Waste Connections, Inc. Q4 FY2024 Earnings Call

Good morning, everyone, and welcome to the Waste Connections Inc. Q4 2024 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Ron Mittelstaedt, President and CEO. Sir, please go ahead.

Thank you, operator, and good morning. I would like to welcome everyone to this conference call to discuss fourth quarter results and our outlook for both the first quarter and full year 2025. I'm joined this morning by Mary Anne Whitney, our CFO, and several other members of our senior management. As noted in our earnings release, Q4 provided a solid finish to a year of extraordinary accomplishments for Waste Connections, both financially with double-digit growth in both revenue and adjusted EBITDA and operationally with accelerating improvements in employee engagement and retention, along with the integration of record levels of private company acquisitions, which totaled approximately $750 million in annualized revenue in 2024. Most importantly, our continued focus on human capital resulted in multiyear lows for employee turnover, now down over 1000 basis points from 2022 with the associated improvements in operational execution, providing momentum for another year of outsized margin expansion in 2025. Price-led organic solid waste growth along with improving commodities and ongoing acquisition activity should position us at or above the high end of our range of potential outcomes with normalized adjusted free cash flow in excess of $1.55 billion. 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 February 12th 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.

Thank you, Mary Anne. Please note that 2024 was an extraordinary year at Waste Connections by any number of measures, including safety performance, employee engagement and retention, acquisition activity, financial results, and ultimately value creation. Solid waste core pricing of 7.1% was supported by strong operational execution and record levels of acquisition integration to drive industry-leading margins for the whole company, not just solid waste at 32.5%, up 100 basis points year-over-year despite significant commodity, RINs, and FX declines in Q4. As we have indicated, we maintain that the best leading indicator of performance is voluntary turnover, which has declined by 50% in less than two years to below 13% now. Over the same period, we have also seen a reduction of over 60% in open employee positions, with every region at or below targeted levels of 3% to 4%, down from 7.5%. Additionally, our 2024 employee engagement scores showed continuous improvement from an already high base on record levels of employee participation. We are seeing traction from higher staffing levels and expanded frontline training. We're sending more new and existing employees through our in-house commercial driver academies and realizing the benefits from that engagement in both improved retention and safety statistics. We're also reducing overtime as well as reliance on third-party services, improving service levels, customer satisfaction, and employee morale while also maximizing the integration benefits from new acquisitions and providing more avenues for growth. In short, we've achieved the balance in service quality, pricing, retention, and acquisition integration that we've been working towards over the past 18 months. The benefits of these improving trends were evident in Q4 when we delivered a 6.7% core price and overcame the FX of an additional 0.5 point of negative volume due to our decision to ramp down activity at Takeda Canyon landfill. This reduction, along with the combined headwinds from the sequential decline in commodities, RINs, and FX rates during the quarter accounted for more than 60 basis points margin impact relative to our Q4 guidance. The good news is that RINs have already bounced back to about 250, and commodities have firmed up from recent lows. For the full year 2024, we delivered better-than-expected adjusted free cash flow of $1.218 billion, converting over 50% of adjusted EBITDA to adjusted free cash flow, normalized for RNG project CapEx and over $200 million in outlays associated with the site-specific impacts at our Chiquita Canyon landfill in Southern California, reflecting adjusted free cash flow of over $1.4 billion in the base business, excluding Chiquita. On the subject of Chiquita Canyon, we made the decision to close active waste disposal operations at the site as of year-end 2024. While we do have remaining airspace available at the site, we determined it was no longer feasible to continue operations due to the imposition of tonnage limits taking effect on January 1, 2025, and the final permit approval needed for Chiquita to access otherwise permitted and constructed airspace, along with incremental capital requirements. Although not our preferred choice long-term, closing Chiquita was within the range of potential outcomes contemplated when we provided a preliminary framework for 2025 back in October. And we have successfully redirected a significant portion of the waste throughput to another of our landfills in Central California. Put simply, the economics of operating no longer made financial sense. We will, of course, continue to manage the site, including addressing the elevated temperature landfill or ETLF event as well as honoring our commitments with respect to closure and post-closure as appropriate. Mary Anne will cover the impacts to our 2024 financial results and closure and post-closure liabilities in Q4 to address and mitigate the ETLF event impacts, which, as we've noted before, are site-specific and non-recurring in nature. Looking next at acquisitions. In 2024, we closed approximately $750 million in annualized revenue from 24 acquisitions, with deals in E&P Waste and across our footprint of solid waste franchises and competitive markets, including acquisitions that can be internalized into our disposal network, plus new market entries and a number of tuck-ins to existing operations. We continue to have a robust pipeline. In fact, we already have over $75 million in annualized revenue, either closed or signed and expected to close during Q2. This brings the 2025 expected revenue contribution from acquisitions to over $300 million as we sit here in early February. Our disciplined approach to acquisitions remains unchanged and relationship-driven, with our focus as always on market selection, the risk profiles we accept, and the valuations we determine to be appropriate. As we say, what matters is not just closing deals but integrating and delivering results to provide value creation and to maintain low leverage for continued growth. To that end, in spite of outlays of $2.2 billion, our leverage was virtually unaffected during 2024, ending the year at 2.67 times debt to EBITDA, a reflection of the quality of the revenue acquired and our ability to delever dynamically. That low leverage plus liquidity approaching $1 billion provides tremendous optionality for continued funding of outsized acquisition activity and investment in sustainability-related projects, along with an increasing return of capital to shareholders. And now I'd like to pass the call to Mary Anne to review more in-depth the financial highlights of the fourth quarter and provide a detailed outlook for Q1 and the full year 2025. I will then wrap up before we head into Q&A.

Thank you, Ron. In the fourth quarter, revenue of $2.26 billion was up $225 million or 11% year-over-year, bringing full year 2024 revenues to $8.92 billion, above our expectations and up 11.2% year-over-year. Acquisitions completed since the year ago period contributed about $169 million of revenue in Q4, net of divestitures, bringing full year net acquisition contribution to $529 million. Core pricing in Q4 of 6.7% ranged from about 5% in our mostly exclusive market Western region to about 7% in our competitive markets. Fuel and material surcharges were negative 50 basis points in the quarter on lower fuel costs. Solid waste volumes in Q4 were down 2.7%, excluding a 50 basis point negative volume impact at Chiquita, where we ramped down activity in advance of closing the site. Elsewhere, volumes continue to reflect our focus on quality of revenue through shedding and a purposeful trade-off between price and volume, as well as the timing of special waste activity, some of which, as noted last quarter, was completed in Q3. Looking at year-over-year results in the fourth quarter on a same-store day adjusted basis, roll-off pulls were down 4%. And total landfill pounds were about flat. Adjusting for Chiquita, tonnes were up 3% year-over-year on MSW, up 6%, special waste up 2%, and C&D waste down 6%. Over half of the MSW increase was attributable to storm cleanup activity in Florida or the internalization of tonnes from our Northeast operations into our rail-served Arrowhead landfill in Alabama. Adjusted EBITDA for Q4, as reconciled in our earnings release, was up 11.6% year-over-year to $732 million or 32.4% of revenue. As Ron noted, excluding the reduction in tonnes at Chiquita and the drop-off in commodity-driven revenues and FX rates during the quarter, adjusted EBITDA margin was over 33%. Looking at the full year, 2024 adjusted EBITDA of $2.902 billion was up 15% year-over-year, with adjusted EBITDA margin up 100 basis points to 32.5%. And as a reminder, that included a margin of 33.7% during Q3, our seasonally strongest quarter. Given our decision to close Chiquita Canyon landfill as of year-end, our Q4 results reflect our accounting for the related impacts. The write-down of $116.1 million in site costs, plus an adjustment of $480.8 million to increase our closure and post-closure liabilities. This amount includes a full forward of what we would describe as the customary outlays associated with landfill closure and post-closure obligations scheduled to occur over a 30-year period. It also reflects an update to projections for outlays to address the ETLF event, which totaled $224 million in 2024 and are expected to step down in subsequent periods to about $100 million to $150 million in 2025, and down to about $50 million in 2026. Total 2024 outlays outpaced original expectations, primarily as a result of related regulatory, permitting, legal, consulting, and other indirect costs that were outside of the original scope, as well as incremental requirements driving up the direct costs associated with leachate treatment. We continue to pursue strategies to mitigate these impacts and the related costs. In spite of those incremental outlays, our 2024 adjusted free cash flow of $1.218 billion exceeded our expectations. Capital expenditures of $1.056 billion reflect ordinary course CapEx in line with expectations and slower-than-expected RNG project spend, totaling about $60 million. As discussed on prior calls, our sustainability-related projects include about a dozen R&D facilities with a variety of ownership structures. We continue to expect projects to be online by 2026 and expect aggregate capital outlays to approach $250 million before any benefit from investment tax credits. While RIN values will drive the payback period, our hybrid ownership approach insulates us from volatility on about half the economics of these projects. R&D capital expenditures of $100 million to $150 million have been factored into our 2025 outlook, which I will now review along with our outlook for Q1 2025. 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 change in the current economic environment. Beyond the noted signed deals, our outlook 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 the full year 2025, revenue in 2025 is estimated in the range of $9.45 billion to $9.6 billion. For solid waste, we expect price plus volume in the range of 4% to 5%, excluding about 0.5 point volume impact from closing Chiquita, which, by the way, is how we'll communicate organic growth in 2025. On pricing, we expect an increase of about 6%. Acquisition revenue contribution of about 3.5% includes deals signed and expected to close during Q2. As the range of outcomes includes the potential for some recovery in commodity values and FX rates from recent levels. On that basis, adjusted EBITDA in 2025 is expected in the range of $3.12 billion to $3.2 billion or adjusted EBITDA margin in the range of 33% to 33.3%, up 50 to 80 basis points year-over-year. This positions us for peak quarterly margin in excess of 34% and consistent with what we've discussed in prior periods, in spite of lower commodity values, RINs, and FX rates. Incremental acquisition activity and further improvements in commodity-driven revenues would provide upside to our 2025 outlook. Adjusted free cash flow in 2025 is also expected in the range of $1.3 billion to $1.35 billion, with estimated CapEx of $1.2 billion to $1.225 billion, including $100 million to $150 million for RNG projects. Our adjusted free cash flow outlook also reflects $100 million to $150 million for outlays associated with the Chiquita Canyon ETLF. Adjusting for these discrete items, we expect 2025 adjusted free cash flow of over $1.55 billion to be indicative of the jumping-off point for growth going into 2026. When we expect to revert to our more normalized conversion rate of 48% to 50% of adjusted EBITDA or more. Turning now to our outlook for Q1 2025, revenue in Q1 is estimated in the range of $2.2 billion to $2.225 billion, and adjusted EBITDA is estimated at $700 million to $710 million or 31.8% to 31.9% of revenue. Depreciation and amortization for the first quarter is estimated to be about 13.4% of revenue, including amortization of intangibles of about $48 million or about $0.13 per diluted share net of taxes. Q1 interest expense net of interest income is estimated at about $80 million, and the tax rate for the first quarter is estimated at approximately 23%. And now, let me turn the call back over to Ron for some final remarks before Q&A.

Okay. Thank you, Mary Anne. Coming into 2024, we emphasized the interconnectivity of relationships and results, and our performance reflects the importance of both with financial excellence and record acquisition activity supported by notable improvement in operational statistics and employee engagement. Even more importantly, they positioned us for continued outsized growth in 2025. In fact, we believe we're better positioned than ever. In 2025, we're focused on delivering excellence with humility. We're sticking to a model that has served us well for over 27 years and which guides us as we grow to revenue of $10 billion and more, while acknowledging the benefits of innovation and new ideas to ensure that the company is well positioned for the future. Along these lines, we're excited to be working with partners to provide solutions for PFAS treatment and expand renewable natural gas generation in our landfills. We're introducing electric trucks as we build out our newest franchise market, New York City, and we're further digitizing the employee and customer experience to bring people closer together through technology. We are already seeing the benefits of the use of AI, higher productivity and output quality from robotics in our recycling facilities, improved safety outcomes, and routing efficiencies across our fleet, along with opportunities to drive sales and augment revenue quality, just to name a few of the applications. We'll always maintain a human-centered design to inform and direct our approach to the use of technology, but we'll also focus on opportunities to leverage and maximize the utility of our resources. We're also humbled by the trust of many stakeholders from the communities we have the privilege to serve to the private sellers entrusting us with their legacy, and we're most grateful for the dedication of our 24,000 employees, who embody the enduring values of Waste Connections and whose efforts truly set us apart. We appreciate your time today. I will now turn this call over to the operator to open up the lines for your questions.

Ladies and gentlemen, we will now begin the question-and-answer session. Our first question today comes from Tyler Brown from Raymond James. Please go ahead with your question.

Hey. Good morning, guys.

Good morning, Tyler.

Hey, Tyler.

Hey. Lots of good detail, as usual. But can we go back over some of the moving pieces on cash flow? Maybe can we start with green CapEx? I just want to make sure that I've got it. So I think in 2023, you spent maybe $40 million. It sounds like in 2024, $60 million. That's going to step up to about $125 million at the midpoint in 2025. Is all that basically right? And then based on what we know, shouldn't that basically sunset and that will be more or less done in 2026?

Yes, you're correct. Everything you said we'd agree with the bulk of the spending will get done in 2025. As you said, we've had those outlays already and will basically be done by 2026. What's unknown would be the benefits from incremental tax credits. And so to the extent there's any good news there that would just make the net impact smaller.

Okay. And then the EBITDA contribution, that kind of really ramps in 2026 and 2027?

That's right. As we've said to this point, there's just been nominal increases from the facilities that have come online. The bulk of them will be online during 2026, and so you'll see it ramp during 2026 for the full year in 2027. And we said that's around $200 million in incremental EBITDA. So the revenue is north of that, but it's very high flow-through and, of course, very high conversion of EBITDA to free cash flow.

Right. Okay. Perfect. And then on Chiquita, again, just to kind of make sure I've got all this. So I think, again, you spent $23 million in 2023. It sounds like you had a really large spend in 2024 at $24 million. That number steps down and call it to $125, and then it steps down again in 2026. And then by the time we get to 2027 that should be kind of zeroed out. Is that about right?

Yes, Tyler, I don't know if it will be zero, but it should be in that zero to $15 million to $20 million range is what we believe by then sort of just a maintenance level at most. It could be zero, but I would say zero to $20 million.

Looking ahead, as we progress through the end of this decade, we expect a significant increase in free cash conversion on a reported basis. You mentioned figures between $48 million and $50 million for 2026 on a normalized basis, not accounting for the advantages of high flow-through RNG. As we approach 2027, the outlook seems promising.

Yes. That's why we mentioned that if you consider our guidance for this year and assume we didn't include RNG or Chiquita, which isn't feasible, the free cash flow for 2025 would be approximately $1.55 billion or around 50%, and this is prior to the EBITDA contribution from RNG, as you pointed out.

Right. Okay. Last one here. I continue to get a lot of questions around volume. It sounds like 2025, even if I kind of take away Chiquita, it's going to be maybe the fourth year in a row of down volume. Can you just kind of help us, Ron, think about that? Could that go positive into 2026? Is there still some intentional shedding? Do we just need a better industrial backdrop or housing backdrop to get there? Just any big picture thoughts on that. I get a lot of questions on that. Thanks guys.

Sure. First, it's important to note that companies report volumes in different ways, and there isn't a right or wrong approach. We specifically report solid waste in our volume figures and do not include changes from recycling or other non-core business lines. So, our focus is solely on solid waste. Next, we had a record year for mergers and acquisitions in 2024, which we believe is positive, and we aim to have another strong year in 2025. However, it's typical for us to anticipate shedding 10% to 15% of the M&A revenue over a one to three-year period due to unprofitable contracts. Therefore, we emphasize following margins rather than volume, as we are intentionally shedding volume and reallocating capital into more profitable contracts. To stop shedding, M&A activity would need to significantly slow down, which is not something we are currently planning for. Additionally, we see a trade-off between price and volume, estimating this trade-off to be between 0.5% and 1%. Others are aiming for a yield of 4% to 4.5%, while we have guided towards over 6%. This represents a significant difference in realized pricing, which may come with some trade-offs. Although inflation is decreasing, it’s not fully resolved yet, and we maintain a focus on achieving a spread of 150 to 200 basis points relative to our cost structure rather than the CPI. In summary, we are consciously shedding volume, acknowledging the trade-off between price and volume, and reporting only solid waste in our calculations. We have experienced a generally flat to slightly negative economic environment for the past 2.5 years, with minimal growth in municipal solid waste and fluctuating activity in construction-related waste. We are hopeful for better economic conditions, which we believe will come, but we have not yet observed significant improvements.

Perfect. Thank you so much, Ron.

Our next question comes from Kevin Chiang from CIBC. Please go ahead with your question.

Hi. Thanks for taking my question. I want to start by congratulating you on your efforts regarding turnover and the posting numbers you've shared. With the record mergers and acquisitions, could you provide any insights on employee retention or turnover in the acquired businesses, considering the significant deal flow over the past year and in recent years?

Yes, Kevin, that's a very good question, especially considering our active approach. We are pleased to report a voluntary turnover rate of under 13%, but it's important to note that this rate tends to be significantly higher in acquired M&A companies. In the first year, it’s not unusual for turnover to reach 30% to 35% due to the adjustments required for employees coming from private companies who are used to our strict safety standards. This figure suggests that our core company turnover is likely even lower. We place a strong emphasis on safety, and it’s common for us to reduce the safety incident rate at an acquired standalone private company by three times within the first 12 months. However, achieving this often necessitates making changes at the frontline and supervision levels within these acquired companies.

That's great color. Maybe just turning to your margin outlook, sorry, 50 to 80 basis points of margin expansion. Is there a way to think about what, I guess, R360 Canada might be contributing to that because you have a full year secured? And I think you're evaluating opening up some facilities there. Just is that one of the, I guess, foundational pieces to driving that outsized margin expansion in 2025?

So Kevin, really, it's the strength of the underlying business that is what's driving the outsized margin expansion. We are enjoying the benefits of a terrific acquisition of Secure, but as you'll recall, we had 11 months of it last year. So the rollover contribution is just one month. And yes, as we've said, the performance there has resulted in incremental activity and looking at opening mothballed facilities. But to the extent that were to contribute, it would be very late in the year and nominal. So really going back to 50 to 80 basis points of margin expansion is in spite of the drag from commodities, RINs, and FX, which think of that as down 20 to 50 basis points, so it implies underlying margins up as much as 100 basis points. And again, that really speaks to all the things that Ron outlined that are working for us in the underlying business. And yes, we're enjoying the benefits of a very solid E&P waste business, but not a huge driver of incremental margins in 2025.

That's very helpful. One last question from me. You mentioned that your leverage ratio is set to change significantly, in light of the record mergers and acquisitions as well as the growth capital expenditures that will begin to decrease in the next few years. Looking ahead, how do share buybacks factor into your free cash flow allocation? It seems like you could potentially adopt a more aggressive approach here, considering the strength of your balance sheet and your free cash flow generation, especially following a record year. I'm curious if this is something you're considering, particularly as free cash flow is expected to increase further in the next 12 to 18 months.

We absolutely agree, Kevin. And the beauty of the sitting at 267 with, as we said, we're approaching $1 billion in liquidity is we have tremendous optionality. I mean to put it all in context, you've seen us continue to grow our dividend as we have every year, double digits and a 14% CAGR over the last 15 years. And you've seen us renew our NCIB, that normal cost issuer bid. So we have the flexibility to buy back up to 5% to preserve that optionality. We always say at some point, M&A slows down, but I think to your point, M&A doesn't even need to slow down for us to use that other arrow in the quiver, and we agree with you and opportunistically, that is something we'll look at.

Excellent. Thanks for the premises and congrats on a good quarter here and all the best for 2025.

Thank you, Kevin.

Our next question comes from Toni Kaplan from Morgan Stanley. Please go ahead with your question.

Thank you so much. I wanted to first ask on price. We've seen core price continue to moderate over the past few quarters, but still holding up very nicely. Where do you see price bottoming out? And what are you thinking for trajectory into 2025 in terms of how that looks? Thanks.

Sure. So the way to think about price, we said about 6% is the way to think about price. Of course, you have the two pieces where you've got the CPI-linked markets, which were in 2024, we're about 5%, and those step down to 4%, and of course, what CPI does will inform how that proceeds going forward. So whatever your view is of that. But for 2025, that's a good placeholder. And so then that implies 7%, 7.5% in the competitive markets to deliver 6% or north of it. In terms of the cadence, you should expect our typical cadence where on a reported basis, it would start higher than that and move down over the course of the year, just the math of it. And also as is pretty typical for us, we do the majority of our price increases in the competitive markets early in the year. And so by the time we report Q1, a couple of months from now, we’ll be able to speak about the visibility we have really for the full year, because this year is really unlike any other, where we'll have 70%, 75% of the price increases either known, because we're contractually, they’re provided we know what the numbers are or implement it. And we'll have a sense of rollback. Early reads are that pricing retention is as strong as usual. And again, I referenced the things that Ron raised about the strength of the underlying business and the benefits of full employment, if you will, and lower turnover to help with price retention.

Great. And Ron, you mentioned working with partners on solutions for PFAS treatment. Just wanted to hear the latest on the topic and what you're doing there?

We are actively exploring several solutions for PFAS treatment, and I would estimate that there are at least six providers offering effective options. Most of these solutions involve a foam fractionation process that captures PFAS and then solidifies it for separate disposal. Both portable and permanent treatment facilities are being utilized, deployed on-site depending on the leachate levels from different landfills. We are testing various technologies at multiple sites, including Minnesota, Pennsylvania, and New York, to determine the most effective methods. The initial outcomes are very promising, demonstrating reasonable capital investment and low treatment costs per gallon. Additionally, many publicly owned treatment works across the country are considering requirements for PFAS pretreatment for accepting landfill leachate. In our case, the treatment we are implementing is allowing us to meet the criteria for getting into those facilities without issues. Overall, we believe that viable and cost-effective solutions for PFAS treatment are currently available and will continue to improve in the future.

Thanks so much.

Our next question comes from Bryan Burgmeier from Citi. Please go ahead with your question.

Good morning. Thank you for taking my questions. Mary Anne, sorry if I missed this in Tyler's question, how much did RNG contribute to EBITDA in 2024? And then, what do you assume for 2025 guidance? And then, is there going to be maybe an opportunity to lock in RIN prices? Or do we expect to be using the spot market this year?

Sure. The sales from landfill gas and the additional revenue from new facilities haven't changed much. We're still projecting around $100 million to $110 million in revenue. There will be some minimal additional contribution in 2024, and you should consider that for 2025 as well. The significant increase for us is expected when one of our facilities becomes operational in 2026, thanks to our hybrid structure. Regarding opportunities to lock in prices, yes, we will be looking for those opportunities as they arise. We have already secured a portion of our RINs for most of 2024 at around $3. When the chances come up, we plan to continue reducing risks in that area of the business whenever possible.

Got it. Got it. Thank you. And then, Ron, maybe just on M&A, the 2024 spending obviously blew past the kind of normalized target that Waste Connections provides. And you've been in this business a long time. So I'm just curious, if you think there's maybe greater urgency for sellers right now versus the last 5 or 10 years? Do you think maybe persistently high interest rates are deferring some of the smaller players? Just curious maybe what drove the outsized selling in 2024 and your thoughts on 2025? Thank you. I will turn it over.

Thanks, Bryan. As we've mentioned before, at least seven or eight out of every ten deals in our model are typically driven by routine transitional and estate planning issues that occur naturally within family-run businesses. In that sense, external factors don't influence things significantly. However, the recent trends in interest rates have impacted private companies with floating rate or lease rate debt more than public companies. Concerns about election outcomes and potential tax increases also play a role. Currently, the situation seems somewhat stable compared to the run-up to the election, depending on the results. Sellers generally prefer to sell when the economy is strong and when they believe their business is properly valued, which has been neutral to negative lately. If the economy improves, it could accelerate mergers and acquisitions. Additionally, some sellers, after experiencing a pandemic and hyperinflation, may be reluctant to engage in transactions they previously wouldn’t have considered. That aspect is difficult to predict. Nonetheless, we are in what I would describe as a very strong M&A market with a robust pipeline featuring various types of transactions, including stand-alone franchises and tuck-ins. While we won’t claim we’ll match our record year of $750 million, we are confident in expecting an above-average year as we enter February.

And our next question comes from Jerry Revich from Goldman Sachs. Please go ahead with your question.

Yes. Hi, good morning, everyone.

Good morning, Jerry.

Good morning, Jerry.

Ron, I'm wondering if you could just expand on the progress that you folks are making ramping up the rail shipments and where do you expect volumes to get exiting in 2025 and what are you seeing in terms of the actual shipping costs versus what you folks were modeling at the beginning of the ramp?

Sure, Jerry. To give you some background, let’s revisit our Arrowhead transaction from August 2023, which we have owned for about 15 to 16 months now. When we acquired those assets, they were processing around 2,500 to 2,700 tonnes a day into the landfill. We're now consistently handling about 7,000 tonnes a day. While we haven't quite tripled the volume yet, we're getting closer. The majority of this increase comes from internalized markets on the Northeast that we previously served externally or sent to one of our East Coast landfills, which has freed up airspace for third-party marketing. We expect to reach the 8,000 to 9,000 tonne a day range by 2025. Thus, within 24 months of ownership, we anticipate a tripling of the volumes compared to when we first acquired it, which aligns with our initial expectations. In the long term, we aim to achieve more than 10,000 tonnes a day over several years, primarily leveraging our internalized network on the East Coast. Regarding the cost structure, it has remained stable. A major asset accompanying this acquisition was a long-term contract with Norfolk Southern. We dedicated significant effort to assess volatility in the cost structure since transporting volumes from the East Coast to the Southeast is the largest expense. We feel positive about indexing it to a national Consumer Price Index, which has resulted in a favorable cost structure for our intermodal facilities along the Eastern Seaboard. Overall, this asset is performing as well as, or even better than, we anticipated.

Ron. Thank you for that update. And in terms of the M&A opportunity now that you have that logistics runway, and we're seeing more and more landfill closures in the Northeast? How optimistic are you folks about significant M&A opportunity where you have a lot of value to add via the rail network in the Northeast as you look at your pipeline for 2025?

I would say, Jerry, we're very, very optimistic. I mean, obviously, we had a very big year in 2024, and we had a big year in New York in 2024. And I can tell you that in the transactions that are signed definitive agreements that haven't yet closed, there are more transactions in New York that we have done, and you will hear about as we come through Q1 all of those are being internalized. So it is providing us, I would say, multiple bites out of the revenue dollar relative to what we had before potentially doing that transaction. So yes, it certainly has created greater white space, so to speak, on the Eastern seaboard of markets that we are looking at and have entered in 2024 and will continue to do parts of 2025 and beyond. So no question about that. It also helps remove or protect against volatility of permitting time frames and things that happen, particularly as you get along the eastern seaboard, which can be as challenging as the West Coast and permitting time frames. So it does provide us a lot of optionality.

Super. And lastly, just conceptually, as we look at the volatility in recycled cardboard and plastic prices and good to see a stabilization, but if they were to take a leg down, would you folks think about pushing pricing in the baseline waste business to offset the headwind to earnings this year, if that were to happen, just conceptually, how are you thinking about that given the lack of control on that part of the pricing stream?

Yes. I think what we see is that we don't necessarily intend to push our solid waste or other customers to cover the decline in recycling. Instead, we would aim to increase the processing cost per tonne through our recycling facilities. Of course, when working with third parties, you recoup costs, but you also need to apply this internally. This aligns with your question, but essentially, the entire industry has shifted towards relying on processing costs per tonne for returns in recycling, both for ourselves and our third-party customers. The commodities serve as an upside or a variable factor, essentially creating a rebate structure for customers willing to handle the volatility.

Appreciate the conversation. Thank you.

Thank you, Jerry.

Our next question comes from Noah Kaye from Oppenheimer & Company. Please go ahead with your question.

Good morning. Thanks for taking the questions.

Good morning.

Quick housekeeping one to start for our models. So volumes, I think it implies down 1% to 2%, but actually, there's another 50 bps from Chiquita. So just so we all understand, is it accurate that reported volumes you're expecting down 1.5% to 2.5%, is that right?

That's correct. You're saying, including Chiquita. Yes.

Okay. And regarding the ITC, it seems you are not including any potential benefits. There has been clarification from the treasury about what is eligible following a purge. First, can you confirm if you expect to qualify for ITC benefits based on the timing of the start of construction? Additionally, could you provide a rough estimate for the portion of CapEx related to the facilities you are operating?

What we'd say is, yes, to the first point that we believe we qualify. And to that point, we benefited from a $10 million tax credit last year. And so we certainly understand the process and the dynamics. It'd be premature, not knowing what the qualifying equipment is precisely in the content. But we look to maximize those benefits through making the decisions about the equipment and labor and we'll certainly keep you posted. But our view is we communicate the outlays excluding any of that benefit and let it be upside to anything we've told you.

Yes. And presumably, just to add a point, the claiming of this would really be coinciding with when facilities come online, right? So I understand there's not that much for this year. Okay. And then the last one, and it's partly a modeling question, but really, I think, trying to understand or underscore the pace of operating improvements is the margin bridge, right? So you gave us the impact of commodities and FX. I would love to understand how M&A factors into the margin bridge. But what I'd really love to get to here is kind of apples-to-apples, what underlying solid waste margin expansion was in 2024 where you expect it will be in 2025, and what drives that pace of improvement?

Yes. M&A had a margin contribution that was flat or potentially down about 10 basis points, which is generally better than usual due to the mix of deals. In a typical year with more deals than average, there’s usually a 15 to 20 basis point headwind on margins. So, considering the 10 basis points, we reported a 100 basis point improvement for the year, which brings you to around 110. We did see a decline of up to 60 basis points in the fourth quarter from factors like FX, RINs, commodities, and Chiquita. Essentially, the underlying margin expansion in the base business would be around 120 to more than that. With the 2025 guidance of 50 to 80, we have accounted for those other impacts, and you’ll likely get a number slightly below that. Part of this is driven by price-led organic growth, as we’ve indicated before, focusing on the spread to the cost structure. We are close to achieving our 100 basis point improvement target for operating costs, except for one area, which is insurance costs that remain a headwind, though we have made some progress there. I will turn it over to Mary Anne for more details.

Yes. To clarify the relationship between RINs and recycling, what Ron mentioned pertains mainly to the latter part of the year, whereas we experienced benefits early in the year. We gained from recycling and RINs throughout 2024. If you consider approximately a 30 basis points benefit from that, the rest, as Ron indicated, is mostly related to solid waste management to achieve that 100 basis points. As I mentioned earlier, this year, recycling and RINs are expected to become a headwind, so based on our guidance, we anticipate a decrease of 20 to 50 basis points. Transitioning from a positive 30 to a negative 20 to 50, alongside foreign exchange impacts—which can sometimes be underestimated, as every penny of foreign exchange translates to nearly $20 million in revenue with a high margin of 45%—underscores the resilience of our core business as Ron described. Furthermore, as we've indicated, we are aiming for up to 100 basis points of margin expansion in 2025.

Yes. So really a very consistent pace of improvement here. Thank you for all the detail.

Our next question comes from Konark Gupta from Scotiabank. Please go ahead with your question.

Thank you for answering my question. I wanted to follow up on the margin topic. For Q1, it seems you're expecting a margin expansion of 0.5 points, and for the full year, at least 80 basis points. I know Q3 is typically your largest quarter, but in terms of the various factors like commodities and Chiquita, is there a specific quarter where you anticipate above-average margin expansion?

Here's how to consider it. We provided guidance of 50 to 80 basis points and are presenting Q1 at the lower end of that range. Factors that could push us towards the higher end include improvements in recycled commodities, RINs, and foreign exchange rates. In Q1, we are not banking on these improvements. For example, the foreign exchange comparison is challenging; it was $0.74 last year, and we are at $0.69 now, which is just one factor. There are also tough comparisons for recycled commodities and RINs. You can see how these comparisons create a drag in Q1, but there is the potential for improvements in these areas throughout the year, which could help us reach the higher end of our range over time.

Okay. That makes sense. Thanks. On the volume side, I appreciate the pricing information. Regarding the anticipated 1.5% to 2.5% decline for the full year, I understand that 0.5 points are attributed to Chiquita. Is the decline more pronounced in the first half compared to the second half, especially as you begin to compare against some of those shedding comps?

Yes, that's the right way to think about it. If you consider the exit speed in Q4, even without Chiquita, that doesn't disappear right away because you're dealing with that transition. I would approach it from a different angle in my modeling, where the price starts high and goes low, while I see volume starting low and going high.

Okay. Great. Thanks. And last one for me before I turn over. On the E&P side, I think this quarter recently at least were pretty strong from a revenue standpoint. I know secure assets obviously contributed there. But like even your underlying business seems like it's doing pretty well. How should we think about the growth in this business this year?

Sure. So you'll continue to see the rollover contributions not only from the secure deal, right, which is 1-month rollover. But then we did a follow-on acquisition in the second quarter in Canada, and we've done some additional activity in the US. And so, I think you saw a total of $140 million in reported revenue in Q4, and that number continues to grow and probably approaches a run rate more like $150 per quarter. And so again, it's really primarily rollover contribution from facilities we put in place last year.

Thank you.

Our next question comes from Brian Butler from Stifel. Please go ahead with your question.

Good morning. Thank you for taking my questions.

Thank you, Brian.

Just on the first one, maybe when you talk about internal inflation, I mean, you have pricing kind of running at 6%. So if you think about the 50 basis points to 80 basis points of margin expansion you're looking at, where is internal inflation in your estimates for 2025?

Yes. So right about 4.5% is a good way to think about it and not just because that nicely ties to our 150 basis point spread by doing 6% price. But what we're really seeing in the business, primarily led by the abating of the inflation in labor rates. And as you'll recall, we've been talking about this for the past couple of years, the step down from 8% two years ago. We came down in Q4 to about 4.5%, which is really right where we would the way to think about it, we think, for 2025. And so that's the primary mover there, and that is what's contributing to that price/cost spread that helps to drive the margin expansion in 2025.

Okay. Great. And then we already touched on M&A, but I thought just I'd revisit it. When you look at the pipeline, how does it compare to where we were maybe a year ago? And how does the competitive environment for deals compare? And is there anything under the current administration that actually could get done now that maybe over the last four years could not?

Let's address the second part first. Fortunately, I have not encountered a second request on an HSR, which aligns with our model focus. We have not experienced deal flow issues under the previous administration, so I cannot say that there will be improvements due to any restrictions we have faced. Others may have had different experiences based on their situation, but for us, there is no additional improvement expected. That said, our pipeline remains strong. The key difference is that we entered early last year having announced in December 2023 that we would complete the Secure acquisition in the first quarter, contributing a couple of hundred million dollars in revenue. Today, we are not in a similar position with a notable acquisition in the first quarter, but I can confirm that our pipeline includes discussions and letters of intent for deals of comparable size. This marks the only notable change between now and this time last year.

Okay. Great. Thanks for taking my questions.

And our next question comes from Tobey Sommer from Truist. Please go ahead with your question.

Thanks. Going to follow up on the change in administration. You touched on taxes, and now you commented on whether the M&A regulatory regime matters for you. Are there any other elements of the change in administration that you have your eye on for your business? And maybe comment on what it could do to your acquisition targets.

I think it's still early, Tobey, and there are many factors at play. So far, I haven't heard anything that suggests a negative impact on acquisition activity. Most of what we have seen and heard indicates a positive trend if implemented. I can't speak for private sellers, but any improvement in tax rates or a decrease in interest rates would accelerate mergers and acquisitions. An improving economy is also a plus, as are tariffs that affect capital expenditures for private sellers. Additionally, a decrease in regulatory or enforcement measures could be neutral for private sellers but beneficial for us overall. If immigration reform occurs, which I can't predict, it would likely benefit the entire sector, including service sectors. At this point, we aren't aware of any negatives.

Thank you very much.

And ladies and gentlemen, with that, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Ron Mittelstaedt for any closing remarks.

Okay. Thank you, operator. 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, Regulation G, and applicable securities laws in Canada. Thank you again, and we look forward to seeing you at upcoming investor conferences or on our next earnings call.

And thank you, everyone, for joining today's conference call and presentation. It has now concluded. Once again, we do thank you for joining. Have a pleasant day.