Good day, and welcome to the Waste Connections, Inc. Second Quarter 2024 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 today’s event is being recorded. I would now like to turn the conference over to Ron Mittelstaedt, President and CEO. Please go ahead, sir.

Thank you, operator and good morning. I would like to welcome everyone to this conference call to discuss our second quarter results and an updated outlook for 2024 and to provide a detailed outlook for the third quarter. I am joined this morning by Mary Anne Whitney, our CFO; and several other members of our senior management. As noted in our earnings release, solid operational execution supplemented by incremental acquisitions and increased commodity values drove an across-the-board beat in the second quarter positioning us for an increase to our full year outlook. Revenue and adjusted EBITDA increased in the quarter by 11.2% and 16.4%, respectively, as price-led organic solid waste growth and 100 basis point sequential improvement in volume was augmented by accretive acquisitions. We are extremely pleased by the continued strength of our operational execution during the quarter, including sequential improvement in employee retention as we maintain the strategy that has served to differentiate our results and which positions us for continued outsized growth. Given the strength of our performance in the first half of 2024, the momentum from continuing trends and contribution from recent acquisitions, we are raising our full year 2024 outlook to approximately $8.85 billion in revenue and approximately $2.9 billion in adjusted EBITDA or 32.8% adjusted EBITDA margin exceeding our initial outlook and up 130 basis points as compared to the prior year. 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 US Private Securities Litigation Reform Act of 1995 including forward-looking information within the meaning of applicable Canadian securities laws. Actual results could differ materially from those made in such forward-looking statements due to various risks and uncertainties. Factors that could cause actual results to differ discussed both in the cautionary statement included in our July 2024 earnings release and in greater detail in Waste Connections filings with the US Securities and Exchange Commission and the Securities Commissions or similar regulatory authorities in Canada. You should not place undue reliance on forward-looking statements as there may be additional risks of which we are not presently aware or that we currently believe are immaterial which could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements in order to reflect events or circumstances that may change after today's date. On the call we will discuss non-GAAP measures such as adjusted EBITDA, adjusted net income attributable to Waste Connections on both a dollar basis and per diluted share and adjusted free cash flow. Please refer to our earnings releases for a reconciliation of such non-GAAP measures to the most comparable GAAP measures. Management uses certain non-GAAP measures to evaluate and monitor the ongoing financial performance of our operations. Other companies may calculate these non-GAAP measures differently. I will now turn the call back over to Ron.

Okay. Thank you, Mary Anne. Revenue growth of over 11% in the second quarter was driven primarily by core solid waste pricing of 7%, which ranged from over 5% in our mostly exclusive market Western region to over 8% in our competitive market regions. Pricing is largely in place for the full year and continues to reflect the resilience of our market model with retention in line with historical levels. Reported solid waste volumes of negative 2.8% in the quarter were up 100 basis points from Q1 and continue to reflect the ongoing purposeful shedding and price-volume trade-offs that we have discussed in previous quarters. That sequential improvement was in line with our expectations despite limited seasonal ramp impacting most notably special waste tons, which reflect the more cyclical and event-driven aspects of the business. Special waste tons were down 13% year-over-year in Q2 on reduced or delayed project activity across most regions and are now down 20% from 2022 levels. A reminder of the cyclical sensitivity of these speculative and event-driven waste streams. In spite of these declines in underlying activity levels, we are encouraged by the pace of sequential improvement to reported volumes as we anniversary the purposeful shedding and non-renewal of certain contracts during previous quarters. Any pickup in the macro environment to drive incremental activity levels would be additive to that improvement. Beyond solid waste revenues also played out slightly better than expected in Q2 with recycled commodities, landfill gas, and renewable energy credits or RENs collectively up about 40% year-over-year. Recycled commodity values were up around 20% from earlier this year on prices for OCC or Old Corrugated Containers averaging about $140 per ton in Q2. RENs averaged slightly above $3, with higher values mitigating impacts from additional costs and delays in the commissioning and start-up of the three renewable natural gas plants previously expected to commence operations in Q2. These benefits are now expected to begin during Q3. Along with better-than-expected financial results, we saw continued improvement in trends for employee retention. In Q2, voluntary turnover once again stepped down sequentially, now marking our seventh consecutive quarter of improvement. At the low 15%, voluntary turnover levels are now 35% below the peaks, we saw during 2022, with open positions down 45% from related highs from two years ago. The wide-ranging benefits of reducing open positions include not only better safety incident rates but also improved levels of service and customer satisfaction, along with employee engagement. To that end, as noted earlier this year, we've also expanded training including through our two in-house driver academies where we will be actively engaging both new hires and existing employees, along with our diesel technician school partnership, offering and emphasizing opportunities for family members of existing employees. We are already realizing the impact of these internal efforts on retention and continue to expect them to augment the improving dynamics we've seen in employee recruiting, resulting from additional resources and targeted efforts. The changes put in place today are investments to drive continued outside margin expansion from future savings in productivity and risk management, along with continued and expected growing savings across several areas including labor, maintenance, and third-party services. We're also taking steps to address the evolving opportunities around PFAS, capture and removal to leachate treatment, with the introduction of technology through partnerships at several of our landfills. Consistent with our sustainability-related priorities, we're positioning ourselves for decreased reliance on treatment by third parties, as we develop and expand our internal capabilities. Moreover, we're actively pursuing other investments in technology focused on both customer experience and our operations including the use of robotics in our recycling facilities and through machine learning applications, using cameras in our trucks for safety, service, and sales opportunities. We see the benefits from these and other AI-driven applications as opportunities to drive both growth and value creation. On the subject of value creation, moving next to acquisitions, another key driver of our growth. We are positioned for a record year of private company acquisition activity in 2024, having already completed 18 acquisitions, with over $500 million in annualized revenue. Acquisitions during the second quarter included multiple tuck-ins to existing markets as well as the strategic acquisition of state-of-the-art recycling facilities in the Pacific Northwest, furthering our sustainability-related efforts and internalizing our recyclables in that market. In addition to the deals already closed this year, we have over $150 million in annualized revenue from solid waste acquisitions in franchise markets spread across multiple geographies that are under definitive agreement and expected to close later this year. To be clear, these have not been included in our updated full year 2024 outlook. Continued balance strength provides the flexibility to fund outsized acquisition activity along with an increasing return of capital to shareholders. We continue to see high levels of seller interest and have a robust pipeline of solid waste opportunities across our footprint, positioning us for over $700 million in acquired revenue by the end of 2024, which would set an all-time annual record for us in private company acquired revenue. And to be clear, this is $700 million of acquired revenue in acquisition, not $700 million in acquisition spend as has recently been communicated by others. With over 1% rollover contribution in 2025 already in hand from acquisitions closed, we are well positioned for up to 3% or more rollover including incremental contribution from other deals as well as those noted under definitive agreement, and based on our ongoing elevated activity levels. Clearly, a great way to already be positioning for continued outside growth as we look ahead to 2025. And now, I'd like to pass the call to Mary Anne, to review more in depth the financial highlights of the second quarter, to review our increased full year 2024 outlook and provide a detailed outlook for Q3. I will then wrap up, before we head into Q&A.

Thank you, Ron. In the second quarter, revenue reached $2.248 billion, exceeding our expectations by $23 million, mainly due to contributions from new acquisitions and higher commodity values. This represents an increase of $227 million or 11.2% compared to the same quarter last year. The acquisitions made since last year’s period generated approximately $123 million in revenue for the quarter, or about $121 million after accounting for divestitures. Core pricing was up 7% in Q2, although prices declined sequentially because of typical seasonal variations. Fuel and material surcharges negatively impacted results by 20 basis points, largely due to decreasing diesel costs. As mentioned, volumes fell by 2.8% as expected but improved by 100 basis points sequentially despite overall declines. Examining year-over-year results for Q2 on a same-store basis, daily roll-off pulls dropped by 3%, with declines across all regions except for the Western US, where pulls increased by about 2%. Daily landfill tons decreased by 2%, special waste activity fell by 13% year-over-year, and was down over 20% from 2022. C&D tons decreased by 4% year-over-year, while MSW tons rose by 3% in Q2. The most significant declines in special waste and C&D occurred in our central and mid-South regions. Adjusted EBITDA for Q2 was $731.8 million, marking a 16.4% increase year-over-year, exceeding our expectations by about $10 million. Our adjusted EBITDA margin was 32.6% of revenue, which is 10 basis points above our outlook and a 150 basis point rise year-over-year, although it included a 20 basis point drag from the drop in special waste tons mentioned earlier. After adjusting for that, our underlying solid waste margins improved by 80 to 90 basis points due to reductions in certain third-party costs as retention improved and some cost pressures lessened. Other margin contributors included a combined impact from commodities of 50 to 60 basis points and around 30 basis points from acquisitions. The net interest expense for the quarter was $78.4 million, benefiting from our Q1 public offering and our $750 million senior notes issued in the US, as well as our CAD 500 million inaugural senior notes offering in Canada completed in June. Currently, our average cost of debt is about 4% with a maturity of roughly 10 years. By the end of the quarter, we had approximately $7.71 billion in outstanding debt, with around 13% at a floating rate, and liquidity of about $1.26 billion. Despite $1.5 billion in acquisition expenditures through Q2, our leverage ratio declined to 2.67 times debt to adjusted EBITDA. Our effective tax rate for the second quarter was 22.6%, slightly lower than expected due to reduced foreign exchange rates. Year-to-date, we have generated an adjusted free cash flow of $727.4 million, which is 16.8% of revenue, reflecting a 15% annual increase. I will now present our updated full-year outlook and our expectations for the third quarter of 2024. Before proceeding, I want to highlight that actual results may vary significantly due to the risks and uncertainties outlined in our safe harbor statement and filings with the SEC and similar regulatory bodies in Canada. We encourage investors to review these factors closely. Our outlook assumes stability in the current economic conditions and does not account for any further acquisitions that may happen within the year, nor the expenses related to such transactions. Regarding our updated full-year outlook, as detailed in our earnings release, we now expect revenue to be approximately $8.85 billion, an increase of $100 million from our initial forecast, mainly driven by contributions from recent acquisitions and updated recycled commodity values reflecting recent trends. Adjusted EBITDA for the full year is now anticipated to be around $2.9 billion, which accounts for 32.8% of revenue, marking an increase of $40 million and 10 basis points above our previous outlook, corresponding to a 130 basis point rise in adjusted EBITDA margin for 2024. Our adjusted free cash flow outlook for 2024 remains at about $1.2 billion, with capital expenditures projected at approximately $1.15 billion. Moving on to our Q3 expectations, we estimate revenue to fall between $2.275 billion and $2.3 billion, with an adjusted EBITDA margin of approximately 33.7%, representing a 120 basis point year-over-year increase. Depreciation and amortization for Q3 is estimated to be around 12.7% of revenue, including about $44 million in intangible amortization, which equates to $0.13 per diluted share after taxes. We project interest expenses, net of income, to be around $82 million for the third quarter. Lastly, our effective tax rate in Q3 is estimated to be approximately 23.5%, subject to some variability. Now, let me turn the call back to Ron for concluding remarks before the Q&A session.

Okay. Thank you, Mary Anne. We're extremely grateful to our teams for once again driving better-than-expected results while prioritizing our most important assets, our people and positioning ourselves for continued growth. On double-digit top line growth, we further expanded our already industry-leading margins during the quarter while implementing and integrating record amounts of acquisition activity. And as indicated by our increased outlook for revenue, adjusted EBITDA and EBITDA margin for the full year, we remain well positioned for continued outside margin expansion throughout 2024. In fact, as provided in our updated outlook for 2024, our Q3 outlook reflects margins approaching the 34% threshold we've referenced in recent quarters, despite a slower seasonal ramp thus far and ongoing cost pressures in many areas. Our results reflect our consistent focus on revenue quality, as we shed less profitable activities and maintain a disciplined approach to acquisitions, a strategy that has served us well. Moreover, our results in 2024 could set up another year of outsized growth in 2025 expected to be driven once again by price-led organic growth along with rollover contribution from acquisitions already completed and under agreement. Looking ahead, we would expect our financial results to reflect more of the benefits from improving operating results and retention and safety, along with the potential for underlying volume improvement and easing of cost pressures not fully captured by headline CPI in the current environment. As we reflect on the success to date and our positioning for 2025, I want to conclude by thanking our nearly 24,000 employees whose dedication is truly our greatest asset. Our differentiated results are driven by their commitment to our operating values, safety, integrity, and customer service, as we strive every day to be the premier service provider in North America and a great place to work. With solid waste pricing largely in place, higher commodity values, and record M&A activity driving better-than-expected results, we're off to a great start for 2024 and well positioned for continuing success. And for those of you in New York City, you've probably seen our EV trucks in action picking up recyclables. We're excited to expand our presence across the city beginning with the first commercial pilot zone this fall as well as additional expansion we expect. We'll keep you posted on this and other developments. We appreciate your time today. I will now turn this call over to the operator to open up the lines for your questions.

Thank you. And today's first question comes from Tyler Brown at Raymond James. Please go ahead.

Hey. Good morning.

Good morning, Tom.

Tom.

Hey. I just want to make sure I have it. So what are kind of the expectations around volume in the second half? Is maybe Q3 still under pretty good pressure and eases in Q4 as you anniversary that purposeful shedding? Or will Q4 also remain under pretty good pressure?

Well, Tyler, if you think about the way we came into the year our expectation was that volumes would be most negative early in the year and sequentially improved as we anniversary the shedding and the purposeful non-renewal of contracts. We also expect that there would be some contribution from underlying volume generation, which we haven't seen yet, which is why in the updated guidance you can see the impact to volumes that's implied by that. And so, I would say, the trajectory the pace is a little different but we would still see sequential improvement Q3 versus Q2 and then about the same or a little better in Q4, again as we anniversary known losses, very purposeful losses. The upside, of course, would come from any pickup in that activity. As at this point, as we've mentioned on the call Q2, we didn't see the seasonal ramp in special waste, and as you know, Q3 is the strongest seasonal quarter. So we'd be looking for that to come back and haven't seen it yet.

Right. And that kind of plays into my second question, and I don't want to necessarily get out on my skis here but, it seems that you have a pretty easy special waste maybe even C&D comp into next year. It feels like housing is maybe a coiled spring if mortgage rates could move lower, infrastructure spending should be pretty good next year. I guess do you think roll off and maybe just volumes more broadly could stabilize into 2025, maybe 2026 after three years of negative volumes? Or will that calling still pressure that?

Yes. I mean obviously, Tyler, we can't predict total macro economy, but I would agree with you. Look, as you know, special waste in particular 90-plus percent of special waste that this industry speaks about is the cleanup of generally contaminated soils for speculative real estate development, residentially, commercially or industrially. What we are seeing is that many municipalities across the US are saying they are sort of cash strapped in their current budgets and are delaying the completion or the starting of their larger projects within their communities. At some point, that just in, okay? And so, there's a natural bounce back of that. And so, we've seen these cycles before. There's generally a year up to maybe 1.5 years long. We feel like we've been in this sort of for the last 18 months. So I would concur with you that at some point in 2025 and certainly as we go into 2026 that should improve. I would also note, Tyler, that we have historically seen in national election years, presidential election years, we've seen sort of just a stall of activity as things become unknown leading up to an election and then sort of a releasing of it once the results are known. So, for all those reasons, I would concur with that your statement.

Yes, that’s interesting. Ron, regarding labor, it appears that turnover is continuing to decrease. I understand there are delayed benefits associated with this. As we assess the margin performance this year, how much can we attribute to specific labor benefits, and how much is due to effective execution and a favorable price-to-cost spread? I'm curious if some of the labor benefits might not actually have a significant impact until 2025.

Yes. So first off, Tyler and everyone else, as we've mentioned, we are working towards our targeted levels. While we're not there yet, we are getting closer. By the end of 2025, we expect to see about 100 basis points of margin expansion from these efforts. So far, we've achieved around 25 to 30 basis points, which means we still have another 70 to 75 basis points to capture. We are confident we can achieve this. As we've stated before, this improvement isn't just related to labor; it's driven by several factors, including labor, labor overtime, variable costs, third-party repairs, and outside repairs. All these aspects are influenced by our route downtimes and what our routing times are, which are connected to our headcount. So, to summarize, we believe we are a little more than a quarter of the way towards our goal, which is why we anticipate continued margin expansion into 2025.

Right. And the other element associated with that Tyler is really what hasn't abated to be where we still see the runway for opportunity. We made reference to the fact that we had outsized underlying margin expansion in solid waste in Q2. And I would note that that's in the face of still seeing same employee wage increases above 5.5%. And as you may recall coming into the year, we thought the 6% we were seeing would abate to sub-5% as we move through the year. So we're still looking forward to that. And that's the point about headline CPI not necessarily capturing the reality of all the cost pressures that still continue.

Okay. Perfect. Thank you guys so much.

Thanks, Alan.

Thank you. And our next question today comes from Kevin Chiang with CIBC. Please go ahead.

Hi. Good morning. Thanks for taking my question. You mentioned in your prepared remarks that you still observe strong seller interest. However, when I consider what's going on in both Canada and the US, there's been a change in capital gains legislation here, and we could also face an election next year. Additionally, you are experiencing an election with a possible change in administration later this year. I'm curious if you've noticed any shifts in seller expectations or if sellers are attempting to time their deals based on these developments in both countries.

Yes, that's a very insightful question, Kevin. Historically, we believe that changes in capital gains tax significantly influence seller psychology and timing. The Trump tax cuts are set to expire at the end of 2025 unless there are changes before then. Depending on the outcome of the upcoming US presidential election, as well as the House and Senate, if there is a perception that capital gains rates will increase in 2025 or early 2026, we might observe a surge in seller activity in the latter half of 2024 and throughout 2025. On the other hand, if there is an expectation that rates will remain the same or decrease, that could maintain the current status quo. It's worth noting that higher rates after 2025 would likely affect seller psychology negatively. Conversely, when taxes increase, we generally see a decline in multiples. We have been successful in M&A under both political environments, but certainly, lower capital gains rates motivate sellers to take action. That's undeniable.

That makes sense. And maybe just a couple of housekeeping questions. There's these wildfires in Alberta. Just wondering are your assets that you acquired from Secure, are they impacted at all by those wildfires?

No, the assets we acquired from Secure are currently not affected. However, we do have solid waste assets near some of the fires. For the second summer in a row, we had to fully evacuate some operations last summer. We haven't had to evacuate this summer yet, but it's been borderline. So, it's not on the Secure side, but on the solid waste side.

Okay. That’s great color. I'll pass it on congrats on a good quarter.

Thanks, Kevin.

Thank you. And our next question today comes from Bryan Burgmeier with Citi. Please go ahead.

Good morning. Thanks for taking the question. If I heard correctly in the prepared remarks you guided to 3Q EBITDA margins like 33.7%. Just how should we think about the drivers of that? Is it accurate to say that underlying net price trends are the same or maybe a touch better? And then I guess you have less help from commodities maybe a little bit of dilution from M&A. Is that directionally accurate?

Yeah. That's the right way to think about it. When I think about what's different in the back half of the year than the first half of the year, a couple of things. The incremental deal contribution changes the mix a little bit. I'd say that lack of special waste becomes more of a headwind. So that implies that underlying solid waste continues to expand. It's getting a little granular. There is an extra day of expenses in the quarter. And so that impacts the year-over-year and takes it down 30 to 40 basis points. And then as you said the commodity tailwinds are smaller in the back half of the year than they were of course in the first half of the year.

Got it. Got it. Thanks for the details. And then, I was just wondering if maybe you can touch on just some of the acquisitions you made in the quarter. Is anything kind of particularly noteworthy or are these kind of focusing on that rural exclusive market that Waste Connections is in? And are these all collection businesses? Thank you. I'll turn it over.

Thanks, Bryan. During the quarter, we completed several acquisitions, the most significant being the recycling facilities we acquired in the Pacific Northwest. One facility is located just outside of Tacoma, and the other is near Portland. We were among the largest customers of both facilities, which allowed us to internalize our recycling operations. This is particularly important in these two states that have recently implemented ERP legislation, given our extensive presence there. It was a strategic move for us. Additionally, we executed several smaller acquisitions in our solid waste operations and made a minor exploration and production deal in Canada, expanding our footprint after the SECURE transaction we completed in the first quarter. Overall, it was a strong quarter with deals made throughout the US and Canada. We also signed some significant agreements yet to be finalized, which will be discussed in next quarter's call, involving franchise deals on both the West and East Coasts. This is part of the $150 million in contracts we reported that have been signed but are not yet closed.

All right. Thank you. And our next question today comes from Noah Kaye with Oppenheimer. Please go ahead.

Yeah. Thanks. I'll just pick up right there Ron. And that's to think about the actual return profile for all of these deals in aggregate. I think your point well taken about looking at the revenue profile. And then, Mary Anne, you mentioned some of the margin implications from what's already been closed. But how do we think about the kind of returns that you're seeing now on these acquisitions? You've always had a pretty disciplined underwriting process very standardized. Where are your returns penciling out these days on the acquisitions? And can you comment at all directionally on multiples?

Sure. To address the latter part of your question, I believe that overall multiples have decreased by about 1.5 to 2 turns over the past two or more quarters. This decrease reflects a rise in the cost of debt capital for many private and public companies. Our returns have remained stable, and by that, I mean we don't focus solely on EBITDA multiples; these are simply a result of our return on invested capital model. Depending on the size and risk of the investment in an acquisition, we're typically looking for an internal rate of return between 11% and 15%. We also aim for a positive net present value on invested capital throughout the life of the transaction, in relation to the size and risk of the investment. Thus, while an EBITDA multiple offers a convenient way to discuss financials, we consider various factors including asset quality, margins, necessary capital expenditures, replacement capital expenditures, investment risk, and permitting risk in assessing what we can pay to achieve acceptable returns. Over time, I believe these conditions will continue to improve. This is due to the fact that managing our 115 to 120 landfills and continuing to acquire and develop new ones is much more challenging today than it was 10, 15, or 20 years ago. Consequently, we expect to see more collection and transfer operations as we expand our network of landfills in both the U.S. and Canada, which will contribute to an upward trend in our aggregate returns.

Very helpful, Ron. I want to touch briefly on the RNG sustainability investments because while you mentioned the higher commodities as a tailwind it sounds like you along with the industry are seeing some timing start-up delays. So can you just refresh us on the expected contribution from those incremental investments to EBITDA this year? And then possibly how you see it for next year because obviously these should be a lever to support margin expansion as they layer in over time?

Sure. So no, we had talked about an expectation of $15 million to $20 million in contribution and in our revised guidance that was taken down by about $10 million with very high flow-through. And we mentioned that in Q2 in essence we just had costs not the benefit. And so that mitigated some of the benefit from higher RINs. And when we think more broadly about what's driving the delays. In this case it's really the last mile if you will, it's the interconnect with electric utilities and just getting the projects up and going. So it's tough to generalize on project development on all the other projects we have. But what we do know is that across the industry the projects are taking longer and the costs are running higher. And so we remain committed to the plans that we have. And we would say during 2026 we still expect those projects to come online that we've described about $200 million in EBITDA contribution. So that's how we're thinking about it.

Yes. And the other thing I would note is that while projects are running a little more expensive that does not include in our analysis the offset of ITC tax credits because we've never included that. And that while it can create a timing mismatch between the project and that when you net that against the increased CapEx you should still be net about what we thought.

Okay. So all very helpful color. And just to reflect back make sure I get it we still committed to the $200 million EBITDA at least as a run rate by 2026. Maybe just more of a ramp to get there as we move through the next year and change that effect characterization?

Yes, that's how we're thinking about it. And to that point we're still committed to spending the capital primarily this year but maybe some will flow into next year.

Yes.

And our next question today comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Thanks so much. Strong free cash flow quarter, but looks like you kept the guidance unchanged for now despite raising the EBITDA guide. Just anything that might warrant higher than normal spending or more than you thought before? Or is this just conservatism? And how should we think about potential sources of free cash flow upside for the year?

Sure. So Toni, the reason for keeping free cash flow the same in spite of the increased EBITDA would be that CFFO would be largely unchanged given the incremental interest expense associated with the $1.5 billion in acquisition outlays we've already made. So that's how we think about it. The other observation would be we didn't adjust CapEx in spite of the fact that we did all that M&A and very often or in some cases M&A can come along with the CapEx needs right up front. And so I actually think of it that there's underlying upside outperformance and we're absorbing that incremental CapEx and not changing our free cash flow guidance at $1.2 billion.

Yes. Okay. Great. And I was hoping you could provide an update on any technology opportunities or productivity initiatives. I think you mentioned that cameras in the prepared remarks, but maybe expand on that opportunity or any other opportunities you think could move the needle for you in the next year or so?

Sure. We are currently working on several initiatives that impact revenue, productivity, safety, and the performance and quality of our materials recovery facilities (MRFs). To highlight a few, we are utilizing a significant amount of robotics and AI in our MRF operations. Recently, we opened a newly rebuilt MRF in Illinois that incorporates robotics, AI, and optical sorting, which has notably reduced headcount while significantly increasing hourly productivity and improving the quality of materials we produce and deliver to the market. In some cases, we have transformed facilities from employing 80 to 100 workers down to the high 20s while maintaining or exceeding the same volume through the implementation of robotics and advanced sorting technologies. We are planning to launch another MRF in early 2025, which is currently in development. Additionally, we are leveraging new camera technology that has been installed on our trucks to enhance operational performance. By integrating AI, we can now measure commercial overloads in bins automatically for billing purposes, improving revenue from commercial clients. This advancement is expected to positively affect both volume and pricing as we move from 2024 into 2025. Furthermore, we are applying new routing technology that allows for real-time adjustments. This means when our team arrives at a district and identifies any operational issues, they can reroute on the spot, moving away from the previous manual methods. These are just a few examples of the technological advancements we are implementing.

Perfect. Thank you.

Thank you. And our next question today comes from Jerry Revich with Goldman Sachs. Please go ahead.

Yes. Hi. Good morning, everyone.

Good morning, Jerry.

Hi. I wonder if trouble you for an update on the Northeast rail development. How is the ramp going? And can you give us an update on when do you expect to be fully operational at full volume levels?

Sure, Jerry. Here are a couple of updates. First, we are approaching the first anniversary of acquiring Arrowhead, which is the landfill's name, not the rail infrastructure. We acquired it just over a month ago, and at that time, it was handling about 2,700 tonnes a day. We had committed to doubling that by the end of 2024. As of now, we are at 6,000 tonnes a day, and there have been days when we've exceeded 7,000 tonnes. We've surpassed our initial goal ahead of schedule. We believe we can eventually reach 10,000 tonnes a day by 2026, with the site's permitted capacity at 15,000 tonnes a day, though that may be further down the line. The increase from 2,700 to 6,000 tonnes has predominantly been from internal operations, which limits revenue growth visibility as these volumes are accounted for internally rather than as third-party tons. On the downside, we've faced some short-term challenges due to operational issues at Norfolk Southern, which underwent some leadership changes during Q2 that affected their volume delivery. Fortunately, their situation has improved over the last month, and we're more optimistic about increasing our volume capacity. We are laying more track at our Arrowhead facility to handle higher daily volumes and store more cars, and similar expansions are underway at our rail sites in the Northeast. There's a lot happening right now.

Super. Thank you. And in terms of free cash flow conversion obviously, these investments. You mentioned the recycling upgrades, the landfill gas investments as well. Can you just talk about the puts and takes around free cash flow conversion, three years out once the landfill gas facilities are online? How much higher could your already strong free cash conversion move as you look at the puts and takes including bonus depreciation, et cetera?

Sure. And as we said when we gave our guidance at the beginning of this year, if you normalize the free cash flow this year it was closer to historical levels of that 48% to 50%. So we'd say, that's the right way to think about, the sort of underlying conversion. And that's in spite of the fact that we do have bonus depreciation sunsetting, unless or until some other changes put in place. And so we still think that's the right way to think about recall that in our highest our peak years it was 53% to 54%. Absent the benefits from bonus depreciation and outsized M&A and the expensing of qualifying equipment, the writing off. So that was outside benefits during that period. We don't see getting back to those levels in the current environment, with the sun setting of bonus depreciation. But certainly the $48 million to $50 million is the way we think about it on a more normalized basis.

And Gerald, I would just add that there is no theoretical limit on conversion, just as there is no theoretical limit on margins. As we improve margins over time, you will naturally see conversion increase as well.

Super. And Ron, can I ask the last one that you spoke about to the automated truck cameras. I think they're coming from a supplier that just changed ownership. Please correct me if I'm wrong. I'm wondering if you just talk about your views on that potential change in ownership? And can you just talk about where you stand in receiving truck deliveries today versus replacement levels if you don't mind?

Sure. Well, I think the transaction you're referencing unless I'm wrong Jerry is Terex's acquisition of Environmental Solutions Group from Dover. And if I'm right in that assumption, yes, we are acquiring cameras and have for many years, although this is a different technology on the AI for commercial overages, but yes that is through one of the ESG subsidiaries, 3rd Eye. We've had a very long-standing relationship with ESG on a number of their products. As you know, they've got seven or eight different product lines for solid waste from containers to truck bodies to onboard safety technology to compaction equipment. So we are a user of all of it. As I said, I've had a very good relationship. I think very highly of the folks at ESG. I think they've done a very nice job on their products and services. As far as the transaction itself, we don't know much about it, never had much interaction with Dover as a parent, just dealt with ESG corporate. And as I understand, they're going to continue to be sort of a stand-alone entity within Terex. And I think they feel good about that from everything we've heard. And as long as we continue to deal with the folks we've dealt with, we think it's excellent for both companies, really excellent for ESG for Terex for getting a quality company. And we have some relationship with Terex on some of our heavy equipment stuff in our field. And so we know them not as well as we do ESG, but thank highly both of them.

Super. I appreciate it. Thank you.

Thank you. And our next question today comes from Tobey Sommer with Truist Securities. Please go ahead.

Hey, good morning everyone. This is Jack filling in on for Tobey. I think you mentioned earlier price cost spreads still being elevated in 2025. Based on your pricing visibility and what you're seeing on the inflation side? Is there any way to frame where that spread is now and where you think that might be in 2025?

Sure. So the point I have made is that, the wage pressures hadn't abated to the extent that might have otherwise been suggested by the lower CPI and that we were delivering the underlying margin expansion, approaching 100 basis points in spite of that fact. And so, in our view that creates opportunity ahead to the extent that those wage pressures, we expect would or should continue to abate. We also acknowledge that price/cost spread is something we'll be very mindful of as we think about what pricing is necessary as we go into 2025. We certainly know that CPI-linked markets would be expected to step down meaning the price increase in '25 would be lower than it is in '24. And in those markets we're getting a little over 5%. So those are the pieces that start informing us. And of course, we'll have better visibility on that by October when we typically start talking about the pieces of our guidance.

Yes. Josh, what I would say is look for 20-plus years now, our approach hasn't changed. We target getting 150 to 200 basis points spread minimally relative to sort of the ongoing not only CPI, but what we believe our cost structure is doing which often reflects CPI. Sometimes there are some minor dislocations. So, you tell us what you think the CPI is and layer on 200 basis points and that's what will be likely targeting and achieving in our reported net pricing next year. And that is at 200 basis points just below to answer what we're getting right now. And of course, we target beating what we're out there and we guide. So we would tell you we would expect it to be relatively the same. The dollar amount may be a little different because CPI comes down, but the spread of price to cost should be about the same as current.

Thanks. That all makes sense. I'm hoping to get an update on the secure energy assets. Has the integration progressed? What are the expectations for the E&P waste business for the remainder of the year?

I appreciate the question, as it gives me a chance to thank our R360 Canada group for their first full quarter in Q2. They had an exceptional quarter, delivering revenue and EBITDA at or above our expectations. We have an outstanding group of assets and employees there, along with a strong leadership team we’ve developed. They are performing very well. We have not yet reopened any of the seven additional E&P assets that were shut down with that transaction, but we're getting closer to reopening one of them and will evaluate the rest over time. We anticipate that probably four or five of those will make sense to reopen, presenting some incremental opportunity. Additionally, we completed a tuck-in transaction outside the Alberta market in the E&P space in Canada during Q2, bringing on an excellent company with a strong leadership team into our R360 Canada team. In summary, I believe we are performing well, very pleased with the asset quality, and have an exceptional team in place to drive progress.

And the only thing I would add to that with respect to the E&P waste trends that we're seeing, we also saw sequential improvement in the US in that business. And I'd say that's in spite of rig count continuing to decline. So, I would point out that there is remediation activity that contributed to the Q2 beat of our expectations and we never assume that continues, because those are one-off jobs.

Appreciate the detail there. Thanks for taking the questions.

Yes.

Thank you. And our next question today comes from James Schumm with TD Cowen. Please go ahead.

Hey. Good morning, everyone. There's a third-party survey noting landfill pricing declined year-over-year with the exception of maybe the Northeast. I was just curious what do you think drove that? And what's your expectation going forward?

Number one, I'm looking, James. I'm not aware of that survey. So I apologize. I can tell you that is not the case for us. All three lines of disposal business price per unit increased in 2024. It was up almost 6%, just under 6% between all three of our lines on the price per ton basis year-over-year. So, I'm not certain what that is. One thing that does affect that and it did hurt our volumes somewhat in Q1 more than in Q2. And this would be, what I would guess, is in the winter the incinerators on the Eastern Seaboard dropped their price from the $100 a ton rate down as low as the teens to keep volume and attract volume and many landfills along the Eastern seaboard chased price down to keep volumes when that happened. And that would be what I would guess it was. We did not play that game, and that did have a volume effect, but others did and I'm imagining that's what it is.

Okay. Interesting. Thank you. And Ron, you mentioned cost pressures in many areas. Mary Anne you mentioned, labor, maybe labor expenses not declining or decelerating as fast as maybe thought. Is there anything incremental? Are you seeing anything on the repair and maintenance side? Are you seeing any reacceleration of inflation elsewhere? Just any color you could give there?

No. The point we were trying to make was that cost pressures haven't necessarily abated to the extent that headline numbers might suggest. And so, we are still seeing, for instance, improving trends in things like third party maintenance costs and parts and materials. Those are getting better but they're still above the 3%, for instance, headline number. So if that's your proxy for cost escalation. We're still north of that, which is why our overall cost inflation is more like 4.5%, because it's driven by those higher numbers. We are seeing them improve. They're just not improving as quickly as we had expected. And so when you think about our 80 to 90 basis points of underlying margin expansion, it tells you those retention-related efforts, which Ron said, are 25 to 30 basis points are helping to decrease our reliance on third parties, whose costs aren't escalating quite as quickly as they were before but are still escalating.

Okay. Great. Thank you very much.

Thank you. And our next question today comes from Sabahat Khan with RBC Capital Markets. Please go ahead.

Thank you and good morning. Earlier, there was some discussion regarding the outlook for cyclical volumes in the system and the associated shedding. From a high-level perspective, considering the recent moderation in volumes, has this been more influenced by macro factors or shedding? Moving forward, would a recovery in macro conditions lead to an increase in volumes even with the ongoing shedding? I am curious if one of these factors is more significant than the other in the overall volume picture. Thank you.

Yes, that's a very insightful question. When we mention that special waste volumes are down 20% in Q2 compared to 2022, it's due to macro conditions and not due to any shedding. Roll-off volume decreased by 3%, which is also influenced by macro factors related to construction and events. To answer your question, improvements in the macro environment would positively affect both of these areas quickly, as it has historically. The shedding that occurs is typically within the commercial and residential segments of our business, particularly when we acquire companies with underperforming contracts. We often end up shedding some or all of the broker work that comes with the commercial business we acquire. Shedding is not something new for Waste Connections; we've been doing it for a long time. In the past, the macro environment provided enough underlying volume that you didn't see negative volume. Now that real volume is closer to zero, any shedding will lead to negative volume. That's the explanation.

Okay. That's great insight. One topic that you likely encounter frequently is how to manage pricing as inflation decreases. If we consider the price versus cost dynamics, one perspective is that as inflation reduces, the overall price levels may also decline. This could potentially allow for a greater price-cost spread due to the lower absolute figures. From your perspective, how would you address that line of thought?

I would actually say it's the opposite. It's crucial to understand the strategic differences and variations in business models. In a higher inflationary environment, it is much easier to achieve a greater price-cost spread. Conversely, this becomes harder in a lower inflationary setting. While it may seem counterintuitive, when consumers are facing 7% or 8% inflation, they anticipate 10% or 11% price increases, leading to a 200 or 300 basis point differential. However, when inflation is at 3%, achieving a differential of 2% to 3% towards 6% is significantly more challenging due to customer perceptions. This is essentially about percentage differentials—one situation presents a 20% or 30% differential, while the other shows a 50% differential, making it more complex. That's why we appreciate our business mix, particularly the low 40% in franchise, which guarantees a CPI return. This enables us to concentrate on the competitive 60%, often in rural areas, where we can enhance pricing. Ultimately, it's misguided for people to claim that pricing is decelerating. While the absolute dollar percentage may be decreasing, the spread is what truly matters. The focus should be on that spread rather than the overall dollar percentage.

Great. I just want to confirm something I heard earlier in the call regarding the M&A activities you mentioned. Did you indicate that the acquisitions were in new franchise markets?

What we said is $150 million in deals that have been signed but not yet closed. Those included franchise markets. So we're looking forward to closing them in the back half of the year.

Great. Thanks very much.

Thank you. And our next question today comes from Brian Butler with Stifel. Please go ahead.

Hey. Good morning. Most of my questions have been answered, but just two quick ones hopefully. On the R&D, I just wanted to clarify that $200 million of EBITDA that's out there in maybe 2026, that assumption was kind of made with RIN prices closer to $2. Is that correct? And there's potentially some upside of RIN stays for the next 24 months at a higher level. I just want to make sure you get that assumption correct?

Yes, that $200 million was based on RIN pricing in the range of $250 million to $260 million, not $2. While there is some upside at $3, it's not a 50% increase because the original assumption was not made at $2. We mentioned that the investment thesis remained valid down to $2 without the ITC tax credit and even below $2 with it. This might cause some confusion, but the $200 million projection was indeed based on RIN prices of $250 million to $260 million.

Perfect. Thank you for that clarification. And then you talked about partnership on PFAS and obviously with kind of an emerging issue that's out there. How should we think about that partnership, and maybe from a management of leachate, what that cost might look like out into the future? I mean, obviously, it's early days, but where is a good starting point?

It's still early, Brian. I would mention a couple of points. First, uniform federal regulation for all our competitors has typically been beneficial for our industry. Public companies have the financial resources to meet the new requirements, and this creates a pricing opportunity to recover investments along with some additional margin. We see this as no different than any other opportunity, although the cost impact varies by market based on the level of PFAS that needs treatment and available outlet options. Essentially, it's a logistics challenge. Generally, capital costs for a landfill could fall between $2 million and $10 million for acquiring treatment units, but realistically, it's likely closer to $2 million to $4 million. This investment would enable the use of technology to solidify PFAS in leachate, allowing the solidified material to be permanently contained in the landfill while the liquid is treated at a publicly owned treatment works or an industrial plant, without significantly increasing costs. The expected impact on pricing could be around $0.02 to $0.04 per gallon. We will account for both capital and additional operational costs in our pricing strategy, but as you've noted, it's still early in this process.

Okay. Great. Thanks for taking the questions.

Thank you. And our final question today comes from Timna Tanners with Wolfe Research. Please go ahead.

Yes. Good morning. I just have a few quick ones that I think will be pretty high level. But I wanted to just ask for any updated thoughts on desire if any to stray away from your solid waste focus given a competitor doing so? Any updated thoughts there?

No, we have no intention to do so. For 27 years, we have been primarily focused on solid waste. Twelve years ago, we entered the E&P disposal business, which at one point accounted for 15% of our revenue, but now represents around 5.5% to 6% after our adjustments earlier this year. It's significantly less than it was in 2012. We have plenty of opportunities in our core solid waste and recycling services, as well as in E&P disposal and treatment. We see no reason to move away from that focus right now. While we explore other options, we haven't found anything that is as attractive compared to our current capital uses. I can't comment on what others are doing; it may make sense for them, but it's not a strategic direction we are pursuing.

That's helpful. And then similarly I know in the past you've said the elections and politics aren't necessarily that important for you all but seems to me like President Trump could try to deemphasize if you will the EVs if nothing else. And I'm just wondering does that change your strategy at all? Or is it too late to put that genie back in the lamp?

Well, I don't know who will win the election or what they will ultimately do. Depending on their statements, things could change anyway. However, we have not invested heavily in electric vehicles. We are engaging in markets that either request or require us to participate, such as certain areas in New York City and parts of California, and we are either complying or planning to comply with those requirements. I don't believe that any investment decisions we make are solely influenced by who wins the election or who controls Congress. Our investment choices are based on strategic considerations, what is best for the environment and sustainability, and the economic return on each investment. If any factor changes in those evaluations, we reserve the right to adjust our approach. But currently, we are not seeing anything from either side that suggests we should change our strategy.

Okay. Got it. And then final one. Can you just remind us of what it would take to revisit the dividend at this time? Is it just a question of alternatives and acquisition opportunities? Or just if you can remind us your thinking there?

So I'd remind you that since the initiation of the dividend in 2010, we've raised it double-digits every year, on a per share basis. And we continue to think about looking at it every year in Q3. And we have no differing expectations at this point in time.

I'm sorry, I misspoke. I meant, the buyback, I'm sorry about that.

Regarding the buyback, we maintain the same philosophy we've always had, viewing mergers and acquisitions as our top priority for driving incremental growth. This, of course, depends on valuations and strategic fit, which always come first. I've already discussed our approach to dividends. What this means is that in years when we don't see significant M&A activity, such as this year where we've already invested over $1.5 billion in deals and expect more before the year's end, there could be plenty of free cash flow available. We would certainly consider taking advantage of buyback opportunities when they arise. That’s how we continue to approach the situation.

Thank you.

Thanks.

Thank you. And this concludes our question-and-answer session. I'd like to turn the conference over to Mr. Mittelstaedt, for closing remarks.

Okay. Well, if there are no further questions, on behalf of our entire management team, we appreciate your listening to and interest in the call today. Mary Anne and Joe Box are available today to answer any direct questions that we did not cover, that we are allowed to answer under Regulation FD, Reg G and applicable securities laws in Canada. Thank you again. We look forward to connecting with you at upcoming investor conferences or on our next earnings call.

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines. And have a wonderful day.