Good morning and welcome to the Waste Connections, Inc. Second Quarter 2023 Earnings Conference Call. I would now like to turn the conference over to Ron Mittelstaedt, President and CEO. Please go ahead.

Okay. Thank you, operator, and good morning. I would like to welcome everyone to this conference call to discuss our second quarter results and updated outlook for 2023 as well as to provide a detailed outlook for the third quarter. I'm joined this morning by Mary Whitney, our CFO. I'm also joined by Joe Box, our recently promoted Vice President of Investor Relations. Congratulations, Joe. As noted in our earnings release, we are extremely pleased by the strength of our operational execution during the quarter for a solid beat on revenue and adjusted EBITDA to deliver margins 30 basis points above our outlook. Solid waste core pricing growth of 9.8% positioned us to expand underlying solid waste collection, transfer and disposal margins by 100 basis points in the period, largely overcoming the ongoing headwinds from year-over-year declines in recovered commodity values and continued inflationary pressures during the period. Our performance in the first half of 2023, along with recent acquisitions and reduced headwinds from fuel and other commodity-related impacts, positions us to increase our full-year outlook for adjusted EBITDA to approximately $2.525 billion, expanding our adjusted EBITDA margin to 31.5% for the full year up 40 basis points from our initial outlook and up 70 basis points as compared to the prior year. Most importantly, we are encouraged by improving trends in safety and employee retention as we doubled down on human capital in our decentralized operating model, including through the realignment of our organizational structure with the addition of a sixth region and refinements to our corporate operational structure. We look forward to driving outsized margin expansion in the second half of 2023 and into 2024. 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, Ron, and good morning. The discussion during today's call includes forward-looking statements made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including forward-looking information within the meaning of applicable Canadian Securities Laws. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ are discussed both in the cautionary statement in our August 2 earnings release and in greater detail in Waste Connections filings with the U.S. Securities and Exchange Commission and the securities commissions of 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 Ron.

Okay. Thank you, Mary Anne. Looking at Q2, our results began with price-led organic solid waste growth from core price of 9.8%, ranging from over 7% in our mostly exclusive market, Western region to between 9% and 12% in our competitive regions. Total price of 9.1% includes a 70 basis point decline in fuel and material surcharges, reflecting lower diesel prices in the quarter as projected. Reported volume growth of negative 1.9% reflects a degree of intentional shedding of lesser quality accounts and purposeful non-renewals of certain municipal contracts, including in some cases, at recently acquired operations, where we've identified opportunities for improving revenue quality. We consider this pruning to be integral to our disciplined approach to growth and typical of the opportunities for margin improvement we see in acquisitions. Given the number of acquisitions over the past few years, this was fully anticipated. Our volumes also reflect a muted seasonal ramp in activity levels as we had anticipated, impacting collection, transfer and disposal volumes, most notably special waste tons, a good barometer of the more cyclical and event-driven aspects of the business were down 7% year-over-year on reduced or delayed project activity across most regions. However, in July, special waste volumes were up 9% year-over-year, a reminder of how lumpy these project volumes can be and why it's tough to generalize about broader volume trends based on improvements in special waste or other event business. Lastly, consistent with a constructive trade-off between price and volume we've described in prior periods, we're making a conscious choice of up to 1 point of volume reduction to achieve our price objectives. We're very comfortable with the trade-off and our improving EBITDA margins reflect the benefit. Looking next at Q2 revenues from recovered commodities, that is recycled commodities, landfill gas, and renewable energy credits, or RINs. Excluding acquisitions, collectively, they were down about 40% year-over-year due to tough comparisons for values of both recycled commodities and RINs. OCC, or old corrugated containers, averaged about $75 per ton and RINs averaged about $2.15 in Q2, starting lower and jumping to over $3 late in the quarter in response to a favorable EPA ruling establishing renewable volume obligations. We are encouraged by the EPA ruling given our portfolio of renewable natural gas facilities under development, which remains on track to deliver the projected $200 million in incremental annual EBITDA by 2026 from over a dozen RNG projects with a range of ownership structures. Those benefits begin later this year when three facilities are expected to be operational and should ramp in 2024, when we are projecting the majority to capital expenditures. Beyond these projects, we continuously evaluate additional opportunities, including as we complete acquisitions. Moving on to the subject of acquisitions. We recently closed on Arrowhead Environmental, a $100 million revenue integrated transportation and disposal network with rail access from multiple transfer locations on the East Coast to Arrowhead landfill in Alabama. Operating locations include transload facilities in Connecticut, Massachusetts, New Jersey, and Florida, all of which feed into Arrowhead, a 1,400-acre MSW landfill serviced directly by rail. This important strategic addition provides enhanced internalization opportunities to our operations across the Northeast and has the potential both to reshape existing markets and to expand acquisition opportunities, given the internalization benefits afforded by leveraging this strategic disposal asset. In time, we expect this will be one of our most strategic assets in the company. This year is on track to once again be what we consider above average in terms of activity as we have already closed acquisitions with over $160 million in annualized revenue. In addition, dialogue remains very active with a robust pipeline, all in solid ways, setting up the potential for additional rollover contribution into 2024 for many acquisitions completed later this year. Our focus remains, as always, on value creation and replicating the success achieved over 25 years through disciplined capital allocation and consistency in market selection along with an intentional culture. In short, there is no change to our strategy. Our decentralized operating philosophy has been and continues to be a point of differentiation for Waste Connections along with our servant leadership-oriented culture. To that end, we made a number of changes to reinforce this approach, both in the field and within our corporate operational organization serving the field. Among other things, we completed our segment realignment to accommodate continued growth across our footprint and maintain our field-focused decentralized approach to decision-making and implementation. We expanded our regional structure through the addition of a fifth U.S. region, we're calling the Mid-South. This serves to accommodate the growth we have enjoyed over the past several years, a portion of which was heavily concentrated in the Eastern U.S. including our just announced acquisition of Arrowhead. With the addition of a regional office infrastructure in Charlotte, North Carolina, our region leadership team is well positioned to maintain the relationships with local operations, which we believe ultimately drive the results in our model. Moreover, this additional bandwidth sets us up for continued growth across our footprint as we look ahead to revenue of $10 billion and more. To that end, we also implemented leadership changes with an emphasis on coaching and developing our next generation of leaders as we position ourselves for the future. In conjunction with a purposeful evaluation of corporate resources to serve the field, we made some changes to the roles of certain of our long-tenured senior regional leaders to broaden their experiences and perspectives. While not necessarily significant from an outsider's point of view, these changes are expected to be impactful internally as they will influence the next generation of leaders to drive operating and financial results. These changes are also designed to streamline decision-making to support the field in two ways: first, to further enhance local autonomy on operational matters as appropriate; and second, to prioritize resource utilization from corporate support directed towards the achievement of the local objectives. We have always maintained that this is a local business, and regardless of our size, we are committed to ensuring that we are set up to manage it that way as we believe human capital is critical to our success. To that end, we are also focused on addressing the challenges of employee retention and what we still see is a tight labor environment. As noted earlier, we are encouraged by the progress we have seen year-to-date with voluntary turnover levels down 15% and open headcount requisitions down 25% from the peak seen during '22 and early '23, and we look forward to driving further improvements through a variety of approaches. We're adding resources, expanding our use of technology, and we're exploring alternative approaches to improving the flow of qualified candidates, including through driver and technician training facilities in which we have ownership interests or other involvement. Given the high correlation between retention and safety, we're mindful of the potential to accelerate improvements and safety incident rates along with retention. We're also leveraging the recent investments we made in updated camera technology and telematics to drive continuous improvement in safety and customer service, including at our newest acquisitions where the opportunities are the greatest. And now I'd like to pass the call to Mary Anne to review more in depth the financial highlights of the second quarter and our increased outlook for 2023 and to provide a detailed outlook for Q3. I will then wrap up before heading into Q&A.

Thank you, Ron. In the second quarter, revenue of $2.021 billion was $21 million above our outlook and up $205 million or 11.3% year-over-year. Acquisitions completed since the year-ago period contributed about $122 million of revenue in the quarter or about $121 million net of divestitures. As Ron noted, core pricing was 9.8% in Q2 with the vast majority of pricing done for the year. As we've described in prior quarters, total pricing stepped down on a reported basis over the course of the year, as a result of the combined impact of negative fuel surcharges from improving diesel costs, the anniversarying of outsized price increases in 2022, and the typical cadence of seasonality on reported price. With respect to volumes, Ron already described the dynamics and the key drivers. Here are the steps looking at year-over-year results on a same-store basis. Commercial revenue was up about 10%, on pricing up about 11%. Daily roll-off pulls were up nominally, on rates per pull up about 7%, and landfill tons were down nominally on flattish MSW tons with special waste tons down 7%, as noted, and C&D tons up about 7%. Adjusted EBITDA for Q2, as reconciled in our earnings release, increased by 11% to $628.9 million or 31.1% of revenue, 30 basis points above our margin guidance. Underlying solid waste margins expanded by 100 basis points year-over-year, largely offsetting 110 basis points in combined headwinds from tough year-over-year comparisons for recycled commodities, a 90 basis point drag and RINs a 20 basis point drag. Other year-over-year margin drivers included 30 basis points combined benefits from higher E&P waste activity and acquisitions completed since the year-ago period with offsets from a 30 basis point impact to deferred compensation related to stock market movements during the period. Our Q2 tax rate stepped up to 24.7% as a result of two factors: first, the impact of nonrecurring executive severance payments, most of which were nondeductible; and second, higher foreign exchange rates for the Canadian dollar, normalizing for the severance yields an adjusted rate of 23.6%. Year-to-date, we've delivered adjusted free cash flow of $630 million or 16.1% of revenue, leaving us well positioned to meet our full-year outlook for $1.225 billion in adjusted free cash flow. During the quarter, we opportunistically paid down about $240 million in debt, taking leverage down to 2.75x debt-to-EBITDA, and resulting in a mix of about 15% variable rate debt and a weighted average cost of about 3.8%. The strength of our balance sheet and free cash flow generation affords the flexibility to reinvest in our business and execute on our growth strategy while also returning capital to shareholders, including, as we've demonstrated over the last dozen years through double-digit percentage per share annual increases to our cash dividend, which we will revisit again later this year. I will now review our updated outlook for the full year and provide our outlook for the third quarter of 2023. 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 and reconciled in our earnings release. Adjusted EBITDA for the full year is now estimated at approximately $2.525 billion or about 31.5% of revenue, up $25 million and 40 basis points from our initial outlook for a 70 basis point year-over-year increase in adjusted EBITDA margin for 2023. Our updated revenue outlook of approximately $8.025 billion reflects a $35 million reduction in fuel and material surcharges related to declining fuel costs since providing our initial outlook in February. Net of this adjustment, our revenue outlook is up $10 million from February on updated values for recycled commodities and RINs, plus contributions from acquisitions completed since that time with solid waste volumes reflecting Q2 trends. Our adjusted free cash flow outlook of $1.225 billion reflects an increase to net capital expenditures of $25 million. Said another way, we increased our outlook for adjusted cash flow from operations by $25 million, in line with our EBITDA raise and took up capital expenditures as well. Turning next to our outlook for Q3. Revenue in Q3 is estimated to be approximately $2.06 billion. We expect core price of approximately 9% and total price plus volume of 5.5% to 6%. Recycled commodity values are projected in line with recent levels, down sequentially from Q2 on lower values for plastics with RINs in the range of $2.50 to $3. Adjusted EBITDA in Q3 is estimated at approximately $670 million or 32.5% of revenue. Depreciation and amortization expense for the third quarter is estimated at about 12.5% of revenue, including amortization of intangibles of about $39.5 million or about $0.11 per diluted share net of taxes. Interest expense, net of interest income in Q3 is estimated at approximately $68 million, and finally, our effective tax rate in Q3 is estimated at about 23.5%, subject to some variability.

Thank you, Mary Anne. Once again, we are extremely pleased by our results to date and encouraged by the factors driving our increased margin outlook for the full year, particularly given the reality of ongoing inflationary impacts. As provided in our updated outlook for 2023 and the back half of the year, we are set to exit 2023 at close to 32.5% adjusted EBITDA margin as the jumping off point for 2024. Normalized for recycled commodities, this puts our adjusted EBITDA margin well north of 33%. And yes, this is our total company EBITDA margin, not just solid waste and it translates to year-over-year margin expansion of over 150 basis points in the back half of the year, demonstrating the power of price-led organic growth along with a disciplined approach to acquisitions, and the avoidance of margin dilutive activities away from that core strategy. Looking ahead, we anticipate another year of price-led organic solid waste growth, positioning us for underlying margin expansion in 2024, along with benefits from continued improvements in retention, abating inflationary pressures, and purposeful shedding. Moreover, ongoing acquisition activity, contributions from new RNG facilities, and improvements to commodity-driven revenue could potentially produce further growth, which we will lay out when we provide our formal outlook for '24 in February. I want to conclude by thanking our 23,000 employees, whose dedication and hard work has driven our performance in the first half of the year and set us up for outside margin expansion in the second half. Their efforts and these results, including continuous improvement in our industry-leading safety metrics once again validated our market selection strategy and the role of local decision-making in driving results. Our focus is on maintaining a strategy that has served us well, executing on our playbook, and delivering on our commitments. We appreciate your time today. And with that, I will now turn this call over to the operator to open up the lines for your questions.

The first question is from Toni Kaplan of Morgan Stanley.

I wanted to begin by asking about the contracts that were lost. Were there any common themes among them, and did they occur in specific geographies or sectors? Are we finished with this process of losing contracts, or is there more to come? I'm also trying to understand the volume related to the negative 1% you mentioned—was that a cumulative figure or incremental?

Sure. First of all, the contracts that we have shed are scattered throughout our operations. However, there was a larger concentration on the eastern seaboard, where we have seen significant growth through mergers and acquisitions over the past three years. There were also some contracts in the South that were part of our ongoing review from the Progressive transaction we completed over seven years ago. The common factor is that these were municipal contracts with low margins. We either aim to maintain an acceptable margin and return on capital, or we are willing to let someone else manage them. Often, the volumes will still end up at our landfill, which we see as advantageous for both sides. There isn't a specific geographic focus. Regarding your question about shedding contracts, during a robust M&A period, like the last three years where we surpassed $1 billion in acquisitions, it’s common to experience 10% to 20% in private M&A transactions of revenue that is likely to offer little to no margin. This is an anticipated aspect that we identify. As contracts come up for renewal, we seek to reprice or exit them. For the past 25 years, intentional shedding has been a part of our model. Currently, we are seeing more of it due to the substantial M&A activity over the past three years and a relatively flat economy last year from a GDP perspective, which contributes to a softer market. With increased M&A, we are observing a bit more shedding in our volume numbers. In a typical economic environment with a modest GDP growth rate of 2-3% and slower acquisition activity, we continue this practice, but it may not be as visible on a quarterly basis. I expect that this number will decrease since we haven't reached $1 billion in M&A this year. However, this approach is part of our standard business operations with a focus on returns. Additionally, if you consider our peers who reported this quarter and have also engaged in significant M&A recently, they have encountered similar situations. This sheds light on the dynamics surrounding municipal contracts.

And just a one thing I would add to that, Ron touched on a couple of the regions. The other I would add would be Canada, where you saw purposeful shedding of certain residential municipal contracts. And I mentioned that because to Ron's point, about the impact of acquisitions, of course, that dates back to Progressive from 7 years ago, it tells you, you're still refining the portfolio opportunistically as contracts still roll off multiple years after the acquisition is completed. And frankly, the other point I'd make is then follow the margin. Because if you look at our regional reporting in our Q, you'll see the margin improvement that really stands out in our Eastern region and Canada, both of which we mentioned as having shedding going on.

Yes. And lastly, Toni, I would say, obviously, as I mentioned, you have a number between 10% and 20% of that acquired revenue that you ultimately may reprice or shed, you're not seeing that level of it. Why? Because there's also municipal contracts we're winning all along as well. So again, this is sort of a net number of that. And as Mary Anne said, follow the margin because that tells you whether we're making the right decision on repricing or not.

Perfect. And for my follow-up, I wanted to go to the margin. So you mentioned second half and third quarter expected to be 32.5%. Even just staying at that level in '24 would be 100 basis points of expansion year-over-year over this year, seems like a little bit higher than typical. And then you have inflation moderating and then maybe even some normal operating leverage on top of that? I guess, why shouldn't we be modeling 100-plus even basis points of expansion for next year? What would be the factors to offset some of that? Or is that your expectation?

Well, first off, remember, and I'm going to let Mary Anne take parts of this as well Toni. First off, remember, the second half of the year is just seasonally higher margin period. So the second half of the year, Q3 being guidance of 32.5%. If you do the math, I think Q4 comes in around 32.3%, so 32.4% blend. You're going to naturally have a step down in Q1 and Q2 seasonally, so your total margin isn't quite at 32.5% yet as we have guided this year is at 31.5%. So you're somewhat below that as you enter. But look, I think it's too early yet to make any projections for next year's margin. We generally say, as you know, with price-led growth, we get around 30 to 40 basis points of margin expansion. Yes, I think the number will be north of that next year, not ready to commit to what that will be. And there's certainly a number of moving things. That also depends on the level of M&A over the balance of this year because, as you know, that can come in margin dilutive so we want to be cautious in what we're guiding to. But what we are saying is the second half of this year on a normalized basis and depending on what you want to assume for commodities is at that 33% number. So I would be cautious telling you 100 basis points. I'm not saying that can't happen, but there are things outside our control, which influence that.

I want to emphasize what Ron mentioned, which is that we are not providing guidance at this time. However, we find it valuable to discuss the factors that are contributing to the expected sequential improvement in the latter half of the year. The fact is we have not experienced a reduction in cost pressures during the first half of the year. This situation, combined with easier comparisons on aspects like wage increases from last year, positions the second half of this year to be somewhat stronger. Additionally, this will also impact our projections for next year, which is why we advise being cautious about establishing a starting point and anticipating growth from there.

The next question is from Sean Eastman of KeyBanc Capital Markets.

I just wanted to come back to the margins, the 33% comment. Just for clarity, is that where we're run rating on an annualized basis in the second half at sort of a longer-term average commodity input level? Just some clarity there would be helpful.

So I think the point we're trying to communicate was, as we exit the year at 32.5%, you say look, commodities are really up about only 20% from where they exited last year, which was down 70% from the highest last July, right? So since there's a long way to go to get back to last July's levels, and so that was Ron's point, just layer on, it's more than 50 basis points, it's probably 70 basis points. And so he's saying well north of 33% if we're exiting at around 32.5%.

Okay. Understood. And then are there any sort of KPIs or margin enhancement targets that you could share or quantify around the big employee retention cultural programs that you're kicking off here, Ron?

Sure. There are several factors we consider. As I’ve indicated in past investor meetings and analyst conferences, we don’t have a simple lever to pull at Waste Connections. The company has always prioritized cost management and efficient operations. However, given the turnover we experienced, there is potential to reduce costs by up to 100 basis points over the next 18 to 24 months across seven or eight areas as we improve retention. If we reduce turnover from the mid-30% range to about 20%, we can expect to see improvements in those line items by 10 to 15 basis points each. This will impact labor costs, variable accounts, external repairs, risk management, SG&A, and overall volume, since everything improves when we are fully staffed and workloads are balanced without overburdening our employees and equipment. We are monitoring various aspects in each of these categories. The key focus is on reducing turnover. As turnover decreases, these line items as a percentage of revenue will continue to improve. We expect to show progress on this throughout the remainder of this year and into next year. If we exit the year at around 32.5% and commodities normalize, we aim to reach over 33%. If we achieve that 100 basis point improvement, we will be on track for a 34% EBITDA margin or higher within the next 18 to 24 months.

The next question is from Tyler Brown of Raymond James.

Hey Ron, curious if we could get some more details on the Arrowhead deal. This asset seems very interesting to me. I'm just curious if you can talk about how that fits in the Northeastern disposal strategy? And basically, does it give you more confidence in acquiring collection in that market or even other rail-serve transfer stations along the East Coast? And then does this move have anything to do with Seneca, basically, is it an alternative, if that site were to shut down?

Let's address the last part of your question about Seneca first. To clarify, this is unrelated to Seneca. Seneca is performing well, and we remain confident in our presence and growth there, with no significant changes expected. We have experienced substantial growth along the eastern seaboard, and there was a clear need for better connectivity to disposal options to integrate several markets that have not been previously unified. We have been focused on this for about a year and a half to two years and have made an internal commitment to integrate the eastern seaboard. Regarding your first question, this certainly creates more market opportunities for mergers and acquisitions. It also provides more chances to connect markets that are not currently integrated. Additionally, this is a key asset, and we are quite enthusiastic about it. The landfill is substantial, spanning 1,300 acres and currently handles around 3,500 tons per day, with the capacity to manage significantly more over time and the necessary permits to do so for an extended period. You can expect to see us discuss our planned development for this asset in the coming quarters and into next year. We approach these matters with a long-term perspective. This acquisition also opens up other rail transfer opportunities, making it strategically important in our view.

Yes. Okay. Very interesting. And then Mary Anne, just from a modeling perspective, just based on the acquisitions to date, how much contribution from M&A is kind of implied in the full year guide?

Yes. For the full year, the original guide was about $316 million, and we're now at like $405 million to $410 million. And then the rollover for next year is around $70 million.

Okay. And then my last one here, Ron, this is a bigger picture question. So I think it's already been 100 days back in the seat. I know that you never really left, but you have been interfacing investors pretty actively. And I'm just curious what your impressions have been there with all the new investors. What do you think the market still seems to miss about you or the story, if anything?

Thank you, Tyler. It's been 100 days since I returned, and I've appreciated reconnecting with many familiar investors as well as a significant number of new investors who I hadn't previously met. The investment community is quite knowledgeable. We have strong analyst coverage, which contributes to transparency. However, there is an important and often misunderstood issue regarding volumes. Many seem to believe that all volume is beneficial, which is simply not true. There is a considerable amount of volume that a public company shouldn't have. Public companies can sustain EBITDA margins of 25% to 35% even with inherently low volumes due to market conditions, contracts, or market positioning. Therefore, I think concerns about negative volumes are misplaced. The focus should be on whether margins and cash flow are declining; if they are increasing, it indicates a good reason for the approach being taken. I want to emphasize this, especially since it's a relevant topic right now.

The next question is from Bryan Burgmeier of Citi.

Your guide and your comments quite fairly balanced capital allocation for the year and you increased CapEx guidance a little bit this quarter. Maybe just from a big picture perspective, can you expand on where you see the best returns for Waste Connections right now? And can you remind me what you think Waste Connections' optimal leverage point is?

To begin with leverage, we are comfortable within the range of 2.5 to 3 times. This range offers us flexibility for potential large expenditures, although there aren't any significant opportunities at the moment that would push our leverage higher. It would require a substantial deal to exceed 3 times, but it's good to have that flexibility. Meanwhile, we maintain access to low-cost capital by preserving our investment-grade rating. Currently, we are at 2.75 in that range. Regarding capital deployment and returns, we have over $1 billion in free cash flow after dividends, which have grown in double digits for the past twelve years. This gives us significant flexibility to reinvest in our business, primarily through capital expenditures. In this industry, around 10% to 11% is typically spent on replacement capital and landfill development. Additionally, we're investing opportunistically in projects like renewable natural gas, which we see as offering strong returns, particularly in light of available tax credits. Looking ahead, we expect capital expenditures next year to be significant, with about $120 million planned for RNG projects. We will continue to make those investments as opportunities arise, without restrictions. This is why I began with our leverage position and the extent of our capital reinvestment, as we feel very positive about our current situation and the options available to us.

And Bryan, I would just add to that, and Mary Anne said it without stating it directly. Look, our best return of discretionary capital is an appropriately priced strategic M&A that meets our market, our financial and our operating criteria. I mean that is how we have built the valuation we have over 25 years. That's how we'll continue to build it going forward. And so that's what I think you've seen from us and you'll continue to see from us.

Got it. And second maybe just follow up on the M&A outlook. Can you just provide a little bit of detail on where your pipeline may stand right now? Would you say it's as full, less full, more full than it was maybe 1 or 2 years ago? I know you're targeting that fairly kind of niche markets, but you've always been able to find deals. Just a little bit of detail on the pipeline and the outlook. I'll turn it over.

Sure. While I can't share specific details about our M&A pipeline for proprietary reasons, I can confirm that it is quite robust. We have several letters of intent at the offer stage and some that are in final negotiations. As we look ahead to the next few quarters, we feel confident about our M&A activity. Compared to about a year to a year and a quarter ago, our pipeline is lower, but that was an unusual time coming out of the pandemic and experiencing hyperinflation, along with low interest rates that prompted many private sellers to take action after being sidelined for so long. Thus, it's important to view 2022 as somewhat of an anomaly. It would be misleading to compare our current pipeline directly to that period. However, relative to historical trends, our pipeline is stronger and continues to grow, encompassing a diverse range of collection and disposal opportunities throughout our operations in both the U.S. and Canada.

The next question is from Michael Hoffman of Stifel.

Can we talk about price and trend? So inferred in the full-year guidance is you're maintaining the 9.5%. And if I follow the trend on restricted 7% in 2Q, aren't we resetting at a higher number on restricted in the second half given 2022's inflation was 8.9%? And so that sets up, you don't need a big reach on open market to hit the 9% that you're giving in the 3Q outlook. Am I thinking about that correctly?

The way I'd encourage you to think about it, Michael, is that coming into the year, we basically know what the price increases will be on the 40% of our business that you're referring to, where there are those contracts reset and that's been factored into what we're communicating for our full year numbers. And most of those price increases. Yes, there's some that reset in the middle of the year, and that influences those numbers. But the majority of our price increases more broadly happen early in the year. And so that really determines the overall number. There's a little movement over the course of the year. The bigger factor in driving the cadence on a reported basis was, as we mentioned in prepared remarks, you've got a few things happening. One is the rolling off of outside price increases that we did last year in the face of accelerating inflationary pressures earlier in the year. And then also just the math the denominator getting bigger, which is why on a reported basis, our core price steps down. And then, of course, you've got kind of the noise of the good news on fuel, having fuel surcharges come down. So that's how I'd encourage you to think about it, it's around 7% in those contracts, CPI linked market. It doesn't move dramatically in the back half of the year. And again, the denominator gets bigger. And so the number comes down a little bit.

Okay. Fair enough. But you've trended ahead of your budget on open market? You've retained better. So is there any...

We see pricing playing out about as we expected, Michael. We feel really good about the visibility we had on pricing coming into the year. We said last quarter, we already had about 85% of it locked up done or known as we're even above that now. So we'd encourage people that 9.5% a pretty good number for the full year.

Okay. The OCC at $75 in your model is higher than RISI, which is at $50. There are two questions here. What can you do differently than the underlying RISI? More importantly, you mentioned what OCC price indicates normalcy when we consider normal recycling and margins.

Well, so a couple of things. I think we all talk about what we see in our book of business, which is influenced by geography and other dynamics. And so when we talk about lows of maybe $50 that might have been lift RISI pricing in the high 30s. So it's tough to compare, but we're always running above. Now I do think, in addition, we benefit from doing some things to make sure we're maximizing the value of our commodities. By the way, we have a national marketing agreement where we're taking advantage of volumes and consolidating. And also, we're seeing the benefit of the improved quality coming out of our facilities, we're using robotics and therefore decreasing contamination coming out the back end of recycling facilities. So I would say those influence what we communicate as what the numbers are. I think so it's all relative to expectations early in the year, and we're about 20% above where we were when we exited last year. And that's what's factored into what we have guided for, for the full year.

Everything Mary Anne stated is accurate. We believe that normalized OCC pricing is somewhere in the range of $110 to $120, which reflects the year-over-year decline we’re experiencing. It previously peaked significantly higher, between $160 and $200. While we are not suggesting prices will revert to those levels, we consider this range a more typical metric. Additionally, it's important to note that much of our commodities come from one of the two coasts, providing transportation advantages to certain markets that are not as accessible when a significant portion of volume is based in the Midwest and South, contributing to pricing variances.

Okay. There has been a significant improvement in labor turnover from year-end to now. Ron, your best-in-class periods were below 20%. Given the challenges in the current labor market, is it possible to achieve that again?

Yes. I think it is, Michael. Obviously, that's a high goal, a high bar, but we're going to hold ourselves to that high bar. I think certainly getting into the mid-20s first and then working our way down from the mid-20s down to that 20% or below level is the goal. Our goal is to get it into the mid-20s by the early part of next year or the mid part of next year and then work it down from there. There's a lot of components that go along to that from sourcing to onboarding to supervision, to equipment, to everything. There's just so many things that you have to fine-tune to get those numbers down, a point at a time once you get down to that 23% number or so. But yes, it is achievable, and we're going to hold ourselves to that. I would also say, Michael, what we really focus on is, look, if you're at 23%, just pick a number. How much of that is involuntary versus voluntary? As long as that involuntary number is somewhere in that 40%, 50% range, we're not as hung up on what turnover is because that means we're making proactive decisions most likely about safety on employees who are not going to make it and are going to cause a bigger issue. We could bring turnover reported down to 23% today if we backed off the involuntary. So you've got to understand that as long as we're going to hold our standard to where almost half of that, we're making proactive decisions really, that voluntary number is dropping to 10% to 13% when you get to 23%.

The next question is from Kevin Chiang of CIBC.

Congratulations, Joe, on your new title. I would like to ask about Arrowhead in relation to your segmented results, particularly the lower margin segments in Eastern and Mid-South that you recently disclosed. Does Arrowhead significantly impact your view of the profitability of these two segments over time? Will this asset help narrow the gap between these segments compared to what you observe in other markets?

Yes. I mean, obviously, if you can integrate a market, Kevin, you're going to pick up that internalized margin on disposal that was going external. So it obviously is going to help improve the margin without question. It also more importantly, improves your competitive positioning and sustainability of margins in a market area over a longer period of time. So that's why it is so important. You've got to also remember, Kevin, when you look at this, that the Northeast, in particular, is always, for the most part, taken as a whole, going to be a lower-margin profile business because of the pricing of disposal. You're talking about a market that is $80 to $130 a ton, pick a $100, $110 as a midpoint comparing that to a Midwest or South that might be $30 to $45 a ton. So you've got an inflated revenue number because of disposal in your collection system, in your revenue and therefore, obtaining the same EBITDA margin is that much more difficult. So if you look at a company based in the Northeast, like Casella, you've seen a historically lower than someone not based in Northeast public company margin, and that's a reflection of the market area as much as anything else. So are we going to raise the Northeast margins to the Canadian or the West Coast margins? Well, most likely not because it's not structurally possible, but it is structurally possible to raise it from where it is. And Arrowhead will absolutely help that.

That's great color. And again, you kind of noted this in your previous response, just the constituents of what's in revenue that impacts the segmented revenue in terms of the cost structure of those individual regions. But if I look at it, simplistically with the new mix South segment. Let's say you're running at least if I look at the most recent quarter, roughly $100 million in revenue quarterly below maybe the second smallest region in the U.S., or excluding Canada. Here so let's call it $400 million of annualized revenue. Is the argument or is the perception here that the Mid-South can grow to the size of some of your other U.S. segment. So that's kind of the opportunity in front of the Mid-South, whether it's through M&A or outside organic growth that you can close a gap from an overall top-line perspective here and we should see.

Yes, that's a good question, Kevin. First, let me clarify how we approach our regional alignment. We consider not only revenue size but also employee size, geography, and our ability to operate within that area, including travel logistics for our regional staff. Waste flows within a geography also play a role, as does potential for future mergers and acquisitions and growth. It's important not to merely compare regions based on annual revenue figures, such as one region at $1 billion and another at $2 billion, as that could be misleading. For instance, the number of employees may be similar in both a $1 billion to $1.2 billion region and a $2 billion region, influenced by disposal costs and other factors. In the Mid-South—Tennessee, Kentucky, Alabama, and other more rural states—you're covering larger areas, hence you have more employees and more residential business. This adds complexity to how we evaluate regions. Does the Mid-South present great growth opportunities? Absolutely, we believe it does, just by looking at these states. However, suggesting it will reach the scale of the Southern or Eastern region in the near future might be a bit misleading.

The next question is from Jerry Revich of Goldman Sachs.

Ron, I'm wondering if you could talk about how much of the Alabama acquisition expands your potential M&A pipeline with companies that fit the Waste Connections mold given how much that asset can be scaled?

Yes, Jerry, I wouldn’t want to speculate because I don’t have a precise answer. We can see that our Massachusetts and Rhode Island markets were previously non-integrated before yesterday's announcement, and now they are integrated. As of now, we can transport most of our materials from Massachusetts and Rhode Island to the Arrowhead landfill using our network. This indicates there are opportunities within those states and nearby ones, where we currently aren’t present or where we already operate, and there’s more potential for mergers and acquisitions now than there was a few days ago. I can't provide an exact figure yet, but as we move forward in the next couple of quarters and gain more clarity, we will be able to offer more specific information. What’s important to note is that this creates opportunities that we previously declined because we were uncertain about our integration capabilities. Our approach focuses on either establishing an exclusive market through a franchise or similar agreement, or building a de facto asset franchise by strategically positioning assets within a market. In a competitive market, if you have a long-term disadvantage in disposal, you won’t be able to create that de facto asset franchise. Therefore, there are markets we were consciously stepping back from that we can now reconsider, which is why we describe this as a strategic advantage.

Super. And can you totally just expand on the point of becoming vertically integrated in the existing markets. I mean in some of those areas, there's local disposal options that you're currently flowing through there, just more efficient than shipping all the way to Alabama by rail. So can you just expand on that point in terms of the plan. So is this really taking a view of disposal capacity 5 years out in those markets? Can you just expand on that? Because I know you folks aren't running railcars for practice, you want to make sure you're getting really good returns on those investments.

Yes, definitely, Jerry. We have not indicated that we plan to move all of our Northeast market waste to Arrowhead. Each of our markets has specific characteristics; some have local municipal disposal options, which will still be utilized. Economically, it makes sense for certain waste streams to go there. To your point, many areas in the Northeast have disposal costs ranging from $80 to $130, with $100 as a midpoint. Rail transport for waste at $100 a ton is viable over long distances. We do not anticipate a decrease in disposal pricing in the Northeast, and if that were to happen, it would actually benefit our collection operations. We're committed to moving waste to locations that provide the best economic returns. We are closely assessing the situation, and with diminishing disposal capacity in the Northeast, we expect prices to rise as disposal options decrease. Consequently, we will likely continue to transport waste to locations outside of the Northeast over greater distances.

Super. I appreciate the detail. And Ron, can you totally just update us on how the landfill gas developments are tracking? And as we think about when they start flowing through and obviously contributing to margins. Any update on the timing and the cadence, given the moving pieces in the industry, not only from project timing, but getting EPA certified and other moving pieces that are essentially delaying some players in ramping up capacity utilization?

Yes, Jerry, we say the update is our projects are on track. They're in line with our expectations. We said there were a couple that should be online by the end of this year, that they would then layer in over the next couple of years. And we've talked about that $200 million in annual EBITDA by '26, and there's no change to that outlook.

The next question is from Noah Kaye of Oppenheimer.

I appreciate the thoughtful responses today. And I just wanted to do a little bit of housekeeping to clean these up. First, just to level set on where we sit today on turnover and if you can disaggregate into voluntary versus involuntary.

Sure. We peaked in turnover at the end of Q4 of 2022 at about 35%. We reduced that to around 30% by mid-Q2 and further decreased it to just under 29% by the end of Q2. We are currently tracking below that as we enter Q3 of 2023, and I expect it to be 1 or 2 points lower at the end of Q3 compared to the end of Q2. We peaked at approximately 1,900 open positions at the end of Q4 of 2022, which was about 8% of our headcount. By the end of June, we had about 1,200 open positions, equating to around 5% of headcount. By Q3, I project we will reduce that to around 1,100 or slightly below, bringing it down to the 4.5% range. A 4.5% is a comfortable number for us; ideally, I think 3.5% is optimal. We always need some open positions for involuntary decisions, but if we can reach that 3.5% over the next 6 to 8 months, we would be very pleased. There is a significant difference between running 7% or 8% of open headcount versus 3.5% to 4%.

Very helpful. And then just remind us how much you're spending this year in CapEx on RNG and new recycling facilities? And did that number change at all in the $25 million higher CapEx guide?

No change in the higher guide. So this year, total for '23, the expectation is around $45 million for RNG and another $25 million for our recycling facilities for a total of about $70 million. And as I mentioned earlier, it steps up the expectation of the R&D spending stepped up in '24, probably $125 million, somewhere thereabout.

Okay. So there's an $80 million step-up on RNG and recycling, is that kind of flattish for next year? Or are those investments rolling off?

I think those are rolling off next year from maybe a nominal amount in '24.

Okay. So net-net, that's like a $55 million, $60 million increase in total CapEx above and beyond what you normally spend?

Yes.

Yes. I mean, having said that, I think it's important to understand the Dollar amount of the CapEx is elevating because of the revenue opportunities as we look at RNG and recycling. So it's important to recognize that this isn't just CapEx elevating for the purpose of elevating it's elevating for significant opportunities that are coming down the road here quickly.

Thanks, Ron. I did have a follow-up on the Arrowhead acquisition. This is your first significant acquisition to be primarily on the East Coast, and we've historically seen your operations concentrated in the West and South. Is this a possible change in strategy? And what kind of projects or growth do you see for Arrowhead in the future?

I would say that for us, I don't think it's a change in strategy. It's more of an enhancement of our footprint and our overall portfolio in the Northeast. We've had opportunities there that have existed for us as we've grown over the years. But this allows us to execute on those opportunities with greater flexibility. I mean, the Arrowhead acquisition ultimately increases our potential to build out more efficiencies across our footprint, which includes initiating new collection and disposal contracts. The potential is very encouraging for us, and we are confident in our teams to drive this strategy effectively.

This concludes our question-and-answer session. I would like to turn the conference back over to Ron Mittelstaedt for closing remarks.

Okay. 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 are available today to answer any direct questions we did not cover that we are allowed to answer under Regulation FD, Regulation G and applicable securities laws in Canada. 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 has now concluded. Thank you for attending today's presentation. You may now disconnect.