revenue in any given year. That's great. When you look at your acquisition pipeline, I know you have a significant number for potential acquisitions, but given the rapid pace at which you're completing these deals, it seems the most appealing opportunities are pursued first. At what point do you think you'll align your annual guidance with the actual numbers you achieve, as there appears to be quite a gap? It sounds like you believe 2023 will be another exceptional year. How long do you expect these exceptional years to continue before we see a return to what you've referred to as a typical year for acquisitions?

As you know, it's important to remind everyone that we haven't made any transactions yet, which could make things even more favorable for us this year. We've passed on many opportunities because it was the right choice. However, there's still visibility for 2023. As mentioned before, we might achieve an average annual revenue by the time we hold this call in February, with plenty of time still remaining. We consistently turn down seven or eight transactions for every one or two that we actually pursue. Most of the deals we're involved in stem from relationship discussions that have been ongoing for over 20 or 30 years, and now the owners are finally saying they're ready to sell. It's difficult to predict when the owners of quality companies will decide to sell since they control the timing. We just need to be prepared to act when they are ready to proceed.

Got it. My final question is about your guidance for next year being in double digits. One of your peers has indicated a retreat from that position, but I’m not comparing you to them. What do you believe is the strongest support for you given the decline in OCC prices? You mentioned overcoming this challenge. Which area do you think has been most effective in addressing this degradation? Is it the acquisitions you've mentioned, your stronger markets, or better pricing strategies? How would you rank the most significant offsets to the decline in OCC pricing?

I believe you are witnessing the impact in both Q3 and Q4. Specifically, pricing is around 10%. If you're unable to achieve the necessary price, I understand why some may hesitate to provide further insight into 2023, as they may prefer to wait. The reality is that we are implementing our strategies effectively, and we are prepared to replicate this in the upcoming year. The positive aspect is that we currently face about eight months of headwinds at this level, which makes calculations easier. Additionally, while it’s important to be aware of the price of OCC, successfully moving the product is another challenge. Our team has done an impressive job of maintaining product movement in this environment rather than just accumulating inventory in our facilities.

Great. I appreciate the time and congrats on a great quarter.

Thank you.

We will now conclude our question-and-answer session. I'd like to turn the conference back over to Worthing Jackman for any closing remarks.

Well, 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 do not cover that we're allowed to answer under Reg FD, Reg G and applicable securities laws. I'll be missed to say, I've already been called out internally by the Philly fans that we have in Pennsylvania. And so hanging there folks with respect to three now. Thank you again. We look forward to seeing you at our upcoming investor conferences or hearing from you on our next earnings call.

The conference is now concluded. Thank you for your time in today's presentation. You may now disconnect.